<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999
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. 6 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 7 /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
JEFFREY M. PEEK
MERRILL LYNCH ASSET INCOME FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Counsel for the Company:
Leonard B. Mackey, Jr., Esq. Michael J. Hennewinkel, Esq.
ROGERS & WELLS LLP MERRILL LYNCH ASSET MANAGEMENT L.P.
200 Park Avenue P.O. Box 9011
New York, New York 10166 Princeton, N.J. 08543-9011
</TABLE>
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE
BOX)
<TABLE>
<C> <S>
/ / immediately upon filing pursuant to paragraph (b)
/X/ 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.
</TABLE>
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
<TABLE>
<C> <S>
/ / This post-effective amendment designates a new effective date for a previously
filed post- effective amendment.
</TABLE>
------------------------
TITLE OF SECURITIES BEING REGISTERED: Class A shares, Class B Shares, Class
C shares and Class D shares of Common Stock of the Merrill Lynch Asset Income
Fund, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT USE THIS PROSPECTUS TO SELL SECURITIES UNTIL THE REGISTRATION STATEMENT
CONTAINING THIS PROSPECTUS, WHICH HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
[LOGO]
SUBJECT TO COMPLETION, DATED MARCH 1, 1999 PRELIMINARY PROSPECTUS
Merrill Lynch Asset Income Fund, Inc.
_April __, 1999
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD
KNOW BEFORE INVESTING, INCLUDING INFORMATION ABOUT
RISKS. PLEASE READ IT BEFORE YOU INVEST AND KEEP IT
FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED
UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
PAGE
[ICON] KEY FACTS
------------------------------------------------------
The Merrill Lynch Asset Income Fund at a Glance .... 3
Risk/Return Bar Chart .............................. 5
Fees and Expenses .................................. 6
[ICON] DETAILS ABOUT THE FUND
------------------------------------------------------
How the Fund Invests ............................... 9
Investment Risks .................................. 11
[ICON] YOUR ACCOUNT
------------------------------------------------------
Merrill Lynch Select Pricing-SM- System ........... 26
How to Buy, Sell, Transfer and Exchange Shares .... 31
How Shares are Priced ............................. 35
Participation in Merrill Lynch Fee-Based
Programs .......................................... 35
Dividends and Taxes ............................... 36
[ICON] MANAGEMENT OF THE FUND
------------------------------------------------------
Merrill Lynch Asset Management .................... 37
Financial Highlights .............................. 38
[ICON] FOR MORE INFORMATION
------------------------------------------------------
Shareholder Reports ....................... Back Cover
Statement of Additional Information ....... Back Cover
</TABLE>
MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
KEY FACTS [ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
EQUITY -- securities representing ownership of a company ("stock") or securities
whose price is linked to the value of securities that represent company
ownership.
DEBT -- Securities representing an obligation to pay specified amounts at
specified times.
MONEY MARKET SECURITIES -- Short term debt instruments such as U.S. Treasury
bills.
THE MERRILL LYNCH ASSET INCOME FUND AT A GLANCE
--------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a
high level of current income and, secondarily,
capital appreciation. The Fund tries to choose a
mix of U.S. and foreign DEBT, EQUITY, and MONEY
MARKET SECURITIES, including some that provide
current income through dividends or interest, some
which increase in value and some that may do both.
The Fund tries to blend these investments to
create a portfolio that produces high current
income and, secondarily, capital appreciation. We
cannot guarantee that the Fund will achieve its
goals.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in U.S. and foreign debt, equity
and money market securities. Fund Management
varies the composition of the portfolio among
these securities and markets in response to
changing market and economic trends. This approach
provides the Fund with the opportunity to benefit
from anticipated shifts in the relative
performance of different types of securities and
different capital markets.
The Fund primarily invests in debt, including
money market securities. Under normal conditions,
at least 65% of the Fund's total assets will be
invested in debt securities. The Fund may invest
entirely in debt securities. The Fund invests in
debt obligations 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
Investor's Service, Inc., ("Moody's") or which, in
the Investment Adviser's judgment, possess similar
rating credit characteristics. The average
maturity of the Fund's portfolio of debt
securities will vary based on the Investment
Adviser's assessment of pertinent economic market
conditions.
The Fund invests in equity securities. In
selecting stocks and other securities that are
convertible to stocks, Fund management emphasizes
stocks that it believes are undervalued. Fund
management places particular emphasis on companies
selling at a discount from the price-to-book value
ratios and price/ earnings ratios or that pay
above average dividends. Fund management also
considers as undervalued securities selling at a
discount from their historic price-to-book value
or price/earnings ratios. Under normal conditions,
the Fund may invest up to 35% of the Fund's total
assets in equity securities.
The Fund may invest up to 25% of the Fund's total
assets in foreign securities. In determining the
allocation of assets among capital markets, the
Investment Adviser considers 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 financial, social and
political factors which may affect such markets.
MERRILL LYNCH ASSET INCOME FUND, INC. 3
<PAGE>
[ICON] KEY FACTS
The Fund may invest up to 25% of its total assets
in any particular industry sector.
The Fund is a non-diversified fund, which means
that it can invest more of its assets in fewer
companies than most other funds.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's
investments, and therefore the value of the Fund's
shares, may go up or down. These changes may occur
because the stock or bond markets are rising or
falling, or in response to interest rate changes.
At other times, there are specific factors that
may affect the value of a particular investment.
These specific factors include, for example, that
the issuer of a Fund investment may be unable to
pay principal, interest or both when due. If the
value of the Fund's investments goes down, you may
lose money.
The Fund may invest a portion of its assets in
non-U.S. securities. Foreign investing involves
special risks, including foreign currency risk and
the possibility of substantial volatility due to
adverse political, economic or other developments.
Foreign securities may also be less liquid and
harder to value than U.S. securities. The risks
are greater for investments in emerging markets.
The Fund is a non-diversified fund. By
concentrating in a smaller number of investments,
the Fund's risk is increased because each
investment has a greater effect on the Fund's
performance. This helps the Fund's performance
when its investments are successful, but hurts the
Fund's performance when its investments are
unsuccessful.
WHO SHOULD INVEST?
The Fund may be an appropriate investment for you
if you:
- Are looking for an investment that
provides income, but are also seeking
some capital appreciation.
- Want a professionally managed portfolio.
- Are looking for exposure to a variety of
asset classes, including investments in
foreign markets.
- Are willing to accept the risks of
foreign investing.
- Are prepared to receive taxable
distributions of ordinary income and
capital gains.
4 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
RISK/RETURN BAR CHART
--------------------------------------------
The bar chart and table shown below
provide an indication of the risks
of investing in the Fund. The bar
chart shows changes in the Fund's
performance for Class B shares for
each complete calendar year since
the Fund's inception. Sales charges
are not reflected in the bar chart.
If these amounts were reflected,
returns would be less than those
shown. The table compares the
average annual total returns for
each class of the Fund's shares for
the periods shown with those of the
Merrill Lynch (ML) US Corporate &
Government Master Index and the
Composite Index. How the Fund
performed in the past is not
necessarily an indication of how
the Fund will perform in the
future.
[CHART]
During the period shown in the bar
chart, the highest return for a
quarter was 6.22% (quarter ended
June 30, 1997) and the lowest
return for a quarter was -1.67%
(quarter ended September 30, 1998).
<TABLE>
<CAPTION>
Average Annual Total Returns Past
(for the calendar year ended Past Ten Years/
December 31, 1998) One Year Since Inception
<S> <C> <C>
- -------------------------------------------------------------------------
Merrill Lynch Asset Income Fund*--Class A 5.61% 9.18%+
ML US Corporate & Government Master Index** 9.52% 9.12%
Composite Index*** 13.35% 12.55%
- -------------------------------------------------------------------------
Merrill Lynch Asset Income Fund*--Class B 5.19% 9.39%+
ML US Corporate & Government Master Index** 9.52% 9.12%
Composite Index*** 13.35% 12.55%
- -------------------------------------------------------------------------
Merrill Lynch Asset Income Fund*--Class C 8.14% 9.81%++
ML US Corporate & Government Master Index** 9.52% 9.87%
Composite Index*** 13.35% 13.36%
- -------------------------------------------------------------------------
Merrill Lynch Asset Income Fund*--Class D 5.36% 9.32%++
ML US Corporate & Government Master Index** 9.52% 9.87%
Composite Index*** 13.35% 13.36%
- -------------------------------------------------------------------------
</TABLE>
* Includes sales charge.
** This unmanaged Index is comprised of investment-grade bonds.
*** The Composite Index consists of: 5%--3-month US Treasury Bills; 75%--ML
Bond Index: BOAO--Corporate & Government Master; and 20%--Standard & Poor's
500. The 3-month US Treasury bill is using performance data as of August
31, 1994 for Class A and Class B Shares and October 31, 1994 for Class C
and Class D Shares. Past performance is not predictive of future
performance.
+ Inception date is September 2, 1994.
++ Inception date is October 21, 1994.
MERRILL LYNCH ASSET INCOME FUND, INC. 5
<PAGE>
[ICON] KEY FACTS
UNDERSTANDING
EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEE -- a fee paid to the Investment Adviser for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities dealers
for account maintenance activities.
FEES AND EXPENSES
--------------------------------------------------
The Fund offers four different classes of shares.
Although your money will be invested the same way
no matter which class of shares you buy, there are
differences among the fees and expenses associated
with each class. Not everyone is eligible to buy
every class. After determining which classes you
are eligible to buy, decide which class best suits
your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
This table shows the different fees and expenses
that you may pay if you buy and hold the different
classes of shares of the Fund. Future expenses may
be greater or less than those indicated below.
<TABLE>
<CAPTION>
SHAREHOLDER FEE (FEES PAID
DIRECTLY FROM YOUR INVESTMENT): Class A Class B(a) Class C Class D
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on purchases (as a 4.00%(b) None None 4.00%(b)
percentage of offering price)
- --------------------------------------------------------------------------------------------------------------------------
Sales Charge imposed on Dividend Reinvestments None None None None
- --------------------------------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of None(c) 4.0%(b) 1.0%(b) None(c)
original purchase price or redemption proceeds, whichever
is lower)
- --------------------------------------------------------------------------------------------------------------------------
Redemption Fees None None None None
- --------------------------------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- --------------------------------------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- --------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS):
- --------------------------------------------------------------------------------------------------------------------------
Management Fees(d)(g) 0.75% 0.75% 0.75% 0.75%
- --------------------------------------------------------------------------------------------------------------------------
None 0.25% 0.25% 0.25%
- --------------------------------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(e) None 0.50% 0.55% None
- --------------------------------------------------------------------------------------------------------------------------
Other Expense (including transfer agency fees)(f) 2.35% 2.40% 2.39% 2.35%
- --------------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(g)(h) 3.10% 3.90% 3.94% 3.35%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(SEE NEXT PAGE FOR
FOOTNOTES)
6 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
(FOOTNOTES FROM PRECEDING PAGE)
(a) Class B shares automatically convert to Class D shares about ten years
after you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund pays the Investment Adviser a fee at the annual rate of 0.75% of
the average daily net assets of the Fund. For the fiscal year ended
December 31, 1998, the Investment Adviser received a fee equal to 0.75% of
the Fund's average daily net assets.
(e) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares for a long
time, it may cost you more in distribution (12b-1) fees than the maximum
sales charge that you would have paid if you had bought one of the other
classes.
(f) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the fiscal year
ended December 31, 1998, the Fund paid the Transfer Agent fees totaling
$19,204. The Investment Adviser provides accounting services to the Fund at
its cost. For the fiscal year ended December 31, 1998, the Fund reimbursed
the Investment Adviser $55,769 for these services.
(g) For the fiscal year ended December 31, 1998, Merrill Lynch Asset
Management, L.P. ("MLAM") voluntarily waived management fees and reimbursed
the Fund for a portion of other expenses. As MLAM may discontinue its
waiver of such fees and reimbursement of expenses, the table above has been
restated to assume the absence of any such waiver or reimbursement. During
the fiscal year ended December 31, 1998, MLAM waived management fees
totaling 2.60% for Class A shares, 2.65% for Class B shares, 2.64% for
Class C shares, 2.60% for Class D shares after which the Fund's total
expense ratio was 0.50% for Class A shares, 1.25% for Class B shares, 1.30%
for Class C shares and 0.75% for Class D shares.
(h) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
MERRILL LYNCH ASSET INCOME FUND, INC. 7
<PAGE>
[ICON] KEY FACTS
EXAMPLES:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Class A $700 $1,319 $1,960 $3,675
- ----------------------------------------------------------
Class B $792 $1,389 $2,004 $4,121
- ----------------------------------------------------------
Class C $496 $1,201 $2,023 $4,155
- ----------------------------------------------------------
Class D $724 $1,389 $2,076 $3,894
- ----------------------------------------------------------
</TABLE>
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Class A $700 $1,319 $1,960 $3,675
- ----------------------------------------------------------
Class B $392 $1,189 $2,004 $4,121
- ----------------------------------------------------------
Class C $396 $1,201 $2,023 $4,155
- ----------------------------------------------------------
Class D $724 $1,389 $2,076 $3,894
- ----------------------------------------------------------
</TABLE>
8 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
DETAILS ABOUT THE FUND [ICON]
ABOUT THE
PORTFOLIO MANAGER
Thomas R. Robinson has served as the Portfolio manager of the Fund since
November 1995. He has served as a First Vice President of MLAM since 1997 and as
a Senior Portfolio Manager of MLAM from November 1995 to 1997. From 1989 he
served as Manager of International Strategy for Merrill Lynch & Co. Global
Securities Research & Economics Group.
ABOUT THE
INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
--------------------------------------------------
The Fund can invest in U.S. and foreign debt,
equity securities and money market instruments. In
allocating among debt, equity and money market
securities, Fund management 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.
DEBT SECURITIES -- Under normal conditions, at
least 65% of the Fund's total assets will be
invested in debt, including money market,
securities. The Fund may invest entirely in debt
securities. However, in general, the Fund will
include both equity and debt securities. The Fund
can invest in all types of debt securities,
including U.S. and foreign government bonds,
corporate bonds and convertible bonds, mortgage
and asset backed securities, and securities issued
or guaranteed by certain international
organizations such as the World Bank. U.S.
government securities include U.S. Treasury
obligations, obligations issued or guaranteed by
U.S. government agencies or instrumentalities,
including government guaranteed mortgage-related
securities. The securities may be backed by the
full faith and credit of the United States. Other
securities, however, may be backed only by the
credit of the issuer itself such as, for example,
obligations of the Student Loan Marketing
Association. The Fund invests in debt obligations
of governmental issuers and in corporate debt
securities, including convertible debt securities,
rated A or better by Standard & Poor's or by
Moody's, or which, in the Investment Adviser's
judgment, possess similar rating credit
characteristics. Debt securities, such as bonds,
involve credit risk and interest risk.
EQUITY SECURITIES -- Under normal conditions, the
Fund may invest up to 35% of the Fund's total
assets in equity securities. The Fund can invest
in all types of equity securities, including
common stock, warrants and stock purchase rights.
The Investment Adviser seeks to identify
securities of companies and industries that are
expected to provide high total return as compared
to other equity securities. In selecting stocks
and other securities that are convertible to
stocks, Fund management emphasizes stocks that it
believes are undervalued. Fund management places
emphasis on companies selling at a discount from
the price/earnings ratios computed with respect to
the relevant stock market averages. Fund
management also considers as undervalued
securities selling at a discount from their
historic price-to-book value or price/earnings
ratios.
MERRILL LYNCH ASSET INCOME FUND, INC. 9
<PAGE>
[ICON] DETAILS ABOUT THE FUND
Fund management may also seek to invest in the
stock of smaller or emerging growth companies that
it expects will provide a higher total return than
other equity investments. Fund management places
emphasis on companies 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 Investment Adviser
seeks to identify small and emerging growth
companies that possess superior management,
marketing ability, research and product
development skills and sound balance sheets.
Investing in smaller or emerging growth companies
involves greater risk than investing in more
established companies.
The Fund may invest up to 25% of its total assets
in any particular industry sector. When Fund
management believes that market and economic
conditions favor certain types of tangible assets
as compared to other types of investments, the
Fund may emphasize investments related to that
particular industry sector.
MONEY MARKET SECURITIES -- The Fund can invest in
quality short-term debt securities. These
securities include, for example, U.S. government
securities, commercial paper, master demand notes
rated at least "A" by S&P or "Prime" by Moody's,
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. U.S. banks, foreign branches of
U.S. banks, or U.S. branches of foreign banks may
issue commercial bank obligations.
OPTIONS, FUTURES AND OTHER DERIVATIVES -- The Fund
may use options, futures and forward contracts
both to increase the return of the Fund and to
hedge, or protect, the value of its assets against
adverse movements in equity, debt and currency
markets. The use of options, futures and forward
contracts can be effective in protecting or
enhancing the value of the Fund's assets. While
these instruments involve certain risks, the Fund
will not engage in strategies that are considered
highly risk and speculative. The Fund is not
required to hedge and may not do so. A full
description of the Fund's use of options, futures,
forward contracts and other derivatives is
included in the Statement of Additional
Information.
FOREIGN SECURITIES -- The Fund can invest up to
25% of its assets in foreign equity and debt
markets when, in the opinion of the Investment
Adviser, foreign markets are expected to
outperform, in U.S. dollar terms, the U.S.
10 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
equity and debt markets. The Fund can invest in
any country or geographic region but at the
current time anticipates that it will invest in
primarily in the securities of corporate and
governmental issuers domiciled or located in
Canada, Western Europe and the Far East. In making
investment decisions, 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. The Fund is not required to invest in
foreign markets and may invest substantially all
of its assets in U.S. markets or U.S.
dollar-denominated obligations.
In determining the allocation of assets among
capital markets, Fund management considers such
factors as the relative valuation, condition and
growth potential of the various economies. Other
factors that Fund management considers include
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.
INVESTMENT RISKS
- ----------------------------------------------------------------------------
This section contains a summary discussion of the
general risks of investing in the Fund. As with
any mutual fund, there can be no guarantee that
the Fund will meet its goals or that the Fund's
performance will be positive for any period of
time.
MARKET AND SELECTION RISK -- Market risk is the
risk that the stock or bond market will go down in
value, including the possibility that the market
will go down sharply and unpredictably. Selection
risk is the risk that the investments that the
Fund management selects will underperform the
market or other funds with similar investment
objectives and investment strategies.
CREDIT RISK -- Credit risk is the risk that the
borrower will not make timely payments of
principal and interest. The degree of credit risk
depends on the borrower's financial condition and
the terms of the bonds or obligation.
MERRILL LYNCH ASSET INCOME FUND, INC. 11
<PAGE>
[ICON] DETAILS ABOUT THE FUND
INTEREST RATE RISK -- Interest rate risk is the
risk that prices of bonds (or value of the
security) may fall when interest rates rise. In
general, the market price of debt securities will
increase when interest rates decline and decrease
when interest rates rise. Prices of longer-term
securities generally fluctuate more in response to
interest rate changes than do shorter-term
securities.
CALL AND REDEMPTION RISK -- A bond's issuer may
call a bond for redemption before it matures. If
this happens to a bond the Fund holds, the Fund
may lose income and may have to invest the
proceeds in bonds with lower yields.
FOREIGN MARKET RISK -- Since the Fund may invest
in foreign equity and debt securities, it offers
the potential for more diversification than an
investment only in the United States. This is
because stocks traded on foreign markets have
often (though not always) performed differently
than stocks and debt in the United States.
However, such investments involve special risks
not present in U.S. investments that can increase
the chances that the Fund will lose money. In
particular, investment in foreign securities
involves the following risks, which are generally
greater for investments in emerging markets.
- The economies of some foreign markets
often do not compare favorably with that
of the United States in areas such as
growth of gross domestic product,
reinvestment of capital, resources and
balance of payments. Some of these
economies may rely heavily on particular
industries or foreign capital. They may be
more vulnerable to adverse diplomatic
developments, the imposition of economic
sanctions against a particular country or
countries, changes in international
trading patterns, trade barriers, and
other protectionist or retaliatory
measures.
- Governmental actions such as the
imposition of capital controls,
nationalization of companies or
industries, expropriation of assets, or
the imposition of punitive taxes may
adversely affect investments in foreign
markets.
- The governments of certain countries may
prohibit or impose substantial
restrictions on foreign investing in their
capital markets or in certain industries.
Any of these actions could severely affect
security prices. They could also impair
the Fund's ability to purchase or sell
foreign securities or transfer its assets
or income back into the United States, or
otherwise adversely affect the Fund's
operations.
12 MERRILL LYNCH ASSET INCOME FUND, INC.
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- Other foreign market risks include foreign
exchange controls, difficulties in pricing
securities, defaults on foreign government
securities, difficulties in enforcing
favorable legal judgments in foreign
courts, and political and social
instability. Legal remedies available to
investors in some foreign countries may be
less extensive than those available to
investors in the United States.
- Because there are generally fewer
investors on foreign exchanges and a
smaller number of shares traded each day,
it may be difficult for the Fund to buy
and sell securities on those exchanges. In
addition, prices of foreign securities may
go up and down more than prices of
securities traded in the United States.
- Foreign markets may have different
clearance and settlement procedures. In
certain markets settlements may be unable
to keep pace with the volume of securities
transactions. If this occurs, settlement
may be delayed and the Fund's assets may
be uninvested and not earning returns. The
Fund may miss investment opportunities or
be unable to sell and investment because
of these delays.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING
STANDARDS -- Many foreign governments supervise
and regulate stock exchanges, brokers and the sale
of securities less than the United States does.
Other countries may not have laws to protect
investors the way that the U.S. securities laws
do. For example, some foreign countries may have
no laws or rules against insider trading. Insider
trading occurs when a person buys or sells a
company's securities based on non-public
information about the company. Accounting
standards in other countries are not necessarily
the same as in the United States. If the
accounting standards in another country do not
require as much detail as U.S. accounting
standards, it may be harder for the Fund
management to completely and accurately determine
a company's financial condition. Also, brokerage
commissions and other costs of buying or selling
securities often are higher in foreign countries
than they are in the United States. This reduces
the amount the Fund can earn on its investments.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU) -- A
number of European countries have entered into EMU
in an effort to reduce trade barriers between
countries, increase competition among companies,
reduce government subsidies in certain industries
and reduce or eliminate currency fluctuations
among these countries. Among other things, EMU has
established a single European currency (the
"euro") which was introduced on
MERRILL LYNCH ASSET INCOME FUND, INC. 13
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[ICON] DETAILS ABOUT THE FUND
January 1, 1999 and is expected to replace the
existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds)
were redenominated in the euro. These securities
list, trade and make dividend and other payments
only in euros. Although EMU is generally expected
to have a beneficial effect, it could negatively
affect the Fund in a number of situations,
including as follows:
- If the transition to euro, or EMU as a
whole, does not proceed as planned, the
Fund's investments could be adversely
affected. For example, sharp currency
fluctuations, exchange rate volatility and
other market disruptions could occur.
- Withdrawal from EMU by a participating
country could also have a negative effect
on the Fund's investments -- for example,
if securities redenominated in the euro
were transferred back into that country's
national currency.
- Computer, accounting and trading systems
must be capable of recognizing the euro as
a distinct currency. Like other investment
companies and business organizations, the
Fund could be adversely affected if the
systems used by the Investment Adviser,
the Fund's other service providers or
entities with which the Fund or its
service providers do business do not
properly address this issue before the
euro conversion begins January 1999. These
issues may also negatively affect the
operations of the companies in which the
Fund invests.
Risks associated with certain types of obligations
in which the Fund may invest include:
SMALL CAP AND EMERGING GROWTH SECURITIES -- The
Fund may invest in small cap or emerging growth
securities. A small cap or emerging growth company
is one that typically has total market
capitalization of up to $1 billion at the time of
the Fund's initial purchase. These may be less
financially secure than larger, more established
companies. They may depend on a small number of
key personnel. If a product fails, management
changes or other adverse developments occur, the
Fund's investment in a small cap or emerging
growth company may lose substantial value.
14 MERRILL LYNCH ASSET INCOME FUND, INC.
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Small cap or emerging growth securities generally
trade in lower volumes and are subject to greater
and more unpredictable price changes than larger
cap securities or the stock market as a whole.
Investing in small cap and emerging growth
securities requires a longer-term view.
WARRANTS -- A warrant gives the Fund the right to
buy a quantity of stock. The warrant specifies the
amount of underlying stock, the purchase (or
"exercise") price, and the date the warrant
expires. The Fund has no obligation to exercise
the warrant and buy the stock.
A warrant has value only if the Fund exercises or
sells it before it expires. If the price of the
underlying stock does not rise above the exercise
price before the warrant expires (or is sold), the
warrant generally expires without any value and
the Fund loses any amount it paid for the warrant.
Thus, investments in warrants may involve
substantially more risk than investments in common
stock. Warrants may trade in the same markets as
their underlying stock; however, the price of the
warrant does not necessarily move with the price
of the underlying stock.
DERIVATIVES -- Derivatives are financial
instruments whose value is derived from another
security or an index such as the Financial
Times/Standard & Poor's-Actuaries World Index. The
Fund may use derivative instruments including
futures, forwards, options, indexed securities,
inverse securities and swaps. Derivatives allow
the Fund to increase or decrease its risk exposure
more quickly and efficiently than other types of
instruments. Derivatives are volatile and involve
significant risks, including:
LEVERAGE RISK -- the risk associated with certain
types of investments or trading strategies (such
as borrowing money to increase the amount of
investments) that relatively small market
movements may result in large changes in the value
of an investment. Certain investments or trading
strategies that involve leverage can result in
losses that greatly exceed the amount originally
invested.
CREDIT RISK -- the risk that the counterparty (the
party on the other sie of the transaction) on a
derivative transaction will be unable to honor its
financial obligation to the Fund.
CURRENCY RISK -- the risk that changes in the
exchange rate between currencies will adversely
affect the value (in U.S. dollar terms) of an
investment.
MERRILL LYNCH ASSET INCOME FUND, INC. 15
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[ICON] DETAILS ABOUT THE FUND
LIQUIDITY RISK -- the risk that certain securities
may be difficult or impossible to sell at the time
that the seller would like or at the price that
the seller believes the security is currently
worth.
INTEREST RATE RISK -- the risk that prices of
fixed income securities will fluctuate at a
function of interest rate movement.
The Fund may use derivatives for hedging purposes,
including anticipatory hedges. Hedging is a
strategy in which the Fund uses a derivative to
offset the risk that other Fund holdings may
decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if
the market moves in a different manner than
anticipated by the Fund or if the cost of the
derivative outweighs the benefit of the hedge.
Hedging also involves the risk that changes in the
value of the derivative will not match those of
the holdings being hedged as expected by the Fund,
in which case any losses on the holdings being
hedged may not be reduced. There can be no
assurance that the Fund's hedging strategy will
reduce risk or that hedging transactions will be
either available or cost effective. The Fund is
not required to use hedging and may not do so.
CONVERTIBLES -- Convertibles are generally debt
securities or preferred stocks that may be
converted into common stock. Convertibles
typically pay current income, as either interest
(debt security convertibles) or dividends
(preferred stocks). A convertible's value usually
reflects both the stream of current income
payments and the value of the underlying common
stock. The market value of a convertible performs
like regular debt securities; that is, if market
interest rates rise, the value of a convertible
usually falls. Since it is convertible into common
stock, the convertible also has the same types of
market and issuer risk as the value of the
underlying common stock.
ASSET BACKED SECURITIES -- Like traditional fixed
income securities, the value of asset-backed
securities typically increases when interest rates
fall and decreases when interest rates rise.
Certain asset-backed securities may also be
subject to the risk of prepayment. In a period of
declining interest rates, borrowers may pay what
they owe on the underlying assets more quickly
than anticipated. Prepayment reduces the yield to
maturity and the average life of the asset-backed
securities. In addition, when the Fund reinvests
the proceeds of a prepayment it may receive a
lower interest rate than the rate on the security
that was prepaid. In a period of rising interest
rates, prepayments may occur at a slower rate than
expected. As a result, the
16 MERRILL LYNCH ASSET INCOME FUND, INC.
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average maturity of the Fund's portfolio may
increase. The value of longer-term securities
generally changes more widely in response to
changes in interest rates than shorter-term
securities.
MORTGAGE BACKED SECURITIES -- Mortgage backed
securities represent the right to receive a
portion of principal and/or interest payments made
on a pool of residential or commercial mortgage
loans. When interest rates fall, borrowers may
refinance or otherwise repay principal on their
mortgages earlier than scheduled. When this
happens, certain types of mortgage backed
securities will be paid off more quickly than
originally anticipated and the Fund will have to
invest the proceeds in securities with lower
yields. This risk is known as "prepayment risk."
When interest rates rise, certain types of
mortgage backed securities will be paid off more
slowly than originally anticipated and the value
of these securities will fall. This risk is known
as "extension risk."
Because of prepayment risk and extension risk,
mortgage backed securities react different to
changes in interest rates than other fixed income
securities. Small movements in interest rates
(both increases and decreases) may quickly and
significantly reduce the value of certain
mortgage-backed securities.
Mortgage backed securities may be either
pass-through securities or collateralized mortgage
obligations (CMOs). Pass-through securities
represent a right to receive principal and
interest payments collected on a pool of
mortgages, which are passed through to security
holders (less servicing costs). CMOs are created
by dividing the principal and interest payments
collected on a pool of mortgages into several
revenue streams (tranches) with different priority
rights to portions of the underlying mortgage
payments. Certain CMO tranches may represent a
right to receive interest only (IOs), principal
only (POs) or an amount that remains after other
floating-rate tranches is paid (an inverse
floater). These securities are frequently referred
to as "mortgage derivatives" and may be extremely
sensitive to changes in interest rates. If the
Fund invests in CMO tranches (including CMO
tranches issued by government agencies) and
interest rates move in a manner not anticipated by
Fund management, it is possible that the Fund
could lose all or substantially all of its
investment.
INDEXED AND INVERSE FLOATING RATE
SECURITIES -- The Fund may invest in securities
whose potential returns are directly related to
changes in an underlying index or interest rate,
known as indexed securities. The return on indexed
securities will rise when the underlying index or
interest rate rises
MERRILL LYNCH ASSET INCOME FUND, INC. 17
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[ICON] DETAILS ABOUT THE FUND
and fall when the index or interest rate falls.
The Fund may also invest in securities whose
return is inversely related to changes in an
interest rate (inverse floaters). In general,
inverse floaters change in value in a manner that
is opposite to most bonds -- that is, interest
rates on inverse floaters will decrease when
short-term rates increase in value and increase in
value when short-term rates decrease. Investments
in inverse floaters may subject the Fund to risks
of reduced or eliminated interest payments and
losses of principal. In addition, certain indexed
securities and inverse floaters may increase or
decrease in value at a greater rate than the
underlying interest rate, which effectively
leverages the Fund's investment. As a result, the
market value of such securities will generally be
more volatile than that of fixed rate, tax-exempt
securities. Both indexed securities and inverse
floaters are derivative securities and can be
considered speculative.
ILLIQUID SECURITIES -- The Fund may invest up to
15% of its net assets in illiquid securities that
it cannot easily resell within seven days at
current value or that have contractual or legal
restrictions on resale. If the Fund buys illiquid
securities it may be unable to resell them quickly
or may be able to sell them only at a price below
current value.
RESTRICTED SECURITIES -- Restricted securities
have contractual or legal restrictions on their
resale. They include private placement securities
that the Fund buys directly from the issuer.
Private placement and other restricted securities
may not be listed on an exchange and may have no
active trading market.
Restricted securities may be illiquid. The Fund
may be unable to sell them on short notice or may
be able to sell them only at a price below current
value. Because the Fund may get only limited
information about the issuer it may be less able
to predict a loss. In addition, if Fund management
receives material adverse nonpublic information
about the issuer, the Fund will not be able to
sell the securities.
RULE 144A SECURITIES -- Rule 144A securities are
restricted securities that can be resold to
qualified institutional buyers but not to the
general public. Rule 144A securities may have an
active trading market, but carry the risk that the
active trading market may not continue.
WHEN ISSUED SECURITIES, DELAYED DELIVERY
SECURITIES AND FORWARD COMMITMENTS -- When-issued
and delayed-delivery securities and forward
commitments involve the risk that the security the
Fund buys will lose value prior to its delivery to
the Fund. There is also the risk that the security
will not be
18 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
issued or that the other party will not meet its
obligations. If this occurs, the Fund will lose
the investment opportunity for the assets it has
set aside to pay for the security and any gain in
the security's price.
PRECIOUS AND INDUSTRIAL METAL RELATED
SECURITIES -- Securities of precious metals
historically have been very volatile. The high
volatility of precious metal prices may adversely
affect the financial condition of companies
involved with precious metals. The production and
sale of precious metals by governments or central
banks or other large holders can be affected by
various economic, financial, social and political
factors, which may be unpredictable and may have a
significant impact on the prices of precious
metals. Other factors that may affect the prices
of precious metals and securities related to them
include changes in inflation, the outlook for
inflation and changes in industrial and commercial
demand for precious metals.
REAL ESTATE RELATED SECURITIES -- Real estate
related securities are subject to the risks
associated with real estate. The main risk of real
estate related securities is that the value of the
real estate may go down. Many factors may affect
real estate values. These factors include both the
general and local economies, the laws and
regulations (including zoning and tax laws)
affecting real estate, the costs of owning,
maintaining and improving real estate, and the
location and the attractiveness of the properties.
The availability of mortgages and changes in
interest rates may affect real estate values. Real
estate trusts also are dependent on management
skill and may not be diversified in their
investments.
If the Fund's real estate related investments are
concentrated in one geographic area or in one
property type, the Fund will be particularly
subject to the risks associated with that area or
property type.
SOVEREIGN DEBT -- The Fund may invest in sovereign
debt securities. These securities are issued or
guaranteed for foreign government entities.
Investments in sovereign debt subject the Fund to
the risk that a government entity may delay or
refuse to pay interest or repay principal on its
sovereign debt. Reasons may include cash flow
problems, insufficient foreign currency reserves,
political considerations, the relative size of the
entity's debt position to its economy or its
failure to implement economic reforms required by
the International Monetary Fund or other
multilateral agencies. If a government entity
defaults, it may ask for more time in which to pay
or for further
MERRILL LYNCH ASSET INCOME FUND, INC. 19
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[ICON] DETAILS ABOUT THE FUND
loans. There is no legal process for collecting
sovereign debts that a government does not pay and
no bankruptcy proceeding by which all or part of a
sovereign debt that a government entity has not
repaid may be collected.
BORROWING AND LEVERAGE -- The Fund may borrow
amounts of up to 33 1/3% of its assets for
temporary emergency purposes including meeting
redemptions. Borrowing may exaggerate changes in
the net asset value of Fund shares and in the
yield on the Fund's portfolio. Borrowing will cost
the Fund interest expense and other fees. The
costs of borrowing may reduce the Fund's return.
Certain securities that the Fund buys may create
leverage including, for example, when issued
securities, forward commitments, options, warrants
and reverse repurchase agreements.
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.
SECURITIES LENDING -- The Fund may lend securities
to financial institutions which provide government
securities as collateral. Securities lending
involves the risk that the borrower may fail to
return the securities in a timely manner or at
all. As a result, the Fund may lose money and
there may be a delay in recovering the loaned
securities. The Fund could also lose money if it
does not recover the securities and the value of
the collateral falls. These events could trigger
adverse tax consequences to the Fund.
REPURCHASE AGREEMENTS; PURCHASE AND SALES
CONTRACTS -- The Fund may enter into certain types
of repurchase agreements or purchase and sales
contracts. Under a repurchase agreement, the
seller agrees to repurchase a security (typically
a security issued or guaranteed by the U.S.
Government) at a mutually agreed upon time and
price. This insulates the Fund from changes in the
market value of the security during the period,
except for currency fluctuations. A purchase and
sale contract is similar to a repurchase
agreement, but purchase and sale contract provide
that the purchaser receives any interest on the
security paid during the period. If the seller
fails to repurchase the security in either
situation and the market value declines, the Fund
may lose money.
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
20 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
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 of 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 that 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 the 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
MERRILL LYNCH ASSET INCOME FUND, INC. 21
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[ICON] DETAILS ABOUT THE FUND
whether the amount received is more or less than
the premium paid for the put option 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) if as a result of
such purchase, the aggregate cost of all
outstanding options on securities held by the Fund
would exceed 5% of the market value of the Fund's
total assets.
STOCK INDEX OPTIONS AND FUTURES AND FINANCIAL
FUTURES -- The Fund is authorized to engage in
transactions in stock index options and futures
and financial futures, and related options on such
futures. The Fund may purchase or write put and
call options on stock indices to hedge against the
risks of market-wide stock price movements in the
securities in which the Fund invests. Options on
indices are similar to options on securities
except that on exercise or assignment, the parties
to the contract pay or receive an amount of cash
equal to the difference between the closing value
of the index and the exercise price of the option
times a specified multiple. The Fund may invest in
stock index options based on a broad market index
such as the S&P 500 Index or on a narrow index
representing an industry or market segment, such
as 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. 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.
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 costs 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 the 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
22 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
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 contracts 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 in U.S. and foreign exchanges and in
options in the over-the-counter markets ("OTC
options"). In general, exchange-traded contracts
are third-party contracts (I.E., performance of
the parties' obligations is guaranteed by an
exchange or clearing corporation) with
standardized strike prices and expiration dates.
OTC options transactions are two-party contracts
with prices and terms negotiated by the buyer and
seller.
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. The Fund's
dealings in forward foreign exchange will be
limited to hedging involving either specific
transactions or portfolio positions.
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.
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[ICON] DETAILS ABOUT THE FUND
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. 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 not
required to hedge its currency positions and may
not do so.
RESTRICTIONS ON THE USE OF FUTURES
TRANSACTIONS -- The Fund may purchase and sell
futures contracts and options (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, taking
into account unrealized profits and unrealized
losses on any such contracts and options.
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 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 and futures contracts exceeds
15% of the total assets of the
24 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
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.
STANDBY COMMITMENT AGREEMENTS -- The Fund may
enter into standby commitment agreements. These
agreements commit the Fund, for a stated period of
time, to purchase a stated amount of securities
that may be issued and sold to the Fund at the
option of the issuer. The price of the security is
fixed at the time of the commitment.
Standby commitment agreements involve the risk
that the security the Fund buys will lose value
prior to its delivery to the Fund. There is also
the risk that if the security goes up in value,
the counterparty will decide not to issue the
security. If this occurs, the Fund will lose the
investment opportunity for the assets it has set
aside to pay for the security and any gain in the
security's price.
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------
If you would like further information about the
Fund, including how it invests, please see the
Statement of Additional Information.
MERRILL LYNCH ASSET INCOME FUND, INC. 25
<PAGE>
[ICON]
YOUR ACCOUNT [ICON]
MERRILL LYNCH SELECT PRICING-SM- SYSTEM
--------------------------------------------------
The Fund offers four share classes, each with its
own sales charge and expense structure, allowing
you to invest in the way that best suits your
needs. Each share class represents an ownership
interest in the same investment portfolio. When
you choose your class of shares you should
consider the size of your investment and how long
you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which
share class is best suited to your personal
financial goals.
For example, if you select Class A or D shares,
you pay a sales charge at the time of purchase. If
you buy Class D shares, you also pay an ongoing
account maintenance fee of 0.25%. You may be
eligible for a sales charge waiver.
If you select Class B or C shares, you will invest
the full amount of your purchase price, but you
will be subject to a distribution fee of 0.50% for
Class B and 0.55% for Class C and an account
maintenance fee of 0.25%. Because these fees are
paid out of the Fund's assets on an ongoing basis,
over time these fees increase the cost of your
investment and may cost you more than paying an
initial sales charge. In addition, you may be
subject to a deferred sales charge when you sell
Class B or C shares.
The Fund's shares are distributed by Merrill Lynch
Funds Distributor, a division of Princeton Funds
Distributor, Inc., an affiliate of Merrill Lynch.
26 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
The table below summarizes key features of the Merrill Lynch Select Pricing-SM-
System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch. through Merrill Lynch.
- Current Class A Limited availability Limited availability Limited availability
shareholders through other securities through other securities through other securities
- Certain Retirement dealers. dealers. dealers.
Plans
- Participants in certain
Merrill Lynch sponsored
programs
- Certain affiliates of
Merrill Lynch.
- ------------------------------------------------------------------------------------------------------------------------------------
Initial Sales Charge? Yes. Payable at time of No. Entire purchase price No. Entire purchase price Yes. Payable at time of
purchase. Lower sales is invested in shares of is invested in shares of purchase. Lower sales
charges available for the Fund. the Fund. charges available for
larger investments. larger investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred Sales Charge? No. (May be charged for Yes. Payable if you Yes. Payable if you No. (May be charged for
purchases over $1 million redeem within four years redeem within one year of purchases over $1 million
that are redeemed within of purchase. purchase. that are redeemed within
one year.) one year.)
- ------------------------------------------------------------------------------------------------------------------------------------
Account Maintenance and No. 0.25% Account Maintenance 0.25% Account Maintenance 0.25% Account Maintenance
Distribution Fees? Fee Fee Fee
0.50% Distribution Fee. 0.55% Distribution Fee. No Distribution Fee.
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion to Class D No. Yes, automatically after No. No.
shares? approximately ten years.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH ASSET INCOME FUND, INC. 27
<PAGE>
[ICON] YOUR ACCOUNT
RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing System funds that you
agree to buy within a 13 month period. Certain restrictions apply.
CLASS A AND CLASS D SHARES -- INITIAL SALES CHARGE OPTIONS
If you select Class A or Class D shares, you will
pay a sales charge at the time of purchase.
<TABLE>
<CAPTION>
Dealer
Compensation
as a % of
As a % of As a % of Offering
Your Investment Offering Price Your Investment* 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% 3.5%
- -------------------------------------------------------------------------------------
$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.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This
charge is 1% of the lesser of the original cost of the shares being
redeemed or your redemption proceeds. A sales charge of 0.75% will be
charged on purchases of $1,000,000 or more of Class A or Class D shares by
certain employer sponsored retirement or savings plans.
No initial sales charge applies to Class A or
Class D shares that you buy through reinvestment
of dividends or distributions.
A reduced or waived sales charge on a purchase of
Class A or Class D shares may apply for:
- Purchases under a RIGHT OF ACCUMULATION
or LETTER OF INTENT.
- Merrill Lynch Blueprint-SM- Program
participants.
- TMA-SM- Managed Trusts.
- Certain Merrill Lynch investment or
central asset accounts.
- Certain employer-sponsored retirement
or savings plans.
28 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
- Purchases using proceeds from the sale
of certain Merrill Lynch closed-end
funds under certain circumstances.
- Certain investors, including directors
of Merrill Lynch mutual funds and
Merrill Lynch employees.
- Certain Merrill Lynch fee-based
programs.
Only certain investors are eligible to buy Class A
shares. Your Merrill Lynch Financial Consultant
can help you determine whether you are eligible to
buy Class A shares or to participate in any of
these programs.
If you decide to buy shares under the initial
sales charge alternative and you are eligible to
buy both Class A and Class D shares, you should
buy Class A since Class D shares are subject to an
account maintenance fee, while Class A shares are
not.
If you redeem Class A or Class D shares and within
30 days buy new shares of the same class, you will
not pay a sales charge on the new purchase amount.
The amount eligible for this "Reinstatement
Privilege" may not exceed the amount of your
redemption proceeds. To exercise the privilege,
contact your Merrill Lynch Financial Consultant or
the Fund's Transfer Agent at 1-800-MER-FUND.
CLASS B AND CLASS C SHARES -- DEFERRED SALES CHARGE OPTIONS
If you select Class B or Class C shares, you do
not pay an initial sales charge at the time of
purchase. However, if you redeem your Class B
shares within four years after purchase or your
Class C shares within one year after purchase, you
may be required to pay a deferred sales charge.
You will also pay distribution fees of 0.50% on
Class B shares and 0.55% on Class C Shares and
account maintenance fees of 0.25% on both Class B
and Class C shares each year under a distribution
plan that the Fund has adopted under Rule 12b-1.
Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost
you more than paying an initial sales charge. The
Distributor uses the money that it receives from
the deferred sales charges and the distribution
fees to cover the costs of marketing, advertising
and compensating the Merrill Lynch Financial
Consultant or other securities dealer who assists
you in purchasing Fund shares.
MERRILL LYNCH ASSET INCOME FUND, INC. 29
<PAGE>
[ICON] YOUR ACCOUNT
CLASS B SHARES
If you redeem Class B shares within four years
after purchase, you may be charged a deferred
sales charge. The amount of the charge gradually
decreases as you hold your shares over time,
according to the following schedule:
<TABLE>
<CAPTION>
Years Since Purchase Sales Charge*
<S> <C>
- -----------------------------------------------------------------
0 - 1 4.00%
- -----------------------------------------------------------------
1 - 2 3.00%
- -----------------------------------------------------------------
2 - 3 2.00%
- -----------------------------------------------------------------
3 - 4 1.00%
- -----------------------------------------------------------------
4 and thereafter 0.00%
- -----------------------------------------------------------------
</TABLE>
* The percentage charge will apply to the lesser of
the original cost of the shares being redeemed or
the proceeds of your redemption. Shares acquired
through reinvestment of dividends or
distributions are not subject to a deferred sales
charge. Not all Merrill Lynch funds have
identical deferred sales charge schedules. If you
exchange your shares for shares of another fund,
the higher charge will apply.
The deferred sales charge relating to Class B
shares may be reduced or waived in certain
circumstances, such as:
- Certain post-retirement withdrawals
from an IRA or other retirement plan if
you are over 59 1/2 years old.
- Redemption by certain eligible 401(a)
and 401(k) plans and group plans
participating in the Merrill Lynch
Blueprint Program and certain
retirement plan rollovers.
- Redemption in connection with
participation in certain Merrill Lynch
fee-based programs.
- Withdrawals resulting from shareholder
death or disability as long as the
waiver request is made within one year
of death or disability or, if later,
reasonably promptly following
completion of probate, or in connection
with involuntary termination of an
account in which Fund shares are held.
- Withdrawal through the Merrill Lynch
Systematic Withdrawal Plan of up to 10%
per year of your Class B account value
at the time the plan is established.
Your Class B shares convert automatically into
Class D shares approximately ten years after
purchase. Any Class B shares received through
reinvestment of dividends or distributions paid on
converting shares will also convert at that
30 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
time. Class D shares are subject to lower annual
expenses than Class B shares. The conversion of
Class B to Class D shares is not a taxable event
for federal income tax purposes.
Different conversion schedules apply to Class B
shares of different Merrill Lynch mutual funds.
For example, Class B shares of a fixed-income fund
convert approximately ten years after purchase
compared to approximately eight years for equity
funds. If you acquire your Class B shares in an
exchange from another fund with a shorter
conversion schedule, the Fund's eight year
conversion schedule will apply. If you exchange
your Class B shares in the Fund for Class B shares
of a fund with a longer conversion schedule, the
other fund's conversion schedule will apply. The
length of time that you hold both the original and
exchanged Class B shares in both funds will count
toward the conversion schedule. The conversion
schedule may be modified in certain other cases as
well.
CLASS C SHARES
If you redeem Class C shares within one year after
purchase, you may be charged a deferred sales
charge of 1.00%. The charge will apply to the
lesser of the original cost of the shares being
redeemed or the proceeds of your redemption. You
will not be charged a deferred sales charge when
you redeem shares that you acquire through
reinvestment of Fund dividends or distributions.
The deferred sales charge relating to Class C
shares may be reduced or waived in connection with
participation in certain Merrill Lynch fee-based
programs, involuntary termination of an account in
which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion
privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- ----------------------------------------------------------------------------
The chart below summarizes how to buy, sell,
transfer and exchange shares through Merrill Lynch
or other securities dealers. You may also buy
shares through the Transfer Agent. To learn more
about buying shares through the Transfer Agent,
call 1-800-MER-FUND. Because the selection of a
mutual fund involves many considerations, your
Merrill Lynch Financial Consultant may help you
with this decision.
MERRILL LYNCH ASSET INCOME FUND, INC. 31
<PAGE>
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Buy Shares First, select the Refer to the Merrill Lynch Select Pricing table on page 27. Be sure to read
share class this prospectus carefully.
appropriate for you
--------------------------------------------------------------------------------------------------------
Next, determine the The minimum initial investment for the Fund is $1,000 for all accounts
amount of your except:
investment - $500 for Employee Access-SM- Accounts
- $250 for certain Merrill Lynch fee-based programs
- $100 for Merrill Lynch Blueprint-SM- Program
- $100 for retirement plans
(The minimums for initial investments may be waived under certain
circumstances.)
--------------------------------------------------------------------------------------------------------
Have your Merrill The price of your shares is based on next calculation of net asset value
Lynch Financial after your order is placed. Any purchase orders received by Merrill Lynch
Consultant or from a securities dealer within fifteen minutes after the close of business
securities dealer on the New York Stock Exchange will be priced at the net asset value
submit your determined that day.
purchase order Purchase orders placed after that time will be priced at the net asset value
determined on the next business day. The Fund may reject any order to buy
shares and may suspend the sale of shares at any time. Merrill Lynch may
charge a processing fee to confirm a purchase. This fee is currently $5.35.
--------------------------------------------------------------------------------------------------------
Or contact the To purchase shares directly, call the Transfer Agent at 1-800-MER-FUND and
Transfer Agent request a purchase application. Mail the completed purchase application to
the Transfer Agent at the address on the inside back cover of this
prospectus.
- --------------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for additional purchases is $50 for all accounts
Investment shares except that retirement plans have a minimum additional purchase of $1.
(The minimums for additional purchases may be waived under certain
circumstances.)
--------------------------------------------------------------------------------------------------------
Acquire additional All dividends and capital gains distributions are automatically reinvested
shares through the without a sales charge.
automatic dividend
reinvestment plan
--------------------------------------------------------------------------------------------------------
Participate in the You may invest a specific amount on a periodic basis through certain Merrill
automatic Lynch investment or central asset accounts.
investment plan
- --------------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a You may transfer your Fund shares only to another securities dealer that has
Another Securities participating entered into an agreement with Merrill Lynch. All shareholder services will
Dealer securities dealer be available for the transferred shares. You may only purchase additional
shares of funds previously owned before the transfer. All future trading of
these assets must be coordinated by the receiving firm.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
<S> <C> <C>
- --------------------------------------------------------------------------------
Transfer Shares to Transfer to a You must either:
Another Securities non-participating - Transfer your shares to an
Dealer (continued) securities dealer account with the Transfer
Agent;
or
- Sell your shares.
- --------------------------------------------------------------------------------
Sell Your Shares Have your Merrill The price of your shares is based on
Lynch Financial the next calculation of net asset
Consultant or value after your order is placed. For
securities dealer your request, you must submit your
submit your sales request to your dealer within fifteen
order minutes after that day's close of
business on the New York Stock
Exchange (generally 4:00 p.m. Eastern
time). Any redemption request placed
from a dealer after that time will be
priced at the net asset value at the
close of business on the next
business day. Dealers must submit
redemption requests to the Fund not
more than 30 minutes after the close
of business on the New York Stock
Exchange.
Securities dealers, including Merrill
Lynch, may charge a fee to process a
redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No
processing fee is charged if you
redeem shares directly through the
Transfer Agent.
The Fund may reject an order to sell
shares under certain circumstances.
------------------------------------------------------------
Sell through the You may sell shares held at the
Transfer Agent Transfer Agent by writing to the
Transfer Agent at the address on the
inside back cover of this prospectus.
All shareholders on the account must
sign the letter and signatures must
be guaranteed. If you hold stock
certificates, return the certificates
with the letter. The Transfer Agent
will normally mail redemption
proceeds within seven days following
receipt of a properly completed
request. If you make a redemption
request before the Fund has collected
payment for the purchase of shares,
the Fund or the Transfer Agent may
delay mailing your proceeds. This
delay will usually not exceed ten
days.
If you hold share certificates, they
must be delivered to the Transfer
Agent before they can be converted.
Check with the Transfer Agent or your
Merrill Lynch Financial Consultant
for details.
- --------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH ASSET INCOME FUND, INC. 33
<PAGE>
[ICON] YOUR ACCOUNT
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
<S> <C> <C>
- --------------------------------------------------------------------------------
Sell Shares Participate in the You can choose to receive systematic
Systematically Fund's Systematic payments from your Fund account
Withdrawal Plan either by check or through direct
deposit to your bank account on a
monthly or quarterly basis. If you
have a Merrill Lynch
CMA-Registered Trademark-,
CBA-Registered Trademark- or
Retirement Account you can arrange
for systematic redemptions of a fixed
dollar amount on a monthly,
bi-monthly, quarterly, semi-annual or
annual basis, subject to certain
conditions. Under either method you
must have dividends and other
distributions automatically
reinvested. For Class B and C shares
your total annual withdrawals cannot
be more than 10% per year of the
value of your shares at the time your
plan is established. The deferred
sales charge is waived for systematic
redemptions. Ask your Merrill Lynch
Financial Consultant for details.
- --------------------------------------------------------------------------------
Exchange Your Shares Select the fund You can exchange your shares of the
into which you want Fund for shares of many other Merrill
to exchange. Be Lynch mutual funds. You must have
sure to read that held the shares used in the exchange
fund's prospectus for at least 15 calendar days before
you can exchange to another fund.
Each class of Fund shares is
generally exchangeable for shares of
the same class of another fund. If
you own Class A shares and wish to
exchange into a fund in which you
have no Class A shares, you will
exchange into Class D shares.
Some of the Merrill Lynch mutual
funds impose a different initial or
deferred sales charge schedule. If
you exchange Class A or D shares for
shares of a fund with a higher
initial sales charge than you
originally paid, you will be charged
the difference at the time of
exchange. If you exchange Class B
shares for shares of a fund with a
different deferred sales charge
schedule, the higher schedule will
apply. The time you hold Class B or C
shares in both funds will count when
determining your holding period for
calculating a deferred sales charge
at redemption. If you exchange Class
A or D shares for money market fund
shares, you will receive Class A
shares of Summit Cash Reserves Fund.
Class B or C shares of the Fund will
be exchanged for Class B shares of
Summit.
Although there is currently no limit
on the number of exchanges that you
can make, the exchange privilege may
be modified or terminated at any time
in the future.
- --------------------------------------------------------------------------------
</TABLE>
34 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
--------------------------------------------------
When you buy shares, you pay the NET ASSET VALUE,
plus any applicable sales charge. This is the
offering price. Shares are also redeemed at their
net asset value, minus any applicable deferred
sales charge. The Fund calculates its net asset
value (generally by using market quotations) each
day the New York Stock Exchange is open, fifteen
minutes after the close of business on the
Exchange (the Exchange generally closes at 4:00
p.m. Eastern time). The net asset value used in
determining your price is the next one calculated
after your purchase or redemption order is placed.
Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not
price its shares. As a result, the Fund's net
asset value may change on days when you will not
be able to purchase or redeem the Fund's shares.
Generally, Class A shares will have the highest
net asset value because that class has the lowest
expenses, and Class D shares will have a higher
net asset value than Class B or Class C shares.
Class B shares will have a higher net asset value
than Class C shares because Class B shares have
lower distribution expenses than Class C shares.
Also dividends paid on Class A and Class D shares
will generally be higher than dividends paid on
Class B and Class C shares because Class A and
Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- ----------------------------------------------------------------------------
If you participate in certain fee-based programs
offered by Merrill Lynch, you may be able to buy
Class A shares at net asset value, including by
exchanges from other share classes. Sales charges
on the shares being exchanged may be reduced or
waived under certain circumstances.
You generally cannot transfer shares held through
a fee-based program into another account. Instead,
you will have to redeem your shares held through
the program and purchase shares of another class,
which may be subject to distribution and account
maintenance fees. This may be a taxable event and
you will pay any applicable sales charges.
If you leave one of these programs, your shares
may be redeemed or automatically exchanged into
another class of Fund shares or into a money
market fund. The class you receive may be the
class you originally owned when you entered the
program, or in certain cases, a different class.
If the exchange is into Class B shares, the period
before conversion to Class D shares may be
modified. Any redemption or exchange will be at
net asset value. However, if you participate in
the program for less than a specified period, you
may be charged a fee in accordance with the terms
of the program.
MERRILL LYNCH ASSET INCOME FUND, INC. 35
<PAGE>
[ICON] YOUR ACCOUNT
DIVIDENDS -- ordinary income and capital gains paid to shareholders.
Dividends may be reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend or distribution. The
reason? If you buy shares when a fund has realized but not yet distributed
income or capital gains, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable distribution.
Before investing you may want to consult your tax adviser.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.
DIVIDENDS AND TAXES
- ----------------------------------------------------------------------------
The Fund will distribute any net investment
income, monthly, and any net realized capital
gains annually. If your account is with Merrill
Lynch and you would like to receive DIVIDENDS in
cash, contact your Merrill Lynch Financial
Consultant. If your account is with the Transfer
Agent and you would like to receive dividends and
distributions in cash, contact the Transfer Agent.
You will pay tax on dividends from the Fund
whether you receive them in cash or additional
shares. If you redeem Fund shares or exchange them
for shares of another fund, any gain on the
transaction may be subject to tax. The Fund
intends to make distributions that will either be
taxed as ordinary income or capital gains. Capital
gains dividends are generally taxed at different
rates than ordinary income dividends.
If you are neither a lawful permanent resident nor
a citizen of the U.S. or if you are a foreign
entity, the Fund's ordinary income dividends
(which include distributions of net short-term
capital gains) will generally be subject to a 30%
U.S. withholding tax, unless a lower treaty rate
applies.
Dividends and interest received by the Fund may
give rise to withholding and other taxes imposed
by foreign countries. Tax conventions between
certain countries and the United States may reduce
or eliminate such taxes.
By law, the Fund must withhold 31% of your
dividends and proceeds if you have not provided a
taxpayer identification number or social security
number.
This section summarizes some of the consequences
under current federal tax law of an investment in
the Fund. It is not a substitute for personal tax
advice. Consult your personal tax adviser about
the potential tax consequences of an investment in
the Fund under all applicable tax laws. The Fund's
Statement of Additional Information has more
information about taxes.
36 MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
MANAGEMENT OF THE FUND [ICON]
MERRILL LYNCH ASSET MANAGEMENT
--------------------------------------------------
Merrill Lynch Asset Management, the Fund's
Investment Adviser, manages the Fund's investments
and its business operations under the overall
supervision of the Fund's Board of Directors. The
Investment Adviser has the responsibility for
making all investment decisions for the Fund. The
Investment Adviser has a sub-advisory agreement
with Merrill Lynch Asset Management U.K. Limited,
an affiliate, under which the Investment Adviser
may pay a fee for services it receives. The Fund
pays the Investment Adviser a fee at the annual
rate of 0.75% of the average daily net assets of
the Fund. For the fiscal year ended December 31,
1998 the Investment Adviser received a management
fee of $ (based on average daily net assets
of approximately $ million), all of which the
Investment Adviser voluntarily reimbursed to the
Fund.
Merrill Lynch Asset Management is part of the
Asset Management Group, which had approximately
$507 billion in investment company and other
portfolio assets under management as of January
1999. This amount includes assets managed for
Merrill Lynch affiliates.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two
digits to designate years. These systems may not
be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem").
The Fund could be adversely affected if the
computer systems used by the Fund's management or
other Fund service providers do not properly
address this problem before January 1, 2000. The
Fund's management expects to have addressed this
problem before then, and does not anticipate that
the services it provides will be adversely
affected. The Fund's other service providers have
told the Fund management that they also expect to
resolve the Year 2000 Problem, and the Fund
management will continue to monitor the situation
as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund
could be negatively affected. The Year 2000
Problem could also have a negative impact on the
companies in which the Fund invests, and this
could hurt the Fund's investment returns.
MERRILL LYNCH ASSET INCOME FUND, INC. 37
<PAGE>
[ICON] MANAGEMENT OF THE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by Deloitte & Touche LLP, where report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------------------
For the Year Ended For the Period
December 31, Sept. 2, 1994+
Increase (Decrease) in --------------------------------------------------------------- to Dec. 31,
Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Per Share Operating
Performance:
- -----------------------------------------------------------------------------------------------------------------
Net asset value, beginning
of period $ $ 10.53 $ 10.62 $ 9.68 $ 10.00
- -----------------------------------------------------------------------------------------------------------------
Investment income -- net .49 .50 .60 .18
- -----------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net .71 .23 1.04 (.32)
- -----------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.20 .73 1.64 (.14)
- -----------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income -- net (.49) (.50) (.60) (.18)
In excess of investment
income -- net -- (.05) -- --
Realized gain on
investments -- net (.92) (.27) (.01) --
In excess of realized
gain on investments -- net -- -- (.09) --
- -----------------------------------------------------------------------------------------------------------------
Total dividends and
distributions (1.41) (.82) (.70) (.18)
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ $ 10.32 $ 10.53 $ 10.62 $ 9.68
- -----------------------------------------------------------------------------------------------------------------
Total Investment Return:**
- -----------------------------------------------------------------------------------------------------------------
Based on net asset value per
share % 11.67% 7.11% 17.38% (1.37)%#
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
- -----------------------------------------------------------------------------------------------------------------
Expenses, net of
reimbursement % .50% .25% .00% .00%*
- -----------------------------------------------------------------------------------------------------------------
Expenses % 3.28% 3.48% 5.12% 5.20%*
- -----------------------------------------------------------------------------------------------------------------
Investment income -- net % 4.58% 4.73% 5.78% 5.64%*
- -----------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $ $ 2,188 $ 3,918 $ 3,872 $ 1,147
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover % 155.57% 342.71% 46.75% .83%
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Class B
-------------------------------------------------------------------
For the Year Ended For the Period
December 31, Sept. 2, 1994+
Increase (Decrease) in ------------------------------------------------- to Dec. 31,
Net Asset Value: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ------------------------------
Per Share Operating
Performance:
- ------------------------------
Net asset value, beginning
of period $ $ 10.53 $ 10.62 $ 9.68 $ 10.00
- ------------------------------
Investment income -- net .41 .42 .51 .16
- ------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net .71 .23 1.04 (.32)
- ------------------------------
Total from investment
operations 1.12 .65 1.55 (.16)
- ------------------------------
Less dividends and
distributions:
Investment income -- net (.41) (.42) (.51) (.16)
In excess of investment
income -- net -- (.05) -- --
Realized gain on
investments -- net (.92) (.27) (.01) --
In excess of realized
gain on investments -- net -- -- (.09) --
- ------------------------------
Total dividends and
distributions (1.33) (.74) (.61) (.16)
- ------------------------------
Net asset value, end of
period $ $ 10.32 $ 10.53 $ 10.62 $ 9.68
- ------------------------------
Total Investment Return:**
- ------------------------------
Based on net asset value per
share % 10.84% 6.31% 16.51% (1.62)%#
- ------------------------------
Ratios to Average Net
Assets:
- ------------------------------
Expenses, net of
reimbursement % 1.25% 1.00% .75% .75%*
- ------------------------------
Expenses % 4.01% 4.24% 5.94% 6.04%*
- ------------------------------
Investment income -- net % 3.79% 3.99% 5.06% 4.86%*
- ------------------------------
Supplemental Data:
- ------------------------------
Net assets, end of period
(in thousands) $ $ 8,078 $ 8,690 $ 9,236 $ 6,797
- ------------------------------
Portfolio turnover % 155.57% 342.71% 46.75% .83%
- ------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
+ Commencement of Operations.
MERRILL LYNCH ASSET INCOME FUND, INC.
38
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class D
Class C -----------
------------------------------------------------------------------------------- For the
For the Period Year Ended
For the Year Ended Oct. 21, December
December 31, 1994+ to Dec. 31,
Increase (Decrease) in ------------------------------------------------------------- 31, -----------
Net Asset Value: 1998 1997 1996 1995 1994 1998
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of
period $ 10.53 $ 10.62 $ 9.69 $ 9.88
- -----------------------------------------------------------------------------------------------------------------------------
Investment income -- net .41 .41 .52 .10
- -----------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net .71 .23 1.03 (.19)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.12 .64 1.55 (.09)
- -----------------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
- -----------------------------------------------------------------------------------------------------------------------------
Investment income -- net (.41) (.42) (.52) (.10)
- -----------------------------------------------------------------------------------------------------------------------------
Return of capital (.92) (.27) (.01) --
- -----------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions (1.33) (.73) (.62) (.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ 10.32 $ 10.53 $ 10.62 $ 9.69
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment Return**:
- -----------------------------------------------------------------------------------------------------------------------------
Based on net asset value per
share 10.79% 6.25% 16.33% (.94)%#
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------
Expenses, net of
reimbursement 1.30% 1.04% .80% .80%*
- -----------------------------------------------------------------------------------------------------------------------------
Expenses 4.12% 4.28% 6.02% 5.75%*
- -----------------------------------------------------------------------------------------------------------------------------
Investment income -- net 3.78% 3.95% 4.99% 5.19%*
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $ 575 $ 357 $ 418 $ 154
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 155.57% 342.71% 46.75% .83%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Period
Oct. 21,
1994+ to Dec.
Increase (Decrease) in 31,
Net Asset Value: 1997 1996 1995 1994
<S> <C> <C> <C> <C>
- ------------------------------
Per Share Operating Performan
- ------------------------------
Net asset value, beginning of
period $ 10.53 $ 10.62 $ 9.69 $ 9.88
- ------------------------------
Investment income -- net .47 .46 .57 .11
- ------------------------------
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net .70 .24 1.03 (.19)
- ------------------------------
Total from investment
operations 1.17 .70 1.60 (.08)
- ------------------------------
Less dividends and
distributions:
- ------------------------------
Investment income -- net (.47) (.47) (.57) (.11)
- ------------------------------
Return of capital (.92) (.27) (.01) --
- ------------------------------
Total dividends and
distributions (1.39) (.79) (.67) (.11)
- ------------------------------
Net asset value, end of
period $ 10.31 $ 10.53 $ 10.62 $ 9.69
- ------------------------------
Total Investment Return**:
- ------------------------------
Based on net asset value per
share 11.29% 6.84% 16.97% (.83)%#
- ------------------------------
Ratios to Average Net Assets:
- ------------------------------
Expenses, net of
reimbursement .75% .50% .25% .25%*
- ------------------------------
Expenses 3.54% 3.70% 5.44% 5.14%*
- ------------------------------
Investment income -- net 4.32% 4.48% 5.53% 5.70%*
- ------------------------------
Supplemental Data:
- ------------------------------
Net assets, end of period
(in thousands) $ 318 $ 633 $ 771 $ 63
- ------------------------------
Portfolio turnover 155.57% 342.71% 46.75% .83%
- ------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
+ Commencement of operations.
MERRILL LYNCH ASSET INCOME FUND, INC. 39
<PAGE>
[FLOW CHART]
MERRILL LYNCH ASSET INCOME FUND, INC.
<PAGE>
FOR MORE INFORMATION
[ICON]
Shareholder Reports
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc. P.O. Box 45289 Jacksonville, Florida 32232-5289 or
by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated above if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with information that is different.
Investment Company Act file #811-7181
Code # 18235-04-99
- -C- Merrill Lynch Asset Management, L.P.
[LOGO]
PROSPECTUS
Merrill Lynch
Asset Income
Fund, Inc.
_April __, 1999
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED MARCH 1, 1999
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH ASSET INCOME FUND, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
-------------------
Merrill Lynch Asset Income Fund, Inc. (the "Fund") is a non-diversified
mutual fund primarily seeking a high level of current income, consistent with
prudent risk, through an investment policy utilizing United States and foreign
debt, equity and money market securities, the combination of which will be
varied from time to time both with respect to types of securities and markets in
response to changing market and economic trends. The Fund will also seek capital
appreciation. Under normal conditions, at least 65%, and as much as all, of the
Fund's total assets will be invested in debt securities, and no more than 25% of
the Fund's total assets will be invested in foreign securities. There can be no
assurance that the Fund's investment objectives will be achieved. The Fund may
employ a variety of instruments and techniques to enhance income and to hedge
against market and currency risk.
-------------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------
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
, 1999 (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. The Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587, ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
-------------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
--------------
The date of this Statement of Additional Information is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objectives and Policies......................................................................... 2
Debt Securities............................................................................................ 3
Equity Securities.......................................................................................... 4
Money Market Securities.................................................................................... 5
Portfolio Strategies Involving Options and Securities...................................................... 5
Other Investment Policies and Practices.................................................................... 11
Risk Factors and Special Considerations.................................................................... 14
Suitability................................................................................................ 14
Management of the Fund..................................................................................... 18
Directors and Officers..................................................................................... 18
Management and Advisory Arrangements....................................................................... 20
Code of Ethics............................................................................................. 21
Purchase of Shares......................................................................................... 21
Initial Sales Charge Alternative -- Class A and D Shares................................................... 22
Reduced Initial Sales Charges.............................................................................. 24
Reinvested Dividends....................................................................................... 24
Fee Based Programs......................................................................................... 27
Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements.............................. 27
Distribution Plans......................................................................................... 27
Limitations on the Payment of Deferred Sales Charges....................................................... 29
Redemption of Shares....................................................................................... 30
Deferred Sales Charge -- Class B and Class C Shares........................................................ 32
Portfolio Transactions and Brokerage....................................................................... 35
Determination of Net Asset Value........................................................................... 37
Shareholder Services....................................................................................... 37
Investment Account......................................................................................... 38
Automatic Investment Plans................................................................................. 38
Automatic Dividend Reinvestment Program.................................................................... 38
Systematic Withdrawal Plans -- Class A, B, C and Class D Shares............................................ 38
Exchange Privilege......................................................................................... 40
Dividends and Taxes........................................................................................ 41
Taxes...................................................................................................... 42
Performance Data........................................................................................... 44
General Information........................................................................................ 47
Description of Shares...................................................................................... 47
Computation of Offering Price Per Share.................................................................... 48
Independent Auditors....................................................................................... 48
Custodian.................................................................................................. 48
Transfer Agent............................................................................................. 48
Legal Counsel.............................................................................................. 48
Reports to Shareholders.................................................................................... 49
Financial Statements....................................................................................... 49
Additional Information..................................................................................... 49
Appendix................................................................................................... 50
</TABLE>
<PAGE>
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 Investment Adviser, Merrill
Lynch Asset Management, L.P., doing business as Merrill Lynch Asset Management
(the "Investment Adviser") in response to changing market and economic trends.
This investment approach provides the Fund with the opportunity to benefit from
anticipated shifts in the relative performance of different types of 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 Investment Adviser 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 Investment Adviser 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 Investment
Adviser 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 Investment Adviser 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 Investment Adviser 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 Investment Adviser anticipates that the Fund's portfolio
generally will include both equity and debt securities.
2
<PAGE>
DEBT SECURITIES
The debt securities in which the Fund may invest include securities issued
or guaranteed by the U.S. Government and its agencies or instrumentalities, by
foreign governments (including foreign states, provinces and municipalities) and
agencies or instrumentalities thereof and debt obligations issued by U.S. and
foreign corporations. Such securities may include mortgage-backed securities
issued or guaranteed by governmental entities or by private issuers. In
addition, the Fund may invest in debt securities issued or guaranteed by
international organizations designed or supported by multiple governmental
entities (which are not obligations of the U.S. Government or foreign
governments) to promote economic reconstruction or development ("supranational
entities") such as the International Bank for Reconstruction and Development
(the "World Bank").
U.S. Government securities include: (i) U.S. Treasury obligations (bills,
notes and bonds), which differ in their interest rates, maturities and times of
issuance, all of which are backed by the full faith and credit of the U.S.; and
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related securities,
some of which are backed by the full faith and credit of the U.S. Treasury
(E.G., direct pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the issuer to borrow
from the U.S. Government (E.G.,obligations of Federal Home Loan Banks) and some
of which are backed only by the credit of the issuer itself (E.G., obligations
of the Student Loan Marketing Association).
In the case of mortgage-related securities, prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, a mortgage-related
security is often subject to more rapid prepayment of principal than its stated
maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the yield and price of
the securities. Accelerated prepayments adversely impact yields for pass-through
securities purchased at a premium (I.E., a price in excess of principal amount)
and may involve additional risk of loss of principal because the premium may not
have been fully amortized at the time the obligation is repaid. The opposite is
true for pass-through securities purchased at a discount. The Fund may purchase
mortgage-related securities at a premium or at a discount.
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing power. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund invests
in foreign government securities of issuers considered stable by the Investment
Adviser. The Investment Adviser 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 Investment Adviser's judgment, possess similar credit characteristics.
See the Statement of Additional Information for more information regarding
ratings of debt securities. The Investment Adviser 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 Investment Adviser will consider factors such as
price, credit risk, market conditions and interest rates and will sell such
security only if, in the Investment Adviser's judgment, it is advantageous to do
so.
The average maturity of the Fund's portfolio of debt securities will vary
based on the Investment Adviser'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
3
<PAGE>
and decrease when interest rates rise. Prices of longer term securities
generally fluctuate more in response to interest rate changes than do shorter
term securities.
EQUITY SECURITIES
Within the portion, if any, of the Fund's portfolio allocated to equity
securities, the Investment Adviser 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 Investment Adviser 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 Investment Adviser 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 Investment Adviser 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. 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.
4
<PAGE>
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 Investment
Adviser 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
Investment Adviser may take such backing into account in determining the
creditworthiness of the issuer. While the market prices for an asset-based
security and the related natural resource asset generally are expected to move
in the same direction, there may not be perfect correlation in the two price
movements. Asset-based securities may not be secured by a security interest in
or claim on the underlying natural resource asset. The asset-based securities in
which the Fund may invest may bear interest or pay preferred dividends at below
market (or even at relatively nominal) rates. As an example, assume gold is
selling at a market price of $300 per ounce and an issuer sells a $1,000 face
amount gold related note with a seven year maturity, payable at maturity at the
greater of either $1,000 in cash or in the then market price of three ounces of
gold. If at maturity, the market price of gold is $400 per ounce, the amount
payable on the note would be $1,200. Certain asset-based securities may be
payable at maturity in cash at the stated principal amount or, at the option of
the holder, directly in a stated amount of the asset to which it is related. In
such instance, because the Fund presently does not intend to invest directly in
natural resource assets, the Fund would sell the asset-based security in the
secondary market, to the extent one exists, prior to maturity if the value of
the stated amount of the asset exceeds the stated principal amount and thereby
realize the appreciation in the underlying asset.
REAL ESTATE-RELATED SECURITIES. The real estate-related securities which
will be emphasized by the Fund are equity securities of real estate investment
trusts, which own income-producing properties, and mortgage real estate
investment trusts which make various types of mortgage loans often combined with
equity features. The securities of such trusts generally pay above average
dividends and may offer the potential for capital appreciation. Such securities
will be subject to the risks customarily associated with the real estate
industry, including declines in the value of the real estate investments of the
trusts. Real estate values are affected by numerous factors including (i)
governmental regulations (such as zoning and environmental laws) and changes in
tax laws, (ii) operating costs, (iii) the location and the attractiveness of the
properties, (iv) changes in economic conditions (such as fluctuations in
interest and inflation rates and business conditions) and (v) supply and demand
for improved 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
5
<PAGE>
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 Investment Adviser believes that, because the Fund will (i) write only
covered options on portfolio securities and (ii) engage in other options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility of the net asset value of its shares, the net asset value of the
Fund's shares will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in the equity, debt and currency markets
occur.
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 writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer would realize a gain in the amount of the
premium. Such a gain, of course, may be offset by a decline in the market value
of the underlying security during the option period. If a call option is
exercised, the writer would realize a gain or loss from the sale of the
underlying security.
The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt or equity securities denominated in
U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the 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
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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 is authorized to purchase put options to hedge
against a decline in the market value of its securities. By buying a put option
the Fund has a right to sell the underlying security at the stated exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. In
certain circumstances, the Fund may purchase call options on securities held in
its portfolio on which it has written call options or on securities which it
intends to purchase. The Fund will not purchase options on securities (including
stock index options discussed below) if as a result of such purchase, the
aggregate cost of all outstanding options on securities held by the Fund would
exceed 5% of the market value of the Fund's total assets.
STOCK INDEX OPTIONS AND FUTURES AND FINANCIAL FUTURES. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Fund may purchase or
write put and call options on stock indices to hedge against the risks of
market-wide stock price movements in the securities in which the Fund invests.
Options on indices are similar to options on securities except that on exercise
or assignment, the parties to the contract pay or receive an amount of cash
equal to the difference between the closing value of the index and the exercise
price of the option times a specified multiple. The Fund may invest in stock
index options based on a broad market index, E.G., the S&P 500 Index, or on a
narrow index representing an industry or market segment, E.G., the AMEX Oil &
Gas Index.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts in
connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index
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futures and financial futures are subject to limitations as described below
under "Restrictions on the Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant advance, it may
purchase futures in order to gain rapid market exposure that may in part or
entirely offset increases in the cost of securities that the Fund intends to
purchase. As such purchases are made, an equivalent amount of futures contracts
will be terminated by offsetting sales. The Fund does not consider purchases of
futures contracts to be a speculative practice under these circumstances. It is
anticipated that, in a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures position, whether
the long position is the purchase of a futures contract or the purchase of a
call option or the writing of a put option on a future, but under unusual
circumstances (E.G., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund also has authority to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies are utilized under the same market and market sector
conditions (I.E., conditions relating to specific types of investments) in which
the Fund enters into futures transactions. The Fund may purchase put options or
write call options on futures contracts and stock indices rather than selling
the underlying futures contract in anticipation of a decrease in the market
value of its securities. Similarly, the Fund may purchase call options, or write
put options on futures contracts and stock indices, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from an
increase in the market value of securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on U.S. and foreign
exchanges and in options in the over-the-counter markets ("OTC options"). In
general, exchange-traded contracts are third-party contracts (I.E., performance
of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with prices and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
An order has been obtained from the Securities and Exchange Commission
exempting the Fund from the provisions of Section 17(f) and Section 18(f) of the
Investment Company Act of 1940, as amended (the "Investment Company Act"), in
connection with its strategy of investing in futures contracts. Section 17(f)
relates to the custody of securities and other assets of an investment company
and may be deemed to prohibit certain arrangements between the Fund and
commodities brokers with respect to initial and variation margin. Section 18(f)
of the Investment Company Act prohibits an open-end investment company such as
the Fund from issuing a "senior security" other than a borrowing from a bank.
The staff of the Securities and Exchange Commission has in the past indicated
that a futures contract may be a "senior security" under the Investment Company
Act.
FOREIGN CURRENCY HEDGING. Generally, the foreign exchange transactions of
the Fund will be conducted on a spot, i.e., cash basis at the spot rate of
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate in
an amount generally less than one tenth of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to deal
in forward foreign exchange among currencies of the different countries in which
it will invest as a hedge against possible variations in the foreign exchange
rates among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
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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 Investment Adviser. 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 Investment Adviser believes that "straddles" of the type which may
be utilized by the Fund constitute hedging transactions and are consistent with
the policies described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade or
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities which it has committed
or anticipates to purchase which are denominated in such currency and, in the
case of securities which have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. The Fund may not incur potential
net liabilities of more than 20% of its total assets from foreign currency
options, futures or related options.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
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
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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.
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 Investment Adviser'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.
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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 Investment Adviser 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 Investment
Adviser believes are appropriate for the Fund, the Fund will notify investors of
its intention to invest in these instruments.
OTHER INVESTMENT POLICIES AND PRACTICES
NON-DIVERSIFIED STATUS. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. However, the Fund's investments will be limited
so as to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended. 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.
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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.
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
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issuance of the security underlying the commitment is at the option of the
issuer, the Fund may bear the risk of a decline in the value of such security
and may not benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
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.
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.
13
<PAGE>
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.
PORTFOLIO TURNOVER. The Investment Adviser 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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
SUITABILITY
The economic benefit from an investment in the Fund depends on many factors
beyond the control of the Fund, the Investment Adviser and its affiliates.
Because it is a global fund, the Fund should be considered as a vehicle for
diversification and not as a balanced investment program. The suitability for
any particular investor of a purchase of shares of the Fund will depend upon,
among other things, such investor's investment objectives and such investor's
ability to accept the risks of investing in global markets including the risk of
a loss of principal.
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
14
<PAGE>
economic and financial conditions, government intervention, speculation, and
other factors. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resources, self-sufficiency
and balance of payments position.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a U.S. instrument, and foreign entities may not be subject
to accounting, auditing and financial reporting standards and requirements
comparable to those to which U.S. entities are subject. In addition, certain
foreign investments may be subject to foreign withholding taxes. Foreign
financial markets, while generally growing in volume, typically have
substantially less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable domestic companies. Foreign markets also have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than with transactions in U.S. securities. There
is generally less government supervision and regulation of exchanges, financial
institutions and issuers in foreign countries than there is in the U.S.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities because
the expenses of the Fund, such as custodial costs, are higher.
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the securities markets and exchange rates between
currencies by the use of 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 Objective
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.
15
<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.
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. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in reliance
on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the
Investment Company Act at any
16
<PAGE>
time the Fund's shares are owned by another investment company that is part
of the same group of investment companies of the Fund. 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.
In addition, to comply with tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
For purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Board of Directors of the Fund to
the extent necessary to comply with changes to the Federal tax requirements.
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 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.
17
<PAGE>
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Investment Adviser 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 Investment Adviser with the Fund, the Fund
is prohibited from engaging in certain transactions involving the Investment
Adviser'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 (66) -- PRESIDENT AND DIRECTOR(1)(2) -- Chairman of the
Investment Adviser and Fund Asset Management, L.P. ("FAM") (which term as used
herein includes corporate predecessors) from 1997 to 1999; President of the
Investment Adviser and FAM from 1977 to 1997; Chairman of Princeton Services,
Inc. ("Princeton Services") since 1997; Director since 1993 and President from
1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.")
since 1990.
JOE GRILLS (64) -- DIRECTOR -- P.O. Box 98, Rapidan, VA 22733. 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 since 1992 and elected Vice Chairman in May 1998; Director,
LaSalle Street Fund since 1995; Director, Hotchkis and Wiley Mutual Funds since
1996; Director Kimco Realty Corporation since January 1997; Member of the
Investment Advisory Committee of the Virginia Retirement System since 1998.
WALTER MINTZ (70) -- 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. (62) -- DIRECTOR -- 106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Director,
Common Fund; 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 (68) -- 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 (65) -- DIRECTOR -- 24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman of Fernwood Advisers (investment adviser)
since 1996; Principal of Fernwood Associates (financial consultant) since 1975.
TERRY K. GLENN (58) -- EXECUTIVE VICE PRESIDENT(1)(2) -- Executive Vice
President of the Investment Adviser and FAM since 1983; President of Merrill
Lynch Funds Distributor, Inc. (the "Distributor") since
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<PAGE>
1986 and Director thereof since 1991; Executive Vice President and Director of
Princeton Services since 1993; President of Princeton Administrators, L.P. since
1988.
DONALD C. BURKE (38) -- VICE PRESIDENT AND TREASURER(1)(2) -- Senior Vice
President and Treasurer of the Manager and FAM since 1999; First Vice President
of the Manager from 1997 to 1999; Vice President of the Manager from 1990 to
1997; Director of Taxation of the Manager since 1990. Senior Vice President and
Treasurer of Princeton Services; Vice President and Treasurer of PFO.
THOMAS R. ROBINSON (55) -- SENIOR VICE PRESIDENT(1)(2) -- First Vice
President of the Investment Adviser since 1997; Senior Portfolio Investment
Adviser of the Investment Adviser since November 1995; Investment Adviser of
International Equity Strategy of ML & Co.'s Global Securities Research and
Economics Group from 1989 to 1995.
BARBARA FRASER (55) -- SECRETARY(1)(2) -- First Vice President of the
Investment Adviser and FAM since 1996; Vice President of the Investment Adviser
from 1994 to 1996; attorney in private practice from 1991 to 1994.
- ------------
(1) Interested person, as defined in the Investment Company Act, of the Company.
(2) The officers of the Fund are officers of certain other investment companies
for which the Investment Adviser or FAM acts as Investment Adviser.
Pursuant to the terms of the management agreement with the Fund, the
Investment Adviser pays all compensation of officers of the Fund as well as the
fees of all Directors who are affiliated persons of the Investment Adviser. The
Fund pays each Director not affiliated with the Investment Adviser (each a "non-
affiliated Director") a fee of $750 per year plus $125 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-affiliated Directors, with a fee of $750 per year; plus $125 per meeting
attended.
The following table sets forth for the fiscal year ended December 31, 1998
compensation paid by the Fund to the non-affiliated Directors and for the
calendar year ended December 31, 1998, 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-affiliated Directors:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION FROM
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 $ 178,583.34
Melvin R. Seiden(1)............................. $ 2,500 None $ 178,583.34
Stephen B. Swensrud(1).......................... $ 2,500 None $ 195,583.34
Joe Grills(1)................................... $ 2,500 None $ 186,333.34
Robert S. Salomon, Jr.*(1)...................... $ 2,500 None $ 178,583.34
</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 (22 registered investment companies consisting of 55 portfolios); Mr.
Mintz (20 registered investment companies consisting of 41 portfolios); Mr.
Salomon (20 registered investment companies consisting of 41 portfolios);
Mr. Seiden (20 registered investment companies consisting of 41 portfolios);
Mr. Swensrud (23 registered investment companies consisting of 56
portfolios).
As of , 1999, the officers and Directors of the Fund as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of 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 ML
& Co.
As of , 1999, Merrill Lynch Trust Company of America Trustee IBO
Providian Bancorp Thrift Savings Plan, owned of record and Providian Bancorp
Thrift Savings Plan owned beneficially % of the outstanding Class A shares
of the Fund. The address of Merrill Lynch Trust Company of America is 225 West
Wacker Drive, Suite 2275, Chicago, IL 60606; the address of Providian Bancorp
Thrift Savings is 201 Mission Street, 10th Floor, San Francisco, CA 94105.
19
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser 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 Investment Adviser 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 Investment Adviser or its affiliates during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
The Fund has entered into a management agreement with the Investment Adviser
(the "Management Agreement"). As discussed in the Prospectus, the Management
Agreement provides that the Fund will pay the Investment Adviser 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, 1998, the
management fees paid by the Fund to the Investment Adviser totaled $ ,
all of which was voluntarily waived. For the fiscal year ended December 31, 1997
the management fees paid by the Fund to the Investment Adviser totaled $92,433,
all of which was voluntarily waived. For the fiscal year ended December 31,
1996, the management fees paid by the Fund to the Investment Adviser totaled
$103,776, all of which was voluntarily waived. For the fiscal year ended
December 31, 1998, the Investment Adviser voluntarily reimbursed the Fund for
additional expenses of $ . For the fiscal year ended December 31, 1997,
the Investment Adviser voluntarily reimbursed the Fund for additional expenses
of $248,970. For the fiscal year ended December 31, 1996, the Investment Adviser
voluntarily reimbursed the Fund for additional expenses of $345,299.
The Investment Adviser may discontinue waiver of its management fee and any
voluntary reimbursement by the Investment Adviser of the Fund's expenses in
whole or in part at any time without notice.
The Management Agreement obligates the Investment Adviser to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of the Fund connected with investment and
economic research, trading and investment management of the Fund, as well as the
fees of all Directors of the Fund who are affiliated persons of the Investment
Adviser 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 Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services on a semi-annual basis. For the fiscal
year ended December 31, 1998 the amount of such reimbursement was $ . For
the fiscal year ended December 31, 1997 the amount of such reimbursement was
$59,442. For the fiscal year ended December 31, 1996, the amount of such
reimbursement was $35,078. 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."
20
<PAGE>
The Investment Adviser is a limited partnership, the partners of which are
ML & Co., Merrill Lynch Investment Management, Inc. and Princeton Services, Inc.
The Investment Adviser 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 Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K., but in no
event in excess of the amount that the Investment Adviser actually receives for
providing services to the Fund pursuant to the Management Agreement. The address
of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9H, England.
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 31, 1998. Unless earlier terminated as
described below, the Management Agreement will remain in effect from year to
year if approved annually (a) by the Board of Directors or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contracts or interested persons (as defined in the
Investment Company Act) of any such party. Such contracts are not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of the Fund.
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 Investment Adviser
(together, the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Investment Adviser and, as described below,
impose additional, more onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser 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
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security 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 Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus for certain information as to the purchase of Fund shares.
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund, and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. The contingent deferred
sales charges ("CDSCs") 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
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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 the account maintenance and/or distribution fees
are paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). Each class has different
exchange privileges. See "Shareholder Services -- Exchange Privilege."
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or its affiliate, FAM. Funds
advised by MLAM or FAM that use the Merrill Lynch Select Pricing(SM) System are
referred to herein as "MLAM-advised mutual funds."
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 CDSC and distribution fees with respect to Class B and Class C shares in
that the sales charges and distribution fees applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares.
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
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase Class
A shares should purchase Class A shares rather than Class D shares because there
is an account maintenance fee imposed on Class D shares. Investors qualifying
for significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges imposed
in connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A or
Class D shares, because over time the accumulated ongoing account maintenance
and distribution fees on Class B or Class C shares may exceed the initial sales
charge and, in the case of Class D shares, the account maintenance fee. Although
some investors who previously purchased Class A shares may no longer be eligible
to purchase Class A shares of other Select Pricing Funds, those previously
purchased Class A shares, together with Class B, Class C and Class D share
holdings, will count toward a right of accumulation which may qualify the
investor for reduced initial sales charge on new initial sales charge purchases.
In addition, the ongoing Class B and Class C account maintenance and
distribution fees will cause Class B and Class C shares to have higher expense
ratios, pay lower dividends and have lower total returns than the initial sales
charge shares. The ongoing Class D account maintenance fees will cause Class D
shares to have a higher expense ratio, pay lower dividends and have a lower
total return than Class A shares.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an
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individual, or to concurrent purchases, which in the aggregate are at least
equal to the prescribed amounts, by an individual, his spouse and their children
under the age of 21 years purchasing shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust created pursuant to a plan qualified under Section
401 of the Code) although more than one beneficiary is involved. The term
"purchase" also includes purchases by any "company," as that term is defined in
the Investment Company Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no purpose
other than the purchase of shares of the Fund or shares of other registered
investment companies at a discount; provided, however, that it does not include
purchases by any group of individuals whose sole organizational nexus is that
the participants therein are credit cardholders of a company, policyholders of
an insurance company, customers of either a bank or broker-dealer or clients of
an investment adviser.
ELIGIBLE CLASS A INVESTORS. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors who currently own Class A shares in a
shareholder account including participants in the Merrill Lynch Blueprint(SM)
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class A shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by MLAM or any of its affiliates. Class A shares are available at
net asset value to corporate warranty insurance reserve fund programs provided
that the program has $3 million or more initially invested in MLAM-advised
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA(SM) Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee, 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 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.
For the fiscal year ended December 31, 1998, the Distributor received $3 and
$256 as sales charges on Class A and Class D shares, respectively, and Merrill
Lynch received $37 and $2,146 as sales charges on Class A and Class D shares,
respectively. For the fiscal year ended December 31, 1998 there were no CDSCs
received on the redemption of load-waived shares. For the fiscal year ended
December 31, 1997, the Distributor received $7 and $100 as sales charges on
Class A and Class D shares, respectively, and Merrill Lynch received $60 and
$1,141 as sales charges on Class A and Class D shares, respectively. 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.
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REDUCED INITIAL SALES CHARGES
REINVESTED DIVIDENDS No initial sales charges are imposed upon Class A and
Class D shares issued as a result of the automatic reinvestment of dividends.
RIGHT OF ACCUMULATION. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being purchased
plus (b) an amount equal to the then current net asset value or cost, whichever
is higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of other MLAM-advised mutual funds. For any such right of accumulation
to be made available, the Distributor must be provided at the time of purchase,
by the purchaser or the purchaser's securities dealer, with sufficient
information to permit confirmation of qualification. Acceptance of the purchase
order is subject to such confirmation. The right of accumulation may be amended
or terminated at any time. Shares held in the name of a nominee or custodian
under pension, profit-sharing or other employee benefit plans may not be
combined with other shares to qualify for the right of accumulation.
LETTER OF INTENTION. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares purchased does not equal the amount stated in the Letter of
Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A shares or Class D shares equal to 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 Intent 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 BLUEPRINT(SM) PROGRAM. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In
addition, participants in Blueprint who own Class A
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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 with a waiver of
the front-end sales charge to Blueprint participants through the Merrill Lynch
Directed IRA Rollover Program ("IRA Rollover Program") available from Merrill
Lynch Business Financial Services, a business unit of Merrill Lynch. The IRA
Rollover Program is available to custodian rollover assets from Employer
Sponsored Retirement and Savings Plans (as defined below) whose Trustee and/or
Plan Sponsor offers the Merrill Lynch Directed IRA Rollover Program.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, The Blueprint(SM) 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 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 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
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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 Investment
Adviser or FAM who purchased such closed-end fund shares prior to October 21,
1994 (the 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
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to the understanding that the disposition of the Fund's portfolio securities
shall at all times remain within its control); and (iii) are liquid securities,
the value of which is readily ascertainable, which are not restricted as to
transfer either by law or liquidity of market (except that the Fund may acquire
through such transactions restricted or illiquid securities to the extent the
Fund does not exceed the applicable limits on acquisition of such securities set
forth under "Investment 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 "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each, a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
The Distribution Plans for 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
27
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the annual rate of 0.50% for Class B shares and 0.55% for Class C shares of the
average daily net assets of the Fund attributable to the shares of the relevant
class in order to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing shareholder and distribution services, and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B and Class C shares of the Fund. The
Distribution Plans relating to Class B and Class C shares are designed to permit
an investor to purchase Class B and Class C shares through dealers without the
assessment of an initial sales charge and at the same time permit the dealer to
compensate its financial consultants in connection with the sale of the Class B
and Class C shares. In this regard, the purpose and function of the ongoing
distribution fees and the CDSC are the same as those of the initial sales charge
with respect to the Class A and Class D shares of the Fund in that the deferred
sales charges provide for the financing of the distribution of the Fund's Class
B and Class C shares.
For the fiscal year ended December 31, 1998, the Fund paid the Distributor
$ pursuant to the Class B Distribution Plan (based on average net daily
assets subject to such Class B Distribution Plan of approximately $ 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, 1998, the Fund paid the Distributor
$ pursuant to the Class C Distribution Plan (based on average daily net
assets subject to such Class C Distribution Plan of approximately $ million),
all of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended December 31, 1998, the Fund paid the Distributor
$ pursuant to the Class D Distribution Plan (based on average daily net
assets subject to such Class D Distribution Plan of approximately $ million)
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 expenses. 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, 1998, direct cash revenues exceeded direct
cash expenses of Class B shares by approximately $ . For the year ended
December 31, 1998, direct cash revenues exceeded direct cash expenses of Class C
shares by $ . For the year ended December 31, 1998, fully allocated expenses
exceeded fully allocated accrual revenues of Class B shares by approximately
$ . Class "C" fully allocated expenses exceeded fully allocated accrual
revenues by approximately $ .
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charge, 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
28
<PAGE>
shares as set forth under "Deferred Sales Charge Alternatives -- Class B and
Class C Shares -- Conversion of Class B Shares to Class D Shares."
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. See
"General Information -- Description of Shares." Among other things, each
Distribution Plan provides that the Distributor will provide and the Directors
will review quarterly reports of the disbursement of the account maintenance
fees and/or distribution fees paid to the Distributor. In their consideration of
each Distribution Plan, the Directors must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and to its related class of shareholders. Each Distribution Plan
further provides that, so long as such Distribution Plan remains in effect, the
selection and nomination of Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the "Independent Directors"),
will be committed to the discretion of the Independent Directors then in office.
In approving each Distribution Plan in accordance with Rule 12b-1, the
Independent Directors concluded that there is a reasonable likelihood that such
Distribution Plan will benefit the Fund and its related class of shareholders.
Each Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Directors or by the vote of the holders of
a majority of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholders, and
all material amendments are required to be approved by the vote of Directors,
including a majority of the Independent Directors who have no direct or indirect
financial interest in such Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the Fund preserve copies of
such Distribution Plan and any reports made pursuant to such plan for a period
of not less than six years from the date of the Distribution Plan or such
reports, the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the 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,
1998 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, 1998.
29
<PAGE>
DATA CALCULATED AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
CLASS B
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------------
Annual
Allowable Allowable Amount Distribution
Aggregate Interest Maximum Previously Aggregate Fee at Current
Eligible Gross Sales on Unpaid Amount Paid to Unpaid Net Asset
Sales(1) Charges(2) Balance(3) Payable Distributor(4) Balance Level(5)
-------------- ------------- ---------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted.... $14,390 $900 $255 $1,155 $256 $899 $46
Under Distributor's Voluntary
Waiver...................... $14,390 $900 $ 72 $ 972 $256 $716 $46
</TABLE>
<TABLE>
<CAPTION>
CLASS C
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------------
Annual
Allowable Allowable Amount Distribution
Aggregate Interest Maximum Previously Aggregate Fee at Current
Eligible Gross Sales on Unpaid Amount Paid to Unpaid Net Asset
Sales(6) Charges(2) Balance(2) Payable Distributor(3) Balance Level(4)
-------------- ------------- ---------- ------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted.... $1,220 $76 $18 $94 $12 $83 $4
</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) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of Summit
can only be purchased by exchange from another fund (the "redeemed fund").
Upon such an exchange, the maximum allowable sales charge payment to the
redeemed fund is reduced in accordance with the amount of the redemption.
This amount is then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the remaining balance of
this amount is deducted from the maximum allowable sales charge payment to
Summit and added to the maximum allowable sales charge payment to the fund
into which the exchange is made.
(3) Interest is computed on a monthly 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.
(4) Consists of CDSC payments, distribution fee payment and accruals. Of the
distribution fee payments made with respect to Class B shares prior to July
6, 1993 under the distribution plan in effect at that time, at a 1.0% rate,
0.75% of average daily net assets has been treated as a distribution fee and
0.25% of average daily net assets has been deemed to have been a service fee
and not subject to the NASD maximum sales charge rule. See "Purchase of
Shares -- Distribution Plans" in the Prospectus. This figure may include
CDSC's that were deferred when a shareholder redeemed shares prior to the
expiration of the applicable CDSC period and invested the proceeds, without
the imposition of a sales charge, in Class A shares in conjunction with the
shareholder's participation in the Merrill Lynch Mutual Funds Advisor
("MFA") program. The CDSC is booked as a contingent obligation that may be
payable if the shareholder terminates participation in the MFA Program.
(5) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
(6) 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 "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus for certain information as to the redemption and repurchase of Fund
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
30
<PAGE>
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.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the New York Stock Exchange (the "NYSE") 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.
The value of shares at the time of redemption may be more of less than the
Shareholder's cost, depending on the market value of the Securities held by the
Fund at any 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 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 NYSE
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 NYSE
(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 NYSE (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 that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through
31
<PAGE>
the Fund's 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 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.
DEFERRED SALES CHARGES ALTERNATIVE -- 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. The proceeds from the account
maintenance fees are used to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) 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".
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 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.
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.
32
<PAGE>
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.
For the fiscal year ended December 31, 1998, Merrill Lynch received CDSC's
of $66,836 and $1,226 relating to transactions in Class B and Class C shares of
the Fund, respectively. For the fiscal year ended December 31, 1997, Merrill
Lynch received CDSCs of $21,266 and $0.00 relating to transactions in Class B
and Class C shares of the Fund, respectively. 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. Additional CDSCs
payable to the Distributor may have been waived or converted to a contingent
obligation in connection with a shareholder's participation in certain fee-based
programs.
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
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------------------------------------------------------------ ---------------------------
<S> <C>
0-1..................................................................... 4.0%
1-2..................................................................... 3.0%
2-3..................................................................... 2.0%
3-4..................................................................... 1.0%
4 and thereafter........................................................ 0.0%
</TABLE>
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12, and during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his 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).
MERRILL LYNCH BLUEPRINT(SM) PROGRAM. Class B shares are offered to certain
participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). Blueprint
is directed to small investors, group IRAs and participants in certain affinity
groups such as trade associations and credit unions. Class B shares of the Fund
are offered through Blueprint only to members of certain affinity groups. The
CDSC is waived in connection with purchase orders placed through Blueprint.
Services, including the exchange privilege, available to Class B investors
through Blueprint, however, may differ from those available to other investors
in Class B shares. Orders for purchases and redemptions of Class B shares of the
Fund will be
33
<PAGE>
grouped for execution purposes which, in some circumstances, may involve the
execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There is no minimum initial or
subsequent purchase requirement for investors who are part of the Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
RETIREMENT PLANS. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value may
purchase Class B shares with a waiver of the CDSC upon redemption if the
following qualifications are met. The CDSC is waived for any Eligible 401(k)
Plan redeeming Class B shares. "Eligible 401(k) Plan" is defined as a retirement
plan qualified under section 401(k) of the Code with a salary reduction feature
offering a menu of investments to plan participants. CDSC is also waived for
Class B redemptions from a 401(a) plan qualified under the Code, provided that
each such plan has the same or an affiliated sponsoring employer as an Eligible
401(k) Plan purchasing Class B shares ("Eligible 401(a) Plan"). Other tax
qualified retirement plans within the meaning of Section 401(a) and 403(b) of
the Code which are provided specialized services (E.G., plans whose participants
may direct on a daily basis their plan allocations among a menu of investments)
by independent administration firms contracted through Merrill Lynch may also
purchase Class B shares with a waiver of the CDSC. The CDSC is also waived for
any Class B shares which are purchased by an Eligible 401(k) Plan or Eligible
401(a) Plan and are rolled over into a Merrill Lynch or Merrill Lynch Trust
Company custodied IRA and held in such account at the time of redemption. The
Class B CDSC is also waived for shares purchased by a Merrill Lynch rollover IRA
that was funded by a rollover from a terminated 401(k) plan managed by the MLAM
Private Portfolio Group and held in such account at the time of redemption. The
minimum initial and subsequent purchase requirements are waived in connection
with all the above-referenced Retirement Plans.
CONTINGENT DEFERRED SALES CHARGE -- CLASS C SHARES. Class C shares that are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. 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. The Class C CDSC may be waived 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.
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.
34
<PAGE>
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.
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."
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions. In executing such transactions, the Investment Adviser
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 Investment Adviser 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 Investment Adviser
under the Management Agreement, and the expenses of the Investment Adviser 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 Investment Adviser 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.
35
<PAGE>
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 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, 1998, the Fund paid total brokerage
commissions of $ , of which $ , or %, was paid to Merrill Lynch for
effecting % of the aggregate dollar amount of transactions on which the
Fund paid brokerage commissions. For the fiscal year ended December 31, 1997,
the Fund paid total brokerage commissions of $8,579, of which $496, or 5.78%,
was paid to Merrill Lynch for effecting 4.08% of the aggregate dollar amount of
transactions on which the Fund paid brokerage commissions. 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.
Reference is made to "How Shares are Priced" in the Prospectus.
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DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends as of 15
minutes after the closing time (generally 4:00 p.m. Eastern time) on each day
during which the NYSE 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. The NYSE is not open on New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. 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 Investment Adviser 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. Long positions in 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. Short positions in securities traded in the OTC
market are valued at the last available ask price in the OTC market prior to the
time of valuation. Portfolio securities that are traded both in the OTC market
and on a stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last asked price. Options purchased by the Fund are valued at their
last sale price in the case of exchange-traded options or in the case of options
traded in the OTC market, the last bid price. Other investments, including
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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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-Registered Trademark- account may arrange to have periodic
investments made in the Fund in amounts of $100 or more ($1 for retirement
accounts) through the CMA-Registered Trademark- Automated Investment Program.
AUTOMATIC DIVIDEND REINVESTMENT PROGRAM
Unless specific instructions to the contrary are given as to the method of
payment of dividends, dividends 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. Shareholders may elect in writing to receive
their dividends in cash, in which event payment will be mailed or direct
deposited on or about the payment date.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if their account is maintained
with the Transfer Agent that they no longer wish to have their dividends
reinvested in shares of the Fund or vice versa and, commencing ten days after
the receipt by the Transfer Agent of such notice, those instructions will be
effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed dividend or redemption checks. 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.
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A, B, C AND CLASS D SHARES
A Class A, B, C or Class D shareholder may elect to make systematic
withdrawals from an Investment Account of Class A, Class B, Class C or Class D
shares in the form of payments by check or through automatic payment by direct
deposit to such shareholders bank 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 having a value of
$10,000 or more.
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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 the dollar amount and class of shares to be redeemed. Redemptions will be
made at net asset value as determined at the close of business of the NYSE on
the 24th day of each month or the 24th day of the last month of each quarter,
whichever is applicable. If the NYSE is not open for business on such date, the
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.
Alternatively a Class A or Class D shareholder whose shares are held within
a CMA-Registered Trademark-, CBA-Registered Trademark- 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 $50. The proceeds of systematic redemptions will be posted
to the shareholder's account five business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or fourth Monday
of each month, in the case of monthly redemptions, or of every other month, in
the case of bimonthly redemptions. For quarterly, semiannual or annual
redemptions, the shareholder may select the month in which the shares are to be
redeemed and may designate whether the redemption is to be made on the first,
second, third or fourth Monday of the month. If the Monday selected is not a
business day, the redemption will be processed at net asset value on the next
business day. The CMA-Registered Trademark-/CBA-Registered Trademark- 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 CMA-Registered Trademark-/CBA-Registered Trademark- Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C Shares -- Contingent
Deferred Sales Charges -- Class B Shares" and "-- Contingent Deferred Sales
Charges -- Class C Shares" in the Prospectus. Where the systematic withdrawal
plan is applied to Class B shares, upon conversion of the last Class B shares in
an account to Class D shares, the systematic withdrawal plan will automatically
be applied thereafter to Class D shares. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Class B and Class C Shares -- Conversion of Class B
Shares to Class D Shares" in the Prospectus; if an investor wishes to change the
amount being withdrawn in a systematic withdrawal plan the investor should
contact his or her Financial Consultant.
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EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second Select
Pricing 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
Select Pricing 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 shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second Select
Pricing Fund at any time as long as, at the time of the exchange, the
shareholder holds Class A shares of the second fund in the account in which the
exchange is made or is otherwise eligible to purchase Class A shares of the
second fund. Class B, Class C and Class D shares will be exchangeable with
shares of the same class of other Select Pricing 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 Select Pricing 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 other Select Pricing Funds or
for Class A shares of Summit ("new Class A or Class D shares") are transacted on
the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares 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 Select Pricing Fund with Class B or 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 Select Pricing Fund or for Class B shares of Summit ("new Class B or
Class C shares") on the basis of relative net asset value per Class B or Class C
share, without the payment of any CDSC that might otherwise be due on redemption
of the outstanding shares. Class B shareholders of the Fund exercising the
exchange privilege will continue to be subject to the Fund's 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
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schedule is higher than the CDSC schedule relating to the Class B shares of the
fund from which the exchange has been made. For purposes of computing the sales
charge that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C shares is
"tacked" to the holding period of the new Class B or Class C shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Global Resources Trust (formerly Merrill Lynch Natural Resources
Trust) after having held the Fund's Class B shares for two and a half years. The
2% sales charge that generally would apply to a redemption would not apply to
the exchange. Three years later the investor may decide to redeem the 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 Investment Adviser 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 AND TAXES
DIVIDENDS
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 dividends. As a result, the dividends paid by the Fund for any
particular period may be more or less than the amount of net investment income
earned by the Fund during such period. However, it is the Fund's intention to
distribute during any fiscal year all its net investment income. Shares will
accrue dividends as long as they are issued and outstanding. Shares are issued
and outstanding as of the settlement date of a purchase order or the settlement
date of a
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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 Dividend Reinvestment Plan" for information
concerning the manner in which dividends may be reinvested automatically in
shares of the Fund. Shareholders may elect in writing to receive any such
dividends, or both, in cash. Dividends are taxable to shareholders as described
below whether they are invested in shares of the Fund or received in cash. The
per share dividends on Class B and Class C shares will be lower than the per
share dividends on Class A and Class D shares as a result of the account
maintenance and higher transfer agency fees applicable with respect to the Class
B and Class C shares. Similarly, the per share dividends on Class D shares will
be lower than the per share dividends 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"). As long as it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income 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 or losses from certain transactions in warrants,
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. 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. 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). Recent legislation creates additional categories of capital
gains taxable at different rates. 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 income dividends. Although the Fund may invest in
certain municipal securities, it is not anticipated that any portion of the
dividends paid by the Fund will qualify for tax-exempt treatment to
shareholders.
Dividends are taxable to shareholders even if they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income dividends
may be eligible for the dividends received deduction allowed to corporations
under the Code, if certain requirements are met. For this purpose, the Fund will
allocate dividends eligible for the dividends received deduction between the
Class A, Class B, Class C and Class D shareholders according to a method (which
it believes is consistent with the Securities and Exchange Commission exemptive
order permitting the issuance and sale of multiple classes of stock) that is
based on the gross income allocable to Class A, Class B, Class C and Class D
shareholders during the taxable year, or such other method as the Internal
Revenue Service may prescribe. If the Fund pays a dividend in January that was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% U.S. withholding
tax under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the U.S.
withholding tax.
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Under certain provisions of the Code, certain non-corporate shareholders may
be subject to a 31% withholding tax on certain ordinary income 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 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.
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SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS. In general, gains
from "foreign currencies" and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in stock,
securities or foreign currencies will be qualifying income for purposes of
determining whether the Fund qualifies as a RIC. It is currently unclear,
however, who will be treated as the issuer of a foreign currency instrument or
how foreign currency options, foreign currency futures and forward foreign
exchange contracts will be valued for purposes of the RIC diversification
requirements applicable to the Fund. The Fund intends to monitor developments in
this area and may request a private letter ruling from the Internal Revenue
Service on some or all of these issues.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (I.E., unless
certain special rules apply, currencies other than the U.S. dollar). In general,
foreign currency gains or losses from certain debt instruments, from forward
contracts, from futures contracts that are not "regulated futures contracts" and
from unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, the Fund may elect capital gain or loss
treatment for such transactions. Regulated futures contracts, as described
above, will be taxed under Code Section 1256 unless application of Section 988
is elected by the Fund. In general, however, Code Section 988 gains or losses
will increase or decrease the amount of the Fund's income available to be
distributed to shareholders as ordinary income. Additionally, if Code Section
988 losses exceed other ordinary income during a taxable year, the Fund would
not be able to make any ordinary dividend distributions, and any distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares. These rules and the mark-to-market
rules described above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of currency fluctuations with respect
to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income dividends and capital gain dividends may also be subject to
state and local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
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 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
44
<PAGE>
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.
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. 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, 1998 was % for Class A shares, % for Class B shares,
% for Class C shares, and % 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.
45
<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>
REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT AT
ON A HYPOTHETICAL THE END OF THE
PERIOD $1,000 INVESTMENT PERIOD
- ------------------------------------------------------------------------- ------------------ --------------------
<S> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
One Year Ending December 31, 1998
Class A................................................................ % $
Class B................................................................ % $
Inception (September 2, 1994) to December 31, 1998
Class A................................................................ % $
Class B................................................................ % $
One Year Ending December 31, 1998
Class C................................................................ % $
Class D................................................................ % $
Inception (October 21, 1994) to December 31, 1998
Class C................................................................ % $
Class D................................................................ % $
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
One Year Ending December 31, 1998
Class A................................................................ % $
Class B................................................................ % $
One Year Ending December 31, 1997
Class A................................................................ 11.67 % $ 1,116.70
Class B................................................................ 10.84 % $ 1,108.40
One Year Ending December 31, 1996
Class A................................................................ 7.11 % $ 1,071.10
Class B................................................................ 6.31 % $ 1,063.10
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, 1998
Class C................................................................ % $
Class D................................................................ % $
One Year Ending December 31, 1997
Class C................................................................ 10.79 % $ 1,107.90
Class D................................................................ 11.29 % $ 1,112.90
One Year Ending December 31, 1996
Class C................................................................ 6.25 % $ 1,062.50
Class D................................................................ 6.84 % $ 1,068.40
Inception (October 21, 1994) to December 31, 1994
Class C................................................................ (0.94 )% $ 990.60
Class D................................................................ (0.83 )% $ 991.70
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT AT
ON A HYPOTHETICAL THE END OF THE
PERIOD $1,000 INVESTMENT PERIOD
- ------------------------------------------------------------------------- ------------------ --------------------
AGGREGATE TOTAL RETURN
<S> <C> <C>
(INCLUDING MAXIMUM APPLICABLE SALES
CHARGES)
Inception (September 2, 1994) to December 31, 1998
Class A................................................................ % $
Class B................................................................ % $
Inception (October 21, 1994) to December 31, 1998
Class C................................................................ % $
Class D................................................................ % $
YIELD
------------------
30 Days Ended December 31, 1998
Class A................................................................ %
Class B................................................................ %
Class C................................................................ %
Class D................................................................ %
</TABLE>
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.
47
<PAGE>
The Investment Adviser 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 Investment Adviser upon redemption of any of such shares will be reduced by
the proportionate amount of the unamortized organizational expenses which the
number of shares redeemed bears to the number of shares initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
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, 1998, 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........................................................... $ $ $ $
--------- --------- --------- ---------
--------- --------- --------- ---------
Number of Shares Outstanding.........................................
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)....................................................... $ $ $ $
Sales Charge (for Class A and Class D shares: 4.00% of offering price
(4.17% of net asset value per share))*.............................
--------- --------- --------- ---------
Offering Price....................................................... $ $ $ $
--------- --------- --------- ---------
--------- --------- --------- ---------
</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
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 LLP, 200 Park Avenue, New York, New York 10166, is counsel
for the Fund.
48
<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.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
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.
49
<PAGE>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations, (I.E., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real investment
standing.
</TABLE>
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
50
<PAGE>
commercial paper is by any other definition "commercial paper" or is exempt from
registration under the Securities Act of 1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
PRIME-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2. Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME. Issuers rated Not Prime do not fall within any of the Prime
rating categories.
If an issuer represents to Moody's that its commercial paper obligations are
supported by the credit of another entity or entities, then the name or names of
such supporting entity or entities are listed within the parentheses beneath the
name of the issuer, or there is a footnote referring the reader to another page
for the name or names of the supporting entity or entities. In assigning ratings
to such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement. You are cautioned to review with your
counsel any questions regarding particular support arrangements.
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.
51
<PAGE>
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
"aaa" An issue which is rated "aaa" is considered to be a top-quality preferred stock.
This rating indicates good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium grade preferred
stock. While risks are judged to be somewhat greater than in the "aaa" and "aa"
classifications, earnings and asset protections are, nevertheless, expected to
be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
"ba" An issue which is rated "ba" is considered to have speculative elements and its
future cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
"b" An issue which is rated "b" generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
"caa" An issue which is rated "caa" is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
"ca" An issue which is rated "ca" is speculative in a high degree and is likely to be
in arrears on dividends with little likelihood of eventual payments.
"c" This is the lowest rated class of preferred or preference stock. Issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
</TABLE>
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
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
52
<PAGE>
accordance with the terms of the obligation; (2) nature of and provisions of the
obligation; and (3) protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative
Grade characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC Debt rated CCC has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt which is
assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being paid.
D Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
</TABLE>
53
<PAGE>
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
N.R. indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the Legal Investment Laws of various states may impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest capacity for
timely payment. Issues in this category are delineated with the numbers 1, 2, and 3
to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong. However,
the relative degree of safety is not as high as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for timely payment.
However, such capacity may be damaged by changing conditions or short-term
adversities.
C This rating is assigned to short-term debt obligations with a doubtful capacity for
payment.
D Debt rated "D" is in payment default. The "D" rating category is used when interest
payments or principal payments are not made on the date due even if the applicable
grace period has not expired, unless Standard & Poor's believes that such payments
will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock
54
<PAGE>
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:
<TABLE>
<S> <C>
I. Likelihood of payment capacity and willingness of the issuer to meet the timely
payment of preferred stock dividends and any applicable sinking fund requirements in
accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed income
security. The capacity to pay preferred stock obligations is very strong, although
not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to make payments for a preferred stock in this category
than for issues in the "A" category.
BB Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as predominately
B speculative with respect to the issuer's capacity CCC to pay preferred stock
obligations. "BB"
CCC indicates the lowest degree of speculation and "CCC" the highest degree of
speculation. While such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk exposures
to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in default on debt
instruments.
</TABLE>
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
55
<PAGE>
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies................ 2
Precious and Industrial Metal-Related
Securities.................................... 4
Real Estate-Related Securities.................. 5
Portfolio Strategies Involving Options and
Futures....................................... 5
Other Investment Policies and Practices......... 11
Investment Restrictions......................... 16
Management of the Fund............................ 18
Directors and Officers.......................... 18
Management and Advisory Arrangements............ 20
Purchase of Shares................................ 21
Initial Sales Charge Alternative --
Class A and Class D Shares.................... 22
Reduced Initial Sales Charges................... 24
Fee Based Programs.............................. 27
Employer-Sponsored Retirement or Savings Plans
and Certain Other Arrangements................ 27
Distribution Plans.............................. 27
Limitations on the Payment of Deferred Sales
Charges....................................... 29
Redemption of Shares.............................. 30
Deferred Sales Charges--Class B and Class C
Shares........................................ 32
Portfolio Transactions and Brokerage.............. 35
Determination of Net Asset Value.................. 36
Shareholder Services.............................. 37
Investment Account.............................. 37
Automatic Investment Plans...................... 38
Automatic Reinvestment of Dividends and Capital
Gains Distributions........................... 38
Systematic Withdrawal Plans..................... 38
Exchange Privilege.............................. 39
Dividends, Distributions and Taxes................ 41
Dividends and Distributions..................... 41
Taxes........................................... 41
Performance Data.................................. 44
General Information............................... 47
Description of Shares........................... 47
Computation of Offering Price Per Share......... 48
Independent Auditors.............................. 48
Custodian......................................... 48
Transfer Agent.................................... 48
Legal Counsel..................................... 48
Reports to Shareholders........................... 49
Additional Information............................ 49
Appendix.......................................... 50
Financial Statements..............................
</TABLE>
CODE # 18238-0498
[LOGO]
MERRILL LYNCH
ASSET INCOME
FUND, INC.
[LOGO]
STATEMENT OF
ADDITIONAL
INFORMATION
,1999
Distributor
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND 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.*
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.*
(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 Amendment
No. 2 to the Registration Statement; and Article II, Article III
(Sections 1, 3, 5, 6 and
C-1
<PAGE>
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.
***** Previously filed with Post-Effective Amendment No. 4 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.
ITEM 26. 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,
C-2
<PAGE>
non-party Directors, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient of
the advance ultimately will be found entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933 (the "Act"),
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal 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 27. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), acts as
the 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 Convertible 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 Growth Fund, Inc., Merrill Lynch Global Holdings, Inc.,
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 Real Estate Fund, Inc., Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch 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 Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM); and the following for
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts
as subadviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch
C-3
<PAGE>
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
Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida
Insured Fund III, MuniHoldings Florida Insured Fund IV, MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured Fund II,
Inc., MuniHoldings New York Insured Fund III, Inc., 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., 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 and Merrill Lynch Intermediate Government Bond Fund is One
Financial Center, 23th 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 North Tower, World Financial Center, 250 Vesey Street, New York, New York
10281-1201. 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. Burke is Vice President and
Treasurer and Mr. Glenn is Executive Vice President of substantially all of the
investment companies listed in the first two paragraphs of this item 28
paragraph, and Messrs. Giordano, Harvey, and Monagle are officers of one or more
of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------------ ---------------------------- ---------------------------------------------
<S> <C> <C>
ML & Co............................. Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services.................. General Partner General Partner of FAM
Jeffrey M. Peek..................... President President of FAM since 1997; President and
Director of Princeton Services since 1997;
Executive Vice President of ML & Co.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------------ ---------------------------- ---------------------------------------------
Terry K. Glenn...................... Executive Vice President Executive Vice President of FAM; Executive
Vice President and Director of Princeton
Services; President and Director of PFD;
Director of FDS; Director of Princeton
Administrators.
<S> <C> <C>
Michael G. Clark.................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Director of
PFD; First Vice President of MLAM from 1997
to 1999; Vice President of MLAM from 1996 to
1997.
Mark A. Desario..................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Linda L. Federici................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Vincent R. Giordano................. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel.............. Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of FAM; Senior Vice President of
Secretary Princeton Services
Philip L. Kirstein.................. Senior Vice President Senior Vice President of FAM; Senior Vice
President, General Counsel, Director and
Secretary of Princeton Services
Ronald M. Kloss..................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Deborah W. Landsman-Yaros........... Senior Vice President Senior Vice President of FAM; Vice President
of MLFD; 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
Brian A. Murdock.................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Donald C. Burke..................... Senior Vice President, Senior Vice President and Treasurer of FAM;
Treasurer and Director of Senior Vice President and Treasurer of
Taxation Princeton Services; Vice President and
Treasurer of PFD; First Vice President of
MLAM from 1997 to 1998; Vice President of
MLAM from 1990 to 1997.
Gregory D. Upah..................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Ronald L. Welburn................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies; The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Income
C-5
<PAGE>
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill
Lynch Consults International Portfolio, Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing Capital
Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging
Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund
for Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc.,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc.,
Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series
Trust Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill
Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund, Inc., The
Municipal Fund Accumlulations Program, 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 MLAM U.K. is Milton Gate, 1 Moor 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 December 31,
1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Mr. Albert is an officer of one or more of the
registered investment companies listed in the first two paragraphs of this Item
28:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------------ -------------------------------- -----------------------------------------
<S> <C> <C>
Alan J. Albert...................... Senior Managing Director Vice President of the Manager
Nicholas C.D. Hall.................. Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group
Carol Ann Langham................... Company Secretary None
Debra Anne Scarle................... Assistant Company Secretary None
</TABLE>
ITEM 28. PRINCIPAL UNDERWRITERS.
(a) MLFD a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end investment companies referred to in the
first two paragraphs of Item 28 except CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program, Inc., and MLFD
also acts as principal underwriter for the following closed-end funds: Merrill
Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. A separate division
of PFD acts as the principal underwriter of a number of other investment
companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of
C-6
<PAGE>
Officers Crook, Breen, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
- --------------------------------------------- -------------------------------- --------------------------------
<S> <C> <C>
Terry K. Glenn............................... President and Director President and Director
Michael G. Clark............................. Director and Treasurer None
Thomas J. Verage............................. Director None
Robert W. Crook.............................. Senior Vice President None
Michael J. Brady............................. Vice President None
William M. Breen............................. Vice President None
James T. Fatseas............................. Vice President None
Debra W. Landsman-Yaros...................... Vice President None
Michelle T. Lau.............................. Vice President None
Salvatore Venezia............................ Vice President None
William Wasel................................ Vice President None
Donald C. Burke.............................. Vice President Vice President and Treasurer
Robert Harris................................ Secretary None
</TABLE>
(c) Not applicable.
ITEM 29. 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 30. 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 31. 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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this 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 1st day of March, 1999.
<TABLE>
<S> <C> <C>
MERRILL LYNCH ASSET INCOME FUND, INC.
By: /s/ TERRY K. GLENN
-----------------------------------------
(Terry K. Glenn, Executive Vice President)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
* President and Director
- ------------------------------ (Principal Executive March 1, 1999
Arthur Zeikel Officer)
*
- ------------------------------ Director
Joe Grills
*
- ------------------------------ Director
Walter Mintz
*
- ------------------------------ Director
Melvin R. Seiden
*
- ------------------------------ Director
Robert S. Salomon, Jr.
*
- ------------------------------ Director
Stephen B. Swensrud
* Treasurer, Principal
- ------------------------------ Accounting and Financial
Donald C. Burke Officer
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ TERRY K. GLENN
-------------------------
(Terry K. Glenn, March 1, 1999
Attorney-in-Fact)
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
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
C-10
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Asset Income Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 6 to Registration Statement No. 33-53997 of our report dated February 18,
1999 appearing in the annual report to shareholders of Merrill Lynch Asset
Income Fund, Inc. for the year ended December 31, 1998, and to the reference to
us under the caption "Financial Highlights" in the Prospectus, which is a part
of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
February 25, 1999
<TABLE> <S> <C>
<PAGE>
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<PAGE>
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<PAGE>
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</TABLE>
