-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, n//bJnTT8pVNhSsjDIeoGx422PZ1AnOsg8U2wML/XHyzryqhQE1s8FFuvrTWQOpT 1FyvgZWDwu6upz2CEh5rGw== 0000950112-94-002138.txt : 19940816 0000950112-94-002138.hdr.sgml : 19940816 ACCESSION NUMBER: 0000950112-94-002138 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940927 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND INC CENTRAL INDEX KEY: 0000874619 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 811-06304 FILM NUMBER: 94544058 BUSINESS ADDRESS: STREET 1: P.0. BOX 9011 STREET 2: MERRILL LYNCH ASSET MANAGEMENT CITY: PRINCETON STATE: NJ ZIP: 08543-9011 BUSINESS PHONE: 6092822800 MAIL ADDRESS: STREET 1: P.O. BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH PHOENIX FUND INC CENTRAL INDEX KEY: 0000701960 STANDARD INDUSTRIAL CLASSIFICATION: 0000 IRS NUMBER: 133114958 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 811-03450 FILM NUMBER: 94544059 BUSINESS ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543 BUSINESS PHONE: 6092823319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH FEDERAL SECURITIES TRUST CENTRAL INDEX KEY: 0000750406 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 811-04077 FILM NUMBER: 94544060 BUSINESS ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543 BUSINESS PHONE: 6092823319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH FUNDAMENTAL GROWTH FUND INC CENTRAL INDEX KEY: 0000887509 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 811-06669 FILM NUMBER: 94544061 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092822800 MAIL ADDRESS: STREET 1: P.O. BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 DEF 14A 1 MERRILL LYNCH ASSET CLUSTER SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: / / Preliminary Proxy Statement /X/ Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. MERRILL LYNCH FEDERAL SECURITIES TRUST MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. MERRILL LYNCH PHOENIX FUND, INC. P.O. Box 9011 Princeton, New Jersey 08543-9011 ------------------------------------------------------------------------------ (Name of Registrant as Specified In Its Charter) SAME AS ABOVE ------------------------------------------------------------------------------ (Name of Person(s) Filing Proxy Statement) Payment of filing fee (Check the appropriate box): / / $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).* / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------------------ (2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------------------ (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11:1 ------------------------------------------------------------------------------ (4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------------------ / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. (1) Amount Previously Paid: ------------------------------------------------------------------------------ (2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------------------ (3) Filing Party: ------------------------------------------------------------------------------ (4) Date Filed: August 15, 1994 ------------------------------------------------------------------------------ - --------------- * $125 per Registrant per Investment Company Act Rule 20a-1(c) previously paid. 1 Set forth the amount on which the filing fee is calculated and state how it was determined. Notes: MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. MERRILL LYNCH FEDERAL SECURITIES TRUST MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. MERRILL LYNCH PHOENIX FUND, INC. P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 DEAR SHAREHOLDER: The enclosed proxy statement requests that you consider and approve (i) the election of the Board of Directors or Trustees, (ii) the selection of the independent auditors, (iii) certain changes to the fundamental investment restrictions for each of the above-referenced mutual funds (each a "Fund") of which you own shares; and (iv) an amendment to the Fund's Articles of Incorporation or Declaration of Trust in connection with the implementation by the Funds of the Merrill Lynch Select PricingSM System (the "Select Pricing System"). As you are aware, many of the mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM") or its affiliate, Fund Asset Management, L.P. ("FAM"), and distributed by Merrill Lynch Funds Distributor, Inc., offer two classes of shares which may be purchased at a price equal to the next determined net asset value per share plus a sales charge which, at the election of the purchaser, may be imposed (i) at the time of purchase (the "Class A shares") or (ii) on a deferred basis (the "Class B shares") (the "Dual Distribution System"). In order to provide additional distribution alternatives tailored more specifically to an investor's needs, the Funds, as well as all of the other mutual funds advised by MLAM or FAM that are currently operating under the Dual Distribution System, intend to implement the Select Pricing System, a new distribution system under which each Fund will offer four classes of shares, each with a different combination of sales charges, ongoing fees and other features. The implementation of the Select Pricing System will not adversely affect the net asset value of a current shareholder's investment in the Fund nor will the two new classes of shares have an adverse effect on the shares that are currently issued and outstanding. An amendment to the Articles of Incorporation or Declaration of Trust of each of the Funds is being proposed in connection with the implementation of the Select Pricing System. This amendment, as well as the election of the Boards of Directors and Trustees, the selection of independent auditors and the proposed investment restriction changes, require the separate approval of the outstanding shareholders of each of the Funds. When we have solicited proxies in the past, you have received a proxy statement directed solely to shareholders of your Fund. Because all of the mutual funds currently operating under the Dual Distribution System intend to begin operating under the Select Pricing System, and since much of the information required to be included in the proxy materials for each Fund is substantially identical, we believe it is more efficient to prepare a single "omnibus" proxy statement for use by the shareholders of all Funds having a common Board of Directors or Trustees. Specific information pertaining to your Fund is attached hereto as Exhibits A and C. If you own more than one Fund, the term "Fund" refers to each Fund in which you own shares. EACH SHAREHOLDER WILL VOTE ONLY ON PROPOSALS THAT APPLY TO THAT SHAREHOLDER'S FUND. THE ENCLOSED PROXY CARD(S) SOLICITS YOUR VOTE ON EACH PROPOSAL AS A SHAREHOLDER OF EACH OF THE FUNDS THAT YOU OWN. YOU WILL BE SENT A SEPARATE PROXY STATEMENT AND PROXY CARD FOR EACH ACCOUNT IN WHICH YOU HOLD SHARES OF THE FUNDS COVERED BY THIS PROXY STATEMENT; IN ADDITION, IF YOU OWN SHARES OF OTHER MLAM-ADVISED FUNDS, YOU WILL BE SENT FOR EACH ACCOUNT IN WHICH YOU OWN SHARES AN ADDITIONAL COMBINED PROXY STATEMENT AND PROXY CARD FOR EACH GROUP OF FUNDS WITH A COMMON BOARD. EACH VOTE IS IMPORTANT; PLEASE REVIEW EACH PROXY STATEMENT CAREFULLY AND CAST YOUR VOTE ON EACH PROXY CARD YOU RECEIVE. MANAGEMENT AND THE BOARD RECOMMEND THAT YOU VOTE "FOR" EACH PROPOSAL. If you have any questions, please call (609) 282-2800. Sincerely, ARTHUR ZEIKEL President 2 MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. MERRILL LYNCH FEDERAL SECURITIES TRUST MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. MERRILL LYNCH PHOENIX FUND, INC. P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 ------------------------ NOTICE OF MEETINGS OF SHAREHOLDERS SEPTEMBER 27, 1994 ------------------------ TO THE SHAREHOLDERS: Notice is hereby given that Meetings of Shareholders (the "Meetings") of the above-listed mutual funds (each a "Fund") advised by Merrill Lynch Asset Management, L.P. ("MLAM") and Fund Asset Management, L.P. ("FAM") will be held at the offices of MLAM, 800 Scudders Mill Road, Plainsboro, New Jersey, on September 27, 1994 at the time specified in Exhibit A hereto. The Meetings will be held for the following purposes: (1) To elect members of the Boards of Directors or Trustees to serve for an indefinite term until their successors are duly elected and qualified; (2) To consider and act upon a proposal to ratify the selection of the independent auditors of each Fund for its current fiscal year; (3) To consider and act upon a proposal to amend the fundamental investment restrictions of each Fund; (4) To consider and act upon a proposal to amend the Articles of Incorporation or Declaration of Trust of each Fund in connection with the implementation of the Merrill Lynch Select PricingSM System (the "Select Pricing System"), a multiclass distribution system for the offer and sale of shares of the Fund (this proposal must be approved by the shareholders of both classes of the Fund voting as a single class and also by the Class B shareholders of the Fund voting as a separate class); and (5) To transact such other business as may properly come before the Meeting or any adjournment thereof. The Board has fixed the close of business on August 5, 1994 as the record date for the determination of shareholders entitled to notice of and to vote at the Meetings or any adjournment thereof. A complete list of the shareholders of each Fund entitled to vote at each Meeting will be available and open to the examination of any shareholder of that Fund for any purpose germane to the Fund's Meeting during ordinary business hours from and after September 6, 1994 at the office of the Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 08536. You are cordially invited to attend your Fund's Meeting. Shareholders who do not expect to attend the Meeting in person are requested to complete, date and sign the enclosed form of proxy, as well as any other proxies you may receive from the Funds in connection with these Meetings, and return them promptly. Each proxy you receive from the Funds in connection with these meetings is being solicited on behalf of the Board. By Order of the Board ROBERT HARRIS MICHAEL J. HENNEWINKEL Secretaries of the Funds Plainsboro, New Jersey Dated: August 12, 1994 2 COMBINED PROXY STATEMENT ------------------------ MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. MERRILL LYNCH FEDERAL SECURITIES TRUST MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. MERRILL LYNCH PHOENIX FUND, INC. P.O. BOX 9011 PRINCETON, NEW JERSEY 08543-9011 ------------------------ MEETINGS OF SHAREHOLDERS SEPTEMBER 27, 1994 ------------------------ INTRODUCTION This Proxy Statement is furnished in connection with the solicitation of proxies on behalf of the Boards of the above-listed funds (each a "Fund" and collectively, the "Funds"), to be voted at the Meeting of Shareholders of each Fund (the "Meeting"), to be held at the offices of Merrill Lynch Asset Management, L.P. ("MLAM"), 800 Scudders Mill Road, Plainsboro, New Jersey, on September 27, 1994 at the time specified in Exhibit A hereto. The approximate mailing date of this Proxy Statement is August 16, 1994. Each Fund is organized either as a Maryland corporation or a Massachusetts business trust. In each jurisdiction, nomenclature varies. For ease and clarity of presentation, throughout the proxy statement shares of common stock or beneficial interest of a Fund are referred to as "shares", holders of shares are referred to as "shareholders", the Board of Directors or Trustees of each of the Funds is referred to as the "Board", the directors or trustees of each Fund are referred to as "Board members", the investment adviser of each Fund is referred to as the "Investment Adviser" or "MLAM" and each Fund's Articles of Incorporation or Declaration of Trust is referred to as its "charter". Unless otherwise indicated, MLAM and Fund Asset Management, L.P. ("FAM") are together referred to as "MLAM" and Merrill Lynch Funds Distributor, Inc. is referred to as "MLFD". All properly executed proxies received prior to the Meeting will be voted at the Meeting in accordance with the instructions marked thereon or otherwise as provided therein. Unless instructions to the contrary are marked, proxies will be voted "FOR" the election of the Board, "FOR" the ratification of the selection of independent auditors to serve for the Fund's current fiscal year, "FOR" the proposal to amend the fundamental investment restrictions of the Fund and "FOR" the charter amendment in connection with the implementation of the Merrill Lynch Select PricingSM System (the "Select Pricing System"). Any proxy may be revoked at any time prior to the exercise thereof by giving written notice to the Secretary of the Fund. The Board has fixed the close of business on August 5, 1994 (the "Record Date") for the determination of shareholders entitled to notice of and to vote at the Meetings and at any adjournment thereof. Shareholders on the Record Date will be entitled to one vote for each share held and fractional votes for fractional shares held, with no shares having cumulative voting rights. Shareholders of each Fund will vote as a single class, and will vote separately on each proposal on which shareholders of that Fund are entitled to vote. As noted, with respect to Proposal 4, Class B shareholders of each Fund voting together as a separate class also will be required to approve the charter amendment. As of the Record Date, each of the Funds had outstanding the number of shares indicated in Exhibit A. To the knowledge of the Fund, no person owned beneficially more than five percent of the outstanding shares of the Fund at such date. The Board knows of no business other than that mentioned in Proposals 1 through 4 of the Notice of Meeting which will be presented for consideration at the Meeting. If any other matter is properly presented, it is the intention of the persons named in the enclosed proxy, as well as any other proxy sent by the Funds in connection with the Meetings, to vote in accordance with their best judgment. PROPOSAL 1 ELECTION OF BOARD MEMBERS At the Meeting, each Board member will be elected to serve for an indefinite term until his successor is elected and qualified, until his death, until he resigns or is otherwise removed under the charter or until December 31 of the year in which he reaches age 72. It is the intention of the persons named in the enclosed proxy to nominate and vote in favor of the election of the persons listed below. 2 The Board knows of no reason why any of these nominees will be unable to serve, but in the event of any such unavailability, the proxies received will be voted for such substitute nominee or nominees as the Board may recommend. Certain information concerning the nominees is set forth below. Additional information concerning the nominees and other information relevant to the election of Board members is set forth in Exhibit A.
PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS AND PUBLIC NAME AND ADDRESS OF NOMINEE AGE DIRECTORSHIPS (1) - -------------------------------- ----------- ----------------------------------------- Joe Grills(1)(2)................ 59 Member of the Committee of Investment of 183 Soundview Lane Employee Benefit Assets of the Financial New Canaan, Executives Institute ("CIEBA") since Connecticut 06840 1986, member of CIEBA's Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Incorpo- rated ("IBM") and Chief Investment Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment Advisory Committee of the State of New York Common Retirement Fund; Director, Duke Management Company and Winthrop Financial Associates (real estate management). Walter Mintz(1)(2).............. 65 Special Limited Partner of Cumberland 1114 Avenue of the Associates (investment partnership) since Americas 1982. New York, New York 10036 Melvin R. Seiden(1)(2).......... 63 President of Silbanc Properties, Ltd. 780 Third Avenue (real estate, investment and consulting) Suite 2502 since 1987; Chairman and President of New York, New York Seiden & de Cuevas, Inc. (private 10017 investment firm) from 1964 to 1987. Stephen B. Swensrud(1)(2)....... 61 Principal of Fernwood Associates 24 Federal Street (financial consultants); Director, Boston, Massachusetts Hitchiner Manufacturing Company. 02110 (footnotes at end of table)
3
PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS AND PUBLIC NAME AND ADDRESS OF NOMINEE AGE DIRECTORSHIPS (1) - -------------------------------- ----------- ----------------------------------------- Harry Woolf(1)(2)............... 71 Member of the editorial board of The Institute for Interdisciplinary Science Reviews; Advanced Study Director, Alex. Brown Mutual Funds, Olden Lane Advanced Technology Laboratories, Family Princeton, New Jersey Health International and SpaceLabs 08540 Medical (medical equipment manufacturing and marketing). Arthur Zeikel(1)(3)............. 62 President of MLAM or its predecessor P.O. Box 9011 since 1977 and Chief Investment Officer Princeton, New Jersey since 1976; President and Chief 08543-9011 Investment Officer of FAM or its predecessor since 1977; President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Executive Vice President of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")since 1990; Senior Vice President of Merrill Lynch from 1985 to 1990; Director of MLFD.
- --------------- (1) Each of the nominees is a director, trustee or member of an advisory board of certain other investment companies for which FAM or MLAM acts as investment adviser. See "Merrill Lynch Investment Company Board Memberships" below. (2) Member of the Audit and Nominating Committee of the Board. (3) Interested person, as defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"), of the Funds. Committees and Board Meetings. The Board has a standing Audit and Nominating Committee (the "Committee"), which consists of the Board members who are not "interested persons" of the Fund within the meaning of the Investment Company Act. The principal purpose of the Committee is to review the scope of the annual audit conducted by the Fund's independent auditors and the evaluation by such auditors of the accounting procedures followed by the Fund. The Committee will also select and nominate the Board members who are not "interested persons" of the Fund within the meaning of the Investment Company Act. The Committee generally will not consider nominees recommended by shareholders of the Fund. The non-interested 4 Board members have retained independent legal counsel to assist them in connection with these duties. During the Fund's last fiscal year, each of the Board members then in office attended at least 75% of the aggregate of (i) the total number of meetings of the Board held during the fiscal year and (ii) if a member, the total number of meetings of the Committee held during the fiscal year. Compensation of Board Members. The Investment Adviser pays all compensation of all officers of the Fund and all Board members who are affiliated with ML & Co. or its subsidiaries. The Fund pays each Board member not affiliated with the Investment Adviser an annual fee plus a fee for each meeting attended, and the Fund also pays each member of its Committee an annual fee plus a fee for each meeting attended, together with such Board member's out-of-pocket expenses relating to attendance at such meetings. Information with respect to fees and expenses paid to the Board members for each Fund's most recently completed fiscal year is set forth in Exhibit A. Merrill Lynch Investment Company Board Memberships. MLAM and FAM act as the investment adviser for more than 100 registered investment companies. Mr. Zeikel is a trustee or director of each of these companies except for Merrill Lynch Series Fund, Inc., Merrill Lynch Institutional Intermediate Fund and Merrill Lynch Funds for Institutions Series. Messrs. Grills, Mintz, Seiden, Swensrud and Woolf are trustees or directors of Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Financial Institutions Series Trust, Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Variable Series Funds, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., MuniInsured Fund, Inc., and MuniYield Insured Fund, Inc. Mr. Swensrud is also a director of Merrill Lynch Series Fund, Inc. Officers of the Fund. Information regarding the officers of the Fund is set forth in Exhibit A. Officers of the Fund are elected and appointed by the Board and hold office until they resign, are removed or are otherwise disqualified to serve. 5 Stock Ownership. As of July 29, 1994, none of the nominees held shares of the Funds except those set forth below: NO. OF NOMINEE FUND* AND CLASS SHARES HELD - ---------------- --------------------------------------------- ------------- Mr. Mintz....... ML Phoenix Fund--Class A 10,105.038 Mr. Woolf....... ML Federal Securities Trust--Class A 801.476 ML Phoenix Fund--Class A 2,031.767 Mr. Zeikel...... ML Fundamental Growth--Class A 239.123 ML Phoenix Fund--Class A 915.623 - --------------- * For the purpose of this table, the following Funds will be referred to as follows: Merrill Lynch Federal Securities Trust ("ML Federal Securities Trust"), Merrill Lynch Fundamental Growth Fund, Inc. ("ML Fundamental Growth") and Merrill Lynch Phoenix Fund, Inc. ("ML Phoenix Fund"). At the Record Date, the Board members and officers of the Fund as a group owned an aggregate of less than 1% of the shares of the Fund outstanding at such date. At such date, Mr. Zeikel, an officer of the Fund and a member of the Board, and the other officers of the Fund owned an aggregate of less than 1% of the outstanding shares of common stock of ML & Co. PROPOSAL 2 SELECTION OF INDEPENDENT AUDITORS The Board, including a majority of the Board members who are not interested persons of the Fund, has selected independent auditors to examine the financial statements of the Fund for the current fiscal year. The Fund knows of no direct or indirect financial interest of such auditors in the Fund. Such appointment is subject to ratification or rejection by the shareholders of the Fund. Unless a contrary specification is made, the accompanying proxy will be voted in favor of ratifying the selection of such auditors. Deloitte & Touche ("D&T") acts as independent auditors for all of the Funds except Merrill Lynch Fundamental Growth Fund, Inc., for which Ernst & Young acts as independent auditor. D&T also acts as independent auditors for ML & Co. and all of its subsidiaries and for most other investment companies for which MLAM or FAM act as investment adviser. The fees received by D&T from these other entities are substantially greater, in the aggregate, than the total fees received by it from the Fund. The Board considered the fact that D&T has been retained as the independent auditors for ML & Co. and the other entities described above in its evaluation of the independence of D&T with respect to each applicable Fund. 6 Representatives of the Fund's independent auditors are expected to be present at the Meeting and will have the opportunity to make a statement if they so desire and to respond to questions from shareholders. PROPOSAL 3 PROPOSAL TO AMEND THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUND Each Fund advised by MLAM or FAM (collectively, the "MLAM Funds") has adopted investment restrictions that govern generally the operations of the Fund. Investment restrictions that are deemed fundamental may not be changed without a vote of the outstanding shares of the Fund, while non-fundamental investment restrictions may be changed by the Fund's Board if it deems it in the best interest of the Fund and its shareholders to do so. In addition to investment restrictions, each of the Funds operate pursuant to investment objectives and policies, described in the Fund's Prospectus and Statement of Additional Information, that govern the investment activities of the Fund and further limit its ability to invest in certain types of securities or engage in certain types of transactions. These investment objectives and policies will be unaffected by the adoption of the proposed investment restrictions. Generally the investment objective of a Fund is a fundamental policy of the Fund that may be changed only by shareholder vote. The investment policies of a Fund are non-fundamental and may not be changed unless and until (i) the Board of the Fund explicitly authorizes, by resolution, a change in the investment policy and (ii) the Prospectus of the Fund is amended to reflect the change in policy and, if appropriate, to include additional disclosure. You should note that certain of the proposed fundamental investment restrictions are stated in terms of "to the extent permitted by applicable law". Applicable law can change over time and may become more or less restrictive as a result. The restrictions have been drafted in this manner so that a change in law would not require the Fund to seek a shareholder vote to amend the restriction to conform to applicable law, as revised. Investment restrictions may differ among Funds depending on prevailing regulations and the nature of the securities markets at the time the particular Fund commenced operations. As a result, similar Funds in the MLAM complex have different investment restrictions, which may disadvantage one Fund over another in the current marketplace and make administration and compliance monitoring unnecessarily difficult. 7 To address this problem, MLAM has analyzed the various fundamental and non-fundamental investment restrictions of the Funds covered by this proxy statement, as well as the investment restrictions of all of the other MLAM-advised non-money market mutual funds, in light of each Fund's investment objectives and policies, and has created a set of standard fundamental and non-fundamental investment restrictions. The proposed uniform restrictions are designed to provide each Fund with as much investment flexibility as possible under the Investment Company Act and applicable state securities regulations ("state blue sky regulations"), help promote operational efficiencies and facilitate monitoring of compliance. Several recently created funds in the MLAM complex operate under investment restrictions substantially similar to the proposed restrictions. The proposed changes to the investment restrictions are not expected to affect materially the current operations of the Funds. Although adoption of new or revised investment restrictions is not likely to have any effect on the current investment techniques employed by a Fund, it will contribute to the overall goal of uniformity and standardization, as well as provide the Fund with a greater ability to make future changes in non-fundamental investment restrictions through Board action. In this regard, the Boards propose that each Fund adopt, as described below, the uniform, updated investment restrictions. The proposed restrictions restate many of the fundamental and non-fundamental restrictions currently in effect for each Fund. In some instances, certain fundamental or non-fundamental restrictions have been modified or eliminated in accordance with developments in Federal or state blue sky regulations or in the securities markets since the inception of the Fund. In other instances, certain restrictions previously deemed fundamental have been redesignated non-fundamental. Fundamental investment restrictions may not be changed without a vote of the shareholders of the Fund, and the costs of shareholder meetings for these purposes generally are borne by the Fund and its shareholders. By making certain restrictions non-fundamental, the Board may amend a restriction as it deems appropriate and in the best interest of the Fund and its shareholders, without incurring the costs of seeking a shareholder vote. Each Fund's current investment restrictions are set forth in Exhibit C. Set forth below is each proposed restriction, followed by a commentary describing the proposed restriction and detailing the significance, if any, of the proposed changes for the MLAM Funds. 8 Proposed Fundamental Investment Restrictions. Under the proposed fundamental investment restrictions, a Fund may not: 1. MAKE ANY INVESTMENT INCONSISTENT WITH THE FUND'S CLASSIFICATION AS A DIVERSIFIED COMPANY UNDER THE INVESTMENT COMPANY ACT. Commentary: Current applicable law regarding diversification of assets requires that with respect to 75% of its total assets, a Fund may not invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities of any one issuer or acquire more than 10% of the voting securities of any one issuer. The U.S. Government, its agencies and instrumentalities are not included within the definition of "issuer" for purposes of these limitations. Certain MLAM Funds apply this diversification restriction to 100% of total assets. At one time, state blue sky regulations applied the diversification restriction to 100% of a mutual fund's assets, thereby prohibiting an investment company from investing more than 5% of total assets in a single issuer or from holding more than 10% of the voting securities of a single issuer. These state blue sky limitations, however, have been eliminated. If the uniform restrictions are approved, each Fund currently classified as "diversified" would be subject, as a matter of investment policy, to the diversification restriction described above only with respect to 75% of its total assets. As to the remaining 25% of total assets, there would be no fundamental investment limitation on the amount of (i) total assets the Fund could invest in a single issuer or (ii) voting securities of a single issuer that could be held by the Fund. A Fund could, for example, invest up to 25% of its assets in a single issuer without limitation as to the percentage ownership of that issuer's outstanding securities. The primary purpose of the proposal is to give the MLAM Funds that presently have a diversification restriction with respect to 100% of their assets the same investment flexibility as MLAM Funds that have a diversification restriction with respect to 75% of their assets, as well as to enable the Funds to comply with any future changes in applicable law regarding diversification requirements without incurring the costs of soliciting a shareholder vote. The Internal Revenue Code of 1986, as amended (the "Code") contains its own, less restrictive, diversification requirements in order for a fund to qualify as a "regulated investment company". The MLAM Funds will continue to comply with the Code diversification requirements. 9 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).1 Commentary: The proposed restriction, which addresses concentration in a particular industry, is in substance identical to the applicable restriction in effect for each MLAM Fund. Certain MLAM Funds currently do not exclude explicitly the U.S.Government, its agencies and instrumentalities from the definition of "industry". However, such entities have not been considered to constitute "industries" for purposes of concentration, and therefore explicit reference to such entities in the proposed restriction does not change a MLAM Fund's concentration policy. In addition, for purposes of this restriction, states, municipalities and their political subdivisions are not considered to be part of any industry. 3. MAKE INVESTMENTS FOR THE PURPOSE OF EXERCISING CONTROL OR MANAGEMENT. Commentary: The proposed restriction is in substance identical to the applicable restriction in effect for each MLAM Fund. Certain MLAM Funds currently include the restriction in their non-fundamental, rather than their fundamental, investment restrictions. Certain MLAM Funds that invest on an international basis go on to state in this restriction that investments by the Fund in wholly-owned investment entities created under the laws of certain countries will not be deemed the making of investments for the purpose of exercising control or management. This language, which is considered by those MLAM Funds to be - --------------- (1) A MLAM Fund that concentrates in a particular industry (i.e., more than 25%) will continue to use its present concentration restriction. A typical restriction in this regard reads as follows: The Fund will not 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, its agencies and instrumentalities), except that, under normal circumstances, the Fund will invest more than 25% of its total assets in the securities of issuers in the [name of industry]. None of the Funds covered by this proxy statement concentrate in a particular industry. 10 explanatory in nature, will continue to be set forth in the investment restrictions of these Funds, including Merrill Lynch Fundamental Growth Fund, Inc. 4. PURCHASE OR SELL REAL ESTATE, EXCEPT THAT A 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. Commentary: The proposed restriction is substantially similar to the applicable restriction in effect for each MLAM Fund, except that certain MLAM Funds in accordance with state blue sky regulations also prohibit investment in real estate limited partnerships and/or real estate mortgage loans in the fundamental restriction. Prohibition on investments in real estate limited partnerships is required under current applicable law, however, such law does not require this restriction to be fundamental. Accordingly, under the proposed uniform restrictions, investment in real estate limited partnerships is prohibited in non-fundamental investment restriction (g) to provide the flexibility to the Board to modify the restriction in response to future changes in applicable law without incurring the expense of a shareholder vote. Prohibition on investment in real estate mortgage loans is not required under current applicable law and, accordingly, has been deleted from the proposed restriction. In addition, the applicable restrictions currently in effect for certain MLAM Funds do not contain any exception to the general prohibition on investments in real estate. The proposed restriction clarifies that these MLAM Funds have the flexibility, consistent with other MLAM Funds, to invest in securities secured by real estate or issued by companies investing in real estate, such as real estate investment trusts. 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. Commentary: The proposed restriction, with respect to the making of loans, is in substance similar to the applicable restrictions 11 in effect for each MLAM Fund. Certain MLAM Funds address loans to other persons and securities lending in two separate restrictions. A MLAM Fund may, as an investment policy, restrict investment in the instruments specifically permitted in the exception beyond the limitations set forth in the proposed restriction. Each MLAM Fund is permitted to engage in securities lending but the MLAM Funds have a variety of different investment restrictions in this regard. For example, certain MLAM Funds have a fundamental investment restriction limiting securities lending to less than 20% of total assets. In addition to investment restrictions, certain MLAM Funds have imposed limitations on securities lending as an investment policy. Applicable law generally permits the lending of a Fund's portfolio securities in an amount up to 33 1/3% of the Fund's total assets, provided that such loans are made in accordance with prescribed guidelines which typically are set forth in the Statement of Additional Information of the Fund. Each Fund will continue to be subject to the lending limitations set forth as an investment policy in its Prospectus and Statement of Additional Information following approval of the proposed uniform investment restrictions, unless and until the Board determines that an amendment to such investment policy is in the best interest of the Fund and its shareholders and the Prospectus of the Fund is amended. 6. ISSUE SENIOR SECURITIES TO THE EXTENT SUCH ISSUANCE WOULD VIOLATE APPLICABLE LAW. Commentary: Certain MLAM Funds currently limit the extent to which the Fund may issue senior securities, while other MLAM Funds have no restriction on the issuance of senior securities. The proposed restriction substitutes instead a limitation on the issuance of senior securities based upon applicable law. Applicable law currently prohibits the issuance of senior securities, defined as any bond, debenture, note or similar obligation or instrument evidencing indebtedness, and any stock of any class having priority as to any other class as to distribution of assets or payment of dividends, but not including (i) bank borrowings provided that immediately thereafter the Fund has 300% asset coverage for all borrowings, or (ii) any note or other evidence of indebtedness representing a loan made to the Fund for temporary purposes (i.e., to be repaid in 60 days without extension or 12 renewal) in an amount not exceeding 5% of the Fund's total assets when the loan is made. Certain other investment techniques, which involve leverage or establish a prior claim to the Fund's assets, may be considered senior securities, absent appropriate segregation of assets or exemptive relief. These techniques include standby commitment agreements, contracts for the purchase of securities on a delayed delivery basis (i.e., firm commitment agreements), reverse repurchase agreements, engaging in financial futures and options thereon, forward foreign currency contracts, put and call options, the purchase of securities on a when-issued basis and short sales. The manner and extent to which a Fund can issue senior securities is governed by applicable law, must be set forth in the Fund's Prospectus and Statement of Additional Information and may be changed only upon resolution of the Board. Investments in interest rate swaps, to the extent permitted, are not treated as senior securities so long as the Fund segregates high-grade liquid debt securities with the Fund's custodian in an amount equal to any net payments required to be made on the swaps. 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. Commentary: Each MLAM Fund has one or more express limitation on various forms of borrowing, a number of which are more restrictive than the limitations set forth in the proposed restriction. For example, a number of MLAM Funds limit borrowings to 5% of total assets. To the extent the Fund's investment policies, as stated in the Fund's Prospectus and Statement of Additional Information, include a limitation on borrowing, or on the pledging of assets to secure borrowings, that is more restrictive than the restrictions in proposed restriction (7), the 13 Fund will continue to be limited by such investment policy on a non-fundamental basis. Moreover, if a Fund intends to borrow from a bank or to offer debt securities privately as part of its investment policies, it will so state in its Prospectus. If the Fund limits borrowing to 5% of total assets, a statement to that effect in the Prospectus will suffice. On the other hand, if the Fund intends as an investment policy to engage in a higher level of borrowing for investment purposes, additional disclosure with respect to the purposes of such borrowing and the consequences of leverage will be included in the Fund's Prospectus and Statement of Additional Information. With regard to purchases on margin, under current applicable law, a Fund may not establish or use a margin account with a broker for the purpose of effecting securities transactions on margin, except that a Fund may obtain such short term credit as necessary for the clearance of transactions. However, a Fund may pay initial or variation margin in connection with futures and related options transactions, as set forth in investment restriction (9) below, without regard to this prohibition. 8. UNDERWRITE SECURITIES OF OTHER ISSUERS EXCEPT INSOFAR AS THE FUND TECHNICALLY MAY BE DEEMED AN UNDERWRITER UNDER THE SECURITIES ACT OF 1933 IN SELLING PORTFOLIO SECURITIES. Commentary: The proposed restriction is in substance identical to the applicable restriction in effect for each Fund. 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. Commentary: Certain MLAM Funds prohibit investment in commodities; others have no restriction on investment in commodities. Under the Investment Company Act, a Fund must state its policy relating to the purchase and sale of commodities. In general, the MLAM Funds currently do not anticipate investment directly in tangible commodities other than currency and would be greatly restricted from making such direct investments by the current provisions of the Federal tax laws; however, the MLAM Funds may invest in financial instruments linked to commodities as described below. Adoption of the proposed uniform restrictions will enable a Fund to invest in commodities only in accordance with applicable law and with the Fund's investment policies as stated in the Fund's Prospectus and Statement of Additional Information. 14 The MLAM Funds have obtained an exemptive order from the Securities and Exchange Commission (the "SEC") which, among other things, permits investment in the commodities markets to the extent such investment is limited to financial futures and options thereon for hedging purposes only. The terms of the exemptive order are slightly more restrictive than currently applicable law. Regulations of the Commodity Futures Trading Commission applicable to the Funds provide that futures trading activities, as described in a Fund's Prospectus and Statement of Additional Information, will not result in the Fund being deemed a "commodity pool operator" as defined under such regulations if the Fund adheres to certain restrictions. In particular, a MLAM Fund that may, as a matter of investment policy, purchase and sell futures contracts and options thereon may do so (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 do not exceed 5% of the liquidation value of such Fund's portfolio, after taking into account unrealized profits and unrealized losses on any such contracts and options. In addition, certain of the MLAM Funds may invest in securities whose potential investment returns are based on the change in value of specific commodities. Subject to review by state blue sky regulators, and if approved by the shareholders, the above-listed restrictions will replace the fundamental investment restrictions for each Fund and, accordingly, will become the only fundamental investment restrictions under which each Fund will operate. If approved, the above restrictions may not be changed without the approval of the holders of a majority of the Fund's outstanding shares (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). Proposed Non-Fundamental Investment Restrictions. The Boards have adopted the following non-fundamental investment restrictions, subject to approval of the fundamental investment restrictions described above. Certain of the proposed non-fundamental restrictions are in substance similar or identical to current fundamental investment restrictions. Redesignating a restriction as non-fundamental allows the Board the flexibility to modify the restriction in response to changes in the securities markets or applicable law if the 15 Board deems it in the best interest of the Fund and its shareholders to do so. Although future modification of a non-fundamental investment restriction would not require a shareholder vote, modification of these restrictions would require both (i) authorization by resolution by the Board and (ii) amendment of the Fund's Prospectus. Under the proposed non-fundamental investment restrictions, each Fund may not: A. PURCHASE SECURITIES OF OTHER INVESTMENT COMPANIES, EXCEPT TO THE EXTENT SUCH PURCHASES ARE PERMITTED BY APPLICABLE LAW. Commentary: A number of MLAM Funds currently state a restriction relating to securities of other investment companies as a fundamental, rather than a non-fundamental, restriction. In addition, a number of the restrictions currently in effect set forth specifically the applicable law. Applicable law currently allows a Fund to purchase the securities of other investment companies if immediately thereafter not more than (i) 3% of the total outstanding voting stock of such company is owned by the Fund, (ii) 5% of the Fund's total assets, taken at market value, would be invested in any one such company, (iii) 10% of the Fund's total assets, taken at market value, would be invested in such securities, and (iv) the Fund, together with other investment companies having the same investment adviser and companies controlled by such companies, owns not more than 10% of the total outstanding stock of any one closed-end investment company. Certain state blue sky regulations have excepted from the prohibition on purchases of securities of other investment companies purchases made in connection with a plan of merger, consolidation, reorganization, or acquisition, or purchases made in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than the customary broker's commission, is involved. This restriction is no longer required and has therefore been deleted from the proposed restriction. B. MAKE SHORT SALES OF SECURITIES OR MAINTAIN A SHORT POSITION EXCEPT TO THE EXTENT PERMITTED BY APPLICABLE LAW. Commentary: In a short sale, an investor sells a borrowed security and has a corresponding obligation to "cover" by delivering at a later date the identical security. In a short sale "against the box", an investor sells the securities short while either owning the 16 same securities in the same amount or having the right to obtain securities to cover through, for example, the investor's ownership of warrants, options, or convertible securities. Certain MLAM Funds currently prohibit short sales under any circumstances; others are specifically authorized to engage in short sales "against the box". Under current applicable law, short sales are considered to involve the creation of senior securities. A Fund that includes short sales in its investment policies must secure its obligation to replace the borrowed security by depositing collateral in a segregated account in compliance with SEC guidelines which are described in the Fund's Prospectus. In addition, under the current blue sky laws of a certain state, Funds that sell short are limited so that the dollar amount of short sales at any one time may not exceed 25% of the net equity of the Fund and the value of securities of any one issuer in which the Fund is short may not exceed the lesser of 2.0% of the value of the Fund's net assets or 2.0% of the securities of any class of any issuer. Short sales "against the box" are not considered speculative sales and do not create senior securities. Funds that are not specifically authorized to engage in short sales "against the box" have not considered short sales "against the box" to be short sales for purposes of their investment restrictions. None of the Funds covered by this Proxy Statement currently have the authority to make short sales. The majority of the MLAM Funds in the MLAM complex, as a matter of investment policy, do not enter into short sales of any kind. If the proposed investment restrictions are adopted, the MLAM Funds that currently are authorized to make short sales will continue to have that ability within the confines of applicable law; the MLAM Funds that are not currently authorized to make short sales will not make short sales unless and until such policy is amended by resolution of the Board and the Fund's Prospectus is amended. C. 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 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 17 WITHIN SEVEN DAYS OR SECURITIES WHICH THE BOARD OF [DIRECTORS OR TRUSTEES] OF THE FUND HAS OTHERWISE DETERMINED TO BE LIQUID PURSUANT TO APPLICABLE LAW. Commentary: Certain MLAM Funds limit investment in restricted and illiquid securities to 5% or 10% of Fund assets. Under the Investment Company Act, open-end investment companies are required to determine net asset value and offer redemption on a daily basis with payment to follow within seven days. In order to ensure that adequate cash is available at all times to cover redemptions, a Fund is required to limit its investments in securities deemed illiquid to 15% of the Fund's net assets. Under current applicable law, an illiquid asset is any asset which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which a Fund has valued the investment. The types of securities that will be considered illiquid will vary over time based on changing market conditions and regulatory interpretations. In accordance with the most restrictive state blue sky regulations currently in effect, a Fund whose shares are registered or qualified for sale in such state may invest no more than 10% of its total assets in illiquid securities. It is possible that such state interpretation will be relaxed in the future to enable a Fund to invest up to 15% of its total assets in illiquid securities. In addition, certain states consider investment of more than 5% of a Fund's total assets in illiquid securities to be speculative and require special disclosure in a Fund's Prospectus with respect thereto. Under current SEC interpretations, a Fund may purchase, without regard to the foregoing 10% (or 15%) limitation, securities which are not registered under the Securities Act of 1933, as amended (the "Securities Act"), provided that they are determined to be liquid pursuant to guidelines and procedures established by the Board. Included among such securities are foreign securities traded in a foreign securities market and securities which can be offered and sold to "qualified institutional buyers," as defined in Rule 144A under the Securities Act ("Rule 144A Securities"). Certain MLAM Funds do not permit the Board the discretion to invest in Rule 144A Securities. 18 The proposed investment restriction would increase the Funds' flexibility with respect to the amount of securities deemed illiquid in which the Fund may invest up to the current SEC limit, assuming that the Fund is not otherwise limited with respect to investment in illiquid securities. A Fund, in its Prospectus and Statement of Additional Information, may limit investment in illiquid securities to a percentage of less than 15%, pursuant to state blue sky regulations or for other reasons. Current applicable law does not require a Fund to state its limitation on investment in illiquid securities as a fundamental policy; however, a number of MLAM Funds currently state their limitations on illiquid securities as a fundamental, rather than a non-fundamental, restriction. D. INVEST IN WARRANTS IF, AT THE TIME OF ACQUISITION, ITS INVESTMENTS IN WARRANTS, VALUED AT THE LOWER OF COST OR MARKET VALUE, WOULD EXCEED 5% OF THE FUND'S TOTAL ASSETS; INCLUDED WITHIN SUCH LIMITATION, BUT NOT TO EXCEED 2% OF THE FUND'S TOTAL ASSETS, ARE WARRANTS WHICH ARE NOT LISTED ON THE NEW YORK STOCK EXCHANGE OR AMERICAN STOCK EXCHANGE OR A MAJOR FOREIGN EXCHANGE. FOR PURPOSES OF THIS RESTRICTION, WARRANTS ACQUIRED BY THE FUND IN UNITS OR ATTACHED TO SECURITIES MAY BE DEEMED TO BE WITHOUT VALUE.3 Commentary: Certain MLAM Funds currently prohibit investment in warrants; others impose limitations that are as restrictive or more restrictive than the proposed restriction. If a Fund is otherwise authorized to invest in warrants as a matter of investment policy, such Fund will now be subject to the limitation set forth in proposed non-fundamental investment restriction (d). A Fund that is currently prohibited from investing in warrants as a matter of investment policy will not invest in warrants unless and until such policy is amended by resolution of the Board and the Fund's Prospectus is amended. E. INVEST IN SECURITIES OF COMPANIES HAVING A RECORD, TOGETHER WITH PREDECESSORS, OF LESS THAN THREE YEARS OF CONTINUOUS OPERATION, IF MORE THAN 5% OF THE FUND'S TOTAL ASSETS WOULD BE INVESTED IN SUCH SECURITIES. THIS RESTRICTION SHALL NOT APPLY TO MORTGAGE-BACKED SECURITIES, ASSET- - --------------- 3 To the extent that a MLAM Fund has broader authority to invest in warrants, it will continue to be subject to its present restriction. None of the Funds covered by this Proxy Statement, except Merrill Lynch Phoenix Fund, Inc., presently has broader authority to invest in warrants. 19 BACKED SECURITIES OR OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES. Commentary: The proposed restriction, which addresses investment by a Fund in "unseasoned issuers", is in substance identical to the applicable restriction in effect for certain MLAM Funds; however, a number of MLAM Funds state this restriction as a fundamental, rather than a non-fundamental, restriction. Restrictions on unseasoned issuers are determined primarily by state blue sky regulations. While several states have more lenient restrictions concerning investment in the securities of unseasoned issuers (i.e., up to 15%), the most restrictive state limitation is currently 5%. Applicable state blue sky regulations do not require that entities with less than three years of continuous operation that issue mortgage-backed securities, asset-backed securities or obligations supported by the U.S. Government, its agencies or instrumentalities be included in the definition of "unseasoned issuers". There is no federal limitation concerning investment in unseasoned issuers. F. PURCHASE OR RETAIN THE SECURITIES OF ANY ISSUER, IF THOSE INDIVIDUAL OFFICERS AND DIRECTORS OF THE FUND, THE INVESTMENT ADVISER, THE DIRECTORS OF SUCH GENERAL PARTNER OR THE OFFICERS AND DIRECTORS OF ANY SUBSIDIARY THEREOF EACH OWNING BENEFICIALLY MORE THAN ONE-HALF OF ONE PERCENT OF THE SECURITIES OF SUCH ISSUER OWN IN THE AGGREGATE MORE THAN 5% OF THE SECURITIES OF SUCH ISSUER. Commentary: The proposed restriction, which addresses investment by a Fund in securities of an issuer in which management of the Fund owns shares, is in substance similar to the applicable restriction in effect for certain MLAM Funds; however, a number of MLAM Funds currently state this restriction as a fundamental, rather than a non-fundamental, restriction. Restrictions on these types of investments are determined primarily by state blue sky regulations. Certain MLAM Funds' current investment restrictions apply to the Investment Adviser or any "affiliate" thereof, which would make the restriction applicable to ML & Co. and any entity controlled by ML & Co. The proposed restriction reflects currently applicable law and applies only to MLAM and certain affiliates. 20 G. INVEST IN REAL ESTATE LIMITED PARTNERSHIP INTERESTS OR INTERESTS IN OIL, GAS OR OTHER MINERAL LEASES, OR EXPLORATION OR DEVELOPMENT PROGRAMS, EXCEPT THAT THE FUND MAY INVEST IN SECURITIES ISSUED BY COMPANIES THAT ENGAGE IN OIL, GAS OR OTHER MINERAL EXPLORATION OR DEVELOPMENT ACTIVITIES. Commentary: Restrictions with respect to these types of investments are determined primarily by state blue sky regulations. The proposed restriction is in substance similar to the applicable restriction in effect for each MLAM Fund; however, a number of MLAM Funds state this restriction, in whole or in part, as a fundamental, rather than a non-fundamental, restriction. H. WRITE, PURCHASE OR SELL PUTS, CALLS, STRADDLES, SPREADS OR COMBINATIONS THEREOF, EXCEPT TO THE EXTENT PERMITTED IN THE FUND'S PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION, AS THEY MAY BE AMENDED FROM TIME TO TIME. Commentary: The proposed restriction is in substance similar to the applicable restriction in effect for each MLAM Fund authorized to engage in these types of transactions, except that certain MLAM Funds impose specific percentage limitations in the investment restriction on the investments. A number of MLAM Funds state this restriction as a fundamental, rather than a non-fundamental, restriction. If the proposed restrictions are approved, MLAM Funds that currently are authorized to engage in puts, calls, straddles, spreads and combinations thereof will be subject to the proposed restriction and will continue to engage in such transactions to the extent set forth in the Fund's Prospectus and Statement of Additional Information. MLAM Funds that are not currently authorized to engage in these types of transactions would not be permitted to engage in such transactions unless and until the Board determines to establish an investment policy in this regard and the Fund's Prospectus is amended. ----------------------------- Elimination of Restrictions Applicable to Foreign Securities. Investment restrictions relating to investment in foreign securities have been eliminated in the proposed uniform restrictions. Certain MLAM Funds that commenced operations more than 10 years ago were required by state blue sky regulations then in effect to include an investment restriction limiting or prohibiting investment in foreign securities. More recently, funds are no longer required to state this policy as an investment restriction but instead include investment policies with respect to foreign securities in their Prospectuses and Statements of Additional Information. 21 PROPOSAL 4 APPROVAL OR DISAPPROVAL OF A CHARTER AMENDMENT IN CONNECTION WITH THE IMPLEMENTATION OF THE MERRILL LYNCH SELECT PRICINGSM SYSTEM DESCRIPTION OF THE SELECT PRICING SYSTEM General. In 1988, MLAM developed a two-class distribution system pursuant to which investors may choose to purchase Class A shares of a Fund with a front-end sales charge or Class B shares with a contingent deferred sales charge ("CDSC") and ongoing distribution fees (the "Dual Distribution System"). The Dual Distribution System was among the first in the mutual fund industry to offer investors alternative sales charge arrangements within the same Fund. On April 12, 1994, the SEC issued an exemptive order permitting certain MLAM-advised mutual funds to issue multiple classes of shares (the "Order"). The Order permits each Fund to create an unlimited number of classes of shares to expand the types of sales charge arrangements available to Fund investors without otherwise affecting investment in the Fund. In this regard, the Funds intend to implement the Select Pricing System, under which eligible investors may choose from different sales charge alternatives in four classes of shares. At its meeting held August 3, 1994, the Board approved the manner in which shares of each class will be offered and sold under the Select Pricing System, as described in detail below. The specific amounts of the sales charges and account maintenance and distribution fees for each Fund are set forth in Exhibit A. Although the Funds currently intend to implement the Select Pricing System as described herein, changes may be made to the distribution arrangements of any class at any time; however, changes will not be made to the terms of the Select Pricing System as it applies to any Fund unless and until (i) the Board of the Fund explicitly authorizes, by resolution, any change in the terms and (ii) the Prospectus of the Fund is amended to reflect the change. Changes to the Select Pricing System ordinarily would not require a vote of the shareholders of a Fund, except in certain circumstances necessitating a charter amendment or in which fees paid by existing shareholders pursuant to Rule 12b-1 under the Investment Company Act ("Rule 12b-1") are increased. Upon implementation of the Select Pricing System, (i) each holder of Class A shares will continue to hold Class A shares except that Class A shares of nine MLAM-advised Funds will be redesignated 22 Class D (see "Redesignation of Shares of Certain MLAM-Advised Funds" below) and (ii) each holder of Class B shares will continue to hold Class B shares except that Class B shares of Merrill Lynch Fundamental Growth Fund, Inc. will be redesignated Class C shares and certain Class B shares will convert to Class D shares pursuant to the conversion feature of the Class B shares (see "Redesignation of Shares of Certain MLAM-Advised Funds" and "Class B" below). The Class A and Class B shares held after the implementation of the Select Pricing System will have the rights, privileges and features described herein. Any holder may, prior to the implementation of the Select Pricing System, exchange or redeem his shares in accordance with the rights, privileges, designations and preferences currently in effect. The following table sets forth a summary of the distribution arrangements for each class of shares under the Select Pricing System, followed by a more detailed description of each class.
ACCOUNT MAINTENANCE DISTRIBUTION CONVERSION CLASS SALES CHARGE FEE FEE FEATURE A* Maximum 5.25% front-end sales No No No charge** B CDSC for periods of up to 4 Maximum Maximum B shares years, at a maximum rate of 4.0% 0.25% 0.75% convert to during the first year, D shares decreasing 1.0% annually to 0.0% automatically after Conversion Period C 1.0% CDSC for one year Maximum Maximum No 0.25% 0.75% D Maximum 5.25% front-end sales Maximum No No charge** 0.25%
* Offered only to eligible investors. See "Class A" below. ** Certain Class A and Class D purchases will be subject to a maximum 1.0% CDSC for one year. See "Class A" and "Class D" below. Class A: Class A shares will be sold subject to a front-end sales charge and will bear no ongoing distribution or account maintenance fees. For most Funds, the front-end sales charge on purchases of Class A shares under the Select Pricing System will be lower than the front-end sales charge currently imposed on Class A shares. Class A shares will be offered to a limited group of investors. Investors that currently own Class A shares of a Fund in an account will be entitled to purchase additional Class A shares of that Fund in that account. Class 23 A shares also will be offered to certain retirement plans. In addition, Class A shares will be offered to directors and employees of ML & Co. and its subsidiaries, Board members and members of the Boards of other MLAM-advised mutual funds and participants in certain investment programs. Class A shares also will be issued on reinvestment of dividends paid on Class A shares. Exchange Privilege. THE EXCHANGE PRIVILEGE FOR CLASS A SHAREHOLDERS WILL BE MODIFIED UNDER THE SELECT PRICING SYSTEM MAKING IT MORE RESTRICTIVE THAN PRESENTLY EXISTS. Under the Select Pricing System, Class A shareholders may exchange Class A shares of one Fund for Class A shares of a second MLAM-advised mutual fund if the shareholder holds any Class A shares of the second Fund in his account in which the exchange is made at the time of the exchange. If the Class A shareholder wants to exchange his Class A shares for shares of a second Fund, and the shareholder does not hold Class A shares of the second Fund in his account at the time of the exchange, the shareholder will receive Class D shares of the second Fund as a result of the exchange. Class A or Class D shares may be exchanged for Class A shares of a second 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. For example, a shareholder owns 50 Class A shares of Merrill Lynch Basic Value Fund, Inc. ("Basic Value") and 50 Class A shares of Merrill Lynch World Income Fund, Inc. ("World Income") in his personal account and 50 Class A shares of Merrill Lynch Pacific Fund, Inc. ("Pacific") in his individual retirement account ("IRA"). In his personal account, the shareholder eliminates his position in Basic Value by exchanging 25 shares of Basic Value for shares of equivalent value of World Income and 25 shares of Basic Value for shares of equivalent value of Pacific. The shareholder will receive Class A shares of World Income, because he holds World Income Class A shares in his personal account at the time of the exchange, and he will receive Class D shares of Pacific, because although he owns Pacific Class A shares, he does not hold them in his personal account. Similarly, if the shareholder decides to exchange back into Basic Value, he will receive Class D shares, because he no longer holds Class A shares of Basic Value in his personal account. 24 In his IRA, if the investor decides to exchange 25 Class A shares of Pacific for shares of equivalent value of Merrill Lynch Fund for Tomorrow, Inc. ("Fund for Tomorrow"), he will receive Class D shares of Fund for Tomorrow, because he holds no Class A shares of Fund for Tomorrow in his IRA. If he decides, however, to exchange back into Pacific, he can receive Class A shares of Pacific as long as he still holds any Class A shares of Pacific in his IRA at the time of the exchange. Class A shareholders also may exchange Class A shares for shares of certain MLAM-advised money market funds. For further information regarding the Select Pricing System exchange privilege, see "Exchange Privilege" below. Reduced initial sales charges. Class A investors may qualify for reduced initial sales charges through a right of accumulation taking into account an investor's holdings of all classes of all MLAM-advised Funds. See "Right of Accumulation" below. Under a right of accumulation, certain Class A shareholders who purchase or accumulate Class A shares, together with Class B, Class C and Class D shares, of any MLAM-advised Funds which aggregate at least $1 million also qualify to add to their investment in Class A shares of a Fund without the imposition of a front-end sales charge. Although these investors will not be subject to a front-end sales charge, they will be subject to a CDSC of 1.0% if the shares are redeemed within one year after purchase. Redesignation of Class A Shares. Class A shares outstanding on the date of the implementation of the Select Pricing System (the "Implementation Date") that are subject to ongoing account maintenance fees automatically will be redesignated Class D shares. Consequently, the Class A shares of Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Federal Securities Trust and Merrill Lynch Fundamental Growth Fund, Inc. will be redesignated as Class D shares on the Implementation Date. The redesignation of the Class A shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. See "Redesignation of Shares of Certain MLAM-Advised Funds" below. Class B: Class B shares will be sold on a deferred sales charge basis. Class B shares do not incur a front-end sales charge, but they 25 are subject to a maximum ongoing 0.25% account maintenance fee, an ongoing distribution fee and a CDSC for periods of up to four years. Conversion of Class B Shares to Class D Shares. After a set time period (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 but no distribution fee. Automatic conversion of Class B shares into Class D shares will occur at least once a month (on the "Conversion Date") on the basis of the relative net asset values of the shares of the two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. In addition, shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The Conversion Date for dividend reinvestment shares will be calculated taking into account the length of time the shares underlying such dividend reinvestment shares were outstanding. In general, Class B shares of equity Funds will convert approximately eight years after initial purchase, and Class B shares of taxable and tax-exempt fixed income Funds will convert approximately ten years after initial purchase. Specific Conversion Periods for each Fund are set forth in Exhibit A. If during the Conversion Period a shareholder exchanges Class B shares with a ten-year Conversion Period for Class B shares with an eight-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 for certain retirement plans will be modified as described under "Proposed Charter Amendment--Class B Retirement Plans" below. The Class B distribution fee is subject to the limitations on asset-based sales charges imposed by the National Association of Securities Dealers, Inc. (the "NASD"), as voluntarily modified by MLFD. See "Limitations on Asset-Based Sales Charges" below. Exchange Privilege. Class B shareholders may exchange Class B shares of the Fund for Class B shares of any 26 MLAM-advised mutual fund as well as shares of certain MLAM-advised money market funds. See "Exchange Privilege" below. Redesignation of Class B Shares. Class B shares of Merrill Lynch Fundamental Growth Fund, Inc. outstanding on the Implementation Date automatically will be redesignated Class C shares. This redesignation of Class B shares to Class C shares will not be deemed a purchase or sale of the shares for Federal income tax purposes. See "Redesignation of Shares of Certain MLAM-Advised Funds" below. Class C: Class C shares will not incur a front-end sales charge when purchased, but Class C shares are subject to a maximum ongoing 0.25% account maintenance fee and an ongoing distribution fee. In the case of fixed income Funds, the Class C distribution fees will be different from the Class B distribution fees of a particular Fund. In the case of equity Funds, Class C distribution fees will equal Class B distribution fees. Class C shares are sold subject to a CDSC of 1.0% for one year. The Class C distribution fee will be charged indefinitely subject to approval of the continuance of the Fund's Class C Distribution Plan pursuant to Rule 12b-1 and the limitations on asset-based sales charges imposed by the NASD. See "Limitations on Asset-Based Sales Charges" below. Exchange Privilege. Class C shareholders may exchange Class C shares of the Fund for Class C shares of any MLAM-advised mutual fund as well as shares of certain MLAM-advised money market funds. See "Exchange Privilege" below. Class D: Class D shares will be sold subject to a front-end sales charge which will be identical to the front-end sales charge imposed on Class A shares under the Select Pricing System. Class D shares are charged a maximum ongoing 0.25% account maintenance fee but are not subject to an ongoing distribution fee. Reduced Initial Sales Charges. Class D investors may qualify for reduced initial sales charges through a right of accumulation taking into account each investor's holdings in Class A, Class B, Class C and Class D shares of any MLAM-advised Fund. See "Right of Accumulation" below. Under a right of accumulation, certain investors who purchase or accumulate at least $1 million in Class A, Class B, Class C 27 and/or Class D shares of any MLAM-advised Funds will not be subject to a front-end sales charge upon the purchase of Class D shares; however, they will be subject to a CDSC of 1.0% if the shares are redeemed within one year after purchase. Exchange Privilege. Class D shareholders may exchange Class D shares of one Fund for Class D shares of any MLAM-advised mutual fund. If the shareholder holds any Class A shares of the second Fund in his account at the time of the exchange, he may exchange Class D shares for Class A shares of the second Fund. Class D shareholders also may exchange Class D shares of the Fund for shares of certain MLAM-advised money market funds. See "Exchange Privilege" below. Class D shares also will be issued upon conversion of Class B shares after the Class B Conversion Period, as more fully described below. MLAM developed the Dual Distribution System to provide investors with the alternative within the same Fund of purchasing shares pursuant to either the front-end sales charge method or the deferred sales charge method. The Select Pricing System was developed to expand the alternatives available under the Dual Distribution System by providing investors with additional distribution alternatives. These alternative sales arrangements permit the investor to choose the method of purchasing shares that the investor believes is most beneficial given the amount of the investor's purchase, the length of time the investor expects to hold the shares and other relevant circumstances. Front-End Sales Charge Alternatives. Investors who prefer a front-end sales charge alternative may elect to purchase Class D shares or, if an eligible investor, Class A shares. Investors choosing the front-end sales charge alternative who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because of the account maintenance fee imposed on Class D shares. Investors qualifying for significantly reduced front-end sales charges may find the front-end 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 28 front-end sales charge and, in the case of Class D shares, the account maintenance fee. Although some investors that previously purchased Class A shares may no longer be eligible to purchase Class A shares of other Funds, those previously purchased Class A shares, as well as any Class B, Class C or Class D shares acquired, will count toward a right of accumulation which may qualify the investor for reduced initial sales charges on new front-end 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 front-end 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 benefit of an initial sales charge waiver for investors who purchase at least $1 million in Class A, Class B, Class C or Class D shares of any MLAM-advised Funds may be offset to the extent the shareholder must pay a CDSC on shares redeemed in less than one year. Deferred Sales Charge Alternatives. Investors that do not qualify for a reduction of front-end sales charges may prefer the deferred sales charge alternatives, because while Class A and Class D initial sales charges are deducted at the time of purchase, Class B and Class C shares provide the benefit of putting all of the investor's dollars to work from the time the investment is made. Both Class B and Class C shares are subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution charges potentially may be offset to the extent any return is realized on the additional funds initially invested in Class B or Class C shares. In addition, Class B shares will be converted into Class D shares of the Fund after the Conversion Period and thereafter will be subject to significantly lower ongoing fees. Certain investors may elect to purchase Class B shares if they determine it to be most advantageous to have all their funds invested initially and intend to hold their shares for an extended period of time. In making this decision, Class B purchasers will take into account whether they intend to redeem their shares within the CDSC period and, if not, whether they intend to remain invested until the end of the Conversion Period and thereby take advantage of the reduction in ongoing fees. Other investors, however, may elect to purchase Class C shares if they determine that it is advantageous to have all their funds invested initially and they are uncertain as to the amount of time they intend to hold the shares. Although Class C shareholders are subject to 29 a shorter CDSC period at a lower rate, they forgo the Class B conversion feature, making their investment subject to account maintenance and distribution fees for an indefinite period of time. In addition, while both Class B and Class C distribution fees are subject to the limitations on asset-based sales charges imposed by the NASD, Class B shares are further limited under a MLFD voluntary waiver of asset-based sales charges. See "Limitations on Asset-Based Sales Charges" below. Each Class A, Class B, Class C and Class D share of a Fund will represent identical interests in the investment portfolio of the Fund and have the same rights, except that Class B, Class C and Class D shares bear the expenses of the ongoing account maintenance fee and Class B and Class C shares also bear the expenses of the ongoing distribution fee and the additional incremental transfer agency costs resulting from the deferred sales charge arrangement. Class B, Class C and Class D shares have exclusive voting rights with respect to the distribution plan adopted pursuant to Rule 12b-1 applicable to each respective class. Each class also has different exchange privileges. The deferred sales charges that are imposed on Class B and Class C shares will be imposed directly and respectively 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. The implementation of the Select Pricing System will not adversely affect the net asset value of a current shareholder's investment in the Fund. Outstanding shares will not be subject to any charge as a result of the reclassification. Two new and separate classes will be added, having no adverse effect on the shares that are issued and outstanding; however, the creation of Class D will provide a significant benefit to Class B shareholders as described herein. Exchange Privilege. As previously stated, investors who hold Class A shares of a Fund in an account will be entitled, subsequent to the Implementation Date, to purchase additional Class A shares of that Fund in that account only. Current Class A shareholders that do not qualify to purchase Class A shares under the Select Pricing System and wish to exchange their Class A shares for shares of a second Fund will receive Class A shares of that Fund only if such shareholder owned Class A shares of the second Fund on the date of the exchange. Otherwise, shareholders that do not qualify to purchase Class A shares under the Select Pricing System will receive Class D shares in exchange for Class A shares after the Implementation Date. Investors will have the right to exchange Class D shares for Class A shares of 30 any Fund held in the account, provided that Class A shares of the Fund acquired in the exchange are held in the account at the time of the exchange. Class A and Class D shares also will be exchangeable for shares of certain money market funds specifically designated as available for exchange by holders of Class A or Class D shares. The period of time that Class A or Class D shares are held in a money market fund, however, will not count toward satisfaction of the holding period requirement for reduction of any CDSC imposed in connection with a reduced initial sales charge purchase. Class B and Class C shares will be exchangeable only with shares of the same class of other mutual funds advised by MLAM as well as certain money market funds specifically designated as available for exchange by holders of Class B or Class C shares. The period of time that Class B or Class C shares are held in a money market fund, however, will not count toward satisfaction of the holding period requirement for reduction of the CDSC for Class B or Class C shares or the Conversion Period for Class B shares. Right of Accumulation. Under the Select Pricing System, reduced sales charges will be applicable through a right of accumulation under which eligible investors are permitted to purchase Class A or Class D shares of a Fund at the offering price applicable to the total of (a) the dollar amount then being purchased plus (b) an amount equal to the then net asset value or cost, whichever is higher, of the purchaser's combined holdings of Class A, Class B, Class C and Class D shares of the Fund and of any other Fund with an initial sales charge for which MLFD is the distributor. Redesignation of Shares of Certain MLAM-Advised Funds. The following eight Funds currently offer Class A shares subject to an account maintenance fee: Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc. and Merrill Lynch Short-Term Global Income Fund, Inc. In order to continue the same sales charge and account maintenance fee arrangements on these Class A shares, on the Implementation Date, Class A shares of those Funds will be automatically redesignated Class D shares. Subsequent to the Implementation Date, reinvestment of dividends paid on these redesignated Class A shares will be in Class D shares. Outstanding Class B shares of Merrill Lynch Fundamental Growth Fund, Inc. ("Fundamental Growth"), which currently are 31 subject to the same CDSC, account maintenance fee and distribution fee as Class C shares will be under the Select Pricing System, will be automatically redesignated Class C shares on the Implementation Date. Subsequent to the Implementation Date, reinvestment of dividends paid on these redesignated Class B shares of Fundamental Growth will be in Class C shares. Redesignation of shares of any Fund in connection with the implementation of the Select Pricing System will not be deemed a purchase or sale of the shares for Federal income tax purposes. Limitations on Asset-Based Sales Charges. Class B and Class C distribution fees are subject to the limitations on asset-based sales charges imposed by the NASD. As applicable to the Funds, the NASD rule limits the aggregate of distribution fee payments and CDSCs payable by a Fund to (1) 6.25% of eligible gross sales of Class B or Class C shares (defined to exclude shares issued pursuant to dividend reinvestments and exchanges) plus (2) interest on the unpaid balance at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fee and the CDSC). The maximum allowable payments under the NASD rule is referred to as the "NASD maximum". Aggregate distribution fee payments on Class C shares will be limited in accordance with the NASD maximum. With respect to Class B shares, MLFD has agreed voluntarily to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the maximum amount payable to MLFD (referred to as the "Class B voluntary maximum") is 6.75% of eligible gross sales. MLFD retains the right to stop waiving the interest charges at any time. To the extent payments would exceed the Class B voluntary maximum, in the case of Class B shares, or the NASD maximum, in the case of Class C shares, the Fund will not make further payments of the distribution fee and any CDSCs will be paid to the Fund rather than to MLFD; however, the Fund will continue to make payments of the account maintenance fee. In certain circumstances the amount payable pursuant to the Class B voluntary maximum may exceed the amount payable under the NASD formula. In such circumstances payments in excess of the amount payable under the NASD maximum will not be made. PROPOSED CHARTER AMENDMENT On August 3, 1994, the Board approved the Select Pricing System and a related amendment to the Fund's charter. The proposed amendment to the charter, among other things, will enable each Fund to institute the Class B to Class D automatic conversion feature which is 32 integral to the implementation of the Select Pricing System. In addition, while the Fund's charter permits the Board to reclassify unissued shares into additional classes, the proposed amendment to the Fund's charter also will permit the Board to institute automatic conversion features with respect to all classes by reclassifying issued shares of the Fund into additional classes at a future date. Class B Retirement Plans. Certain shareholders of the Fund purchased Class B shares through retirement plans. These purchases qualified for a waiver of the CDSC normally imposed on purchases of Class B shares under exemptive orders and a no-action letter granted by the SEC. Retirement plans holding Class B shares purchased without a CDSC are herein referred to as "Class B Retirement Plans". Since these Class B shares were sold without a CDSC, there was heretofore no reason to track the length of time that such shares were held, and therefore Class B Retirement Plan shares cannot be converted to Class D shares in the same manner as other Class B shares. To ensure that both the Class B Retirement Plan shareholders and the other Class B shareholders are treated fairly under the Select Pricing System, the proposed charter amendment provides that rather than imposing the usual Class B Conversion Periods which apply to the shares, a ten-year Conversion Period will be applied to each Class B Retirement Plan. After the Implementation Date, the Class B Retirement Plans will continue to purchase Class B shares without a CDSC. When the first share purchased by a Class B Retirement Plan has been held for ten years (i.e., ten years from the date the relationship between the Funds and the plan was established), all Class B shares of all 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. Text of Proposed Charter Amendment. Each Fund's state of organization is set forth in Exhibit A. With respect to the Funds that are Maryland corporations, the charter will be amended to add the following provision: The Board of Directors may classify and reclassify any issued shares of capital stock into one or more additional or other classes or series as may be established from time to time by setting or changing in any one or more respects the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares of stock and pursuant to such classification or reclassification to increase or decrease the number of 33 authorized shares of any existing class or series; provided, however, that any such classification or reclassification shall not substantially adversely affect the rights of holders of such issued shares. The Board's authority pursuant to this paragraph shall include, but not be limited to, the power to vary among all the holders of a particular class or series (a) the length of time shares must be held prior to reclassification to shares of another class or series (the "Holding Period(s)"), (b) the manner in which the time for such Holding Period(s) is determined and (c) the class or series into which the particular class or series is being reclassified; provided, however, that subject to the first sentence of this section, with respect to holders of the Corporation's shares issued on or after the date of the Corporation's first effective prospectus which sets forth Holding Period(s) (the "First Holding Period Prospectus"), the Holding Period(s), the manner in which the time for such Holding Period(s) is determined and the class or series into which the particular class or series is being reclassified shall be disclosed in the Corporation's prospectus or statement of additional information in effect at the time such shares, which are the subject of the reclassification, were issued; [and provided, further, that subject to the first sentence of this section, with respect to holders of the Corporation's Class B shares issued prior to the date of the Corporation's First Holding Period Prospectus, the Holding Period shall be ten (10) years for retirement plan (as recognized by the Internal Revenue Code of 1986, as amended from time to time) holders of issued Class B shares purchased without a contingent deferred sales charge (a "CDSC-Waived Retirement Plan") and shall be the Holding Period set forth in the Corporation's First Holding Period Prospectus, for all other holders of issued Class B shares; Class B shares held by a CDSC-Waived Retirement Plan shall be reclassified to Class D shares in the month following the month in which the first Class B share of any mutual fund advised by Merrill Lynch Asset Management, L.P., Fund Asset Management, L.P., or their affiliates or successors, held by such CDSC-Waived Retirement Plan has been held for the ten (10) year Holding Period established by the Corporation's Board of Directors for such CDSC-Waived Retirement Plan Class B shareholder; and the Class B shares of every shareholder other than CDSC-Waived Retirement Plans shall be reclassified to Class D shares in the month following the month in which such shares have been held for the Holding Period established by the Corporation's Board of Directors for shareholders other than 34 CDSC-Waived Retirement Plans in the Corporation's First Holding Period Prospectus*.] With respect to Merrill Lynch Federal Securities Trust, a Massachusetts business trust, Sections 6.1, 6.2 and 10.1 of the charter will be amended as follows (changes are underlined): 6.1. Beneficial Interest. The interest of the beneficiaries hereunder shall be divided into transferable shares of beneficial interest, par value $0.10 per share. The number of such shares of beneficial interest authorized hereunder is unlimited. The Trustees, in their discretion, without a vote of the Shareholders, may divide the shares of beneficial interest into classes. In such event, each class shall represent interests in the Trust property and have identical voting, dividend, liquidation and other rights and the same terms and conditions except that expenses related directly or indirectly to the distribution of the shares of a class may be borne solely by such class (as shall be determined by the Trustees) and, as provided in Section 10.1, a class may have exclusive voting rights with respect to matters relating to the expenses being borne solely by such class. The bearing of such expenses solely by a class of Shares shall be appropriately reflected (in the manner determined by the Trustees) in the net asset value, dividend and liquidation rights of the Shares of such class. The Trustees may provide that shares of a class will be exchanged for shares of another class without any act or deed on the part of the holder of shares of the class being exchanged, whether or not shares of such class are issued and outstanding, all on terms and conditions as the Trustees may specify. The Trustees may redesignate a class or series of shares of beneficial interest or a portion of a class or series of shares of beneficial interest whether or not shares of such class or series are issued and outstanding, provided that such redesignation does not substantially adversely affect the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such issued and outstanding shares of beneficial interest. The division of the Shares into classes and the terms and conditions pursuant to which the Shares of the classes will be issued must be made in compliance with the 1940 Act. All shares issued hereunder including, without limitation, Shares issued in connection with a dividend in Shares or a split of Shares, shall be fully paid and nonassessable. - --------------- * Bracketed language not applicable to Merrill Lynch Fundamental Growth Fund, Inc. 35 6.2. Rights of Shareholders. The ownership of the Trust Property of every description and the right to conduct any business hereinbefore described are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust nor can they be called upon to share or assume any losses of the Trust or suffer an assessment of any kind by virtue of their ownership of Shares. The Shares shall be personal property giving only the rights in this Declaration specifically set forth. The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights (except for rights of appraisal specified in Section 11.4 and except as may be specified by the Trustees in connection with the division of shares into classes or the redesignation of classes or portions of classes in accordance with Section 6.1). 10.1. Voting Powers. The Shareholders shall have power to vote (i) for the removal of Trustees as provided in Section 2.3; (ii) with respect to any advisory or management contract as provided in Section 4.1; (iii) with respect to the amendment of this Declaration as provided in Section 11.3; (iv) with respect to such additional matters relating to the Trust as may be required or authorized by the 1940 Act, the laws of the Commonwealth of Massachusetts or other applicable law or by this Declaration or the By-Laws of the Trust; and (v) with respect to such additional matters relating to the Trust as may be properly submitted for Shareholder approval. If the Shares of a Series shall be divided into classes as provided in Article VI hereof, the Shares of each class shall have identical voting rights except that the Trustees, in their discretion, may provide a class with exclusive voting rights with respect to matters related to expenses being borne solely by such class whether or not shares of such class are issued and outstanding. Implementation of the Select Pricing System is conditioned upon approval of the charter amendment by all shareholders of the Fund, voting as a single class, as well as by existing Class B shareholders, voting as a separate class. On August 3, 1994, the Board approved the proposed charter amendment. The Board recommends that the shareholders approve the charter amendment. * * * 36 OTHER PERTINENT INFORMATION REGARDING THE FUND INFORMATION CONCERNING MLAM AND FAM Effective January 1, 1994, MLAM and FAM were reorganized as Delaware limited partnerships. Both MLAM and FAM are owned and controlled by ML & Co., and the general partner of both MLAM and FAM is Princeton Services, a wholly-owned subsidiary of ML & Co. The reorganization did not result in a change of management of either MLAM or FAM, in any of its personnel, or in an adverse change in its financial condition. Prior to the reorganization, MLAM (which was known as Merrill Lynch Investment Management, Inc. and which did business as Merrill Lynch Asset Management) and FAM (which was known as Fund Asset Management, Inc.) were Delaware corporations. MLAM was a wholly-owned subsidiary of ML & Co. and FAM was a wholly-owned subsidiary of MLAM. MLFD, an affiliate of MLAM and FAM, acts as distributor of the Fund's shares. MLAM, FAM, Princeton Services and MLFD are located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. ML & Co. is located at 250 Vesey Street, New York, New York 10281. MLAM and FAM act as the investment adviser to more than 100 registered investment companies. In addition, MLAM offers portfolio management and portfolio analysis services to individuals and institutions. The audited balance sheet of each of MLAM and FAM for the fiscal year ended December 31, 1993 are set forth in Exhibit B. Securities held by the Fund also may be held by or be appropriate investments for other funds or clients (collectively referred to as "clients") for which MLAM or FAM acts as an adviser. Because of different investment objectives or other factors, a particular security may be bought for one or more clients when one or more clients are selling the security. If purchases or sales of securities for the Fund or other clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective clients in a manner deemed equitable to all by MLAM or FAM. To the extent that transactions on behalf of more than one client of MLAM or FAM 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 following table sets forth the name, title and principal occupation of the principal executive officer of MLAM and FAM and the 37 directors of Princeton Services, the general partner of both MLAM and FAM.
NAME* TITLE PRINCIPAL OCCUPATION - ------------------------------- --------------------- --------------------- Arthur Zeikel.................. President and Chief President and Chief Investment Officer of Investment Officer of MLAM and FAM and MLAM and FAM; Director of Princeton Executive Vice Services President of ML & Co.; President of Princeton Services Terry K. Glenn................. Executive Vice Executive Vice President of MLAM and President of MLAM and FAM and Director of FAM; Executive Vice Princeton Services President of Princeton Services Philip L. Kirstein............. Senior Vice President Senior Vice President and General Counsel and General Counsel of MLAM and FAM and of MLAM and FAM; Director of Princeton Senior Vice President Services of Princeton Services
- --------------- * Mr. Zeikel is presently a Board member of the Fund. The address of Messrs. Zeikel, Glenn and Kirstein is P.O. Box 9011, Princeton, New Jersey 08543-9011, which is also the address of MLAM and FAM. TERMS OF INVESTMENT ADVISORY AGREEMENT The Investment Advisory Agreement provides that, subject to the direction of the Board, the Investment Adviser is responsible for the actual management of the Fund's portfolio and for the review of the Fund's holdings in light of its own research analysis and analyses from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser, subject to review by the Board. The Investment Adviser provides the portfolio managers for the Fund who consider analyses from various sources (including brokerage firms with which the Fund does business), make the necessary investment decisions and place transactions accordingly. The Investment Adviser is also obligated to perform 38 certain administrative and management services for the Fund and is obligated to provide all the office space, facilities, equipment and personnel necessary to perform its duties under the Investment Advisory Agreement. Investment Advisory Fee. The Investment Advisory Agreement provides that as compensation for its services to the Fund, the Investment Adviser receives from the Fund at the end of each month a fee calculated as an annual percentage of the Fund's average daily net assets (i.e., the average daily value of the total assets of the Fund minus the sum of accrued liabilities of the Fund). Information pertaining to the Fund's investment advisory fee is set forth in Exhibit A. Payment of Expenses. The Investment Advisory 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 the investment and economic research, trading and investment management of the Fund, as well as the fees of all Board members of the Fund who are affiliated persons of the Investment Adviser or any of its affiliates. The Fund pays all other expenses incurred in its operation, including, among other things, expenses for legal and auditing services, taxes, costs of printing proxies, stock certificates and shareholder reports, charges of the custodian and transfer agent, dividend disbursing agent and registrar fees, SEC fees, fees and expenses of unaffiliated Board members, accounting and pricing costs, insurance, interest, brokerage costs, litigation and other extraordinary or non-recurring expenses, mailing 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. Information with respect to such reimbursement is set forth in Exhibit A. California imposes limitations on the expenses of those Funds whose shares are registered or qualified for sale in California. At the date of this proxy statement, these annual expense limitations require that the Investment Adviser reimburse the Fund in an amount necessary to prevent the aggregate ordinary operating expenses (excluding taxes, brokerage fees and commissions, distribution fees and extraordinary charges such as litigation costs) from exceeding in any fiscal year 2.5% of the Fund's first $30 million of average net assets, 2.0% of the next $70 million and 1.5% of the remaining average net assets. The Investment Adviser's obligation to reimburse the Fund is limited to the amount of the investment advisory fee. No payment will be made to the 39 Investment Adviser during any fiscal year which will cause expenses to exceed the most restrictive expense limitation at the time of such payment. None of the Funds covered by this proxy statement were required to be reimbursed pursuant to such operating expense limitations during such Fund's most recent fiscal year. Duration and Termination. The Investment Advisory Agreement will continue in effect from year to year if approved annually (a) by the Board or by a majority of the outstanding shares of the Fund and (b) by a majority of the Board members who are not parties to such agreement or interested persons (as defined in the Investment Company Act) of any such party. Such agreement is 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. PORTFOLIO TRANSACTIONS AND BROKERAGE Subject to policies established by the Board, the Investment Adviser is primarily responsible for the execution of each Fund's portfolio transactions and the allocation of brokerage. In executing such transactions, the Investment Adviser seeks to obtain the best results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm involved and the firm's risk in positioning a block of securities. While the Investment Adviser generally seeks reasonably competitive commission rates, the Fund does not necessarily pay the lowest commission or spread available. The Fund has no obligation to deal with any broker or group of brokers in the execution of transactions in portfolio securities. Subject to obtaining the best price and execution, brokers or dealers who provided supplemental investment research (such as information concerning money market securities, economic data and market forecasts) to the Investment Adviser, including Merrill Lynch, 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 Investment Advisory Agreement, and the expenses of the Investment Adviser will not necessarily be reduced as a result of the receipt of such supplemental information. It is possible that certain of the supplementary investment research so received will primarily benefit one or more other investment companies 40 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. In addition, consistent with the NASD's Rules of Fair Practice, 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 a majority of the shares of the Fund will be sold by Merrill Lynch. Each Fund invests in securities traded in the over-the-counter markets, and where possible, deals directly with dealers who make markets in the securities involved, except in those circumstances where better prices and execution are available elsewhere. Under the Investment Company Act, except as permitted by exemptive order, persons affiliated with a Fund are prohibited from dealing with the Fund as principal in the purchase and sale of securities. Since transactions in the over-the-counter market usually involve transactions with dealers acting as principal for their own account, a Fund will not deal with affiliated persons, including Merrill Lynch and its affiliates, in connection with such transactions except that pursuant to an exemptive order, obtained by the Investment Adviser, certain Funds may engage in principal transactions with Merrill Lynch in high-quality short-term, tax-exempt securities. For information about transactions with and brokerage commissions paid to Merrill Lynch see Exhibit A. The Board has considered the possibility of recapturing for the benefit of the Fund brokerage commissions, dealer spreads and other expenses of possible portfolio transactions, such as underwriting commissions, by conducting portfolio transactions through affiliated entities, including Merrill Lynch. For example, brokerage commissions received by Merrill Lynch could be offset against the investment advisory fee paid by the Fund to the Investment Adviser. After considering all factors deemed relevant, the Board members made a determination not to seek such recapture. The Board members will reconsider this matter from time to time. ADDITIONAL INFORMATION The expenses of preparation, printing and mailing by the Fund of the proxy materials in connection with the matters to be considered at the meeting will be borne by the Fund. The Fund will reimburse banks, brokers and others for their reasonable expenses in forwarding proxy solicitation material to the beneficial owners of the shares of the Fund. The Fund also may hire proxy solicitors at the expense of the Fund. 41 Each Fund has retained at its expense, Tritech Services, an affiliate of ML & Co. with offices at 4 Corporate Place, Piscataway, New Jersey to aid in the solicitation of proxies from holders of shares held in nominee or "street" name at a cost of approximately $2,000, plus out-of-pocket expenses. The proposal to elect the Fund's Board (Proposal 1) for Merrill Lynch Federal Securities Trust (the "Massachusetts business trust") and Merrill Lynch Fundamental Growth Fund, Inc. may be approved by a plurality of the votes cast, in person or by proxy, at a meeting at which a quorum is duly constituted and for Merrill Lynch Adjustable Rate Securities Fund, Inc. and Merrill Lynch Phoenix Fund, Inc. (together with Merrill Lynch Fundamental Growth Fund, Inc., the "Maryland corporations") may be approved by the affirmative vote of a majority of the shares represented at the Meeting at which a quorum is duly constituted. The proposal to ratify the selection of the Fund's independent auditors (Proposal 2) for each of the Maryland corporations may be approved by a majority of votes cast by the Fund's shareholders, voting in person or by proxy, at a meeting at which a quorum is duly constituted, and for the Massachusetts business trust may be approved by the affirmative vote of a majority of the Fund's shares represented at a meeting at which a quorum is duly constituted. The proposal to amend the fundamental investment restrictions of the Fund (Proposal 3) requires the affirmative vote of the lesser of (i) 67% of the shares represented at the Meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. The proposal to amend the Fund's charter (Proposal 4) must be approved by the affirmative vote of (i) at least 66 2/3% of the outstanding shares of the Fund for Merrill Lynch Phoenix Fund, Inc., or (ii) a majority of the outstanding shares of the Fund for Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Federal Securities Trust and Merrill Lynch Fundamental Growth Fund, Inc. The charter amendment also must be approved separately by the affirmative vote of the outstanding Class B shares of the Fund in the same percentages as set forth in (i) and (ii) immediately above. In order to obtain the necessary quorum at the Meeting, supplementary solicitation may be made by mail, telephone, telegraph or personal interview by officers of the Fund. It is anticipated that the cost of such supplementary solicitation, if any, will be nominal. For Merrill 42 Lynch Adjustable Rate Securities Fund, Inc. and Merrill Lynch Phoenix Fund, Inc., a quorum consists of a majority of the shares entitled to vote at the Meeting, present in person or by proxy; for Merrill Lynch Federal Securities Trust and Merrill Lynch Fundamental Growth Fund, Inc., a quorum consists of 33 1/3% of the shares entitled to vote at the Meeting, present in person or by proxy. Class B quorum requirements for the separate Class B vote on Proposal 4 will be identical to the overall quorum requirements for each Fund. All shares represented by properly executed proxies, unless such proxies have previously been revoked, will be voted at the Meeting in accordance with the directions on the proxies; if no direction is indicated, the shares will be voted "FOR" the Board member nominees, "FOR" the ratification of the independent auditors, "FOR" the amendments to the fundamental investment restrictions of the Fund and "FOR" the charter amendment. With respect to each Fund whose fiscal year ended subsequent to June 30, 1994, the Board represents that there has been no material adverse change in the financial operations of the Fund since the date of the unaudited financial statements contained in the Fund's most recent semi-annual report. Also, with respect to each Fund whose fiscal year ended subsequent to June 30, 1994, shares will not be voted for Proposal 1 unless the Fund has received a certificate from its President, dated the Meeting Date, that, to his knowledge, there has been no material adverse change in the Fund's financial operations since the date of the unaudited financial statements included in the Fund's most recent semi-annual report, unless such material adverse change has been disclosed to shareholders in additional proxy material. If you wish to receive a copy of the Fund's most recent annual report and any semi-annual report, without charge, please call (609) 282-2800 and one will be sent to you. Broker-dealer firms, including Merrill Lynch, holding Fund shares in "street name" for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares on each Proposal before the Meeting. The Fund understands that, under the rules of the New York Stock Exchange, such broker-dealer firms may, without instructions from their customers and clients, grant authority to the proxies designated to vote on the election of Board members (Proposal 1), the ratification of the selection of independent auditors (Proposal 2) and the proposed charter amendment (Proposal 4) if no instructions have been received prior to 43 the date specified in the broker-dealer firm's request for voting instructions. Broker-dealer firms, including Merrill Lynch, will not be permitted to grant voting authority without instructions with respect to the amendments to the fundamental investment restrictions (Proposal 3). The Fund will include shares held of record by broker-dealers as to which such authority has been granted in its tabulation of the total number of votes present for purposes of determining whether the necessary quorum of shareholders exists. Proxies which are returned but which are marked "abstain" or on which a broker-dealer has declined to vote on any proposal ("broker non-votes") will be counted as present for the purposes of a quorum. Merrill Lynch has advised the Fund that it intends to exercise discretion over shares held in its name for which no instructions have been received by voting such shares on Proposals 1, 2 and 4 in the same proportion as it has voted shares for which it has received instructions. However, abstentions and broker non-votes will not be counted as votes cast. Abstentions and broker non-votes will not have an effect on the vote on Proposals 1 and 2 (in the case of the Maryland corporations) or on Proposal 1 only (in the case of the Massachusetts business trust); however, abstentions and broker non-votes will have the same effect as a vote against Proposals 3 and 4 (in the case of the Maryland corporations) or Proposals 2, 3 and 4 (in the case of the Massachusetts business trust). With respect to Merrill Lynch Federal Securities Trust: The charter, which is on file with the Secretary of State of the Commonwealth of Massachusetts, provides that the name of the Fund refers to the Board members under the charter collectively as Board members, but not as individuals or personally; and no Board member, shareholder, officer, employee or agent of the Fund shall be held to any personal liability, nor shall resort be had to their private property for the satisfaction of any obligation or claim of the Fund but the Fund Estate only shall be liable. MEETINGS OF SHAREHOLDERS The Fund's charter does not require that the Fund hold an annual meeting of shareholders. The Fund will be required, however, to call special meetings of shareholders in accordance with the requirements of the Investment Company Act to seek approval of new management and advisory arrangements or of a change in the fundamental policies, objectives or restrictions of the Fund. The Fund also would be required to hold a special shareholders' meeting to elect new Board members at such time as less than a majority of the Board members holding office have been elected by shareholders. The charter or by-laws provide that 44 a shareholders' meeting may be called at the request of 10% of the outstanding shares of Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Federal Securities Trust and Merrill Lynch Fundamental Growth Fund, Inc. or 25% of the outstanding shares of Merrill Lynch Phoenix Fund, Inc., entitled to vote at such meeting, or by a majority of the Board members. By Order of the Board ROBERT HARRIS MICHAEL J. HENNEWINKEL Secretaries of the Funds Dated: August 12, 1994 45 EXHIBIT A INFORMATION PERTAINING TO EACH FUND . GENERAL INFORMATION PERTAINING TO THE FUNDS
DEFINED TERM STATE OF FUND USED IN EXHIBIT A FISCAL YEAR END ORGANIZATION Merrill Lynch Adjustable Rate Securities Fund, Inc. Adjustable Rate 5/31 MD Merrill Lynch Federal Securities Trust Federal Securities 8/31 MA Merrill Lynch Fundamental Growth Fund, Inc. Fundamental Growth 8/31 MD Merrill Lynch Phoenix Fund, Inc. Merrill Lynch Phoenix 7/31 MD FUND MEETING TIME Merrill Lynch Adjustable Rate Securities Fund, Inc. 10:30 a.m. Merrill Lynch Federal Securities Trust 9:30 a.m. Merrill Lynch Fundamental Growth Fund, Inc. 10:00 a.m. Merrill Lynch Phoenix Fund, Inc. 9:00 a.m.
SHARES OUTSTANDING AS OF THE RECORD DATE FUND CLASS A Adjustable Rate 2,250,829 Federal Securities 146,507,583 Fundamental Growth 952,597 Merrill Lynch Phoenix 19,282,596 FUND CLASS B Adjustable Rate 35,350,417 Federal Securities 162,609,020 Fundamental Growth 4,968,525 Merrill Lynch Phoenix 27,869,933
A-1 . INFORMATION PERTAINING TO OFFICERS AND BOARD MEMBERS
YEAR IN WHICH EACH NOMINEE BECAME A MEMBER OF THE BOARD FUND GRILLS MINTZ SEIDEN SWENSRUD WOOLF ZEIKEL Adjustable Rate 1994 1991 1991 1991 1991 1991 Federal Securities 1994 1984 1984 1984 1984 1984 Fundamental Growth 1994 1992 1992 1992 1992 1992 Merrill Lynch Phoenix 1994 1982 1982 1984 1982 1982
Set forth in the table below is information regarding board and committee meetings held and compensation paid to independent Board Members during each Fund's most recently completed fiscal year.
BOARD AUDIT AND NOMINATING COMMITTEE ANNUAL FEE PER MEETING FEE ANNUAL FEE FUND # MEETINGS HELD ($) ($) # MEETINGS HELD ($) Adjustable Rate 4 5,000 250 4 1,000 Federal Securities 4 5,500 250 4 3,000 Fundamental Growth 4 2,600 250 4 800 Merrill Lynch Phoenix 4 5,000 250 4 1,000 PER MEETING FEE AGGREGATE FEES AND FUND ($) EXPENSES ($) Adjustable Rate 500 40,587 Federal Securities 1,500 71,265 Fundamental Growth 150 37,447 Merrill Lynch Phoenix 500 31,972
A-2 Set forth in the table below are the officers of all of the Funds; specific officers of each Fund are indicated according to the year in which he became an officer.
OFFICER INFORMATION OFFICER SINCE NAME AND ADJUSTABLE FEDERAL BIOGRAPHY AGE OFFICE RATE SECURITIES Arthur Zeikel........................................................ 62 President 1991 1984 President of MLAM since 1977 and Chief Investment Officer since 1976; President and Chief Investment Officer of FAM since 1977; President and Director of Princeton Services since 1993; Executive Vice President of ML & Co. since 1990; Executive Vice President of Merrill Lynch since 1990 and Senior Vice President from 1985 to 1990; Director of MLFD. Terry K. Glenn....................................................... 53 Executive 1991 1986 Executive Vice President of MLAM and FAM since 1983; Executive Vice Vice President and Director of Princeton Services since 1993; President President of MLFD since 1986 and Director since 1991; President of Princeton Administrators, L.P. since 1988. Gerald M. Richard.................................................... 45 Treasurer 1991 1984 Senior Vice President and Treasurer of MLAM and FAM since 1984; Senior Vice President and Treasurer of Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice President since 1981. Norman R. Harvey..................................................... 61 Senior Vice -- -- Senior Vice President of MLAM and FAM since 1982; Senior Vice President President of Princeton Services since 1993. Donald C. Burke...................................................... 34 Vice 1993 1993 Vice President and Director of Taxation of MLAM since 1990; President Employee of Deloitte & Touche from 1982 to 1990. OFFICER INFORMATION MERRILL NAME AND FUNDAMENTAL LYNCH BIOGRAPHY GROWTH PHOENIX Arthur Zeikel........................................................ 1992 1982 President of MLAM since 1977 and Chief Investment Officer since 1976; President and Chief Investment Officer of FAM since 1977; President and Director of Princeton Services since 1993; Executive Vice President of ML & Co. since 1990; Executive Vice President of Merrill Lynch since 1990 and Senior Vice President from 1985 to 1990; Director of MLFD. Terry K. Glenn....................................................... 1992 1986 Executive Vice President of MLAM and FAM since 1983; Executive Vice President and Director of Princeton Services since 1993; President of MLFD since 1986 and Director since 1991; President of Princeton Administrators, L.P. since 1988. Gerald M. Richard.................................................... 1992 1984 Senior Vice President and Treasurer of MLAM and FAM since 1984; Senior Vice President and Treasurer of Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice President since 1981. Norman R. Harvey..................................................... 1992 1987 Senior Vice President of MLAM and FAM since 1982; Senior Vice President of Princeton Services since 1993. Donald C. Burke...................................................... 1993 1993 Vice President and Director of Taxation of MLAM since 1990; Employee of Deloitte & Touche from 1982 to 1990.
A-3
OFFICER INFORMATION OFFICER SINCE NAME AND ADJUSTABLE FEDERAL BIOGRAPHY AGE OFFICE RATE SECURITIES Laurence R. Fuller................................................... 53 Vice -- -- Vice President of MLAM since 1992; Senior Vice President and President Director of Benefit Capital Management from 1984 to 1992. Jeffrey B. Hewson.................................................... 43 Vice 1991 1989 Vice President of MLAM since 1989 and portfolio manager of MLAM President since 1985; Senior Consultant, Price Waterhouse 1981 to 1985. Robert J. Martorelli................................................. 37 Vice -- -- Vice President of MLAM since 1987; Senior Security Analyst for the President National Association of Insurance Commissioners from 1981 to 1983. Gregory M. Maunz..................................................... 41 Vice 1991 1986 Vice President of MLAM since 1985 and portfolio manager since 1984. President Robert Harris........................................................ 42 Secretary -- -- Vice President of MLAM since 1984; Secretary of MLFD since 1982. Michael J. Hennewinkel............................................... 42 Secretary 1991 1984 Vice President of MLAM since 1985 and attorney associated with FAM and MLAM since 1982. OFFICER INFORMATION MERRILL NAME AND FUNDAMENTAL LYNCH BIOGRAPHY GROWTH PHOENIX Laurence R. Fuller................................................... 1992 -- Vice President of MLAM since 1992; Senior Vice President and Director of Benefit Capital Management from 1984 to 1992. Jeffrey B. Hewson.................................................... -- -- Vice President of MLAM since 1989 and portfolio manager of MLAM since 1985; Senior Consultant, Price Waterhouse 1981 to 1985. Robert J. Martorelli................................................. -- 1986 Vice President of MLAM since 1987; Senior Security Analyst for the National Association of Insurance Commissioners from 1981 to 1983. Gregory M. Maunz..................................................... -- -- Vice President of MLAM since 1985 and portfolio manager since 1984. Robert Harris........................................................ -- 1982 Vice President of MLAM since 1984; Secretary of MLFD since 1982. Michael J. Hennewinkel............................................... 1992 -- Vice President of MLAM since 1985 and attorney associated with FAM and MLAM since 1982.
A-4 . INFORMATION PERTAINING TO THE SELECT PRICING SYSTEM SALES CHARGES For Adjustable Rate:
DUAL DISTRIBUTION SELECT PRICING CLASS A CLASS B CLASS A CLASS B CLASS C Maximum 3.0% CDSC during the first Maximum 4.0%** 4.0% CDSC during the first 1.0% CDSC during the 3.0%* year, decreasing 1.0% year, decreasing 1.0% first year, decreasing annually to 0.0% after the annually to 0.0% after the to 0.0% after the first third year fourth year year CLASS A CLASS D Maximum Maximum 4.0%** 3.0%*
* 2.5% for purchases between $100,000 and $500,000; 2.0% for purchases between $500,000 and $1,000,000; 1.5% for purchases between $1,000,000 and $3,000,000; 1.0% for purchases between $3,000,000 and $5,000,000; 0.50% for purchases of $5,000,000 and greater. ** 3.75% for purchases between $25,000 and $50,000; 3.25% for purchases between $50,000 and $100,000; 2.5% for purchases between $100,000 and $250,000; 1.5% for purchases between $250,000 and $1,000,000; 0% for purchases of $1,000,000 and greater. For Federal Securities:
DUAL DISTRIBUTION SELECT PRICING CLASS A CLASS B CLASS A CLASS B CLASS C Maximum 4.0% CDSC during the first Maximum 4.0** 4.0% CDSC during the first 1.0% CDSC during the 4.0%* year, decreasing 1.0% year, decreasing 1.0% first year, decreasing annually to 0.0% after the annually to 0.0% after the to 0.0% after the first fourth year fourth year year CLASS A CLASS D Maximum Maximum 4.0%** 4.0%*
* 3.75% for purchases between $25,000 and $50,000; 3.25% for purchases between $50,000 and $100,000; 2.5% for purchases between $100,000 and $250,000; 1.5% for purchases between $250,000 and $1,000,000; 0.50% for purchases of $1,000,000 and greater. ** 3.75% for purchases between $25,000 and $50,000; 3.25% for purchases between $50,000 and $100,000; 2.5% for purchases between $100,000 and $250,000; 1.5% for purchases between $250,000 and $1,000,000; 0% for purchases of $1,000,000 and greater. A-5 For Fundamental Growth:
DUAL DISTRIBUTION SELECT PRICING CLASS A CLASS B CLASS A CLASS B CLASS C Maximum 1.0% CDSC during the first Maximum 5.25%** 4.0% CDSC during the first 1.0% CDSC during the 6.5%* year, decreasing to 0.0% year, decreasing 1.0% first year, decreasing after the first year annually to 0.0% after the to 0.0% after the first fourth year year CLASS A CLASS D Maximum Maximum 5.25%** 6.5%*
* 6.0% for purchases between $10,000 and $25,000; 5.0% for purchases between $25,000 and $50,000; 4.0% for purchases between $50,000 and $100,000; 3.0% for purchases between $100,000 and $250,000; 2.0% for purchases between $250,000 and $1,000,000; 0.75% for purchases of $1,000,000 and greater. ** 4.75% for purchases between $25,000 and $50,000; 4.0% for purchases between $50,000 and $100,000; 3.0% for purchases between $100,000 and $250,000; 2.0% for purchases between $250,000 and $1,000,000; 0% for purchases of $1,000,000 and greater. For Merrill Lynch Phoenix:
DUAL DISTRIBUTION SELECT PRICING CLASS A CLASS B CLASS A CLASS B CLASS C Maximum 4.0% CDSC during the first Maximum 5.25%** 4.0% CDSC during the first 1.0% CDSC during the 6.50%* year, decreasing 1.0% year, decreasing 1.0% first year, decreasing annually to 0.0% after the annually to 0.0% after the to 0.0% after the first fourth year fourth year year CLASS A CLASS D Maximum Maximum 5.25%** 6.50%*
* 6.0% for purchases between $10,000 and $25,000; 5.0% for purchases between $25,000 and $50,000; 4.0% for purchases between $50,000 and $100,000; 3.0% for purchases between $100,000 and $250,000; 2.0% for purchases between $250,000 and $1,000,000; 0.75% for purchases of $1,000,000 and greater. ** 4.75% for purchases between $25,000 and $50,000; 4.0% for purchases between $50,000 and $100,000; 3.0% for purchases between $100,000 and $250,000; 2.0% for purchases between $250,000 and $1,000,000; 0% for purchases of $1,000,000 and greater. A-6 DISTRIBUTION AND ACCOUNT MAINTENANCE FEES (AS A PERCENTAGE OF AVERAGE NET ASSETS) For Adjustable Rate:
DUAL DISTRIBUTION SELECT PRICING CLASS A CLASS B CLASS A CLASS B CLASS C CLASS D ACCOUNT ACCOUNT ACCOUNT ACCOUNT DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION FEE FEE FEE FEE FEE FEE FEE FEE FEE None 0.25% 0.50% 0.25% None 0.50% 0.25% 0.55% 0.25% None CLASS D ACCOUNT DISTRIBUTION MAINTENANCE FEE FEE None 0.25%
For Federal Securities:
DUAL DISTRIBUTION SELECT PRICING CLASS A CLASS B CLASS A CLASS B CLASS C CLASS D ACCOUNT ACCOUNT ACCOUNT ACCOUNT DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION FEE FEE FEE FEE FEE FEE FEE FEE FEE None 0.25% 0.50% 0.25% None 0.50% 0.25% 0.55% 0.25% None CLASS D ACCOUNT DISTRIBUTION MAINTENANCE FEE FEE None 0.25%
For Fundamental Growth:
DUAL DISTRIBUTION SELECT PRICING CLASS A CLASS B CLASS A CLASS B CLASS C CLASS D ACCOUNT ACCOUNT ACCOUNT ACCOUNT DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION FEE FEE FEE FEE FEE FEE FEE FEE FEE None 0.25% 0.75% 0.25% None 0.75% 0.25% 0.75% 0.25% None CLASS D ACCOUNT DISTRIBUTION MAINTENANCE FEE FEE None 0.25%
A-7 For Merrill Lynch Phoenix:
DUAL DISTRIBUTION SELECT PRICING CLASS A CLASS B CLASS A CLASS B CLASS C CLASS D ACCOUNT ACCOUNT ACCOUNT ACCOUNT DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE DISTRIBUTION MAINTENANCE FEE FEE FEE FEE FEE FEE FEE FEE None 0.75% 0.25% None 0.75% 0.25% 0.75% 0.25% None 0.25%
CLASS B CONVERSION PERIODS* Adjustable Rate 10 years Federal Securities 10 years Fundamental Growth 8 years Merrill Lynch Phoenix 8 years
* In general, Class B shares of equity Funds will convert approximately 8 years after initial purchase and Class B shares of taxable or tax-exempt fixed income Funds will convert approximately 10 years after initial purchase. If during the Conversion Period a shareholder exchange Class B shares with a 10-year Conversion Period for Class B shares with an 8-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. A-8 . INFORMATION PERTAINING TO THE FUND'S INVESTMENT ADVISORY ARRANGEMENTS
FEE INFORMATION ADVISORY FEE PAYABLE BASED ON NET INVESTMENT ADVISORY FEE ASSETS INVESTMENT ADVISORY PAID FOR FUND'S MOST AT RECORD AGREEMENT RECENT FISCAL YEAR DATE BASED ON MOST RECENT MOST RECENT FEE AVERAGE FEE INVESTMENT DATE ANNUAL DIRECTOR SHAREHOLDER AMOUNT NET ASSETS OF AMOUNT FUND ADVISER EXECUTED FEE RATE APPROVAL APPROVAL ($) APPROX. ($) ($) Adjustable Rate MLAM 6/11/91 0.50% 10/13/93 10/23/92 2,710,336 542,067,229 1,822,920 Federal Securities FAM 12/20/91 0.50%* 4/13/94 10/23/91 17,119,697 4,105,627,838 12,861,130 Fundamental Growth MLAM 8/18/92 0.65% 1/19/94 -- 220,631 49,359,573 366,321 Merrill Lynch Phoenix FAM 7/15/82 1.00% 10/13/93 9/30/88 3,031,663 303,999,209 6,152,338 REIMBURSEMENT OF INVESTMENT ADVISER DURING FISCAL YEAR BASED ON NET FOR ASSETS OF ACCOUNTING SERVICES FUND APPROX ($) ($) Adjustable Rate 364,583,983 226,047 Federal Securities 2,929,634,709 277,430 Fundamental Growth 56,357,068 37,463 Merrill Lynch Phoenix 615,233,809 53,299
* For that portion of average net assets not exceeding $500 million; 0.475% for that portion of average net assets in excess of $500 million but not exceeding $1 billion; 0.45% for that portion of average net assets in excess of $1 billion but not exceeding $1.5 billion; 0.425% for that portion of average net assets in excess of $1.5 billion but not exceeding $2 billion; 0.40% for that portion of average net assets in excess of $2 billion but not exceeding $2.5 billion; 0.375% for that portion of average net assets in excess of $2.5 billion but not exceeding $3.5 billion; 0.35% for that portion of average net assets in excess of $3.5 billion but not exceeding $5 billion; 0.325% for that portion of average net assets in excess of $5 billion but not exceeding $6.5 billion; and 0.30% for that portion of average net assets in excess of $6.5 billion. A-9 Except as set forth in the table below, during its most recently completed fiscal year, no Fund engaged in portfolio transactions involving the payment of brokerage commissions:
BROKERAGE COMMISSIONS % OF AGGREGATE DOLLAR AMOUNT DOLLAR OF TRANSACTIONS IN WHICH AMOUNT PAID TO % PAID TO BROKERAGE COMMISSIONS PAID FUND DOLLAR AMOUNT MERRILL LYNCH MERRILL LYNCH EFFECTED THROUGH MERRILL LYNCH Fundamental Growth 89,810 4,620 5.14% 4.06% Merrill Lynch Phoenix 992,289 47,441 4.78% 4.66%
A-10 EXHIBIT B MERRILL LYNCH INVESTMENT MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1993 AND INDEPENDENT AUDITORS' REPORT B-1 INDEPENDENT AUDITORS' REPORT MERRILL LYNCH INVESTMENT MANAGEMENT, INC.: We have audited the accompanying consolidated balance sheet of Merrill Lynch Investment Management, Inc. and its subsidiaries (the "Company") as of December 31, 1993. This consolidated balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated balance sheet presents fairly, in all material respects, the financial position of the Company at December 31, 1993 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE Parsippany, New Jersey February 28, 1994 B-2 MERRILL LYNCH INVESTMENT MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993 ---------------- ASSETS Cash and cash equivalents................................... $ 1,664,075 Receivable from affiliated companies: Lease transactions..................................... 708,616,571 Sale of leased investment.............................. 48,312,532 Investments in affiliated limited partnership............... 62,218,528 Investments in leases: Leveraged leases....................................... 57,431,668 Sales-type lease....................................... 3,362,521 Investments in affiliated investment companies-- (market: $26,066,372)................................................ 24,610,184 Fund management and administrative fees receivable.......... 49,098,914 Fixed assets (net of $11,457,912 accumulated depreciation)............................................... 10,406,280 Prepaid expenses and other assets........................... 15,376,412 ---------------- TOTAL ASSETS................................................ $ 981,097,685 ---------------- ---------------- LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Payable to affiliates....................................... $ 759,321,639 Accrued liabilities and other payables...................... 8,432,888 Deferred income--unearned fees.............................. 7,007,406 Deferred income taxes: Arising from leveraged leases.......................... 52,938,886 Arising from sales-type lease.......................... 1,351,622 Other.................................................. 43,685,367 ---------------- Total liabilities........................................... 872,737,808 ---------------- STOCKHOLDER'S EQUITY: Common stock, par value $1.00 per share-- authorized 25,000 shares; outstanding 10,000 shares............................................. 10,000 Additional paid-in capital.................................. 23,266,792 Accumulated translation adjustment.......................... 642,388 Retained earnings........................................... 84,440,697 ---------------- Total stockholder's equity.................................. 108,359,877 ---------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $ 981,097,685 ---------------- ---------------- See notes to consolidated balance sheet. B-3 MERRILL LYNCH INVESTMENT MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Merrill Lynch Investment Management, Inc. and its subsidiaries (the "Company"), serve as investment adviser to certain registered investment companies, and provide investment advisory services for individuals and institutions. Merrill Lynch Investment Management, Inc., a wholly-owned subsidiary of Merrill Lynch Group, Inc., is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). The Company's consolidated balance sheet reflects its 100 percent ownership of Merrill Lynch Funds Distributor, Inc., a distributor of shares of various affiliated managed registered investment companies, Fund Asset Management, Inc., an investment adviser to various registered investment companies and a lessor participant in leveraged lease agreements, Merrill Lynch International Asset Management, Ltd., a Channel Islands based investment adviser and Princeton Administrators, Inc., an administrator to certain non-affiliated investment companies, and its 60% ownership of Merrill Lynch International Capital Management Co., a Japan based investment advisor. CASH AND CASH EQUIVALENTS For purposes of the consolidated balance sheet, cash and cash equivalents include marketable securities with initial maturity dates of less than three months. The carrying amount approximates fair value because of the short maturity of those instruments. FIXED ASSETS Fixed assets are recorded at cost and consist principally of furniture and equipment. Depreciation is calculated using the straight-line method over a period ranging from 3 to 10 years. DEFERRED INCOME--UNEARNED FEES Investment advisory services are billed at the beginning of the period for which services are to be rendered. The fee is deferred and credited to income on a pro rata basis over the period of the contract, which normally does not exceed one year. B-4 MERRILL LYNCH INVESTMENT MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED) DECEMBER 31, 1993 INCOME TAXES The results of operations of the Company are included in the consolidated Federal and combined state and local income tax returns filed by ML&Co. It is the policy of ML&Co. to allocate the tax associated with such operating results to each respective subsidiary in a manner which approximates the separate company method. In 1992, ML&Co. adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") which requires an asset and liability method in recording income taxes on all transactions that have been recognized in the financial statements. SFAS 109 provides that deferred taxes be adjusted to reflect tax rates at which future tax liabilities or assets are expected to be settled or realized. TRANSACTIONS WITH AFFILIATES The Company serves as an investment adviser for certain investment companies. In addition, the Company, through its 100% owned subsidiary, Princeton Administrators, Inc., serves as an administrator for certain non-affiliated investment companies. Management fees earned as adviser and administrator are based on a percentage of the net assets of each investment company. Such fees are recognized in the period earned. The Company maintains investments in certain of these investment companies. Such investments are carried at the lower of cost or market value. Market value is determined based upon quoted market prices. The Company has an arrangement with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate which provides that the Company, which receives revenue as investment adviser to certain investment companies (the "Funds"), reimburse MLPF&S for certain costs incurred in processing transactions involving shares of the Funds. In connection with the formation of certain affiliated investment companies (the "Investment Companies"), the Company has reimbursed MLPF&S for subscription expenses incurred in offering the Investment Companies' shares for sale. The unamortized balance B-5 MERRILL LYNCH INVESTMENT MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED) DECEMBER 31, 1993 included in prepaid expenses and other assets totalled $5,276,842 as of December 31, 1993. The Company has unsecured note agreements with ML&Co. for $700,000,000. These amounts bear interest at a floating rate approximating ML&Co's. average borrowing rate, of which $650,000,000 is payable on demand and $50,000,000 is due August 26, 1994. In addition, the Company has certain other amounts payable to affiliates. During 1992, the Company's investments in Merrill Lynch Interfunding, Inc. and Merlease Leasing Corp. were sold to an affiliate at book value. Receivable from affiliated companies-lease transactions represents the proceeds from this transaction. The Company has a 98 percent limited partnership interest in ML Plainsboro Limited Partnership ("MLP"), whose general partner is an affiliate. Profits and losses are allocated to the Company based on its percentage interest. The "Receivable from affiliated companies" arising from lease transactions is summarized as follows: Monies advanced to fund lease transactions....... $ (103,476,954) Tax benefits allocated to the Company by ML&Co... 88,699,254 Proceeds from sale of subsidiaries............... 684,115,048 Other............................................ 39,279,223 ----------------- Total....................................... $ 708,616,571 ----------------- ----------------- ML&Co. is the holder of the Company's excess cash, which is available on demand to meet current liabilities. ML&Co. credits the Company for interest at a floating rate approximating ML&Co.'s average borrowing rate based on the Company's average daily balance due to/from ML&Co. B-6 MERRILL LYNCH INVESTMENT MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED) DECEMBER 31, 1993 INVESTMENTS IN LEASES The Company is a lessor participant in leveraged lease agreements. Pertinent information relating to the Company's investments in leveraged leases is summarized as follows: ESTIMATED LENGTH OF RESIDUAL VALUE LEASE EQUITY OF LEASED TYPE OF PROPERTY (YEARS) INVESTMENT PROPERTY - ------------------------- ------------- ----------- ----------------- Generating plant......... 24-25 34.06% 15.0% Financing beyond the Company's equity interest in the purchase price of the properties was furnished by outside parties in the form of long-term debt that provides for no recourse against the Company and is collateralized by a first lien on the properties and related rentals. At the end of the respective lease terms, ownership of the properties remains with the Company. The Company's net investment in leveraged leases is summarized as follows: Rentals receivable (net of principal and interest on nonrecourse debt).............................. $ 66,075,030 Estimated residual values of leased assets........ 18,964,143 Less: Unearned and deferred income...................... (26,617,505) Allowance for uncollectibles...................... (990,000) --------------- Investment in leveraged leases.................... 57,431,668 Less deferred taxes arising from leveraged leases............................................ (52,938,886) --------------- Net investment in leveraged leases................ $ 4,492,782 --------------- --------------- In 1993, one of the Company's subsidiaries sold its equity interest in a chemical tanker previously accounted for as a leveraged lease. The sale resulted in an after-tax gain of $112,000. The Company's investment in the sales-type lease consisted of the following elements at December 31, 1993: B-7 MERRILL LYNCH INVESTMENT MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED) DECEMBER 31, 1993 Minimum lease payments receivable................. $ 3,672,000 Less: Unearned income.............................. (59,479) Allowance for uncollectibles................. (250,000) --------------- Investment in sales-type financing leases......... $ 3,362,521 --------------- --------------- At December 31, 1993, minimum lease payments receivable are $3,672,000 for 1994. For Federal income tax purposes, the Company receives the investment tax credit and has the benefit of tax deductions for (i) depreciation on the entire amount of leased assets and (ii) interest on the outstanding long-term debt. For state and local tax purposes, the Company also receives the benefits of tax deductions from (i) and (ii) above. Since, during the early years of the leases, those deductions exceed the Company's lease rental income, substantial excess deductions are available to be applied against the Company's other income and the consolidated income of ML&Co. In the later years of these leases, rental income will exceed the related deductions and taxes will be payable (to the extent that net deductions arising from additional leveraged lease transactions do not offset such lease income). Deferred taxes have been provided to reflect these temporary differences. INCOME TAXES As part of the consolidated group, the Company transfers its current Federal and state tax liabilities to the Parent. At December 31, 1993, the Company had a current Federal tax receivable of $1,015,000 and current state tax payable of $2,900,000 to the Parent. PENSION PLAN The Company participates in the ML&Co. Comprehensive Retirement Program (the "Program"), consisting of the Retirement Accumulation Plan ("RAP") and the Employee Stock Ownership Plan (the "ESOP"). Both plans became effective January 1, 1989. Under the Program, cash contributions made by the Company and the ML&Co. stock held by the ESOP are allocated quarterly to participant's accounts. Allocations are based on years of service, age and B-8 MERRILL LYNCH INVESTMENT MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED BALANCE SHEET--(CONCLUDED) DECEMBER 31, 1993 eligible compensation. Actuarial data regarding the Company's Plan participants is not separately available. NAME CHANGE Effective December 28, 1991, the Company, through an amendment of its certificate of incorporation, changed its name to Merrill Lynch Investment Management, Inc. ("MLIM"). MLIM does business under the name "Merrill Lynch Asset Management". LITIGATION The Company is a party to certain lawsuits arising from the normal conduct of its business. While the ultimate result of the lawsuits against the Company cannot be predicted with certainty, management does not expect that these matters will have a material adverse effect on the Company's financial position or the results of its operations. SUBSEQUENT EVENT Effective January 1, 1994, the Company contributed certain net investment advisory assets to Merrill Lynch Asset Management, L.P., a newly formed Delaware limited partnership, in exchange for a 99% limited partnership interest. The general partner, Princeton Services, Inc. (a wholly-owned subsidiary of Merrill Lynch & Co., Inc.) contributed 1% of the value of the net investment advisory assets in exchange for its 1% general partnership interest. The partnership's profits and losses are to be allocated in proportion to the capital contributions of the partners. B-9 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1993 AND INDEPENDENT AUDITORS' REPORT B-10 INDEPENDENT AUDITORS' REPORT FUND ASSET MANAGEMENT, INC.: We have audited the accompanying consolidated balance sheet of Fund Asset Management, Inc. and subsidiary (the "Company") as of December 31, 1993. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on the balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated balance sheet presents fairly, in all material respects, the financial position of the Company at December 31, 1993 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE Parsippany, New Jersey February 28, 1994 B-11 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993 ----------------- ASSETS Cash....................................................... $ 996,680 Receivable from affiliated companies: Lease transactions.................................... 24,501,523 Sale of leased investment............................. 48,312,532 Fund management fees receivable............................ 28,927,938 Investments in leases: Leveraged leases...................................... 57,431,668 Sales-type lease...................................... 3,362,521 Investments in affiliated investment companies-- (market: $19,731,088)............................................... 18,181,262 Investment in affiliated limited partnership............... 31,109,264 ----------------- TOTAL ASSETS............................................... $ 212,823,388 ----------------- ----------------- LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Payable to Merrill Lynch & Co., Inc. and affiliates........ $ 21,554,955 Deferred income taxes: Arising from leveraged leases......................... 52,938,886 Arising from sales-type lease......................... 1,351,622 Other................................................. 15,838,124 Other...................................................... 8,501 ----------------- Total liabilities.......................................... 91,692,088 ----------------- STOCKHOLDER'S EQUITY: Common stock, par value $1.00 per share-- authorized 25,000 shares; outstanding 1,000 shares............................................. 1,000 Additional paid-in capital................................. 686,215,876 Retained earnings.......................................... 119,029,472 Proceeds receivable from Merrill Lynch & Co., Inc. from sale of subsidiary......................................... (684,115,048) ----------------- Total stockholder's equity................................. 121,131,300 ----------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................. $ 212,823,388 ----------------- ----------------- See notes to consolidated balance sheet. B-12 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED BALANCE SHEET DECEMBER 31, 1993 ORGANIZATION Fund Asset Management, Inc. and subsidiary (the "Company"), a wholly-owned subsidiary of Merrill Lynch Investment Management, Inc. (the "Parent"), or "MLIM" which is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."), serves as an investment adviser to various registered open-end investment companies. The Company is also a lessor participant in certain leveraged and sales-type lease agreements. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Income Taxes--The results of the operations of the Company are included in the consolidated Federal and combined state and local income tax returns filed by ML&Co. It is the policy of ML&Co. to allocate the tax associated with such operating results to each respective subsidiary in a manner which approximates the separate company method. In 1992, ML&Co. adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") which requires an asset and liability method in recording income taxes on all transactions that have been recognized in the financial statements. SFAS 109 provides that deferred taxes be adjusted to reflect tax rates at which future tax liabilities or assets are expected to be settled or realized. TRANSACTIONS WITH AFFILIATES The Company serves as an investment adviser for certain affiliated investment companies. The Company maintains investments in certain of these investment companies. Such investments are carried at the lower of cost or market value. Market value is determined based upon quoted market prices. The Company has an arrangement with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") an affiliate which provides that the Company, which receives revenue as investment adviser to certain investment companies (the "Funds"), reimburse MLPF&S for certain costs incurred in processing transactions involving shares of the Funds. ML&Co. is the holder of the Company's excess cash, which is available on demand to meet current liabilities. ML&Co. credits the B-13 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED) DECEMBER 31, 1993 Company for interest, at a floating rate approximating ML&Co.'s average borrowing rate, based on the Company's average daily balances due to/from ML&Co. The "Receivable from affiliated companies" arising from lease transactions is summarized as follows: Monies advanced to fund lease transactions....... $ (103,476,954) Tax benefits allocated to the Company by ML&Co... 88,699,254 Other............................................ 39,279,223 ----------------- Total....................................... $ 24,501,523 ----------------- ----------------- The Company has a 49 percent limited partnership interest in ML Plainsboro Limited Partnership ("MLP") whose general partner is an affiliate. Profits and losses are allocated to the Company based on its percentage interest. During 1992, the Company sold its investment in Merrill Lynch Interfunding, Inc. and Merlease Leasing Corp. to an affiliate at book value, resulting in a receivable from ML&Co. This receivable is reflected as a reduction to stockholder's equity. INVESTMENTS IN LEASES The Company is a lessor participant in leveraged leases. Pertinent information relating to the Company's investments in leveraged leases is summarized as follows: ESTIMATED LENGTH OF RESIDUAL VALUE LEASE EQUITY OF LEASED TYPE OF PROPERTY (YEARS) INVESTMENT PROPERTY - --------------------------- ----------- ----------- --------------- Generating plant........... 24-25 34.06% 15.0% Financing beyond the Company's equity interest in the purchase price of the properties was furnished by outside parties in the form of long-term debt that provides for no recourse against the Company and is secured by a first lien on the properties and related rentals. At the end of the respective lease terms, ownership of the properties remains with the Company. B-14 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED) DECEMBER 31, 1993 The Company's net investment in leveraged leases is summarized as follows: Rentals receivable (net of principal and interest on nonrecourse debt)............................... $ 66,075,030 Estimated residual values of leased assets......... 18,964,143 Less: Unearned and deferred income.................. (26,617,505) Allowance for uncollectibles.................. (990,000) --------------- Investment in leveraged leases..................... 57,431,668 Less deferred taxes arising from leveraged leases............................................. (52,938,886) --------------- Net investment in leveraged leases................. $ 4,492,782 --------------- --------------- During 1993, the Company sold its equity interest in the chemical tanker previously accounted for as a leveraged lease. The sale resulted in an after-tax gain of $112,000. The Company's investment in the sales-type leases consisted of the following elements at December 31, 1993: Minimum lease payments receivable.................... $ 3,672,000 Less: Unearned income................................. (59,479) Allowance for uncollectibles.................... (250,000) ------------- Investment in sales-type financing leases............ $ 3,362,521 ------------- ------------- At December 31, 1993 minimum lease payments receivable are $3,672,000 for 1994. For Federal income tax purposes, the Company receives the investment tax credit and has the benefit of tax deductions for (i) depreciation on the entire amount of leased assets and (ii) interest on the outstanding long-term debt. For state and local tax purposes, the Company also receives the benefits of tax deductions from (i) and (ii) above. Since, during the early years of the leases, those deductions exceed the Company's lease rental income, substantial excess deductions are available to be applied against the Company's other income and the consolidated income of ML&Co. In the later years of these leases, rental income will exceed the related deductions and taxes will B-15 FUND ASSET MANAGEMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED BALANCE SHEET--(CONCLUDED) DECEMBER 31, 1993 be payable (to the extent that net deductions arising from additional leveraged lease transactions do not offset such net lease income). Deferred taxes have been provided to reflect these temporary differences. INCOME TAXES As part of the consolidated group, the Company transfers its current Federal and state tax liabilities to MLIM. No such amounts were due to MLIM at December 31, 1993. PENSION PLAN The Company participates in the ML&Co. Comprehensive Retirement Program (the "Program") consisting of the Retirement Accumulation Plan ("RAP") and the Employee Stock Ownership Plan (the "ESOP"). Under the Program, cash contributions made by the Company and the ML&Co. stock held by the ESOP will be allocated quarterly to participants' accounts. Allocations will be based on years of service, age and eligible compensation. Actuarial data regarding the Company's Plan participants is not separately available. NAME CHANGE Effective December 28, 1991, the Company's Parent, through an amendment of its certificate of incorporation, changed its name to Merrill Lynch Investment Management, Inc. ("MLIM"). MLIM does business under the name "Merrill Lynch Asset Management". SUBSEQUENT EVENT Effective January 1, 1994, Fund Asset Management, Inc. contributed certain net investment advisory assets to Fund Asset Management, L.P., a newly formed Delaware limited partnership, in exchange for a 99% limited partnership interest. The general partner, Princeton Services, Inc. (a wholly-owned subsidiary of Merrill Lynch & Co., Inc.) contributed 1% of the value of the net investment advisory assets in exchange for its 1% general partnership interest. The partnership's profits and losses are to be allocated in proportion to the capital contributions of the partners. B-16 EXHIBIT C EXISTING INVESTMENT RESTRICTIONS RELATING TO EACH FUND MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC. ("ADJUSTABLE RATE FUND") Fundamental Investment Restrictions The Adjustable Rate Fund may not: 1. With respect to at least 75% of its total assets, invest in the securities of any one issuer if, immediately after and as a result of such investment, the value of the holdings of the Fund in the securities of such issuer exceeds 5% of the Fund's total assets, taken at market value, except that such restriction shall not apply to securities issued or guaranteed by the United States Government or any of its agencies or instrumentalities. 2. Make investments for the purpose of exercising control or management. 3. Purchase the securities of other investment companies except in connection with a merger, consolidation, acquisition or reorganization, and provided further that the Fund may purchase, to the extent permitted by the 1940 Act, the securities of another investment company having substantially the same investment objective and policies as the Fund. 4. Purchase or sell real estate (including interests in real estate limited partnerships); provided that the Fund may invest in mortgage-backed securities as described in the Prospectus and Statement of Additional Information, and including any securities secured by real estate or interests therein. 5. Purchase any securities on margin, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (The deposit or payment by the Fund of initial or variation margin in connection with options, futures or related options transactions, if applicable, is not considered the purchase of a security on margin.) 6. Make short sales of securities or maintain a short position in securities. C-1 7. Make loans to other persons (except as provided in 8 below); provided that for purposes of this restriction the acquisition of mortgage-backed and asset-backed securities, FNMA debentures, money market securities, purchase and sale contracts and repurchase agreements shall not be deemed to be the making of a loan. 8. Lend its portfolio securities in excess of 33 1/3% of its total assets, taken at market value; provided that such loans shall be made in accordance with the guidelines set forth in the Prospectus and Statement of Additional Information. 9. Issue senior securities, borrow money or pledge its assets in excess of 33 1/3% of its total assets taken at value (including the amount borrowed) and then only from banks as a temporary measure for the purpose of meeting redemption requests, distribution requirements under the Internal Revenue Code of 1986, as amended, or settlement of investment transactions or for extraordinary or emergency purposes; provided, however, that for purposes of this restriction, transactions involving "cover" or for which segregated accounts have been established as described in the Prospectus and the Statement of Additional Information shall not be considered a borrowing. Usually only "leveraged" investment companies may borrow in excess of 5% of their assets; however, the Fund will not borrow to increase income but intends only to borrow to meet redemption requests, to meet such distribution requirements, to settle investment transactions which may otherwise require untimely dispositions of Fund securities or for extraordinary or emergency purposes. Interest paid on such borrowings will reduce net income. (See restriction 10 below regarding the exclusion from this restriction of arrangements with respect to interest rate transactions, options, futures contracts and options on futures contracts.) 10. Mortgage, pledge, hypothecate or in any manner transfer as security for indebtedness any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in 9 above, and then such mortgaging, pledging or hypothecating may not exceed 10% of its total assets, taken at market value. (For the purpose of this restriction and restriction 9 above, collateral arrangements with respect to interest rate transactions or the writing of options, futures contracts, options on futures contracts, and collateral arrangements with respect to initial and variation margin are not deemed to be a pledge of assets, and neither such arrangements nor the entering into of interest rate transactions nor the purchase and sale of C-2 options, futures or related options are deemed to be the issuance of a senior security.) 11. Invest in securities which cannot be readily resold because of legal or contractual restrictions or which are not otherwise readily marketable, including repurchase agreements maturing in more than seven days, if, regarding all such securities, more than 10% of its net assets, taken at market value, would be invested in such securities. While the Fund will not purchase illiquid securities in an amount exceeding 10% of its net assets, the Fund may purchase, without regard to that limitation, securities that are not registered under the Securities Act of 1933 (the "Securities Act"), but that can be offered and sold to "qualified institutional buyers" under Rule 144A under the Securities Act, provided that the Fund's Board of Directors continuously determines, based on the trading markets for the specific Rule 144A security, that it is liquid. 12. Act as an underwriter of securities, except to the extent that the Fund may technically be deemed an underwriter in selling portfolio securities described in 11 above. 13. Purchase or sell interests in oil, gas or other mineral exploration or development programs. 14. Invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers in any particular industry (provided that for these purposes, the Fund's investments in mortgage-backed and asset-backed securities shall not be considered investments in the securities of issuers in a particular industry). Non-Fundamental Investment Restrictions The Adjustable Rate Fund may not: a. Invest in securities of companies having a record, together with predecessors, of less than three years of continuous operation, if more than 5% of its total assets would be invested in such securities (except that the Fund will not be subject to this restriction with respect to investments in mortgage-backed or asset-backed securities). b. Write, purchase or sell puts or calls or combinations thereof, except to the extent described in the Fund's Prospectus and Statement of Additional Information, as amended from time to time. c. Purchase or retain the securities of any issuer if those individual Directors, officers and directors of the Fund, the Manager or any C-3 subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. d. Purchase or sell OTC options and securities underlying such options if, as a result of such a transaction, such options, to the extent the Commission staff views such options as illiquid, together with all other illiquid securities or securities which are not readily marketable, exceed 10% of the net assets of the Fund, taken at market value. e. Invest in residual interests in collateralized mortgage obligation structures or residual interests in real estate mortgage investment conduits. MERRILL LYNCH FEDERAL SECURITIES TRUST ("FEDERAL SECURITIES TRUST") Fundamental Investment Restrictions The Federal Securities Trust may not: 1. Invest in the securities of any one issuer, if immediately after and as a result of such investment the value of the holdings of the Fund in the securities of such issuer exceeds 5% of the Fund's total assets, taken at market value, except that such restrictions shall not apply to U.S. Government securities (as defined in the Prospectus). 2. Invest in the securities of any single issuer, if immediately after and as a result of such investment, the Fund owns more than 10% of the outstanding voting securities of such issuer. 3. Make investments for the purpose of exercising control or management. 4. Purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved and only if immediately thereafter not more than 10% of the Fund's total assets, taken at market value, would be invested in such securities. C-4 5. Purchase or sell real estate, provided that the Fund may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein. 6. Purchase or sell commodities or commodity contracts, except that the Fund may purchase and sell interest rate futures contracts and related options. 7. Purchase any security on margin, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (The deposit or payment by the Fund of initial or variation margin in connection with interest rate futures contracts or related options transactions is not considered the purchase of a security on margin.) 8. Make short sales of securities or maintain a short position, unless at all times when a short position is open it owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short, and unless not more than 10% of the Fund's net assets (taken at market value) is held as collateral for such sales at any one time. (It is the present intention of management to make such sales only for the purpose of deferring realization of gain or loss for Federal income tax purposes; such sales would not be made of securities subject to outstanding options.) 9. Make loans to other persons (except as provided in (10) below); provided that for purposes of this restriction the investment in repurchase agreements and purchase and sale contracts shall not be deemed to be the making of a loan. 10. Lend its portfolio securities in excess of 33 1/3% of its total assets taken at market value, provided that such loans shall be made in accordance with specific guidelines. 11. Issue senior securities, borrow money or pledge its assets except that the Fund may borrow from a bank as a temporary measure for extraordinary or emergency purposes or to meet redemptions in amounts not exceeding 10% (taken at the market value) of its total assets and pledge its assets to secure such borrowings. (For the purpose of this restriction, collateral arrangements with respect to the writing of options, interest rate futures contracts, options on interest rate futures contracts, and collateral arrangements with respect to initial and variation margin are not deemed to be a pledge of assets and C-5 neither such arrangements nor the purchase or sale of futures or related options are deemed to be the issuance of a senior security.) 12. Invest in securities which cannot be readily resold because of legal or contractual restrictions or which are not otherwise readily marketable if, regarding all such securities, more than 5% of its net assets, taken at market value, would be invested in such securities. 13. Underwrite securities of other issuers, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as amended (the "Securities Act") in selling portfolio securities. 14. Write, purchase or sell puts, calls or combinations thereof, except that the Fund may write, purchase and sell options with respect to U.S. Government securities (as defined in the Prospectus) and with respect to interest rate futures contracts. 15. Purchase or sell interests in oil, gas or other mineral exploration or development programs. 16. Invest in securities of issuers (other than issuers of U.S. Government agency securities) having a record, together with predecessors, of less than three years of continuous operation if more than 5% of its total assets, taken at market value, would be invested in such securities. 17. Enter into repurchase agreements or purchase and sale contracts if, as a result, more than 10% of the Fund's net assets (taken at market value at the time of each investment) would be subject to repurchase agreements or purchase and sale contracts maturing in more than seven days. Non-Fundamental Investment Restrictions The Federal Securities Trust may not: a. Purchase or retain the securities of any issuer, if those individual officers, directors and Trustees of the Fund, Merrill Lynch Investment Management, Inc., doing business as Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than one-half of 1% of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. Portfolio securities of the Fund may not be purchased from, sold or loaned to the Manager or its affiliates or any of their directors, officers or employees, acting as principal. b. Write any covered put options on U.S. Government securities if as a result the Fund would then have more than 50% of its total C-6 assets (taken at market value) subject to being invested upon the exercise of put options. MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. ("FUNDAMENTAL GROWTH FUND") Fundamental Investment Restrictions The Fundamental Growth Fund may not: 1. With respect to 75% of its total assets, invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities of any one issuer or acquire more than 10% of the voting securities of any one issuer, except that such restriction shall not apply to securities backed by the United States Government or any of its agencies or instrumentalities. 2. Make investments for the purpose of exercising control or management. Investments by the Fund in wholly-owned investment entities created under the laws of certain countries will not be deemed the making of investments for the purpose of exercising control of management. 3. Purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved and only if immediately thereafter not more than (i) 3% of the total outstanding voting stock of such company is owned by the Fund, (ii) 5% of the Fund's total assets, taken at market value, would be invested in any one such company, or 10% of the Fund's total assets, taken at market value, would be invested in such securities. 4. Purchase or sell real estate (including real estate limited partnerships); provided that the Fund may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein. 5. Purchase any securities on margin, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. (The deposit or payment by the Fund of initial or variation margin in connection with futures or related options transactions, if applicable, is not considered the purchase of a security on margin.) C-7 6. Make short sales of securities or maintain a short position. 7. Make loans to other persons (except as provided in 8 below); provided that for purposes of this restriction an investment in repurchase agreements shall not be deemed to be the making of a loan. 8. Lend its portfolio securities in excess of 33 1/3% of its total assets, taken at market value; provided that such loans shall be made in accordance with the guidelines set forth in the Prospectus. 9. Issue senior securities, borrow money or pledge its assets in excess of 20% of its total assets taken at value (including the amount borrowed) and then only from a bank as a temporary measure for extraordinary or emergency purposes. Usually only "leveraged" investment companies may borrow in excess of 5% of their assets; however, the Fund will not borrow to increase income but only to meet redemption requests which may otherwise require untimely dispositions of fund securities. The Fund will not purchase securities while borrowings are outstanding except to honor prior commitments and to exercise subscription rights. Interest paid on such borrowings will reduce net income. (See restriction 10 below regarding the exclusion from this restriction of arrangements with respect to options, futures contracts and options on futures contracts.) 10. Mortgage, pledge, hypothecate or in any manner transfer as security for indebtedness any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in 9 above, and then such mortgaging, pledging or hypothecating may not exceed 10% of its total assets, taken at market value. (For the purpose of this restriction and restriction 9 above, collateral arrangements with respect to the writing of options, futures contracts, options on futures contracts, and collateral arrangements with respect to initial and variation margin are not deemed to be a pledge of assets, and neither such arrangements nor the purchase and sale of options, futures or related options are deemed to be the issuance of a senior security.) 11. Invest in securities which cannot be readily resold because of legal or contractual restrictions or which are not otherwise readily marketable, including repurchase agreements maturing in more than seven days, if, regarding all such securities, more than 15% of its net assets, taken at market value, would be invested in such securities. 12. Act as an underwriter of securities, except to the extent that the Fund may technically be deemed an underwriter when investing in C-8 repurchase agreements or insofar as the Fund may be deemed an underwriter under the Securities Act in selling portfolio securities. 13. Purchase or sell interests in oil, gas or other mineral exploration or development programs except that the Fund may invest in securities issued by companies that engage in oil, gas or other mineral exploration development activities. 14. 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). Non-Fundamental Investment Restrictions The Fundamental Growth Fund may not: a. Invest in warrants if at the time of acquisition its investments in warrants, valued at the lower of cost or market value, would exceed 5% of the Fund's net assets; included within such limitation, but not to exceed 2% of the Fund's net assets, are warrants which are not listed on the New York or American Stock Exchange. For purposes of this restriction, warrants acquired by the Fund in units or attached to securities may be deemed to be without value. b. Purchase or sell commodities or commodity contracts, except that the Fund may deal in forward foreign exchange between currencies of the different countries in which it may invest and purchase and sell stock index and currency options, stock index futures, financial futures and currency futures contracts and related options on such futures. c. Invest in securities of companies having a record, together with predecessors, of less than three years of continuous operation, if more than 5% of its total assets would be invested in such securities. d. Write, purchase or sell puts, calls, straddles, spreads or combinations thereof, to the extent described in the Fund's Prospectus and in this Statement of Additional Information, as amended from time to time. e. Purchase or retain the securities of any issuer, if those individual officers and directors of the Fund, the Manager or any subsidiary thereof each owning beneficially more than 1/2 of 1% of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. C-9 f. Purchase or sell OTC options and securities underlying such options if, as a result of such a transaction, such options, together with all other illiquid securities or securities which are not readily marketable, exceed 15% of the net assets of the Fund, taken at market value. g. Invest greater than 10% of the Fund's total assets, taken at market value at the time of acquisition, in the securities of foreign issuers except that purchases made through American Depositary Receipts will not be subject to this restriction. MERRILL LYNCH PHOENIX FUND, INC. ("MERRILL LYNCH PHOENIX FUND") Fundamental Investment Restrictions The Merrill Lynch Phoenix Fund may not: 1. Invest in securities of any one issuer (other than the United States or its agencies or instrumentalities), if immediately after and as a result of such investment (a) more than 5% of the total assets of the Fund, taken at market value, would be invested in the securities of such issuer; or (b) more than 10% of the outstanding voting securities of such issuer would be owned by the Fund. 2. Invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers in any particular industry. 3. Make investments for the purpose of exercising day-to-day management of any issuer's affairs. (The Fund may, however, from time to time have a controlling interest in a particular issuer, be part of a group holding a controlling interest, or serve on a creditors' committee or otherwise participate in bankruptcy or reorganization proceedings.) 4. Purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization, or by purchase in the open market of securities of closed-end investment companies where no underwriter or dealer's commission or profit, other than customary broker's commission, is involved and only if immediately thereafter not more than 10% of the Fund's total assets, taken at market value, would be invested in such securities. C-10 5. Purchase or sell real estate; provided that the Fund may invest in securities secured by real estate or interest therein or issued by companies which invest in real estate or interests therein. 6. Purchase or sell commodities or commodity contracts. 7. Purchase any securities on margin, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, or make short sales of securities or maintain a short position. 8. Make loans to other persons (except as provided in (9) below); provided that for purposes of this restriction the acquisition of bonds, debentures, or other corporate debt securities and investment in Government obligations, short-term commercial paper, certificates of deposit and bankers' acceptances shall not be deemed to be the making of a loan (the acquisition of bonds, debentures, or other corporate debt securities which are not publicly distributed is considered to be the making of a loan under the Investment Company Act). 9. Lend its portfolio securities in excess of 33 1/3% of its total assets, taken at market value; provided that such loans shall be made in accordance with specific guidelines. 10. Borrow amounts in excess of 20% 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. The Fund will not purchase securities while borrowings are outstanding. 11. Mortgage, pledge, hypothecate or in any manner transfer (except as provided in (9) above), as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in (10) above, and then such mortgaging, pledging or hypothecating may not exceed 10% of the Fund's total assets, taken at market value. (In order to comply with certain state statutes, the Fund will not, as a matter of operating policy, mortgage, pledge or hypothecate its portfolio securities to the extent that at any time the percentage of the value of pledged securities plus the maximum sales charge will exceed 10% of the value of the Fund's shares at the maximum offering price.) 12. Invest in securities which cannot be readily resold to the public because of legal or contractual restrictions or for which there C-11 are no readily available market quotations if, regarding all such securities, more than 10% of its net assets, taken at market value, would be invested in such securities. 13. Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933 in selling portfolio securities. 14. Write, purchase or sell puts, calls or combinations thereof. 15. Invest in securities of foreign issuers if at the time of acquisition more than 20% of its total assets, taken at market value, would be invested in such securities. 16. Purchase or sell interests in oil, gas or other mineral exploration or development programs. 17. Invest in securities of issuers having a record, together with predecessors, of less than three years of continuous operation if more than 5% of the total assets, taken at market value, would be invested in such securities. 18. Purchase or retain the securities of any issuer, if those individual officers and directors of the Fund, Merrill Lynch Investment Management, Inc., doing business as Merrill Lynch Asset Management or any subsidiary thereof each owning beneficially more than l/2 of 1% of the securities of such issuer own in the aggregate more than 5% of the securities of such issuer. Non-Fundamental Investment Restrictions The Merrill Lynch Phoenix Fund may not: a. Purchase warrants in excess of 5% of its net asset value taken at market value, and of such amount will not purchase warrants in excess of 2% of its net asset value which are not listed on either the New York or American Stock Exchanges. The Fund may, however, acquire warrants in excess of these amounts as part of a restructuring or refinancing involving securities in the Fund's portfolio. C-12 Code C PROXY Meeting of the Shareholders Please mark your choices of below in blue or black ink. Merrill Lynch Adjustable This Proxy has been Rate Securities Fund, Inc. personalized to reflect Merrill Lynch Federal those shares of the Securities Trust indicated Funds that are Merrill Lynch Fundamental held within a single Growth Fund, Inc. account. If a shareholder Merrill Lynch Phoenix Fund, holds shares in multiple Inc. accounts, it will be P.O. Box 9011, necessary to execute a proxy Princeton, NJ 08543-9011 for each such account. With respect to Proposal 4, a separate vote is required for Class A and Class B shares owned. This Proxy is solicited on behalf of the Directors/Trustees The undersigned hereby appoints Arthur Zeikel, Terry K. Glenn and Michael J. Hennewinkel as proxies, each with the power to appoint his substitute, and hereby authorizes each to represent and to vote, as designated below, all shares in one or more of the above-mentioned Funds held of record by the undersigned on August 5, 1994, at the Meeting of Shareholders of such Fund to be held on September 27, 1994, or any adjournment thereof. Such proxies are also authorized to vote on such other matters as may properly come before such meeting or any adjournment thereof. This Proxy when properly executed will be voted in the manner directed herein by the undersigned shareholder. If no direction is made, this Proxy will be voted FOR Proposals 1, 2, 3 and 4. Shares Held in Account 1. Election of Directors/Trustees. Class A Class B 000000000 000000000 Merrill Lynch Adjustable Rate Securities Fund, Inc. 000000000 000000000 Merrill Lynch Federal Securities Trust 000000000 000000000 Merrill Lynch Fundamental Growth Fund, Inc. 000000000 000000000 Merrill Lynch Phoenix Fund, Inc. Nominees: Joe Grills, Walter Mintz, Melvin R. Seiden, Stephen B. Swensrud, Harry Woolf and Arthur Zeikel To withhold authority for a Nominee for a particular Fund, check the "FOR ALL FOR WITHHOLD FOR ALL EXCEPT" box and print name ALL ALL EXCEPT of Nominee on the / / / / / / appropriate line below. / / / / / / / / / / / / / / / / / / 2. Ratify the selection of independent auditors. FOR AGAINST ABSTAIN Merrill Lynch Adjustable Rate Securities Fund, Inc. / / / / / / Merrill Lynch Federal Securities Trust / / / / / / Merrill Lynch Fundamental Growth Fund, Inc. / / / / / / Merrill Lynch Phoenix Fund, Inc. / / / / / / 3. Amend the fundamental investment restrictions. FOR AGAINST ABSTAIN / / / / / / / / / / / / / / / / / / / / / / / / 4. Amend the charter of the Fund in connection with the implementation of Merrill Lynch Select Pricing - Class A Shares - - Class B Shares - FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Please mark, sign, date, and mail your Proxy in the enclosed postage-paid envelope. Signature ---------------------------------------------------- Date ------------------------- If joint owner, each should sign. When signing as executor, trustee, etc., give full title as such. Merrill Lynch Family of Funds The enclosed proxy materials include two items that may be of special interest to our shareholders. - - One proposal is to adopt generally uniform investment restrictions among the MLAM Family of Funds. Since the Funds that make up the Merrill Lynch Family were organized at different times over a period of years, each Fund's investment restrictions largely reflect the regulations and financial market environment that prevailed at its inception. Adopting more uniform investment restrictions would allow each Fund to participage equally in the current marketplace and facilitate compliance among over 100 Fund portfolios. - - A second proposal is to implement the Merrill Lynch Select Pricing(SM) System, which would allow investors to elect among four alternative methods of purchasing most Merrill Lynch mutual funds. Currently, two alternatives are available: Class A and Class B Shares. The proposal would add Class C and Class D Shares. In addition, the proposal would provide for the automatic conversion of Class B Shares after a period of time to the new Class D Shares, which would result in lower expenses for those shareholders. In addition, as is typical for meetings of the Funds, shareholders are also asked to elect Directors or Trustees and to ratify the selection of the independent auditors for each Fund. Please take the time to read the proxy statement carefully and return the proxy card in the envelope provided. As required by law, you will be provided with separate proxy materials for each account in which you hold shares of a Fund. -----END PRIVACY-ENHANCED MESSAGE-----