-----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, ti5SXcMB+b8GR8MJlJqwvOAqkr0k+w/WkGEPxossJXzkCrE+pGoR2wfIj/dIdDsm w1bbGH/+XcRoi8DKFQBJ7g== 0000950130-94-000509.txt : 19940330 0000950130-94-000509.hdr.sgml : 19940330 ACCESSION NUMBER: 0000950130-94-000509 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19940329 19940329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL LYNCH GLOBAL UTILITY FUND INC CENTRAL INDEX KEY: 0000868452 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: MA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 33 SEC FILE NUMBER: 033-37103 FILM NUMBER: 94518481 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 40 SEC FILE NUMBER: 811-06180 FILM NUMBER: 94518482 BUSINESS ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 BUSINESS PHONE: 6092823319 MAIL ADDRESS: STREET 1: P O BOX 9011 CITY: PRINCETON STATE: NJ ZIP: 08543-9011 485BPOS 1 POST-EFFECTIVE AMENDMENT NO. 5 TO FORM N-1A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1994 REGISTRATION NOS. 33-37103 811-6180 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_] PRE-EFFECTIVE AMENDMENT NO. [_] POST-EFFECTIVE AMENDMENT NO. 5 [X] AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_] AMENDMENT NO. 7 [X] (Check appropriate box or boxes) --------------------- MERRILL LYNCH GLOBAL UTILITY FUND, INC. (Exact name of Registrant as specified in charter) BOX 9011 PRINCETON, NEW JERSEY 08543-9011 (Address of Principal Executive (Zip Code) Offices) Registrant's Telephone Number, including Area Code (609) 282-2800 ARTHUR ZEIKEL MERRILL LYNCH GLOBAL UTILITY FUND, INC. 800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536 MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011 (Name and Address of Agent for Service) COPIES TO: COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ. JOEL H. GOLDBERG, ESQ. MERRILL LYNCH ASSET MANAGEMENT SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN P.O. BOX 9011 919 THIRD AVENUE PRINCETON, NEW JERSEY 08543-9011 NEW YORK, NEW YORK 10022 IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE: [X] Immediately upon filing pursuant to paragraph (b) of Rule 485, or [_] 60 days after filing pursuant to paragraph (a) of Rule 485, or [_] on (date) pursuant to paragraph (b) of Rule 485, or [_] on (date) pursuant to paragraph (a) of Rule 485 Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant previously elected to register an indefinite number of shares of Class A and Class B common stock, par value $0.10 per share. A Rule 24f-2 notice was last filed on January 25, 1994. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MERRILL LYNCH GLOBAL UTILITY FUND, INC. POST-EFFECTIVE AMENDMENT NO. 5 ON FORM N-1A CROSS REFERENCE SHEET (AS REQUIRED BY RULE 481(A) UNDER THE SECURITIES ACT OF 1933)
N-1A ITEM NO. ------------- PART A LOCATION IN PROSPECTUS ------ ---------------------- Item 1. Cover Page................... Cover Page Item 2. Synopsis..................... Fee Table Item 3. Condensed Financial Information................. Financial Highlights Item 4. General Description of Registrant.................. Cover Page; Special and Risk Considerations; Investment Objective and Policies; Additional Information Item 5. Management of the Fund....... Fee Table; Management of the Fund; Inside Back Cover Page Item 5A. Management's Discussion of Fund Performance............ Not Applicable Item 6. Capital Stock and Other Securities.................. Cover Page; Alternative Sales Arrangements; Additional Information Item 7. Purchase Securities Being Offered..................... Fee Table; Alternative Sales Arrangements; Purchase of Shares; Additional Information; Inside Back Cover Page Item 8. Redemption or Repurchase..... Fee Table; Redemption of Shares Item 9. Pending Legal Proceedings.... Not Applicable PART B ------ Item 10. Cover Page................... Cover Page Item 11. Table of Contents............ Back Cover Page Item 12. General Information and History..................... Not Applicable Item 13. Investment Objectives and Policies.................... Investment Objective and Policies Item 14. Management of the Fund....... Management of the Fund Item 15. Control Persons and Principal Holders of Securities....... Not Applicable Item 16. Investment Advisory and Other Services.................... Management of the Fund; Purchase of Shares; General Information Item 17. Brokerage Allocation and Other Practices............. Portfolio Transactions and Brokerage Item 18. Capital Stock and Other Securities.................. General Information--Description of Shares Item 19. Purchase, Redemption and Pricing of Securities Being Offered..................... Determination of Net Asset Value; Purchase of Shares; Redemption of Shares; Shareholder Services Item 20. Tax Status................... Taxes Item 21. Underwriters................. Purchase of Shares Item 22. Calculations of Performance Data........................ Performance Data Item 23. Financial Statements......... Financial Statements
PART C - ------ Information required to be included is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement. PROSPECTUS - ---------- MARCH 29, 1994 MERRILL LYNCH GLOBAL UTILITY FUND, INC. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 PHONE NO. (609) 282-2800 ---------------- Merrill Lynch Global Utility Fund, Inc. (the "Fund") is a diversified mutual fund seeking both capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of instruments and techniques to enhance income and to hedge against market and currency risk. Investments on an international basis involve special considerations. See "Special and Risk Considerations." ---------------- The Fund offers 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"). Class A shares are subject to an initial sales charge of up to 6.5%. The deferred sales charges to which the Class B shares are subject shall consist of a contingent deferred sales charge which may be imposed on redemptions made within four years of purchase and an ongoing account maintenance fee and distribution fee. Class A shares pay no ongoing fees; Class B shares pay ongoing fees at an annual rate of 0.75% of the Fund's average daily net assets attributable to the Class B shares, comprised of a 0.25% account maintenance fee for account maintenance services and a 0.50% fee for distribution services. These alternatives permit an investor to choose the method of purchasing shares that is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares, and other circumstances. Investors should understand that the purpose and function of the deferred sales charges with respect to the Class B shares are the same as those of the initial sales charge with respect to the Class A shares. Investors should also understand that over time the deferred sales charges related to Class B shares may exceed the initial sales charge with respect to Class A shares. See "Alternative Sales Arrangements" on page 3. Each Class A and Class B share represents identical interests in the investment portfolio of the Fund and has the same rights, except that Class B shares bear the expenses of the account maintenance fee and the distribution fee and certain other costs resulting from the deferred sales charge arrangement, which will cause Class B shares to have a higher expense ratio and to pay lower dividends than those related to Class A shares, and that Class B shares have exclusive voting rights with respect to the account maintenance fee and the distribution fee. The two classes also have different exchange privileges. Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc. (the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011, (609) 282- 2800, and other securities dealers which have entered into selected dealers agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the minimum subsequent purchase is $50, except that for retirement plans the minimum initial purchase is $250 and the minimum subsequent purchase is $1. Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and repurchases. Purchases and redemptions directly through the Fund's Transfer Agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares." ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- This Prospectus is a concise statement of information about the Fund that is relevant to making an investment in the Fund. This Prospectus should be retained for future reference. A statement containing additional information about the Fund, dated March 29, 1994 (the "Statement of Additional Information"), has been filed with the Securities and Exchange Commission and is available, without charge, by calling or by writing the Fund at the above telephone number or address. The Statement of Additional Information is hereby incorporated by reference into this Prospectus. ---------------- MERRILL LYNCH ASSET MANAGEMENT-MANAGER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-DISTRIBUTOR FEE TABLE A general comparison of the sales arrangements and other nonrecurring and recurring expenses applicable to Class A shares and Class B shares follows.
CLASS A SHARES CLASS B SHARES INITIAL SALES DEFERRED SALES CHARGE CHARGE ALTERNATIVE ALTERNATIVE --------------- ----------------- SHAREHOLDER TRANSACTION EXPENSES: Maximum Sales Charge Imposed on Pur- chases (as a percentage of offering price)............................... 6.50%(a) None Sales Charge Imposed on Dividend Rein- vestments............................ None None Deferred Sales Charge (as a percentage None 4.0% during the of original purchase price or first year, redemption proceeds, whichever is decreasing 1.0% lower)............................... annually to 0.0% after the fourth year(b) Exchange Fee.......................... None None ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) FOR THE YEAR ENDED NOVEMBER 30, 1993: Management Fees (c)................... 0.60% 0.60% Rule 12b-1 Fees....................... None 0.75%(d) Other Expenses Custodian Fees........................ 0.02% 0.02% Shareholder Servicing Costs (e)....... 0.07% 0.09% Other................................. 0.13% 0.13% ------- -------- Total Other Expenses................. 0.22% 0.24% ------- -------- Total Fund Operating Expenses......... 0.82% 1.59% ======= ========
- ------- (a) Reduced for purchases of $10,000 and over, decreasing to 0.75% for purchases of $1,000,000 and over. Certain purchasers of Class A shares investing $1,000,000 or more may, in lieu of a front-end sales load, be assessed a deferred sales charge on redemptions within the first year of such investment. See "Purchase of Shares--Initial Sales Charge Alternative--Class A Shares"-page 25. (b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares"-page 27. (c) See "Management of the Fund--Management and Advisory Arrangements"-page 22. (d) Includes both the 0.25% account maintenance fee and the 0.50% distribution fee. See "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares--Distribution Plan"-page 28. (e) See "Management of the Fund--Transfer Agency Services"-page 23.
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF ------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- EXAMPLE: An investor would pay the following expenses on a $1,000 investment including, for Class A shares, the maximum $65 front-end sales charge and assuming (1) an operating expense ratio of 0.82% for Class A shares and 1.59% for Class B shares, (2) a 5% annual return throughout the periods and (3) redemption at the end of the period: Class A...................................... $72.83 $89.48 $107.55 $159.76 Class B...................................... $56.17 $70.19 $ 86.56 $188.92 An investor would pay the following expenses on the same $1,000 investment assuming no redemption at the end of the period: Class A...................................... $72.83 $89.48 $107.55 $159.76 Class B...................................... $16.17 $50.19 $ 86.56 $188.92
The foregoing Fee Table is intended to assist investors in understanding the costs and expenses that a shareholder in the Fund will bear directly or indirectly. The expenses set forth under "Other Expenses" are based on estimated amounts through the end of the Fund's first full fiscal year on an annualized basis. The Example set forth above assumes reinvestment of all dividends and distributions and utilizes a 5% annual rate of return as mandated by Securities and Exchange Commission regulations. The Example should not be considered a representation of past or future expenses or annual rate of return, and actual expenses or annual rate of return may be more or less than those assumed for purposes of the Example. Class B shareholders who own their shares for an extended period of time may pay more in account maintenance and distribution fees than the economic equivalent of the maximum front-end sales charge permitted under the Rules of Fair Practice of the National Association of Securities Dealers, Inc. Merrill Lynch may charge its customers a processing fee (presently $4.85) for confirming purchases and repurchases. Purchases and redemptions directly through the Fund's Transfer Agent are not subject to the processing fee. See "Purchase of Shares" and "Redemption of Shares." 2 ALTERNATIVE SALES ARRANGEMENTS Shares of the Fund may be purchased at a price equal to the next determined net asset value per share, plus a sales charge which, at the election of the purchaser, may be imposed either (i) at the time of the purchase (the "initial sales charge alternative"), or (ii) on a deferred basis (the "deferred sales charge alternative"). Class A Shares. An investor who elects the initial sales charge alternative acquires Class A shares. Although Class A shares incur a sales charge when they are purchased, they enjoy the benefit of not being subject to any ongoing account maintenance fee or distribution fee or, with the exception of certain purchases for which initial sales charges may be waived, any sales charge when they are redeemed. Certain purchases of Class A shares qualify for reduced initial sales charges. See "Purchase of Shares--Initial Sales Charge Alternative--Class A Shares." Class B Shares. An investor who elects the deferred sales charge alternative acquires Class B shares. Class B shares do not incur a sales charge when they are purchased, but they are subject to ongoing account maintenance and distribution fees and a sales charge if they are redeemed within four years of purchase. Class B shares provide the benefit of permitting all of the investor's dollars to work from the time the investment is made. The ongoing account maintenance and distribution fees paid by Class B shares will cause such shares to have a higher expense ratio and to pay lower dividends than those related to Class A shares. Payment of the distribution fee is subject to certain limitations set forth under "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares." As an illustration, investors who qualify for significantly reduced sales charges might elect the initial sales charge alternative because similar sales charge reductions are not available for purchases under the deferred sales charge alternative. See "Purchase of Shares--Initial Sales Charge Alternative-- Class A Shares." Moreover, shares acquired under the initial sales charge alternative would not be subject to ongoing account maintenance and distribution fees. However, because initial sales charges are deducted at the time of purchase, such investors would not have all of their funds invested initially. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time might also elect the initial sales charge alternative because over time the accumulated continuing account maintenance and distribution fees may exceed the initial sales charge. Again, however, such investors must weigh this consideration against the fact that not all of their funds will be invested initially. Furthermore, the ongoing account maintenance and distribution fees will be offset to the extent any return is realized on the additional funds initially invested under the deferred sales charge alternative. However, there can be no assurance as to the return, if any, which will be realized on such additional funds. Certain other investors might determine it to be more advantageous to have all their funds invested initially, although remaining subject to continued account maintenance and distribution fees and, for a four-year period of time, a contingent deferred sales charge. The distribution expenses incurred by the Distributor and dealers (primarily Merrill Lynch) in connection with the sale of the shares will be paid, in the case of the Class A shares, from the proceeds of the initial sales charge and, in the case of the Class B shares, from the proceeds of the ongoing distribution fee and, if applicable, the contingent deferred sales charge incurred on redemption within four years of purchase. Expenses incurred by the Distributor and dealers (primarily Merrill Lynch) in connection with account maintenance activities with respect to Class B shares will be paid from the proceeds of the account maintenance fee. Sales personnel may receive different compensation for selling Class A or Class B shares. Investors should understand that the purpose and function of the deferred sales charges with respect to the Class B shares are the same as those of the initial sales charge with respect to the Class A shares. The account 3 maintenance fees to which Class B shareholders are subject will be used to compensate consultants and other personnel for providing personal services to shareholders and to pay administration costs related to maintenance of shareholder accounts. Dividends paid by the Fund with respect to Class A and Class B shares, to the extent any dividends are paid, will be calculated in the same manner at the same time on the same day and will be in the same amount, except that the account maintenance and distribution fees and any incremental transfer agency costs relating to Class B shares will be borne exclusively by that class. See "Additional Information--Determination of Net Asset Value." Class A and Class B shareholders of the Fund each have an exchange privilege for Class A and Class B shares, respectively, with certain other mutual funds sponsored by Merrill Lynch. Class A and Class B shareholders of the Fund also may exchange their shares for shares of certain money market funds sponsored by Merrill Lynch. See "Shareholder Services--Exchange Privilege." The Directors of the Fund have determined that currently no conflict of interest exists between the Class A and Class B shares. On an ongoing basis, the Directors of the Fund, pursuant to their fiduciary duties under the Investment Company Act of 1940 and state laws, will seek to assure that no such conflict arises. THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE METHOD OF PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES AND OTHER CIRCUMSTANCES. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES CHARGE AND NOT BE SUBJECT TO ONGOING CHARGES, OR TO HAVE THE ENTIRE PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT THEREAFTER BEING SUBJECT TO ONGOING CHARGES. TO ASSIST INVESTORS IN MAKING THIS DETERMINATION, THE FEE TABLE ON PAGE 2 SETS FORTH THE CHARGES APPLICABLE TO EACH CLASS OF SHARES AND A DISCUSSION OF FACTORS RELEVANT TO MAKING SUCH DETERMINATION IS SET FORTH UNDER "PURCHASE OF SHARES--ALTERNATIVE SALES ARRANGEMENTS" ON PAGE 24. 4 FINANCIAL HIGHLIGHTS The financial information in the table below has been audited in conjunction with the annual audits of the financial statements of the Fund by Deloitte & Touche, independent auditors. Financial statements for the year ended November 30, 1993 and the independent auditors' report thereon, are included in the Statement of Additional Information. THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION PROVIDED IN THE FINANCIAL STATEMENTS:
CLASS A CLASS B ------------------------------ ------------------------------ FOR THE FOR THE PERIOD PERIOD FOR THE YEAR ENDED DEC. 28, FOR THE YEAR ENDED DEC. 28, NOV. 30, 1990+ TO NOV. 30, 1990+ TO -------------------- NOV. 30, -------------------- NOV. 30, 1993 1992 1991 1993 1992 1991 --------- --------- -------- --------- --------- -------- INCREASE (DECREASE) IN NET ASSET VALUE: PER SHARE OPERATING PER- FORMANCE: Net asset value, beginning of period.... $ 11.23 $ 10.67 $ 10.00 $ 11.20 $ 10.65 $ 10.00 --------- --------- ------- --------- --------- ------- Investment income-- net.................. .40 .47 .49 .33 .39 .40 Realized and unrealized gain on investments and foreign currency transactions--net++.. 2.01 .57 .56 1.98 .57 .58 --------- --------- ------- --------- --------- ------- Total from investment operations............. 2.41 1.04 1.05 2.31 .96 .98 --------- --------- ------- --------- --------- ------- Less dividends and distributions: Investment income-- net.................. (.41) (.48) (.38) (.33) (.41) (.33) Realized gain on investments--net..... (.01) -- -- (.01) -- -- --------- --------- ------- --------- --------- ------- Total dividends and distributions.......... (.42) (.48) (.38) (.34) (.41) (.33) --------- --------- ------- --------- --------- ------- Net asset value, end of period................. $ 13.22 $ 11.23 $ 10.67 $ 13.17 $ 11.20 $ 10.65 ========= ========= ======= ========= ========= ======= TOTAL INVESTMENT RETURN:** Based on net asset value per share.............. 21.80% 10.05% 10.83%/++/ 20.86% 9.20% 10.05%/++/ ========= ========= ======= ========= ========= ======= RATIOS TO AVERAGE NET ASSETS: Expenses, excluding distribution fees...... .82% 1.01% 1.28%* .84% 1.02% 1.29%* ========= ========= ======= ========= ========= ======= Expenses................ .82% 1.01% 1.28%* 1.59% 1.77% 2.04%* ========= ========= ======= ========= ========= ======= Investment income--net.. 3.57% 4.47% 5.57%* 2.81% 3.65% 4.78%* ========= ========= ======= ========= ========= ======= SUPPLEMENTAL DATA: Net assets, end of period (in thousands).. $ 81,718 $ 29,772 $20,579 $ 596,455 $ 200,396 $90,966 ========= ========= ======= ========= ========= ======= Portfolio turnover...... 8.92% 30.91% 20.51% 8.92% 30.91% 20.51% ========= ========= ======= ========= ========= =======
- -------- *Annualized. **Total investment returns exclude the effects of sales loads. +Commencement of operations. ++Foreign currency transaction amounts have been reclassified to conform to the 1993 presentation. /++/Aggregate total investment return. 5 SPECIAL AND RISK CONSIDERATIONS Because of its emphasis on securities of companies in the utilities industries, the Fund should be considered a vehicle for diversification and not as a balanced investment program. As a global fund, the Fund may invest in United States and foreign securities. Investments in securities of foreign entities and securities denominated in foreign currencies involve risks not typically involved in domestic investment, including fluctuations in foreign exchange rates, future foreign political and economic developments, and the possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. Since the Fund may invest in securities denominated or quoted in currencies other than the United States dollar, changes in foreign currency exchange rates may affect the value of investments in the portfolio and the unrealized appreciation or depreciation of investments insofar as United States investors are concerned. Changes in foreign currency exchange rates relative to the U.S. dollar will affect the U.S. dollar value of the Fund's assets denominated in that currency and the Fund's yield on such assets. Foreign currency exchange rates are determined by forces of supply and demand on the foreign exchange markets. These forces are, in turn, affected by the international balance of payments and other economic and financial conditions, government intervention, speculation, and other factors. Moreover, individual foreign economies may differ favorably or unfavorably from the United States economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources, self- sufficiency and balance of payments position. With respect to certain foreign countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments which could affect investment in those countries. There may be less publicly available information about a foreign financial instrument than about a United States instrument, and foreign entities may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States entities. In addition, certain foreign investments may be subject to foreign withholding taxes. Investors will be able to deduct such taxes in computing their taxable income or to use such amounts as credits against their United States income taxes if more than 50% of the Fund's total assets at the close of any taxable year consists of stock or securities in foreign corporations. See "Additional Information--Taxes." Foreign financial markets, while growing in volume, generally have substantially less volume than United States markets, and securities of many foreign companies are less liquid and their prices more volatile than securities of comparable domestic companies. Foreign markets also have different clearance and settlement procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlement could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. Costs associated with transactions in foreign securities are generally higher than with transactions in United States securities. There is generally less government supervision and regulation of exchanges, financial institutions and issuers in foreign countries than there is in the United States. Investment in the securities of issuers in Eastern European markets involves certain additional risks not involved in investment in securities of issuers in more developed capital markets, such as (i) low or non-existent trading volume, resulting in a lack of liquidity and increased volatility in price for such securities, as 6 compared to securities of comparable issuers in more developed capital markets, (ii) uncertain national policies and social, political and economic instability, increasing the potential for expropriation of assets, confiscatory taxation, high rates of inflation or unfavorable diplomatic developments, (iii) possible fluctuations in exchange rates, differing legal systems and the existence or possible imposition of exchange controls, custodial restrictions or other foreign or United States governmental laws or restrictions applicable to such investments, (iv) national policies which may limit the Fund's investment opportunities such as restrictions on investment in issuers or industries deemed sensitive to national interests, and (v) the lack of developed legal structures governing private and foreign investments and private property. Also, there may be less publicly available information about issuers in Eastern Europe than would be available about issuers in more developed capital markets, and such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to United States companies. In certain Eastern European countries, no reporting standards currently exist. As a result, traditional investment measurements used in the United States, such as price/earnings ratios, may not be applicable in certain Eastern European markets. In addition, the currencies of certain Eastern European countries are not, at present, freely convertible into other currencies and are not internationally traded. Also, it is possible that certain Eastern European countries may not have available institutions qualified under the Investment Company Act of 1940 to hold Fund assets. Therefore, the Fund or the Fund's custodian may need to seek an exemptive order from the Securities and Exchange Commission prior to investing in such Eastern European countries. There is no assurance that the Securities and Exchange Commission will issue such an order. Reforms currently under way and anticipated throughout Eastern Europe are directed at political and economic liberalization, with efforts to develop increasingly market-oriented economies and to decentralize the economic and political decision-making processes currently in the forefront. There can be no assurance that these reforms will continue or, if continued, will achieve their goals. The operating expense ratio of the Fund can be expected to be higher than that of an investment company investing exclusively in United States securities because the expenses of the Fund, such as custodial and brokerage costs, are higher. The Fund may engage in various portfolio strategies to seek to increase its return through the use of options on portfolio securities and to hedge its portfolio against movements in the securities markets and exchange rates between currencies by the use of options, futures and options thereon. Utilization of options and futures transactions involves the risk of imperfect correlation in movements in the price of options and futures and movements in the price of the securities or currencies which are the subject of the hedge. There can be no assurance that a liquid secondary market for options and futures contracts will exist at any specific time. See "Investment Objective and Policies--Portfolio Strategies Involving Options and Futures." The net asset value of the Fund's shares will be affected by changes in the general level of interest rates. When interest rates decline, the value of a portfolio of debt and equity securities of utility companies can be expected to rise. Conversely, when interest rates rise, the value of a portfolio of debt and equity securities of utility companies can be expected to decline. 7 INVESTMENT OBJECTIVE AND POLICIES The Fund is a diversified, open-end management investment company. The Fund's investment objective is to seek both capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Manager, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. This objective is a fundamental policy which the Fund may not change without a vote of a majority of the Fund's outstanding voting securities, as defined in the Investment Company Act of 1940. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of instruments and techniques to enhance income and to hedge against market and currency risk, as described below under "Portfolio Strategies Involving Options and Futures." The Fund at all times, except during temporary defensive periods, will maintain at least 65% of its total assets invested in equity and debt securities issued by domestic and foreign companies in the utilities industries. The Fund reserves the right to hold, as a temporary defensive measure or as a reserve for redemptions, short-term U.S. Government securities, money market securities, including repurchase agreements, or cash in such proportions as, in the opinion of the Manager, prevailing market or economic conditions warrant. Except during temporary defensive periods, such securities or cash will not exceed 20% of its total assets. Under normal circumstances, the Fund will invest at least 65% of its total assets in issuers domiciled in at least three countries, one of which may be the United States, although the Manager expects the Fund's portfolio to be more geographically diversified. Under normal conditions, it is anticipated that the percentage of assets invested in U.S. securities will be higher than that invested in securities of any other single country. It is possible that at times the Fund may have 65% or more of its total assets invested in foreign securities. The Fund will invest in common stocks (including preferred or debt securities convertible into common stocks), preferred stocks and debt securities. The relative weightings among common stocks, debt securities and preferred stocks will vary from time to time based upon the Manager's judgment of the extent to which investments in each category will contribute to meeting the Fund's investment objective. Fixed income securities in which the Fund will invest generally will be limited to those rated investment grade, that is, rated in one of the four highest rating categories by Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"), or deemed to be of equivalent quality (i.e., securities rated at least BBB by S&P or Baa by Moody's) in the judgment of the Manager. Securities rated Baa by Moody's are described by it as having speculative characteristics and, according to S&P, fixed income securities rated BBB normally exhibit adequate protection parameters, although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal. The Fund's commercial paper investments at the time of purchase will be rated "A-1" or "A-2" by S&P or "Prime-1" or "Prime-2" by Moody's or, if not rated, will be of comparable quality as determined by the Directors of the Fund. The Fund may also invest up to 5% of its total assets at the time of purchase in fixed income securities having a minimum rating no lower than Caa by Moody's or CCC by S&P. The Fund may, but need not, dispose of any security if it is subsequently downgraded. For a description of ratings of debt securities, see the Appendix to the Statement of Additional Information. The operating expense ratio of the Fund can be expected to be higher than that of an investment company investing exclusively in United States securities because the expenses of the Fund, such as custodial and brokerage costs, are higher. 8 The Fund may invest in the securities of foreign issuers in the form of American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement. Generally, ADRs, which are issued in registered form, are designed for use in the United States securities markets, and EDRs, which are issued in bearer form, are designed for use in European securities markets. The Fund may invest in ADRs and EDRs through both sponsored and unsponsored arrangements. In a sponsored ADR or EDR arrangement, the foreign issuer assumes the obligation to pay some or all of the depository's transaction fees, whereas in an unsponsored arrangement the foreign issuer assumes no obligations and the depository's transaction fees are paid by the ADR or EDR holders. Foreign issuers in respect of whose securities unsponsored ADRs or EDRs have been issued are not necessarily obligated to disclose material information in the markets in which the unsponsored ADRs or EDRs are traded and, therefore, there may not be a correlation between such information and the market value of such securities. A change in prevailing interest rates is likely to affect the Fund's net asset value because prices of debt and equity securities of utility companies tend to increase when interest rates decline and decrease when interest rates rise. UTILITY INDUSTRIES--DESCRIPTION AND RISKS Under normal circumstances, the Fund will invest at least 65% of its total assets in common stocks (including preferred or debt securities convertible into common stocks), debt securities and preferred stocks of domestic and/or foreign companies in the utility industries. To meet its objective of current income, the Fund may invest in domestic utility companies that pay higher than average dividends, but have a lesser potential for capital appreciation. The average dividend yields of common stocks issued by domestic utility companies historically have significantly exceeded those of industrial companies' common stocks, while the prices of domestic utility stocks have tended to be less volatile than stocks of industrial companies. For certain periods, the total return of utility companies' securities has underperformed that of industrial companies' securities. There can be no assurance that positive relative returns on utility securities will occur in the future. The Manager believes that the average dividend yields of common stocks issued by foreign utility companies have also historically exceeded those of foreign industrial companies' common stocks. To meet its objective of capital appreciation, the Fund may invest in foreign utility companies which pay lower than average dividends, but have a greater potential for capital appreciation. The utility companies in which the Fund will invest include companies which are, in the opinion of the Manager, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. Risks that are intrinsic to the utility industries include difficulty in obtaining an adequate return on invested capital, difficulty in financing large construction programs during an inflationary period, restrictions on operations and increased cost and delays attributable to environmental considerations and regulation, difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets, technological innovations which may render existing plants, equipment or products obsolete, the potential impact of natural or man-made disasters, increased costs and reduced availability of certain types of fuel, occasionally reduced availability and high costs of natural gas for resale, the effects of energy 9 conservation, the effects of a national energy policy and lengthy delays and greatly increased costs and other problems associated with the design, construction, licensing, regulation and operation of nuclear facilities for electric generation, including, among other considerations, the problems associated with the use of radioactive materials and the disposal of radioactive wastes. There are substantial differences between the regulatory practices and policies of various jurisdictions, and any given regulatory agency may make major shifts in policy from time to time. There is no assurance that regulatory authorities will, in the future, grant rate increases or that such increases will be adequate to permit the payment of dividends on common stocks. Additionally, existing and possible future regulatory legislation may make it even more difficult for these utilities to obtain adequate relief. Certain of the issuers of securities of the portfolio may own or operate nuclear generating facilities. Governmental authorities may from time to time review existing policies, and impose additional requirements governing the licensing, construction and operation of nuclear power plants. Prolonged changes in climatic conditions can also have a significant impact on both the revenues of an electric and gas utility as well as the expenses of a utility, particularly a hydro-based electric utility. Utility companies in the United States and in foreign countries are generally subject to regulation. In the United States, most utility companies are regulated by state and/or federal authorities. Such regulation is intended to ensure appropriate standards of service and adequate capacity to meet public demand. Generally, prices are also regulated in the United States and in foreign countries with the intention of protecting the public while ensuring that the rate of return earned by utility companies is sufficient to allow them to attract capital in order to grow and continue to provide appropriate services. There can be no assurance that such pricing policies or rates of return will continue in the future. The nature of regulation of the utility industries is evolving both in the United States and in foreign countries. In recent years, changes in regulation in the United States increasingly have allowed utility companies to provide services and products outside their traditional geographic areas and lines of business, creating new areas of competition within the industries. In some instances, utility companies are operating on an unregulated basis. Because of trends toward deregulation and the evolution of independent power producers as well as new entrants to the field of telecommunications, non-regulated providers of utility services have become a significant part of their respective industries. The Manager believes that the emergence of competition and deregulation will result in certain utility companies being able to earn more than their traditional regulated rates of return, while others may be forced to defend their core business from increased competition and may be less profitable. The Manager seeks to take advantage of favorable investment opportunities that may arise from these structural changes. Of course, there can be no assurance that favorable developments will occur in the future. Foreign utility companies are also subject to regulation, although such regulations may or may not be comparable to that in the United States. Foreign utility companies may be more heavily regulated by their respective governments than utilities in the United States and, as in the U.S., generally are required to seek government approval for rate increases. In addition, many foreign utilities use fuels that cause more pollution than those used in the United States, which may require such utilities to invest in pollution control equipment to meet any proposed pollution restrictions. Foreign regulatory systems vary from country to country and may evolve in ways different from regulation in the United States. The Fund's investment policies are designed to enable it to capitalize on evolving investment opportunities throughout the world. For example, the rapid growth of certain foreign economies will 10 necessitate expansion of capacity in the utility industries in those countries. Although many foreign utility companies currently are government-owned, thereby limiting current investment opportunities for the Fund, the Manager believes that, in order to attract significant capital for growth, foreign governments are likely to seek global investors through the privatization of their utility industries. Privatization, which refers to the trend toward investor ownership of assets rather than government ownership, is expected to occur in newer, faster-growing economies and in mature economies. In addition, efforts toward modernization in Eastern Europe, as well as the potential of economic unification of European markets, in the view of the Manager, may improve economic growth, reduce costs and increase competition in Europe which could result in opportunities for investment by the Fund in utility industries in Europe. Of course, there is no assurance that such favorable developments will occur or that investment opportunities in foreign markets for the Fund will increase. The revenues of domestic and foreign utility companies generally reflect the economic growth and developments in the geographic areas in which they do business. The Manager will take into account anticipated economic growth rates and other economic developments when selecting securities of utility companies. The principal sectors of the global utility industries are discussed below. Electric. The electric utility industry consists of companies that are engaged principally in the generation, transmission and sale of electric energy, although many also provide other energy-related services. In recent years, domestic electric utility companies, in general, have been favorably affected by lower fuel and financing costs and the full or near completion of major construction programs. In addition, many of these companies recently have generated cash flows in excess of current operating expenses and construction expenditures, permitting some degree of diversification into unregulated businesses. Some electric utilities have also taken advantage of the right to sell power outside of their traditional geographic areas. Electric utility companies have historically been subject to the risks associated with increases in fuel and other operating costs, high interest costs on borrowings needed for capital construction programs, costs associated with compliance with environmental and safety regulations and changes in the regulatory climate. As interest rates have declined, many utilities have refinanced high cost debt and in doing so have improved their fixed charges coverage. Regulators, however, have lowered allowed rates of return as interest rates have declined and thereby caused the benefits of the rate declines to be shared wholly or in part with customers. In the United States, the construction and operation of nuclear power facilities is subject to increased scrutiny by, and evolving regulations of, the Nuclear Regulatory Commission and state agencies having comparable jurisdiction. Increased scrutiny might result in higher operating costs and higher capital expenditures, with the risk that the regulators may disallow inclusion of these costs in rate authorizations or the risk that a company may not be permitted to operate or complete construction of a facility. In addition, operators of nuclear power plants may be subject to significant costs for disposal of nuclear fuel and for de-commissioning of such plants. In October 1993, S&P stiffened its debt-ratings formula for the electric utility industry, stating that the industry is in long-term decline. In addition, Moody's stated that it expected a drop in the next three years in its average credit ratings for the industry. Reasons set forth for these outlooks included slowing demand and increasing cost pressures as a result of competition from rival providers. Telecommunications. The telephone industry is large and highly concentrated. Companies that distribute telephone services and provide access to the telephone networks comprise the greatest portion of this segment. Since the mid 1980's, companies engaged in telephone communication services have expanded 11 their non-regulated activities into other businesses, including cellular telephone services, data processing, equipment retailing, computer software and hardware services, and financial services. This expansion has provided significant opportunities for certain telephone companies to increase their earnings and dividends at faster rates than had been allowed in traditional regulated businesses. Increasing competition, technological innovations and other structural changes, however, could adversely affect the profitability of such utilities. Technological breakthroughs and the merger of telecommunications with video and entertainment is now associated with the expansion of the role of cable companies as providers of utility services in the telecommunications industry and the competitive response of traditional telephone companies. Given mergers and certain marketing tests currently underway, it is likely that both traditional telephone companies and cable companies will soon provide a greatly expanded range of utility services, including two-way video and informational services. Gas. Gas transmission companies and gas distribution companies are also undergoing significant changes. In the United States, interstate transmission companies are regulated by the Federal Energy Regulatory Commission, which is reducing its regulation of the industry. Many companies have diversified into oil and gas exploration and development, making returns more sensitive to energy prices. In the recent decade, gas utility companies have been adversely affected by disruptions in the oil industry and have also been affected by increased concentration and competition. In the opinion of the Manager, however, environmental considerations could improve the gas industry outlook in the future. For example, natural gas is the cleanest of the hydrocarbon fuels, and this may result in incremental shifts in fuel consumption toward natural gas and away from oil and coal. Water. Water supply utilities are companies that collect, purify, distribute and sell water. In the United States and around the world, the industry is highly fragmented because most of the supplies are owned by local authorities. Companies in this industry are generally mature and are experiencing little or no per capita volume growth. In the opinion of the Manager, there may be opportunities for certain companies to acquire other water utility companies and for foreign acquisition of domestic companies. The Manager believes that favorable investment opportunities may result from consolidation of this segment. There can be no assurance that the positive developments noted above, including those relating to privatization and changing regulation, will occur or that risk factors other than those noted above will not develop in the future. INVESTMENT OUTSIDE THE UTILITY INDUSTRIES The Fund is permitted to invest up to 35% of its assets in securities of issuers that are outside the utility industries. Such investments may include common stocks, debt securities or preferred stocks and will be selected to meet the Fund's investment objective of both capital appreciation and current income. These securities may be issued by either U.S. or non-U.S. companies. Some of these issuers may be in industries related to utility industries and, therefore, may be subject to similar risks. Securities that are issued by foreign companies or are denominated in foreign currencies are subject to the risks outlined above. See "Special and Risk Considerations." The Fund is also permitted to invest in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S. Government Securities"). Such investments may be backed by the "full faith and credit" of the United States, including U.S. Treasury bills, notes and bonds as well as certain agency securities and mortgage-backed securities issued by the Government National Mortgage Association 12 ("GNMA"). The guarantees on these securities do not extend to the securities' yield or value or to the yield or value of the Fund's shares. Other investments in agency securities are not necessarily backed by the "full faith and credit" of the United States, such as certain securities issued by the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation, the Student Loan Marketing Association and the Farm Credit Bank. The Fund may invest in securities issued or guaranteed by foreign governments. Such securities are typically denominated in foreign currencies and are subject to the currency fluctuation and other risks of foreign securities investments outlined above. See "Special and Risk Considerations." The foreign government securities in which the Fund intends to invest generally will consist of obligations supported by national, state or local governments or similar political subdivisions. Foreign government securities also include debt obligations of supranational entities, including international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the "World Bank"), the European Investment Bank, the Asian Development Bank and the Inter-American Development Bank. Foreign government securities also include debt securities of "quasi- governmental agencies" and debt securities denominated in multinational currency units. An example of a multinational currency unit is the European Currency Unit. A European Currency Unit represents specified amounts of the currencies of certain of the twelve member states of the European Economic Community. Debt securities of quasi-governmental agencies are issued by entities owned by either a national or local government or are obligations of a political unit that is not backed by the national government's full faith and credit and general taxing powers. Foreign government securities also include mortgage-related securities issued or guaranteed by national or local governmental instrumentalities including quasi-governmental agencies. Foreign government securities will not be considered government securities for purposes of determining the Fund's compliance with diversification and concentration policies. PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES The Fund may engage in various portfolio strategies to seek to increase its return through the use of options on portfolio securities and to hedge its portfolio against adverse movements in the equity, debt and currency markets. The Fund has authority to write (i.e., sell) covered put and call options on its portfolio securities, purchase put and call options on securities and engage in transactions in stock index options, stock index futures and financial futures, and related options on such futures. The Fund may also deal in forward foreign exchange transactions and foreign currency options and futures, and related options on such futures. Each of these portfolio strategies is described below. Although certain risks are involved in options and futures transactions (as discussed below and in "Risk Factors in Options and Futures Transactions" below), the Manager believes that, because the Fund will (i) write only covered options on portfolio securities, and (ii) engage in other options and futures transactions only for hedging purposes, the options and futures portfolio strategies of the Fund will not subject the Fund to the risks frequently associated with the speculative use of options and futures transactions. While the Fund's use of hedging strategies is intended to reduce the volatility of the net asset value of Fund shares, the Fund's net asset value will fluctuate. There can be no assurance that the Fund's hedging transactions will be effective. Furthermore, the Fund will only engage in hedging activities from time to time and may not necessarily be engaging in hedging activities when movements in the equity, debt and currency markets occur. Reference is made to the Statement of Additional Information for further information concerning these strategies. 13 Writing Covered Options. The Fund is authorized to write (i.e., sell) covered call options on the securities in which it may invest and to enter into closing purchase transactions with respect to certain of such options. A covered call option is an option where the Fund in return for a premium gives another party a right to buy specified securities owned by the Fund at a specified future date and price set at the time of the contract. The principal reason for writing call options is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. By writing covered call options, the Fund gives up the opportunity, while the option is in effect, to profit from any price increase in the underlying security above the option exercise price. In addition, the Fund's ability to sell the underlying security will be limited while the option is in effect unless the Fund effects a closing purchase transaction. A closing purchase transaction cancels out the Fund's position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. Covered call options serve as a partial hedge against the price of the underlying security declining. The Fund also may write put options which give the holder of the option the right to sell the underlying security to the Fund at the stated exercise price. The Fund will receive a premium for writing a put option which increases the Fund's return. The Fund writes only covered put options which means that so long as the Fund is obligated as the writer of the option it will, through its custodian, have deposited and maintained cash, cash equivalents, U.S. Government Securities or other high grade liquid debt or equity securities denominated in U.S. dollars or non-U.S. currencies with a securities depository with a value equal to or greater than the exercise price of the underlying securities. By writing a put, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of that security at the time of exercise for as long as the option is outstanding. The Fund may engage in closing transactions in order to terminate put options that it has written. Purchasing Options. The Fund is authorized to purchase put options to hedge against a decline in the market value of its securities. By buying a put option the Fund has a right to sell the underlying security at the exercise price, thus limiting the Fund's risk of loss through a decline in the market value of the security until the put option expires. The amount of any appreciation in the value of the underlying security will be partially offset by the amount of the premium paid for the put option and any related transaction costs. Prior to its expiration, a put option may be sold in a closing sale transaction and profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus the related transaction costs. A closing sale transaction cancels out the Fund's position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. In certain circumstances, the Fund may purchase call options on securities held in its portfolio on which it has written call options or on securities which it intends to purchase. The Fund may also purchase put options on U.S. Treasury securities for the purpose of hedging its portfolio of interest rate sensitive equity securities against the adverse effects of anticipated movements in interest rates. The Fund will not purchase options on securities (including stock index options discussed below) if as a result of such purchase, the aggregate cost of all outstanding options on securities held by the Fund would exceed 5% of the market value of the Fund's total assets. Stock Index Options and Futures and Financial Futures. The Fund is authorized to engage in transactions in stock index options and futures and financial futures, and related options on such futures. The Fund may purchase or write put and call options on stock indices to hedge against the risks of market-wide stock price movements in the securities in which the Fund invests. Options on indices are similar to options on securities except that on exercise or assignment, the parties to the contract pay or receive an 14 amount of cash equal to the difference between the closing value of the index and the exercise price of the option times a specified multiple. The Fund may invest in stock index options based on a broad market index, e.g., the S&P 500 Index, or on a narrow index representing an industry or market segment, e.g., the AMEX Oil & Gas Index. The Fund may also purchase and sell stock index futures contracts and financial futures contracts ("futures contracts") as a hedge against adverse changes in the market value of its portfolio securities as described below. A futures contract is an agreement between two parties which obligates the purchaser of the futures contract to buy and the seller of a futures contract to sell a security for a set price on a future date. Unlike most other futures contracts, a stock index futures contract does not require actual delivery of securities, but results in cash settlement based upon the difference in value of the index between the time the contract was entered into and the time of its settlement. The Fund may effect transactions in stock index futures contracts in connection with equity securities in which it invests and in financial futures contracts in connection with the debt securities in which it invests. Transactions by the Fund in stock index futures and financial futures are subject to limitations as described below under "Restrictions on the Use of Futures Transactions." The Fund may sell futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of the Fund's securities portfolio that might otherwise result. When the Fund is not fully invested in the securities markets and anticipates a significant market advance, it may purchase futures in order to gain rapid market exposure that may in part or entirely offset increases in the cost of securities that the Fund intends to purchase. As such purchases are made, an equivalent amount of futures contracts will be terminated by offsetting sales. The Fund does not consider purchases of futures contracts to be a speculative practice under these circumstances. It is anticipated that, in a substantial majority of these transactions, the Fund will purchase such securities upon termination of the long futures position, whether the long position is the purchase of a futures contract or the purchase of a call option or the writing of a put option on a future, but under unusual circumstances (e.g., the Fund experiences a significant amount of redemptions), a long futures position may be terminated without the corresponding purchase of securities. The Fund also has authority to purchase and write call and put options on futures contracts and stock indices in connection with its hedging activities. Generally, these strategies are utilized under the same market and market sector conditions (i.e., conditions relating to specific types of investments) in which the Fund enters into futures transactions. The Fund may purchase put options or write call options on futures contracts and stock indices rather than selling the underlying futures contract in anticipation of a decrease in the market value of its securities. Similarly, the Fund may purchase call options, or write put options on futures contracts and stock indices, as a substitute for the purchase of such futures to hedge against the increased cost resulting from an increase in the market value of securities which the Fund intends to purchase. The Fund may also purchase put options on futures contracts for U.S. Treasury securities for the purpose of hedging its portfolio of interest rate sensitive equity securities against the adverse effects of anticipated movements in interest rates. The Fund may engage in options and futures transactions on U.S. and foreign exchanges and in options in the over-the-counter markets ("OTC options"). In general, exchange-traded contracts are third-party contracts (i.e., performance of the parties' obligations is guaranteed by an exchange or clearing corporation) with standardized strike prices and expiration dates. OTC options transactions are two-party contracts with price and terms negotiated by the buyer and seller. See "Restrictions on OTC Options" below for information as to restrictions on the use of OTC options. 15 Foreign Currency Hedging. The Fund has authority to deal in forward foreign exchange among currencies of the different countries in which it will invest and multinational currency units as a hedge against possible variations in the foreign exchange rates among these currencies. This is accomplished through contractual agreements to purchase or sell a specified currency at a specified future date (up to one year) and price set at the time of the contract. The Fund's dealings in forward foreign exchange will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward foreign currency with respect to specific receivables or payables of the Fund accruing in connection with the purchase and sale of its portfolio securities, the sale and redemption of shares of the Fund or the payment of dividends and distributions by the Fund. Position hedging is the purchase or sale of one forward foreign currency for another currency with respect to portfolio security positions denominated or quoted in such foreign currency to offset the effect of an anticipated substantial appreciation or depreciation, respectively, in the value of such currency relative to the U.S. dollar. In this situation, the Fund also may, for example, enter into a forward contract to sell or purchase a different foreign currency for a fixed U.S. dollar amount where it is believed that the U.S. dollar value of the currency to be sold or bought pursuant to the forward contract will fall or rise, as the case may be, whenever there is a decline or increase, respectively, in the U.S. dollar value of the currency in which portfolio securities of the Fund are denominated (this practice being referred to as a "cross-hedge"). The Fund will not speculate in forward foreign exchange. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for the Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The Fund is also authorized to purchase or sell listed or over-the-counter foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. As an illustration, the Fund may use such techniques to hedge the stated value in United States dollars of an investment in a yen denominated security. In such circumstances, for example, the Fund may purchase a foreign currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Fund may also sell a call option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called "straddle"). By selling such call option in this illustration, the Fund gives up the opportunity to profit without limit from increases in the relative value of the yen to the dollar. The Manager believes that "straddles" of the type which may be utilized by the Fund constitute hedging transactions and are consistent with the policies described above. Certain differences exist between these foreign currency hedging instruments. Foreign currency options provide the holder thereof the right to buy or sell a currency at a fixed price on a future date. A futures contract on a foreign currency is an agreement between two parties to buy and sell a specified amount of a currency for a set price on a future date. Futures contracts and options on futures contracts are traded on boards of trade of futures exchanges. The Fund will not speculate in foreign currency options, futures or 16 related options. Accordingly, the Fund will not hedge a currency substantially in excess of the market value of securities which it has committed or anticipates to purchase which are denominated in such currency and in the case of securities which have been sold by the Fund but not yet delivered, the proceeds thereof in its denominated currency. Further, the Fund will segregate at its custodian U.S. Government or other high quality securities having a market value substantially representing any subsequent net decrease in the market value of such hedged positions, including net positions with respect to cross-currency hedges. The Fund may not incur potential net liabilities with respect to currency and securities positions, including net liabilities with respect to cross-currency hedges, of more than 33 1/3% of its total assets from foreign currency options, futures or related options and forward currency transactions. Restrictions on the Use of Futures Transactions. Under regulations of the Commodity Futures Trading Commission ("CFTC"), the futures trading activities described herein will not result in the Fund being deemed to be a "commodity pool," as defined under such regulations, provided that the Fund adheres to certain restrictions. In particular, the Fund may (i) purchase and sell futures contracts and options thereon for bona fide hedging purposes, as defined under CFTC regulations, without regard to the percentage of the Fund's assets committed to margin and option premiums, and (ii) the Fund may enter into non- hedging transactions, provided that the Fund not enter into such non-hedging transactions if, immediately thereafter, the sum of the amount of the initial margin deposits on the Fund's existing futures positions and option premiums would exceed 5% of the market value of the Fund's liquidating value, after taking into account unrealized profits and unrealized losses on any such transactions. However, the Fund intends to engage in futures transactions and options thereon only for hedging purposes. Margin deposits may consist of cash or securities acceptable to the broker and the relevant contract market. When the Fund purchases a futures contract, or writes a put option or purchases a call option thereon, an amount of cash and cash equivalents will be deposited in a segregated account with the Fund's custodian so that the amount so segregated, plus the amount of initial and variation margin held in the account of its broker, equals the market value of the futures contract, thereby insuring that the use of such futures is unleveraged. Restrictions on OTC Options. The Fund will engage in OTC options, including over-the-counter stock index options, over-the-counter foreign currency options and options on foreign currency futures, only with member banks of the Federal Reserve System and primary dealers in United States Government securities or with affiliates of such banks or dealers which have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. The Fund will acquire only those OTC options for which the Manager believes the Fund can receive on each business day at least two independent bids or offers (one of which will be from an entity other than a party to the option). The staff of the Securities and Exchange Commission (the "Commission") has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures contracts) if, as a result of such transaction, the sum of the market value of OTC options currently outstanding which are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding which were sold by the Fund and margin deposits on the Fund's existing OTC options on futures contracts exceed 10% of the total assets of the Fund, taken at market value, together with all other assets of the Fund which are illiquid or are not otherwise readily marketable. However, if the OTC option is sold by the Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and the Fund has the unconditional contractual right 17 to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is "in-the- money" (i.e., current market value of the underlying security minus the option's strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is "in-the-money." This policy as to OTC options is not a fundamental policy of the Fund and may be amended by the Directors of the Fund without the approval of the Fund's shareholders. However, the Fund will not change or modify this policy prior to the change or modification by the Commission staff of its position. Risk Factors in Options and Futures Transactions. Utilization of options and futures transactions to hedge the portfolio involves the risk of imperfect correlation in movements in the price of options and futures and movements in the price of the securities or currencies which are the subject of the hedge. If the price of the options or futures moves more or less than the price of the hedged securities or currencies, the Fund will experience a gain or loss which will not be completely offset by movements in the price of the subject of the hedge. This risk applies particularly to the Fund's use of cross-hedging, which means that the security which is the subject of the hedged transaction is different from the security being hedged. The successful use of options and futures also depends on the Manager's ability to correctly predict price movements in the market involved in a particular options or futures transaction. To compensate for imperfect correlations, the Fund may purchase or sell stock index options or futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the stock index options or futures contracts. Conversely, the Fund may purchase or sell fewer stock index options or futures contracts if the volatility of the price of the hedged securities is historically less than that of the stock index options or futures contracts. The risk of imperfect correlation generally tends to diminish as the maturity date of the stock index option or futures contract approaches. The Fund intends to enter into options and futures transactions, on an exchange or in the over-the-counter market, only if there appears to be a liquid secondary market for such options or futures or, in the case of over- the-counter transactions, the Manager believes the Fund can receive on each business day at least two independent bids or offers. However, there can be no assurance that a liquid secondary market will exist at any specific time. Thus, it may not be possible to close an options or futures position. The inability to close options and futures positions also could have an adverse impact on the Fund's ability to effectively hedge its portfolio. There is also the risk of loss by the Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom the Fund has an open position in an option, a futures contract or related option. The exchanges on which the Fund intends to conduct options transactions have generally established limitations governing the maximum number of call or put options on the same underlying security or currency (whether or not covered) which may be written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). "Trading limits" are imposed on the maximum number of contracts which any person may trade on a particular trading day. The Manager does not believe that these trading and position limits will have any adverse impact on the portfolio strategies for hedging the Fund's portfolio. OTHER INVESTMENT POLICIES AND PRACTICES Portfolio Transactions. Since portfolio transactions may be effected on foreign securities exchanges, the Fund may incur settlement delays on certain of such exchanges. See "Special and Risk Considerations" above. 18 Where possible, the Fund will deal directly with the dealers who make a market in the securities involved except in those circumstances where better prices and execution are available elsewhere. Such dealers usually are acting as principal for their own account. On occasion, securities may be purchased directly from the issuer. Such portfolio securities are generally traded on a net basis and do not normally involve either brokerage commissions or transfer taxes. Securities firms may receive brokerage commissions on certain portfolio transactions, including options, futures and options on futures transactions and the purchase and sale of underlying securities upon exercise of options. The Fund has no obligation to deal with any broker in the execution of transactions in portfolio securities. Under the Investment Company Act of 1940, persons affiliated with the Fund, including Merrill Lynch, are prohibited from dealing with the Fund as a principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the Commission. Affiliated persons of the Fund may serve as its broker in transactions conducted on an exchange and in over-the-counter transactions conducted on an agency basis. In addition, consistent with the Rules of Fair Practice of the National Association of Securities Dealers, Inc., the Fund may consider sales of shares of the Fund as a factor in the selection of brokers or dealers to execute portfolio transactions for the Fund. It is expected that the majority of the shares of the Fund will be sold by Merrill Lynch. Costs associated with transactions in foreign securities are generally higher than with transactions in United States securities, although the Fund will endeavor to achieve the best net results in effecting such transactions. When-Issued Securities and Delayed Delivery Transactions. The Fund may purchase securities on a when-issued basis, and it may purchase or sell securities for delayed delivery. These transactions occur when securities are purchased or sold by the Fund with payment and delivery taking place in the future to secure what is considered an advantageous yield and price to the Fund at the time of entering into the transaction. Although the Fund has not established any limit on the percentage of its assets that may be committed in connection with such transactions, the Fund will maintain a segregated account with its custodian of cash, cash equivalents, U.S. Government Securities or other high grade liquid debt or equity securities denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the amount of its commitment in connection with such purchase transactions. Standby Commitment Agreements. The Fund may from time to time enter into standby commitment agreements. Such agreements commit the Fund, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee, regardless of whether or not the security is ultimately issued, which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. The Fund will enter into such agreements only for the purpose of investing in the security underlying the commitment at a yield and price which is considered advantageous to the Fund. The Fund will not enter into a standby commitment with a remaining term in excess of 45 days and will limit its investment in such commitments so that the aggregate purchase price of the securities subject to such commitments, together with the value of portfolio securities subject to legal restrictions on resale, will not exceed 10% of its assets taken at the time of acquisition of such commitment or security. The Fund will at all times maintain a segregated account with its custodian of cash, cash equivalents, U.S. Government Securities or other high grade liquid debt or equity securities denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Since the 19 issuance of the security underlying the commitment is at the option of the issuer, the Fund may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period. The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued and the value of the security will thereafter be reflected in the calculation of the Fund's net asset value. The cost basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment. Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in securities pursuant to repurchase agreements or purchase and sale contracts. Repurchase agreements and purchase and sale contracts may be entered into only with a member bank of the Federal Reserve System or primary dealer in U.S. Government securities. Under such agreements, the bank or primary dealer agrees, upon entering into the contract, to repurchase the security at a mutually agreed upon time and price in a specified currency, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period although it may be affected by currency fluctuations. In the case of repurchase agreements, the prices at which the trades are conducted do not reflect accrued interest on the underlying obligation; whereas, in the case of purchase and sale contracts, the prices take into account accrued interest. Such agreements usually cover short periods, such as under one week. Repurchase agreements may be construed to be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. In the case of a repurchase agreement, as a purchaser, the Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase agreement; the Fund does not have the right to seek additional collateral in the case of purchase and sale contracts. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by the Fund but only constitute collateral for the seller's obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs or possible losses in connection with disposition of the collateral. A purchase and sale contract differs from a repurchase agreement in that the contract arrangements stipulate that the securities are owned by the Fund. In the event of a default under such a repurchase agreement or under a purchase and sale contract, instead of the contractual fixed rate, the rate of return to the Fund shall be dependent upon intervening fluctuations of the market value of such security and the accrued interest on the security. In such event, the Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the failure of the seller to perform. The Fund may not invest more than 10% of its net assets in repurchase agreements or purchase and sale contracts maturing in more than seven days. Lending of Portfolio Securities. The Fund may from time to time lend securities from its portfolio with a value not exceeding 33 1/3% of its total assets, to banks, brokers and other financial institutions and receive collateral in cash or securities issued or guaranteed by the United States Government. Such collateral will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. This limitation is a fundamental policy, and it may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities, as defined in the Investment Company Act of 1940. During the period of such a loan, the Fund receives the income on the loaned securities and either receives the income on the collateral or other compensation, i.e., negotiated loan premium or fee, for entering into the loan and thereby increases its yield. In the event that the borrower defaults on its obligation to return 20 borrowed securities, because of insolvency or otherwise, the Fund could experience delays and costs in gaining access to the collateral and could suffer a loss to the extent that the value of the collateral falls below the market value of the borrowed securities. Investment Restrictions. The Fund's investment activities are subject to further restrictions that are described in the Statement of Additional Information. Investment restrictions and policies which are fundamental policies may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities (which for this purpose and under the Investment Company Act of 1940 means the lesser of (a) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (b) more than 50% of the outstanding shares). Among the Fund's more significant investment policies, the Fund may not 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, or the Fund owns more than 10% of the outstanding voting securities of such issuer, except that such restriction shall not apply to securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. The Fund will concentrate in equity and debt securities issued by domestic and foreign companies in the utilities industries. Other fundamental policies include policies which (i) limit investments in securities which cannot be readily resold because of legal or contractual restrictions or which are not otherwise readily marketable, including repurchase agreements and purchase and sale contracts maturing in more than seven days, if, regarding all such securities, more than 10% of its net assets, taken at market value, would be invested in such securities, (ii) limit investments in securities of other investment companies, except in connection with certain specified transactions and with respect to investments of up to 10% of the Fund's assets in securities of closed-end investment companies and (iii) restrict the issuance of senior securities and limit bank borrowings except that the Fund may borrow amounts of up to 10% of its assets for extraordinary purposes or to meet redemptions. The Fund will not purchase securities while borrowings exceed 5% of its total assets. The Fund has no present intention to borrow money in amounts exceeding 5% of its total assets. Moreover, the Fund does not presently intend to make any investment that would result in the Fund becoming subject to the provisions of the Public Utility Holding Company Act of 1935 ("PUCA"). Although not a fundamental policy, the Fund will include OTC options and the securities underlying such options in calculating the amount of its total assets subject to the limitation set forth in clause (i) above. However, as discussed above, the Fund may treat the securities it uses as cover for written OTC options as liquid, and therefore, will be excluded from this restriction, provided it follows a specified procedure. The Fund will not change or modify this policy prior to the change or modification by the Commission staff of its position regarding OTC options, as discussed above. Portfolio Turnover. The Manager will effect portfolio transactions without regard to a holding period, if, in its judgment, such transactions are advisable in light of a change in circumstance in general market, economic or financial conditions. As a result of its investment policies, the Fund may engage in a substantial number of portfolio transactions. Accordingly, while the Fund anticipates that its annual turnover rate should not exceed 100% under normal conditions, it is impossible to predict portfolio turnover rates. The portfolio turnover rate is calculated by dividing the lesser of the Fund's annual sales or purchases of portfolio securities (exclusive of purchases or sales of securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. High portfolio turnover involves correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by the Fund. For the fiscal years ended November 30, 1993 and November 30, 1992, the rate of portfolio turnover for the Fund was 8.92% and 30.91%, respectively. 21 MANAGEMENT OF THE FUND BOARD OF DIRECTORS The Board of Directors of the Fund consists of five individuals, four of whom are not "interested persons" of the Fund as defined in the Investment Company Act of 1940. The Board of Directors of the Fund is responsible for the overall supervision of the operations of the Fund and performs the various duties imposed on the directors of investment companies by the Investment Company Act of 1940. The Directors of the Fund are: Arthur Zeikel*--President and Chief Investment Officer of the Manager and Fund Asset Management, L.P. ("FAM"); President and Director of Princeton Services, Inc. since 1993; Executive Vice President of Merrill Lynch & Co., Inc., and Executive Vice President of Merrill Lynch since 1990 and Senior Vice President thereof from 1985 to 1990; Director of Merrill Lynch Funds Distributor, Inc. Ronald W. Forbes--Professor of Finance, School of Business, State University of New York at Albany. Charles C. Reilly--Adjunct Professor, Columbia University School of Business. Former President and Chief Investment Officer of Verus Capital, Inc.; Former Senior Vice President of Arnhold and S. Bleichroeder, Inc. Kevin A. Ryan--Professor of Education at Boston University since 1982; Founder and current Director of The Boston University Center for the Advancement of Ethics and Character. Richard R. West--Professor of Finance, and Dean from 1984 to 1993, New York University Leonard N. Stern School of Business Administration. - -------- * Interested person, as defined in the Investment Company Act of 1940, of the Fund. MANAGEMENT AND ADVISORY ARRANGEMENTS The Manager, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey (mailing address: Box 9011, Princeton, New Jersey 08543-9011) acts as the manager for the Fund and provides the Fund with management and investment advisory services. The Manager is a Delaware limited partnership and is owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co."), the parent of Merrill Lynch. The Manager or its affiliate, FAM, acts as the manager for more than 90 other registered investment companies. The Manager also offers portfolio management and portfolio analysis services to individuals and institutions. As of February 28, 1994, the Manager and FAM had a total of approximately $164.4 billion in investment company and other portfolio assets under management, including accounts of certain affiliates of the Manager. ML & Co., Merrill Lynch Investment Management, Inc. and Princeton Services, Inc. may be deemed "controlling persons" of the Manager as defined under the Investment Company Act of 1940 because of their power to exercise a controlling influence over its management policies. The management agreement with the Manager (the "Management Agreement") provides that, subject to the direction of the Board of Directors of the Fund, the Manager is responsible for the actual management of the Fund's portfolio. The responsibility for making decisions to buy, sell or hold a particular security rests with the Manager, subject to review by the Board of Directors. 22 Walter D. Rogers is the portfolio manager for the Fund. Mr. Rogers is a Vice President of the Manager and has been employed by the Manager in this capacity since 1987. For the past five years, Mr. Rogers has acted as portfolio manager of one or more other registered investment companies sponsored by the Manager, and continues to act in such capacity. The Manager is obligated to perform certain administrative and management services for the Fund and is obligated to provide all of the office space, facilities, equipment and personnel necessary to perform its duties under the Management Agreement. The Fund pays the Manager a monthly fee at the annual rate of 0.60% of the average daily net assets of the Fund. In addition, the Management Agreement obligates the Fund to pay certain expenses incurred in its operations including, among other things, the investment advisory fee, legal and audit fees, registration fees, unaffiliated Directors' fees and expenses, custodian and transfer agency fees, accounting costs, the costs of issuing and redeeming shares and certain of the costs of printing proxies, shareholder reports, prospectuses and statements of additional information. For the fiscal year ended November 30, 1993, the fee paid by the Fund to the Manager was $2,346,433 (based upon average net assets of approximately $391.1 million). For the fiscal year ended November 30, 1993, the ratio of total expenses to average net assets was 0.82% for the Class A shares and 1.59% for the Class B shares. TRANSFER AGENCY SERVICES Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly- owned subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency and shareholder servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of $7.00 per Class A shareholder account and $9.00 per Class B shareholder account and is entitled to reimbursement for out-of-pocket expenses incurred by it under the Transfer Agency Agreement. For the fiscal year ended November 30, 1993, the total fee paid by the Fund to the Transfer Agent was $341,643. REIMBURSEMENT FOR PORTFOLIO ACCOUNTING SERVICES Accounting services are provided to the Fund by the Manager, and the Fund reimburses the Manager for its costs in connection with such services on a semi-annual basis. For the fiscal year ended November 30, 1993, the Fund reimbursed the Manager $81,576 for accounting services. PURCHASE OF SHARES Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a subsidiary of the Manager and an affiliate of Merrill Lynch, acts as the distributor of Class A and Class B shares of the Fund. Shares of the Fund may be purchased from securities dealers or by mailing a purchase order directly to the Transfer Agent. The minimum initial purchase is $1,000 and the minimum subsequent purchase is $50, except that for retirement plans, the minimum initial purchase is $250 and the minimum subsequent purchase is $1. Different minimums may apply through the Merrill Lynch Blueprint SM Program. See "Purchase of Shares--Reduced Initial Sales Charges--Class A Shares--Merrill Lynch Blueprint SM Program" in the Statement of Additional Information. 23 The Fund is offering its shares at a public offering price equal to the next determined net asset value per share plus sales charges which, at the option of the purchaser, may be imposed either at the time of purchase (the "initial sales charge alternative") or on a deferred basis (the "deferred sales charge alternative"), as described below. The applicable offering price for purchase orders is based upon the net asset value of the Fund next determined after receipt of the purchase order by the Distributor. As to purchase orders received by securities dealers prior to 4:15 P.M., New York time, which includes orders received after the determination of net asset value on the previous day, the applicable offering price will be based on the net asset value determined as of 4:15 P.M., New York time, on the day the order is placed with the Distributor, provided the order is received by the Distributor prior to 4:30 P.M., New York time, on that day. If the purchase orders are not received by the Distributor prior to 4:30 P.M., New York time, such orders shall be deemed received on the next business day. Any order may be rejected by the Distributor or the Fund. The Fund or the Distributor may suspend the continuous offering of the Fund's shares to the general public at any time in response to conditions in the securities markets or otherwise and may thereafter resume such offering from time to time. Neither the Distributor nor the dealers are permitted to withhold placing orders to benefit themselves by a price change. Merrill Lynch may charge its customers a processing fee (presently $4.85) to confirm a sale of shares to such customers. Purchases directly through the Fund's Transfer Agent are not subject to the processing fee. ---------------- The Fund issues two classes of shares: Class A shares are sold to investors choosing the initial sales charge alternative and Class B shares are sold to investors choosing the deferred sales charge alternative. The two classes of shares each represent an interest in the same portfolio of investments of the Fund, have the same rights and are identical in all respects, except that Class B shares bear the expenses of the account maintenance fee and distribution fee and any expenses (including incremental transfer agency costs) resulting from the deferred sales charge arrangement, and have exclusive voting rights with respect to the Rule 12b-1 distribution plan pursuant to which the account maintenance and distribution fees are paid. The two classes also have different exchange privileges. See "Shareholder Services--Exchange Privilege." The net income attributable to Class B shares and the dividends payable on Class B shares will be reduced by the amount of the account maintenance and distribution fees and incremental expenses associated with such account maintenance and distribution fees; accordingly, the net asset value of the Class B shares will be reduced by such amount to the extent the Fund has undistributed net income. Sales personnel may receive different compensation for selling Class A or Class B shares. Investors are advised that only Class A shares may be available for purchase through securities dealers, other than Merrill Lynch, which are eligible to sell shares. ALTERNATIVE SALES ARRANGEMENTS The alternative sales arrangements of the Fund permit an investor to choose the method of purchasing shares that is most beneficial given the amount of his purchase, the length of time the investor expects to hold the shares and other relevant circumstances. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES CHARGE AND NOT BE SUBJECT TO ONGOING CHARGES, AS DISCUSSED BELOW, OR TO HAVE THE ENTIRE INITIAL PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT THEREAFTER BEING SUBJECT TO ONGOING ACCOUNT MAINTENANCE AND DISTRIBUTION FEES. As an illustration, investors who qualify for significantly reduced sales charges, as described below, might elect the initial sales charge alternative because similar sales charge reductions are not available for purchases under the deferred sales charge alternative. Shares acquired under the initial sales charge alternative would 24 not be subject to an ongoing account maintenance fee and distribution fee as described below. However, because initial sales charges are deducted at the time of purchase, such investors would not have all their funds invested initially. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time might also elect the initial sales charge alternative because over time the accumulated continuing account maintenance and distribution fees may exceed the initial sales charge. Again, however, such investors must weigh this consideration against the fact that not all their funds will be invested initially. Furthermore, the ongoing account maintenance and distribution fees will be offset to the extent any return is realized on the additional funds initially invested under the deferred sales charge alternative. Another factor that may be applicable under certain circumstances is that the payment of the Class B distribution fee and contingent deferred sales charge is subject to certain limits as set forth under "Deferred Sales Charge Alternative--Class B Shares." Certain other investors might determine it to be more advantageous to have all their funds invested initially, although remaining subject to continued account maintenance and distribution fees and, for a four-year period of time, a contingent deferred sales charge as described below. For example, an investor subject to the Class A 6.50% initial sales charge will have to hold his investment at least 8 2/3 years for the aggregate 0.25% account maintenance fee and the 0.50% distribution fee of the Class B shares to exceed the initial sales charge of the Class A shares. This example does not take into account the time value of money which further reduces the impact of the account maintenance and distribution fees on the investment, fluctuations in the net asset value, the effect of the return on the investment over this period of time or the effect of any limits that may be imposed upon payment of the distribution fee and the contingent deferred sales charge. INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES The public offering price of Class A shares for purchasers choosing the initial sales charge alternative is the next determined net asset value plus varying sales charges (i.e., sales loads), as set forth below.
SALES CHARGE AS DISCOUNT TO SALES CHARGE PERCENTAGE* OF THE SELECTED DEALERS AMOUNT AS PERCENTAGE OF NET AMOUNT AS PERCENTAGE OF OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE ----------- ---------------- ------------------ ------------------ Less than $10,000....... 6.50% 6.95% 6.25% $10,000 but less than $25,000................ 6.00 6.38 5.75 $25,000 but less than $50,000................ 5.00 5.26 4.75 $50,000 but less than $100,000............... 4.00 4.17 3.75 $100,000 but less than $250,000............... 3.00 3.09 2.75 $250,000 but less than $1,000,000............. 2.00 2.04 1.80 $1,000,000 and over**... .75 .76 .65
- -------- * Rounded to the nearest one-hundredth percent. ** Initial sales charges may be waived for shareholders purchasing $1 million or more in a single transaction (other than an employer sponsored retirement or savings plan, such as a tax qualified retirement plan under Section 401 of the Internal Revenue Code of 1986, as amended (the "Code"), a deferred compensation plan under Section 403(b) and Section 457 of the Code, other deferred compensation arrangements, VEBA plans and non-qualified After Tax Savings and Investment programs maintained on the Merrill Lynch Group Employee Services system (herein referred to as "Employer Sponsored Retirement or Savings Plans"), or a 25 purchase by a TMASM Managed Trust, of Class A shares of the Fund. In addition, purchases of Class A shares of the Fund made in connection with a single investment of $1 million or more under the Mutual Fund Adviser Program will not be subject to an initial sales charge. Purchases described in this paragraph will be subject to a contingent deferred sales charge if the shares are redeemed within one year after purchase at the following rates:
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF AMOUNT OF PURCHASE DOLLAR AMOUNT OF PURCHASE ------------------ ------------------------- $1 million up to $2.5 million...................... 1.00% Over $2.5 million up to $3.5 million............... .60% Over $3.5 million up to $5 million................. .40% Over $5 million.................................... .25%
The Distributor may reallow discounts to such dealers and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers. Since securities dealers selling Class A shares of the Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act of 1933, as amended. Reduced Initial Sales Charges. Sales charges are reduced under a Right of Accumulation and a Letter of Intention. Class A shares of the Fund are offered at net asset value to Directors of the Fund, to directors or trustees of certain other Merrill Lynch-sponsored investment companies, to an investor who has a business relationship with a financial consultant who joined Merrill Lynch from another investment firm within six months prior to the date of purchase if certain conditions set forth in the Statement of Additional Information are met, to directors of ML & Co. and to employees of ML & Co. and its subsidiaries. Class A shares are offered with reduced sales charges and, in certain circumstances, at net asset value to participants in the Merrill Lynch BlueprintSM Program. Class A shares are offered to TMASM Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services at net asset value plus a reduced sales charge. A transaction of $1,000,000 or more by a TMASM Managed Trust to purchase Class A shares of the Fund will not be subject to an initial sales charge. Class A shares are offered at a net asset value to certain Employer Sponsored Retirement or Savings Plans (as defined above), provided such plans meet the required minimum number of eligible employees or required amount of assets advised by the Manager or any of its affiliates. Also, Class A shares may be offered at net asset value in connection with the acquisition of assets of other investment companies. Class A shares of the Fund are also offered at net asset value to shareholders of certain closed-end funds advised by the Manager or FAM who wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in shares of the Fund, provided certain conditions are met. No initial sales charges are imposed upon Class A shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. Class A shares of the Fund are also offered at net asset value, without sales charge, to an investor who has a business relationship with a Merrill Lynch financial consultant and who has invested in a mutual fund sponsored by a non- Merrill Lynch company for which Merrill Lynch has served as a selected dealer, provided certain conditions are met. Class A shares are offered at net asset value, with a waiver of the front-end sales charge, to participants in the Merrill Lynch Blueprint Program through the Merrill Lynch Directed IRA Rollover Program ("IRA Rollover Program") available from Merrill Lynch Business Financial Services, a business unit of Merrill Lynch. The IRA Rollover Program is available to custodian to custodian rollover assets from Eligible 26 Retirement Plans (see definition below) whose Trustee and/or Plan Sponsor offers the Merrill Lynch Directed IRA Rollover Program. Eligible Retirement Plans include: (a) plans qualified under Section 401(k) of the Code, with a salary reduction feature offering a menu of investments to plan participants, provided such plan initially has 1,000 or more employees eligible to participate in the plan (employees eligible to participate in retirement plans of the same sponsoring employer or its affiliates may be aggregated); or (b) tax qualified retirement plans within the meaning of Section 401(a) of the Code or deferred compensation plans within the meaning of Section 403(b) of the Code, provided the plan (i) initially invested $5 million or more in existing plan assets in portfolios, mutual funds or trusts advised by MLAM or its subsidiaries or (ii) has accumulated $5 million or more in existing plan assets invested in mutual funds advised by MLAM or its subsidiaries, which charge a front-end sales charge or contingent deferred sales charge (assets of retirement plans with the same sponsor or an affiliated sponsor may be aggregated). Additional information concerning these reduced initial sales charges, including information regarding investments by Employer Sponsored Retirement or Savings Plans, is set forth in the Statement of Additional Information. DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES Investors choosing the deferred sales charge alternative purchase Class B shares at net asset value per share without the imposition of a sales charge at the time of purchase. The Class B shares are being sold without an initial sales charge so that the Fund will receive the full amount of the investor's purchase payment. Merrill Lynch compensates its financial consultants for selling Class B shares at the time of purchase from its own funds. The proceeds of the contingent deferred sales charge and the ongoing distribution fee discussed below are used to defray Merrill Lynch's expenses, including compensating its financial consultants. The proceeds from the account maintenance fee are used to compensate Merrill Lynch for providing continuing account maintenance activities. Proceeds from the contingent deferred sales charge are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of dealers (including Merrill Lynch) related to providing distribution-related services to the Fund in connection with the sale of the Class B shares, such as the payment of compensation to financial consultants for selling Class B shares from its own funds. Payments of the distribution fee by the Fund to the Distributor under the distribution plan described below also may be used in whole or in part by the Distributor for this purpose. The combination of the contingent deferred sales charge and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B shares without a sales charge being deducted at the time of purchase. Class B shareholders of the Fund exercising the exchange privilege described under "Shareholder Services--Exchange Privilege" will continue to be subject to the Fund's contingent deferred sales charge schedule if such schedule is higher than the deferred sales charge schedule relating to the Class B shares acquired as a result of the exchange. Contingent Deferred Sales Charge. Class B shares which are redeemed within four years of purchase may be subject to a contingent deferred sales charge at the rates set forth below charged as a percentage of the dollar amount subject thereto. The charge will be assessed on an amount equal to the lesser of the current market value or the cost of the shares being redeemed. Accordingly, no contingent deferred sales charge will be imposed on increases in net asset value above the initial purchase price. In addition, no sales charge will be assessed on shares derived from reinvestment of dividends or capital gains distributions. 27 The following table sets forth the rates of the contingent deferred sales charge:
CONTINGENT DEFERRED SALES CHARGE AS A YEAR SINCE PERCENTAGE OF PURCHASE DOLLAR AMOUNT PAYMENT MADE SUBJECT TO CHARGE ------------ ------------------- 0-1.................................. 4.0% 1-2.................................. 3.0% 2-3.................................. 2.0% 3-4.................................. 1.0% 4 and thereafter..................... None
In determining whether a contingent deferred sales charge is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. Therefore, it will be assumed that the redemption is first of shares held for over four years or shares acquired pursuant to reinvestment of dividends or distributions and then of shares held longest during the four-year period. The charge will not be applied to dollar amounts representing an increase in the net asset value since the time of purchase. A transfer from a shareholder's account to another will be assumed to be made in the same order as a redemption. To provide an example, assume an investor purchased 100 shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares through dividend reinvestment. If at such time the investor makes his first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to the charge because of dividend reinvestment. With respect to the remaining 40 shares, the charge is applied only to the original cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the applicable rate in the third year after purchase). The contingent deferred sales charge is waived on redemptions of shares in connection with certain post-retirement withdrawals from an IRA or other retirement plan or following the death or disability (as defined in the Internal Revenue Code) of a shareholder. The contingent deferred sales charge is waived on redemptions of shares in connection with certain group plans placing orders through the Merrill Lynch Blueprint SM Program and on redemption of shares by certain eligible 401(a) and eligible 401(k) plans. The contingent deferred sales charge is also waived for any Class B shares which are purchased by an eligible 401(k) or eligible 401(a) plan and are rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied Individual Retirement Account and held in such account at the time of redemption. Additional information concerning the waiver of the contingent deferred sales charge is set forth in the Statement of Additional Information. Distribution Plan. Pursuant to a distribution plan adopted by the Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Distribution Plan"), the Fund pays the Distributor an ongoing account maintenance fee and distribution fee, which are accrued daily and paid monthly, at the annual rate of 0.25% and 0.50%, respectively, of the average daily net assets of the Class B shares of the Fund. Pursuant to a sub- agreement with the Distributor, Merrill Lynch provides account maintenance and distribution services to the Fund with respect to Class B shares. The ongoing account maintenance fee compensates the Distributor and Merrill Lynch for providing account maintenance services to Class B shareholders. Account maintenance fees will be used to compensate financial consultants and other personnel for providing personal service to shareholders and to pay administrative costs related to the maintenance of the shareholder 28 accounts. The ongoing distribution fee compensates the Distributor and Merrill Lynch for providing shareholder and distribution services and bearing certain distribution-related expenses of the Fund, including payments to financial consultants for selling Class B shares of the Fund. Prior to July 6, 1993, the Fund paid the Distributor an ongoing distribution fee, accrued daily and payable monthly, at the annual rate of 0.75% of average daily net assets of the Class B shares of the Fund under a distribution plan previously adopted by the Fund (the "Prior Plan") to compensate the Distributor and Merrill Lynch for providing account maintenance and distribution-related activities and services to the Class B shareholders. The fee payable and the services provided under the Prior Plan are identical to the aggregate fee rate payable and the services provided under the Distribution Plan, the difference being that the account maintenance and distribution services have been unbundled. For the fiscal year ended November 30, 1993, the Fund paid the Distributor $2,574,752 (based on average net assets relating to the Class B shares of approximately $343.3 million) pursuant to the Distribution Plan, all of which was paid to Merrill Lynch for providing account maintenance and distribution-related services in connection with the Class B shares. The Distribution Plan is designed to permit an investor to purchase Class B shares through dealers without the assessment of a front-end sales load and at the same time permit the dealer to compensate its financial consultants in connection with the sale of the Class B shares. In this regard, the purpose and function of the ongoing account maintenance and distribution fees and the contingent deferred sales charge are the same as those of the initial sales charge with respect to the Class A shares of the Fund in that the deferred sales charges provide for the financing of the distribution of the Fund's Class B shares. The payments under the Distribution Plan are based upon a percentage of average daily net assets regardless of the amount of expenses incurred and, accordingly, distribution-related revenues may be more or less than distribution-related expenses. Information with respect to the distribution- related revenues and expenses is presented to the Directors for their consideration in connection with their deliberations as to the continuance of the Distribution Plan. This information is presented annually as of December 31 of each year on a "fully allocated accrual" basis and quarterly on a "direct expense and revenue/cash" basis. On the fully allocated accrual basis, revenues consist of the distribution fees, the contingent deferred sales charges and certain other related revenues, and expenses consist of financial consultant compensation, branch office and regional operation center selling and transaction processing expenses, advertising, sales promotion and marketing expenses, corporate overhead and interest expense. On the direct expense and revenue/cash basis, revenues consist of the distribution fees and contingent deferred sales charges and the expenses consist of financial consultant compensation. As of December 31, 1993, the last date for which fully allocated accrual data is available, the fully allocated accrual expenses incurred by the Distributor and Merrill Lynch since the Fund commenced operations on December 28, 1990 exceeded fully allocated revenues for such period by approximately $12,187,000 (approximately 1.93% of net assets at that date). As of December 31, 1993, direct cash expenses for the period since commencement of operations exceeded direct cash revenues by $2,461,808 (0.39% of net assets at that date). As of November 30, 1993, direct cash expenses for the period since commencement of operations exceeded direct cash revenues by $2,597,731 (0.44% of net assets at that date). The Fund has no obligation with respect to distribution-related expenses incurred by the Distributor and Merrill Lynch in connection with the Class B shares, and there is no assurance that the Board of Directors of the Fund will approve the continuance of the Distribution Plan from year to year. However, the Distributor intends to seek annual continuation of the Distribution Plan. In their review of the Distribution Plan, the Directors will not be asked to take into consideration expenses incurred in connection with the distribution of Class A shares or of shares of other funds for which the Distributor acts as distributor. The distribution fee and the contingent deferred sales charge in the case of Class B shares will not be used to subsidize the sale of Class A shares. 29 LIMITATIONS ON THE PAYMENT OF SALES CHARGES The maximum sales charge rule in the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based sales charges such as the Fund's distribution fee and the contingent deferred sales charge, but not the account maintenance fee. As applicable to the Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and contingent deferred sales charges payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares (defined to exclude shares issued pursuant to dividend reinvestment and exchanges) plus (2) interest on the unpaid balance at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fee and the contingent deferred sales charge). The Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the maximum amount payable to the Distributor (referred to as the "voluntary maximum") is 6.75% of eligible gross sales. The Distributor retains the right to stop waiving the interest charges at any time. To the extent payments would exceed the voluntary maximum, the Fund will not make further payments of the distribution fee and any contingent deferred sales charges will be paid to the Fund rather than to the Distributor; however, the Fund will continue to make payments of the account maintenance fee. In certain circumstances, the amount payable pursuant to the voluntary maximum may exceed the amount payable under the NASD formula. In such circumstances payment in excess of the amount payable under the NASD formula will not be made. The following table sets forth comparative information as of November 30, 1993 with respect to the Class B shares of the Fund indicating the maximum allowable payments that can be made under the NASD maximum sales charge rule and the Distributor's voluntary maximum for the period December 28, 1990 (commencement of operations) to November 30, 1993. DATA CALCULATED AS OF NOVEMBER 30, 1993 (IN THOUSANDS)
ANNUAL ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4) -------- --------- ----------- ------- -------------- --------- -------------- Under NASD Rule As Adopted................ $522,227 $32,639 $2,106 $34,745 $3,687 $31,058 $2,982 Under Distributor's Vol- untary Waiver................. $522,227 $32,639 $2,611 $35,250 $3,687 $31,563 $2,982
- -------- (1) Purchase price of all eligible Class B shares sold since December 28, 1990 (commencement of operations) other than shares acquired through dividend reinvestment and the exchange privilege. (2) Interest is computed on a monthly basis based upon the prime rate, as reported in the Wall Street Journal, plus 1%, as permitted under the NASD Rule. (3) Consists of contingent deferred sales charge payments, distribution fee payments and accruals. (4) Provided to illustrate the extent to which the current level of distribution fee payments (not including any contingent deferred sales charge payments) is amortizing the unpaid balance. No assurance can be given that payments of the distribution fee will reach either the voluntary maximum or the NASD maximum. 30 REDEMPTION OF SHARES The Fund is required to redeem for cash all full and fractional shares of the Fund upon receipt of a written request in proper form. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any contingent deferred sales charge which may be applicable to Class B shares, there will be no charge for redemption if the redemption request is sent directly to the Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends reinvested through the date of redemption. The value of shares at the time of redemption may be more or less than the shareholder's cost, depending on the market value of the securities held by the Fund at such time. REDEMPTION A shareholder wishing to redeem shares may do so without charge by tendering the shares directly to the Fund's Transfer Agent, Financial Data Services, Inc., Transfer Agency Operations Department, P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other than by mail should be delivered to Financial Data Services, Inc., Transfer Agency Operations Department, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Redemption requests should not be sent to the Fund. Proper notice of redemption in the case of shares deposited with the Transfer Agent may be accomplished by a written letter requesting redemption. Proper notice of redemption in the case of shares for which certificates have been issued may be accomplished by a written letter as noted above accompanied by certificates for the shares to be redeemed. The notice in either event requires the signatures of all persons in whose names the shares are registered, signed exactly as their names appear on the Transfer Agent's register or on the certificate, as the case may be. The signature(s) on the notice must be guaranteed by an "eligible guarantor institution" as such term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. Notarized signatures are not sufficient. In certain instances, the Transfer Agent may require additional documents, such as, but not limited to, trust instruments, death certificates, appointments as executor or administrator, or certificates of corporate authority. For shareholders redeeming directly with the Transfer Agent, payment will be mailed within seven days of receipt of a proper notice of redemption. At various times the Fund may be requested to redeem shares for which it has not yet received good payment. The Fund may delay or cause to be delayed the mailing of a redemption check until such time as it has assured itself that good payment (e.g., cash or certified check drawn on a United States bank) has been collected for the purchase of such shares. Normally, this delay will not exceed 10 days. REPURCHASE The Fund also will repurchase shares through a shareholder's listed securities dealer. The Fund normally will accept orders to repurchase shares by wire or telephone from dealers for their customers at the net asset value next computed after receipt of the order by the dealer, provided that the request for repurchase is received by the dealer prior to the close of business on the New York Stock Exchange on the day received, and such request is received by the Fund from such dealer not later than 4:30 P.M., New York time, on the same day. The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund (other than any applicable contingent deferred sales charge in the case of Class B shares). 31 Securities firms which do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its customers a processing fee (presently $4.85) to confirm a repurchase of shares to such customers. Redemptions directly through the Fund's Transfer Agent are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase, which right of rejection might adversely affect shareholders seeking redemption through the repurchase procedure. A shareholder whose order for repurchase is rejected by the Fund, however, may redeem shares as set forth above. REINSTATEMENT PRIVILEGE--CLASS A SHARES Shareholders who have redeemed their Class A shares have a one-time privilege to reinstate their accounts by purchasing Class A shares of the Fund at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and cannot exceed the amount of the redemption proceeds. The reinstatement privilege is a one-time privilege and may be exercised by the Class A shareholder only the first time such shareholder makes a redemption. SHAREHOLDER SERVICES The Fund offers a number of shareholder services described below which are designed to facilitate investment in its shares. Full details as to each of such services, copies of the various plans described below and instructions as to how to participate in the various plans and services, or to change options with respect thereto, can be obtained from the Fund by calling the telephone number on the cover page hereof or from the Distributor or Merrill Lynch. Included in such services are the following: Investment Account. Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive monthly statements from the Transfer Agent showing any reinvestments of dividends and capital gains distributions and any other activity in the account since the preceding statement. Shareholders also will receive separate confirmations for each purchase or sale transaction other than reinvestment of dividends and capital gains distributions. A shareholder may make additions to his Investment Account at any time by mailing a check directly to the Transfer Agent. Shareholders may also maintain their accounts through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account, an Investment Account in the transferring shareholder's name will be opened automatically, without charge, at the Transfer Agent. Shareholders considering transferring their Class A shares from Merrill Lynch to another brokerage firm or financial institution should be aware that, if the firm to which the Class A shares are to be transferred will not take delivery of shares of the Fund, a shareholder either must redeem the Class A shares so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class A shares. Shareholders interested in transferring their Class B shares from Merrill Lynch and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the shareholder. If the new brokerage firm is willing to accommodate the shareholder in this manner, the shareholder must request that he be issued certificates for his shares, and then must turn the certificates over to the new firm for re-registration as described in the preceding sentence. Shareholders considering transferring a tax-deferred retirement account such as an individual retirement account from Merrill Lynch 32 to another brokerage firm or financial institution should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of the Fund, a shareholder must either redeem the shares (paying any applicable contingent deferred sales charge) so that the cash proceeds can be transferred to the account at the new firm, or such shareholder must continue to maintain a retirement account at Merrill Lynch for those shares. Exchange Privilege. Shareholders of the Fund each have an exchange privilege with certain other mutual funds sponsored by Merrill Lynch. There is currently no limitation on the number of times a shareholder may exercise the exchange privilege. The exchange privilege may be modified or terminated at any time in accordance with the rules of the Securities and Exchange Commission. Class A shareholders of the Fund may exchange their shares ("outstanding Class A shares") on the basis of relative net asset value per Class A share, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class A shares and the sales charge payable at the time of the exchange on the new Class A shares. The Fund's exchange privilege is modified with respect to purchases of Class A shares under the Merrill Lynch Mutual Fund Adviser Program. First, the initial allocation of assets is made under the program. Then, any subsequent exchange under the program of Class A shares of a fund for Class A shares of the Fund will be made solely on the basis of the relative net asset values of the shares being exchanged. Therefore, there will not be a charge for any difference between the sales charge previously paid on the shares of the other fund and the sales charge payable on the shares of the Fund being acquired in the exchange under this program. Class B shareholders of the Fund may exchange their shares ("outstanding Class B shares") for Class B shares of another fund ("new Class B shares") on the basis of relative net asset value per share, without the payment of any contingent deferred sales charge that might otherwise be due on redemption of the outstanding Class B shares. Class B shareholders of the Fund exercising the exchange privilege will continue to be subject to the Fund's contingent deferred sales charge schedule relating to the new Class B shares if such schedule is higher than the contingent deferred sales charge schedule of the fund into which the exchange has been made. In addition, Class B shares of the Fund acquired through use of the exchange privilege will continue to be subject to the contingent deferred sales charge schedule relating to the Class B shares of the fund from which the exchange has been made if such schedule is higher than the Fund's contingent deferred sales charge schedule. For purposes of computing the contingent deferred sales charge that may be payable upon a disposition of the new Class B shares, the period of time that the outstanding Class B shares were held will count toward satisfaction of the holding period of the new Class B shares. Class A and Class B shareholders of the Fund may also exchange their shares for shares of certain money market funds, but in the case of an exchange from Class B shares the period of time that shares are held in a money market fund will not count toward satisfaction of the holding period requirement for purposes of reducing the contingent deferred sales charge. Exercise of the exchange privilege is treated as a sale for Federal income tax purposes. The exchange privilege is available only in states where the exchange legally may be made. For further information, see "Shareholder Services-- Exchange Privilege" in the Statement of Additional Information. Automatic Reinvestment of Dividends and Capital Gains Distributions. All dividends and capital gains distributions are reinvested automatically in full and fractional shares of the Fund, without a sales charge, at the net asset value per share next determined on the ex-dividend date of such dividends and distributions. A shareholder may at any time, by written notification or by telephone (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent dividends or capital gains distributions, or both, paid in cash, rather than reinvested, in which event payment will be mailed on or about the payment date. No contingent deferred 33 sales charge will be imposed upon redemption of shares issued as a result of the automatic reinvestment of dividends or capital gains distributions. Systematic Withdrawal and Automatic Investment Plans. A Class A shareholder may elect to receive systematic withdrawal checks from such shareholder's Investment Account in the form of payments by check or through automatic payment by direct deposit to such shareholder's bank account on either a monthly or quarterly basis. A Class A shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a monthly, bi-monthly, quarterly, semiannual or annual basis through the Systematic Redemption Program, subject to certain conditions. Regular additions of both Class A and Class B shares may be made in an investor's Investment Account by prearranged charges of $50 or more to such investor's regular bank account. Investors who maintain CMA(R) accounts may arrange to have periodic investments made in the Fund in their CMA account or in certain related accounts in amounts of $250 or more through the CMA Automated Investment Program. The Automated Investment Program is not available to shareholders whose shares are held in a brokerage account with Merrill Lynch (other than a CMA(R) account). Retirement Plans. Self-directed individual retirement accounts and other retirement plans are available from Merrill Lynch. Under these plans, investments may be made in the Fund and in certain of the other mutual funds sponsored by Merrill Lynch as well as in other securities. Merrill Lynch charges an initial establishment fee and an annual custodial fee for each account. In addition, eligible shareholders of the Fund may participate in a variety of qualified employee benefit plans which are available from the Distributor. The minimum initial purchase to establish any such plan is $250 and the minimum subsequent purchase is $1. PERFORMANCE DATA From time to time the Fund may include its average annual total return for various specified time periods in advertisements or information furnished to present or prospective shareholders. Average annual total return is computed separately for Class A and Class B shares in accordance with a formula specified by the Commission. Average annual total return quotations for the specified periods will be computed by finding the average annual compounded rates of return (based on net investment income and any capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return will be computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum initial sales charge in the case of Class A shares and the contingent deferred sales charge that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B shares. Dividends paid by the Fund with respect to Class A and Class B shares, to the extent any dividends are paid, will be calculated in the same manner at the same time on the same day and will be in the same amount, except that distribution charges and any incremental transfer agency costs relating to Class B shares will be borne exclusively by that class. The Fund will include performance data for both Class A and Class B shares of the Fund in any advertisement or information including performance data of the Fund. The Fund also may quote total return and aggregate total return performance data for various specified time periods. Such data will be calculated substantially as described above, except that (1) the rates of return 34 calculated will not be average annual rates, but rather, actual annual, annualized or aggregate rates of return and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return generally will be lower than average annual total return data since the average annual rates of return reflect compounding; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. In advertisements directed to investors whose purchases are subject to reduced sales charges in the case of Class A shares or waiver of the contingent deferred sales charge in the case of Class B shares (such as investors in certain retirement plans), performance data may take into account the reduced, and not the maximum, sales charge or may not take into account the contingent deferred sales charge and therefore may reflect greater total return since, due to the reduced sales charges or waiver of the contingent deferred sales charge, a lower amount of expenses may be deducted. See "Purchase of Shares." The Fund's total return may be expressed either as a percentage or as a dollar amount in order to illustrate the effect of such total return on a hypothetical $1,000 investment in the Fund at the beginning of each specified period. Total return figures are based on the Fund's historical performance and are not intended to indicate future performance. The Fund's total return will vary depending on market conditions, the securities comprising the Fund's portfolio, the Fund's operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. On occasion, the Fund may compare its performance to the Financial Times-- Actuaries World Index, Financial Times--Actuaries Utility Index, Standard & Poor's 500 Composite Stock Price Index, the Value Line Composite Index or the Dow Jones Industrial Average, or to data contained in publications such as Lipper Analytical Services, Inc., or performance data published by Morningstar Publications, Inc., Money Magazine, U.S. News and World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine and Fortune Magazine. From time to time, the Fund may include the Fund's Morningstar risk-adjusted performance ratings in advertisements or supplemental sales literature. As with other performance data, performance comparisons should not be considered representative of the Fund's relative performance for any future period. The Fund's annual report contains additional performance information and is available upon request, without charge. ADDITIONAL INFORMATION DIVIDENDS AND DISTRIBUTIONS It is the Fund's intention to distribute all of its net investment income, if any. Dividends, from such net investment income are paid quarterly. All net realized long- or short-term capital gains, if any, are distributed to the Fund's shareholders at least annually. The per share dividends and distributions on Class B shares will be lower than the per share dividends and distributions on Class A shares as a result of the account maintenance, distribution and higher transfer agency fees applicable to the Class B shares. See "Additional Information--Determination of Net Asset Value." Dividends and distributions may be reinvested automatically in shares of the Fund, at net asset value without sales charge. Shareholders may elect in writing 35 to receive any such dividends or distributions or both, in cash. Dividends and distributions are taxable to shareholders as described below whether they are reinvested in shares of the Fund or received in cash. From time to time, the Fund may declare a special distribution at or about the end of the calendar year in order to comply with a Federal income tax requirement that certain percentages of its ordinary income and capital gains be distributed during the calendar year. Certain gains or losses attributable to foreign currency related gains or losses from certain of the Fund's investments may increase or decrease the amount of the Fund's income available for distribution to shareholders. If such losses exceed other income during a taxable year, (a) the Fund would not be able to make any ordinary dividend distributions, and (b) distributions made before the losses were realized would be recharacterized as a return of capital to shareholders, rather than as an ordinary dividend, reducing each shareholder's tax basis in his Fund shares for Federal income tax purposes. For a detailed discussion of the Federal tax considerations relevant to foreign currency transactions, see "Additional Information--Taxes." If in any fiscal year the Fund has net income from certain foreign currency transactions, such income will be distributed at least annually. All net realized long- or short-term capital gains, if any, are declared and distributed to the Fund's shareholders annually after the close of the Fund's fiscal year. Capital gains distributions will be automatically reinvested in shares unless the shareholder elects to receive such distributions in cash. See "Shareholder Services--Automatic Reinvestment of Dividends and Capital Gains Distributions" for information as to how to elect either dividend reinvestment or cash payments. Dividends and distributions are taxable to shareholders as described below whether they are reinvested in shares of any portfolio or received in cash. DETERMINATION OF NET ASSET VALUE Net asset value per share is determined once daily as of 4:15 P.M., New York time, on each day during which the New York Stock Exchange is open for trading. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies will be translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The net asset value is computed by dividing the market value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares outstanding at such time. Expenses, including the fees payable to the Manager and the account maintenance and distribution fee payable to the Distributor, are accrued daily. The per share net asset value of the Class B shares generally will be lower than the per share net asset value of the Class A shares reflecting the daily expense accruals of the account maintenance, distribution and transfer agency fees applicable with respect to the Class B shares. It is expected, however, that the per share net asset value of the two classes will tend to converge immediately after the payment of dividends or distributions, which will differ by approximately the amount of the expense accrual differential between the classes. Portfolio securities which are traded on stock exchanges are valued at the last sale price as of the close of business on the day the securities are being valued, or, lacking any sales, at the last available bid price. Securities traded in the over-the-counter market are valued at the last quoted bid prices as at the close of trading on the New York Stock Exchange on each day by brokers that make markets in the securities. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued 36 according to the broadest and most representative market. Other investments, including futures contracts and related options, are stated at market value. Securities and assets for which market quotations are not readily available are valued at fair market value, as determined in good faith by or under the direction of the Board of Directors of the Fund, including valuations furnished by a pricing service retained by the Fund. TAXES The Fund intends to continue to elect to qualify for the special tax treatment afforded regulated investment companies ("RICs") under the Internal Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any taxable year in which it distributes at least 90% of its taxable net income, the Fund (but not its shareholders) will not be subject to Federal income tax to the extent that it distributes its net investment income and realized capital gains. The Fund intends to distribute substantially all of such income. Dividends paid by the Fund from its ordinary income and distributions of the Fund's net realized short-term capital gains (together referred to hereafter as "ordinary income dividends") are taxable to shareholders as ordinary income. Distributions made from the Fund's net realized long-term capital gains (including long-term gains from certain transactions in futures and options) are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder has owned Fund shares. Under Code Section 988, foreign currency gains or losses from certain forward contracts not traded in the interbank market, from futures contracts that are not "regulated futures contracts" and from unlisted options will generally be treated as ordinary income or loss. Such Code Section 988 gains or losses will increase or decrease the amount of the Fund's investment company taxable income available to be distributed to shareholders as ordinary income. Additionally, if Code Section 988 losses exceed other investment company taxable income during a taxable year, the Fund would not be able to make any ordinary dividend distributions, and any distributions made before the losses were realized but in the same taxable year would be recharacterized as a return of capital to shareholders, thereby reducing each shareholder's basis in his Fund shares. Dividends and distributions are taxable to shareholders even though they are reinvested in additional shares of the Fund. Not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amount of any dividends or capital gains distributions. The portion of the Fund's ordinary income dividends which is attributable to dividends received by the Fund from U.S. corporations may be eligible for the 70% dividends received deduction allowed to corporations under the Code, if certain requirements are met. If the Fund pays a dividend in January which was declared in the previous October, November or December to shareholders of record on a date in such month, then such dividend or distribution will be treated for tax purposes as being paid by the RIC and received by its shareholders on December 31 of the year in which the dividend was declared. Redemptions and exchanges of Fund shares are taxable events, and, accordingly, shareholders may realize gains or losses on such transactions. Under the Code, if a shareholder exercises the exchange privilege within 90 days of acquiring Class A shares of the Fund to acquire shares in a second fund ("New Fund"), then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent the charge paid to the Fund reduces any charge the shareholder would have owed upon purchase of the New Fund shares in the absence of the exchange privilege. Instead, such charges will be treated as an amount paid for the New Fund shares and will be included in the basis of such shares. See "Shareholder Services--Exchange Privilege." 37 Ordinary income dividends paid by the Fund to shareholders who are non- resident aliens or foreign entities generally will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Non-resident shareholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. Pursuant to the investment objectives of the Fund, the Fund may invest in foreign securities. Dividends and interest received by the Fund with respect to these investments may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Shareholders may be able to claim United States foreign tax credits with respect to such taxes, subject to certain provisions and limitations contained in the Code. If more than 50% in value of the Fund's total assets at the close of its taxable year consists of stock or securities of foreign corporations, the Fund will be eligible, and intends, to file an election with the Internal Revenue Service pursuant to which shareholders of the Fund will be required to include their proportionate share of such withholding taxes in their United States income tax returns as gross income, treat such proportionate share as taxes paid by them, and deduct such proportionate share in computing their taxable income or, alternatively, use them as foreign tax credits against their United States income taxes. The Fund will report annually to its shareholders the amount per share of such withholding taxes. Please note that foreign tax credits cannot be claimed on the investments of foreign securities held in the Fund by certain retirement accounts. Under certain provisions of the Code, some shareholders may be subject to a 31% withholding tax on reportable dividends, capital gains distributions and redemption payments ("backup withholding"). Generally, shareholders subject to backup withholding will be those for whom a certified taxpayer identification number is not on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that he is not otherwise subject to backup withholding. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and these Treasury regulations are subject to change by legislative or administrative action either prospectively or retroactively. Dividends and capital gains distributions may also be subject to state and local taxes. Shareholders are urged to consult their advisers as to whether any portion of the dividends they receive from the Fund is exempt from state income tax and as to any other specific questions as to Federal, foreign, state or local taxes. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in the Fund. ORGANIZATION OF THE FUND The Fund was incorporated under Maryland law on September 26, 1990. It has an authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per share, divided into two classes, designated Class A and Class B Common Stock, each of which consists of 100,000,000 shares. Both Class A and Class B Common Stock represent an interest in the same assets of the Fund and are identical in all respects except that the Class B shares bear certain expenses related to the account maintenance and distribution of such 38 shares and have exclusive voting rights with respect to matters relating to such account maintenance and distribution expenditures. See "Purchase of Shares." The Fund has received an order from the Commission permitting the issuance and sale of two classes of Common Stock. The Board of Directors of the Fund may classify and reclassify the shares of the Fund into additional classes of Common Stock at a future date. The creation of additional classes would require an additional order from the Commission. There is no assurance that such an additional order would be issued. Shareholders are entitled to one vote for each full share held and to fractional votes for fractional shares held in the election of Directors (to the extent hereafter provided) and on other matters submitted to the vote of shareholders. All shares of the Fund have equal voting rights, except, as noted above, a class of shares will have exclusive voting rights with respect to matters relating to the account maintenance and distribution expenses being borne solely by such class. There normally will be no meeting of shareholders for the purpose of electing Directors unless and until such time as less than a majority of the Directors holding office have been elected by the shareholders, at which time the Directors then in office will call a shareholders' meeting for the election of Directors. Shareholders may, in accordance with the terms of the Articles of Incorporation, cause a meeting of shareholders to be held for the purpose of voting on the removal of Directors. Also, the Fund will be required to call a special meeting of shareholders in accordance with the requirements of the Investment Company Act of 1940 to seek approval of new management and advisory arrangements, of a material increase in distribution or account maintenance fees or of a change in fundamental policies, objectives or restrictions. Except as set forth above, the Directors shall continue to hold office and appoint successor Directors. Each issued and outstanding share is entitled to participate equally in dividends and distributions declared and in net assets upon liquidation or dissolution remaining after satisfaction of outstanding liabilities except that, as noted above, expenses related to the account maintenance and distribution of the shares of a class will be borne solely by such class. Shares issued are fully-paid and non-assessable by the Fund. SHAREHOLDER INQUIRIES Shareholder inquiries may be addressed to the Fund at the address or telephone number set forth on the cover page of this Prospectus. SHAREHOLDER REPORTS Only one copy of each shareholder report and certain shareholder communications will be mailed to each identified shareholder regardless of the number of accounts such shareholder has. If a shareholder wishes to receive separate copies of each report and communication for each of the shareholder's related accounts the shareholder should notify in writing: Financial Data Services, Inc. Attn: Document Evaluation Unit P.O. Box 45209 Jacksonville, Florida 32232-5290 The written notification should include the shareholder's name, address, tax identification number and Merrill Lynch and/or mutual fund account numbers. If you have any questions regarding this please call your Merrill Lynch financial consultant or Financial Data Services, Inc. at 800-637-3863. 39 [THIS PAGE INTENTIONALLY LEFT BLANK] 40 MERRILL LYNCH GLOBAL UTILITY FUND, INC.--AUTHORIZATION FORM - ------------------------------------------------------------------------------- NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM PROGRAM APPLICATION BY CALLING TOLL FREE (800) 637-3766. - ------------------------------------------------------------------------------- 1. SHARE PURCHASE APPLICATION I, being of legal age, wish to purchase ......... Class A shares or ......... Class B shares (choose one) of Merrill Lynch Global Utility Fund, Inc. and establish an Investment Account as described in the Prospectus. Basis for establishing an Investment Account: A. I enclose a check for $. . . . . . . . . . payable to Financial Data Services, Inc., as an initial investment (minimum $1,000) (Subsequent investments $50 or more). I understand that this purchase will be executed at the applicable offering price next to be determined after this Application is received by you. B. I already own shares of the following Merrill Lynch mutual funds that would qualify for the right of accumulation as outlined in the Statement of Additional Information: 1. ............................ 4. ............................ 2. ............................ 5. ............................ 3. ............................ 6. ............................ (Please list all Funds. Use a separate sheet of paper if necessary.) Until you are notified by me in writing, the following options with respect to dividends and distributions are elected: Distribution Options Elect [_] reinvest dividends Elect [_] reinvest capital gains One [_] pay dividends in cash One [_] pay capital gains in cash If no election is made, dividends and capital gains will be reinvested ------------------ automatically at net asset value without a sales charge. (Please Print) [_][_][_][_][_][_][_][_][_] Name ................................................... Social Security First Name Initial Last Name No. or Taxpayer Identification Name of Co-Owner (if any) .............................. No. First Name Initial Last Name Address ................................................ ......., 19.. Date ................................................... (Zip Code) ........................ Occupation................. Name and Address Employer ........................ ........................ Under penalty of perjury, I certify (1) that the number set forth above is my correct Social Security No. or Taxpayer Identification No. and (2) that I am not subject to backup withholding (as discussed under "Additional Information--Taxes" in the Prospectus) either because I have not been notified that I am subject thereto as a result of a failure to report all interest or dividends, or the Internal Revenue Service ("IRS") has notified me that I am no longer subject thereto. INSTRUCTION: You must strike out the language in (2) above if you have been notified that you are subject to backup withholding due to underreporting, and if you have not received a notice from the IRS that backup withholding has been terminated. The undersigned authorizes the furnishing of this certification to other Merrill Lynch-sponsored mutual funds. SIGNATURE OF OWNER ............ SIGNATURE OF CO-OWNER (IF ANY) .......... In the case of co-owners, a joint tenancy with right of survivorship will be presumed unless otherwise specified. - ------------------------------------------------------------------------------- 2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION) ....... 19. . . . . . DATE OF INITIAL PURCHASE Gentlemen: Although I am not obligated to do so, I intend to purchase shares of Merrill Lynch Global Utility Fund, Inc., or any other investment company with an initial sales charge or deferred sales charge for which the Merrill Lynch Funds Distributor, Inc. acts as a distributor over the next 13-month period which will equal or exceed: [_] $10,000 [_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000 Each purchase will be made at the then reduced offering price applicable to the amount checked above, as described in the Fund prospectus. I agree to the terms and conditions of the Letter of Intention. I hereby irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my attorney, with full power of substitution, to surrender for redemption any or all shares of Merrill Lynch Global Utility Fund, Inc. held as security. By ............................. ................................ Signature of Owner Signature (If registered in joint names, both must sign) In making purchases under this letter,the following are the related accounts on which reduced offering prices are to apply: (1) Name ....................... (2) Name ....................... 41 MERRILL LYNCH GLOBAL UTILITY FUND, INC.--AUTHORIZATION FORM - ------------------------------------------------------------------------------- 3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION) Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly, of shares in Merrill Lynch Global Utility Fund, Inc., at cost or current offering price. Begin systematic withdrawal on ......., 19.. . Withdrawals to be made either (check one) [_] Monthly [_] Quarterly. Quarterly withdrawals are made on the 24th day of March, June, September and December. Specify withdrawal amount (check one): [_] $....... or [_] .......% of the current value of Class A shares in the account Specify withdrawal method: [_] check or [_] direct deposit to bank account (CHECK ONE AND COMPLETE PART (A) OR (B) BELOW): (B) I HEREBY AUTHORIZE PAYMENT BY (A) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT and CHECK (if necessary) debit entries and adjustments for any credit entries made in error to my account Draw checks payable (check one) Specify type of account (check one): [_] checking [_]savings [_] as indicated in item 1. I agree that this authorization will [_] to the order of ........ remain in effect until I provide written notification to Financial Data Services, Inc. amending or terminating this service. Mail to (check one) [_] the address indicated in item 1. Name on your Account ........... [_] Name (Please Print) .... Bank ........................... Bank #......... Account # ...... Address ...................... Bank Address ................... Signature of Owner ........... Signature of Depositor ... Date ..... Signature of Depositor (if joint Signature of Co-Owner (if any) .... account) ....................... Note: If Automatic Direct Deposit is elected, your blank, unsigned check marked "VOID" or a deposit slip from your savings account should accompany this Application. - ------------------------------------------------------------------------------- 4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN I hereby request that Financial Data Services, Inc. draw a check or an automated clearing house ("ACH") debit on my checking account described below each month to purchase ....... Class A shares or ....... Class B shares (choose one) of Merrill Lynch Global Utility Fund, Inc., subject to the terms set forth below. AUTHORIZATION TO HONOR CHECKS OR ACH FINANCIAL DATA SERVICES, INC. DEBITS DRAWN BY FINANCIAL DATA SERVICES, INC. You are hereby authorized to draw checks or an ACH debit each month on my bank account for investment To ..............................Bank in Merrill Lynch Global Utility (Investor's Bank) Fund, Inc., as described below: Bank Address ........................ Amount of each check or ACH City ..... State ..... Zip Code..... debit $ ....................... Account No. ................. As a convenience to me, I hereby Please date and invest request and authorize you to pay and checks or draw ACH debits on charge to my account checks or ACH the 20th of each month debits drawn on my account by and beginning ................... payable to Financial Data Services, Inc., Transfer Agency Mutual Fund (Month) Operations, Jacksonville, Florida or as soon thereafter as possible. 32232-5289. I agree that your rights in respect to each such check or I agree that you are preparing debit shall be the same as if it these checks or drawing these were a check drawn on you and signed debits voluntarily at my request personally by me. This authority is and that you shall not be liable to remain in effect until revoked by for any loss arising from any me in writing. Until you receive delay in preparing or failure to such notice, you shall be fully prepare any such check or debit. protected in honoring any such check If I change banks or desire to or debit. I further agree that if terminate or suspend this program, any such check or debit be I agree to notify you promptly in dishonored, whether with or without writing. cause and whether intentionally or I further agree that if a check inadvertently, you shall be under no or debit is not honored upon liability. presentation, Financial Data Services, Inc. is authorized to discontinue immediately the .......... ....................... Automatic Investment Plan and to Date Signature of Depositor liquidate sufficient shares held .......... ....................... in my account to offset the Bank Signature of Depositor purchase made with the returned Account (If joint account, check or dishonored debit. Number both must sign) NOTE: IF AUTOMATIC INVESTMENT PLAN ........ ......................... IS ELECTED, YOUR BLANK, UNSIGNED Date Signature of Depositor CHECK MARKED "VOID" SHOULD ACCOMPANY ......................... THIS APPLICATION. Signature of Depositor (If joint account, both must sign) - ------------------------------------------------------------------------------- We hereby authorize Merrill Lynch 5. FOR DEALER ONLY Funds Distributor, Inc. to act as Branch Office, Address, Stamp our agent in connection with - - transactions under this authorization form and agree to notify the Distributor of any purchases made under a Letter of Intention or Systematic Withdrawal Plan. We guarantee the Shareholder's signature. - - ..................................... This form when completed should be Dealer Name and Address mailed to: By .................................. Authorized Signature of Dealer Merrill Lynch Global Utility Fund, [_][_][_] [_][_][_][_] Inc. c/o Financial Data Services, ......... Inc. Transfer Agency Operations Branch-Code F/C No. F/C Last Department P.O. Box 45290, Name Jacksonville, Florida 32232-5290 [_][_][_] [_][_][_][_][_] Dealer's Customer A/C No. 42 MANAGER Merrill Lynch Asset Management Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey Mailing Address: Box 9011 Princeton, New Jersey 08543-9011 DISTRIBUTOR Merrill Lynch Funds Distributor, Inc. Administrative Offices: 800 Scudders Mill Road Plainsboro, New Jersey Mailing Address: Box 9011 Princeton, New Jersey 08543-9011 CUSTODIAN The Chase Manhattan Bank, N.A. 1 Chase Manhattan Plaza New York, New York 10005 TRANSFER AGENT Financial Data Services, Inc. Administrative Offices: Transfer Agency Operations Department 4800 Deer Lake Drive East Jacksonville, Florida 32246-6484 Mailing Address: P.O. Box 45289 Jacksonville, Florida 32232-5289 INDEPENDENT AUDITORS Deloitte & Touche 117 Campus Drive Princeton, New Jersey 08540 COUNSEL Shereff, Friedman, Hoffman & Goodman 919 Third Avenue New York, New York 10022 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE- SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPEC- TUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE MANAGER, OR THE DIS- TRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. ------------------- TABLE OF CONTENTS
PAGE ---- Fee Table.................................................................. 2 Alternative Sales Arrangements............................................. 3 Financial Highlights....................................................... 5 Special and Risk Considerations............................................ 6 Investment Objective and Policies.......................................... 8 Management of the Fund..................................................... 22 Purchase of Shares......................................................... 23 Alternative Sales Arrangements............................................ 24 Initial Sales Charge Alternative-- Class A Shares.......................................................... 25 Deferred Sales Charge Alternative--Class B Shares......................... 27 Limitations on the Payment of Sales Charges............................... 30 Redemption of Shares....................................................... 31 Redemption................................................................ 31 Repurchase................................................................ 31 Reinstatement Privilege--Class A Shares................................... 32 Shareholder Services....................................................... 32 Performance Data........................................................... 34 Additional Information..................................................... 35 Dividends and Distributions............................................... 35 Determination of Net Asset Value.......................................... 36 Taxes..................................................................... 37 Organization of the Fund.................................................. 38 Shareholder Inquiries..................................................... 39 Shareholder Reports....................................................... 39 Authorization Form......................................................... 41
Code #11281 PROSPECTUS (ART) - -------------------------------------------------------------------------------- MERRILL LYNCH GLOBAL UTILITY FUND, INC. March 29, 1994 Distributor: Merrill Lynch Funds Distributor, Inc. This Prospectus should be retained for future reference. STATEMENT OF ADDITIONAL INFORMATION - ----------------------------------- MERRILL LYNCH GLOBAL UTILITY FUND, INC. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800 ---------------- Merrill Lynch Global Utility Fund, Inc. (the "Fund") is a diversified mutual fund seeking both capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of instruments and techniques to enhance income and to hedge against market and currency risk. The Fund offers two classes of shares which may be purchased 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"). These alternatives permit an investor to choose the method of purchasing shares that is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other circumstances. Investors should understand that the purpose and function of the deferred sales charges with respect to the Class B shares are the same as those of the initial sales charge with respect to the Class A shares. Each Class A share and Class B share represents identical interests in the investment portfolio of the Fund and has the same rights, except that Class B shares bear the expenses of the account maintenance fee and the distribution fee and certain other costs resulting from the deferred sales charge arrangement and have exclusive voting rights with respect to the distribution fee. The two classes also have different exchange privileges. ---------------- This Statement of Additional Information of the Fund is not a prospectus and should be read in conjunction with the prospectus of the Fund, dated March 29, 1994 (the "Prospectus"), which has been filed with the Securities and Exchange Commission and can be obtained, without charge, by calling or by writing the Fund at the above telephone number or address. This Statement of Additional Information has been incorporated by reference into the Prospectus. ---------------- MERRILL LYNCH ASSET MANAGEMENT--MANAGER MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR ---------------- THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS MARCH 29, 1994 INVESTMENT OBJECTIVE AND POLICIES The Fund is a diversified, open-end management investment company. The Fund's investment objective is to seek both capital appreciation and current income through investment of at least 65% of its total assets in equity and debt securities issued by domestic and foreign companies which are, in the opinion of the Manager, primarily engaged in the ownership or operation of facilities used to generate, transmit or distribute electricity, telecommunications, gas or water. This objective is a fundamental policy which the Fund may not change without a vote of a majority of the Fund's outstanding voting securities, as defined in the Investment Company Act of 1940. There can be no assurance that the Fund's investment objective will be achieved. The Fund may employ a variety of instruments and techniques to enhance income and to hedge against market and currency risk, as described under "Portfolio Strategies Involving Options and Futures" below. PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES Reference is made to the discussion under the caption "Investment Objective and Policies--Portfolio Strategies Involving Options and Futures" in the Prospectus for information with respect to various portfolio strategies involving options and futures. The Fund may seek to increase its return through the use of options on portfolio securities and to hedge its portfolio against movements in the equity, debt and currency markets. The Fund has authority to write (i.e., sell) covered put and call options on its portfolio securities, purchase put and call options on securities and engage in transactions in stock index options, stock index futures and stock futures and financial futures, and related options on such futures. The Fund may also deal in forward foreign transactions and foreign currency options and futures, and related options on such futures. Each of such portfolio strategies is described in the Prospectus. Although certain risks are involved in options and futures transactions (as discussed in the Prospectus and below), the Manager believes that, because the Fund will (i) write only covered call options on portfolio securities, and (ii) engage in other options and futures transactions only for hedging purposes, the options and futures portfolio strategies of the Fund will not subject the Fund to the risks frequently associated with the speculative use of options and futures transactions. While the Fund's use of hedging strategies is intended to reduce the volatility of the net asset value of Fund shares, the Fund's net asset value will fluctuate. There can be no assurance that the Fund's hedging transactions will be effective. The following is further information relating to portfolio strategies involving options and futures the Fund may utilize. Writing Covered Options. The Fund is authorized to write (i.e., sell) covered call options on the securities in which it may invest and to enter into closing purchase transactions with respect to certain of such options. A covered call option is an option where the Fund, in return for a premium, gives another party a right to buy specified securities owned by the Fund at a specified future date and price set at the time of the contract. The principal reason for writing call options is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. By writing covered call options, the Fund gives up the opportunity, while the option is in effect, to profit from any price increase in the underlying security above the option exercise price. In addition, the Fund's ability to sell the underlying security will be limited while the option is in effect unless the Fund effects a closing purchase transaction. A closing purchase transaction cancels out the Fund's position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. Covered call options serve as a particular hedge against the price of the underlying security declining. The writer of a covered call option has no control over when he may be required to sell his securities since he may be assigned an exercise notice at any time prior to the termination of his obligation as a writer. 2 If an option expires unexercised, the writer realizes a gain in the amount of the premium. Such a gain, of course, may be offset by a decline in the market value of the underlying security during the option period. If a call option is exercised, the writer realizes a gain or loss from the sale of the underlying security. The Fund also may write put options which give the holder of the option the right to sell the underlying security to the Fund at the stated exercise price. The Fund will receive a premium for writing a put option which increases the Fund's return. The Fund writes only covered put options which means that so long as the Fund is obligated as the writer of the option it will, through its custodian, have deposited and maintained cash, cash equivalents, U.S. Government securities or other high grade liquid debt or equity securities denominated in U.S. dollars or non-U.S. currencies with a securities depository with a value equal to or greater than the exercise price of the underlying securities. By writing a put, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of that security at the time of exercise for as long as the option is outstanding. The Fund may engage in closing transactions in order to terminate put options that it has written. Options referred to herein and in the Fund's Prospectus may be options issued by The Options Clearing Corporation (the "Clearing Corporation") which are currently traded on the Chicago Board Options Exchange, American Stock Exchange, New York Stock Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange and Midwest Stock Exchange. Options referred to herein and in the Fund's Prospectus may also be options traded on foreign securities exchanges such as the London Stock Exchange and the Amsterdam Stock Exchange. An option position may be closed out only on an exchange which provides a secondary market for an option of the same series. If a secondary market does not exist, it might not be possible to effect closing transactions in particular options, with the result, in the case of a covered call option, that the Fund will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Clearing Corporation may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. The Fund may also enter into over-the-counter option transactions ("OTC options"), which are two-party contracts with price and terms negotiated between the buyer and seller. The Fund will only enter into over-the-counter option transactions with respect to portfolio securities for which management believes the Fund can receive on each business day at least two independent bids or offers (one of which will be from an entity other than a party to the option). The staff of the Securities and Exchange Commission (the "Commission") has taken the position that OTC options and the assets used as cover for written OTC options are illiquid securities. Purchasing Options. The Fund may purchase put options to hedge against a decline in the market value of its equity holdings. By buying a put, the Fund has a right to sell the underlying security at the exercise price, thus limiting the Fund's risk of loss through a decline in the market value of the security until the put 3 option expires. The amount of any appreciation in the value of the underlying security will be offset partially by the amount of the premium paid for the put option and any related transaction costs. Prior to its expiration, a put option may be sold in a closing sale transaction; profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus the related transaction cost. A closing sale transaction cancels out the Fund's position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. In certain circumstances, the Fund may purchase call options on securities held in its portfolio on which it has written call options or on securities which it intends to purchase. The Fund may purchase either exchange traded options or OTC options. The Fund may also purchase put options on U.S. Treasury securities for the purpose of hedging its portfolio of interest rate sensitive equity securities against the adverse effects of anticipated movements in interest rates. The Fund will not purchase options on securities (including stock index options discussed below) if as a result of such purchase, the aggregate cost of all outstanding options on securities held by the Fund would exceed 5% of the market value of the Fund's total assets. Stock Index Options and Futures and Financial Futures. As described in the Prospectus, the Fund is authorized to engage in transactions in stock index options and futures and financial futures, and related options on such futures. The Fund may also purchase put options on futures contracts for U.S. Treasury securities for the purpose of hedging its portfolio of interest rate sensitive equity securities against the adverse effects of anticipated movements in interest rates. Set forth below is further information concerning futures transactions. A futures contract is an agreement between two parties to buy and sell a security or, in the case of an index-based futures contract, to make and accept a cash settlement for a set price on a future date. A majority of transactions in futures contracts, however, do not result in the actual delivery of the underlying instrument or cash settlement, but are settled through liquidation, i.e., by entering into an offsetting transaction. Futures contracts have been designed by boards of trade which have been designated as "contracts markets" by the Commodities Futures Trading Commission ("CFTC"). The purchase or sale of a futures contract differs from the purchase or sale of a security in that no price or premium is paid or received. Instead, an amount of cash or securities acceptable to the broker and the relevant contract market, which varies, but is generally about 5% of the contract amount, must be deposited with the broker. This amount is known as "initial margin" and represents a "good faith" deposit assuring the performance of both the purchaser and seller under the futures contract. Subsequent payments to and from the broker, called "variation margin," are required to be made on a daily basis as the price of the futures contract fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as "mark to the market." At any time prior to the settlement date of the futures contract, the position may be closed out by taking an opposite position which will operate to terminate the position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid to or released by the broker and the purchaser realizes a loss or gain. In addition, a nominal commission is paid on each completed sale transaction. An order has been obtained from the Commission exempting the Fund from the provisions of Section 17(f) and Section 18(f) of the Investment Company Act of 1940 in connection with its strategy of investing in futures contracts. Section 17(f) relates to the custody of securities and other assets of an investment company and may be deemed to prohibit certain arrangements between the Fund and commodities brokers with respect to initial and variation margin. Section 18(f) of the Investment Company Act of 1940 prohibits an open-end investment company such as the Fund from issuing a "senior security" other than a borrowing from a bank. 4 The staff of the Commission has in the past indicated that a futures contract may be a "senior security" under the Investment Company Act of 1940. Restrictions on Use of Futures Transactions. Regulations of the CFTC applicable to the Fund permit the Fund's futures and options on futures transactions to include (i) bona fide hedging transactions without regard to the percentage of the Fund's assets committed to margin and option premiums, and (ii) non-hedging transactions, provided that the Fund not enter into such non-hedging transactions if, immediately thereafter, the sum of the amount of initial margin deposits on the Fund's existing futures positions and option premiums would exceed 5% of the market value of the Fund's liquidating value after taking into account unrealized profits and unrealized losses on any such transactions. However, the Fund intends to engage in futures transactions and options thereon only for hedging purposes. When the Fund purchases futures contracts or a call option with respect thereto or writes a put option on a futures contract, an amount of cash, cash equivalents or short-term, high-grade, fixed income securities will be deposited in a segregated account with the Fund's custodian so that the amount so segregated, plus the amount of initial and variation margin held in the account of its broker, equals the market value of the futures contract, thereby ensuring that the use of such futures is unleveraged. Foreign Currency Hedging. Generally, the foreign exchange transactions of the Fund will be conducted on a spot, i.e., cash basis at the spot rate of purchasing or selling currency prevailing in the foreign exchange market. This rate under normal market conditions differs from the prevailing exchange rate in an amount generally less than one tenth of one percent due to the costs of converting from one currency to another. However, the Fund has authority to deal in forward foreign exchange among currencies of the different countries in which it will invest as a hedge against possible variations in the foreign exchange rate among these currencies. This is accomplished through contractual agreements to purchase or sell a specified currency at a specified future date and price set at the time of the contract. The Fund's dealings in forward foreign exchange will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward foreign currency with respect to specific receivables or payables of the Fund accruing in connection with the purchase and sale of its portfolio securities, the sale and redemption of shares of the Fund or the payment of dividends and distributions by the Fund. Position hedging is the sale of forward foreign currency with respect to portfolio security positions denominated or quoted in such foreign currency. The Fund will not speculate in forward foreign exchange. The Fund may not position hedge with respect to the currency of a particular country to an extent greater than the aggregate market value (at the time of making such sale) of the securities held in its portfolio denominated or quoted in that particular foreign currency. If the Fund enters into a position hedging transaction, its custodian bank will place cash or liquid equity or debt securities in a separate account of the Fund in an amount equal to the value of the Fund's total assets committed to the consummation of such forward contract. If the value of the securities placed in the separate account declines, additional cash or securities will be placed in the account so that the value of the account will equal the amount of the Fund's commitment with respect to such contracts. The Fund will enter into such transactions only to the extent, if any, deemed appropriate by the Manager. The Fund will not enter into a forward contract with a term of more than one year. The Fund is also authorized to purchase or sell listed or over-the-counter foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. As an illustration, the Fund may use such techniques to hedge the stated value in United States dollars of an investment in a yen denominated security. In such 5 circumstances, for example, the Fund may purchase a foreign currency put option enabling it to sell a specified amount of Japanese yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or part, the cost of acquiring such a put option, the Fund may also sell a call option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a "straddle"). By selling such call option in this illustration, the Fund gives up the opportunity to profit without limit from increases in the relative value of the yen to the dollar. The Manager believes that "straddles" of the type which may be utilized by the Fund constitute hedging transactions and are consistent with the policies described above. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for the Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to the Fund of engaging in foreign currency transactions varies with such factors as the currencies involved, the length of the contract period and the market conditions then prevailing. Since transactions in foreign currency exchange usually are conducted on a principal basis, no fees or commissions are involved. Risk Factors in Options and Futures Transactions. Utilization of futures transactions involves the risk of imperfect correlation in movements in the price of options and futures and movements in the price of the securities or currencies which is the subject of the hedge. If the price of the options and futures moves more or less than the price of the hedged securities or currency, the Fund will experience a gain or loss which will not be completely offset by movements in the price of the subject of the hedge. This risk applies particularly to the Fund's use of cross-hedging, which means that the security which is the subject of the hedged transaction is different from the security being hedged. The successful use of options and futures also depends on the Manager's ability to correctly predict price movements in the market involved in a particular options or futures transaction. Prior to exercise or expiration, an exchange-traded option or futures position can only be terminated by entering into a closing purchase or sale transaction. This requires a secondary market on an exchange for call or put options of the same series. The Fund will enter into an option or futures transaction on an exchange only if there appears to be a liquid secondary market for such options or futures. However, there can be no assurance that a liquid secondary market will exist for any particular call or put option or futures contract at any specific time. Thus, it may not be possible to close an option or futures position. The Fund will acquire only over-the-counter options for which management believes the Fund can receive on each business day at least two independent bids or offers (one of which will be from an entity other than a party to the option). In the case of a futures position or an option on a futures position written by the Fund in the event of adverse price movements, the Fund would continue to be required to make daily cash payments of variation margin. In such situations, if the Fund has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. In addition, the Fund may be required to take or make delivery of the security underlying futures contracts it holds. The inability to close options and futures positions also could have an adverse impact on the Fund's ability to hedge effectively its portfolio. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy of a broker with whom the Fund has an open position in a futures contract or related option. The exchanges on which the Fund intends to conduct options transactions have generally established limitations governing the maximum number of call or put options on the same underlying security or 6 currency (whether or not covered) which may be written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). "Trading limits" are imposed on the maximum number of contracts which any person may trade on a particular trading day. An exchange may order the liquidation of positions found to be in violation of these limits and it may impose other sanctions or restrictions. The Manager does not believe that these trading and position limits will have any adverse impact on the portfolio strategies for hedging the Fund's portfolio. OTHER INVESTMENT POLICIES AND PRACTICES When-Issued Securities and Delayed Delivery Transactions. The Fund may purchase securities on a when-issued basis, and it may purchase or sell securities for delayed delivery. These transactions occur when securities are purchased or sold by the Fund with payment and delivery taking place in the future to secure what is considered an advantageous yield and price to the Fund at the time of entering into the transaction. Although the Fund has not established any limit on the percentage of its assets that may be committed in connection with such transactions, the Fund will maintain a segregated account with its custodian of cash, cash equivalents, U.S. Government securities or other high grade liquid debt or equity securities denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the amount of its commitment in connection with such purchase transactions. Standby Commitment Agreements. The Fund may from time to time enter into standby commitment agreements. Such agreements commit the Fund, for a stated period of time, to purchase a stated amount of a fixed income security which may be issued and sold to the Fund at the option of the issuer. The price and coupon of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee, regardless of whether or not the security is ultimately issued, which is typically approximately 0.5% of the aggregate purchase price of the security which the Fund has committed to purchase. The Fund will enter into such agreement only for the purpose of investing in the security underlying the commitment at a yield and price which is considered advantageous to the Fund. The Fund will not enter into a standby commitment with a remaining term in excess of 45 days and will limit its investment in such commitments so that the aggregate purchase price of the securities subject to such commitments, together with the value of portfolio securities subject to legal restrictions on resale, will not exceed 10% of its assets taken at the time of acquisition of such commitment or security. The Fund will at all times maintain a segregated account with its custodian of cash, cash equivalents, U.S. Government securities or other high grade liquid debt or equity securities denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the purchase price of the securities underlying the commitment. There can be no assurance that the securities subject to a standby commitment will be issued and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, the Fund may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period. The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued and the value of the security will thereafter be reflected in the calculation of the Fund's net asset value. The cost basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment. 7 Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in securities pursuant to repurchase agreements or purchase and sale contracts. Repurchase agreements and purchase and sale contracts may be entered into only with a member bank of the Federal Reserve System or primary dealer in United States Government securities. Under such agreements, the bank or primary dealer agrees, upon entering into the contract, to repurchase the security at a mutually agreed upon time and price in a specified currency, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period although it may be affected by currency fluctuations. In the case of repurchase agreements, the prices at which the trades are conducted do not reflect the accrued interest on the underlying obligations; whereas, in the case of purchase and sale contracts, the prices take into account accrued interest. Such agreements usually cover short periods, often under one week. Repurchase agreements may be construed to be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. In the case of a repurchase agreement, as a purchaser, the Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase agreement; the Fund does not have the right to seek additional collateral in the case of purchase and sale contracts. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by the Fund but constitute only collateral for the seller's obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs or possible losses in connection with the disposition of the collateral. A purchase and sale contract differs from a repurchase agreement in that the contract arrangements stipulate that the securities are owned by the Fund. In the event of a default under such a repurchase agreement or under a purchase and sale contract, instead of the contractual fixed rate of return the rate of return to the Fund will depend on intervening fluctuations of the market value of such security and the accrued interest on the security. In such event, the Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the failure of the seller to perform. The Fund may not invest more than 10% of its net assets in repurchase agreements on purchase and sale contracts maturing in more than seven days. While the substance of purchase and sale contracts is similar to repurchase agreements, because of the different treatment with respect to accrued interest and additional collateral, management believes that purchase and sale contracts are not repurchase agreements as such term is understood in the banking and brokerage community. Lending of Portfolio Securities. Subject to investment restriction (9) below, the Fund may lend securities from its portfolio to approved borrowers and receive therefor collateral in cash or securities issued or guaranteed by the United States Government which are maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The purpose of such loans is to permit the borrower to use such securities for delivery to purchasers when such borrower has sold short. If cash collateral is received by the Fund, it is invested in short-term money market securities, and a portion of the yield received in respect of such investment is retained by the Fund. Alternatively, if securities are delivered to the Fund as collateral, the Fund and the borrower negotiate a rate for the loan premium to be received by the Fund for lending its portfolio securities. In either event, the total yield on the Fund's portfolio is increased by loans of its portfolio securities. The Fund will have the right to regain record ownership of loaned securities to exercise beneficial rights such as voting rights, subscription rights and rights to dividends, interest or other distributions. Such loans are terminable at any time. The Fund may pay reasonable finder's, administrative and custodial fees in connection with such loans. With respect to the lending of portfolio securities, there is the risk of failure by the borrower to return the securities involved in such transactions. High Yield-High Risk Bonds. Fixed income securities in which the Fund will invest generally will be limited to those rated investment grade; that is, rated in one of the four highest rating categories by Standard 8 & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"), or deemed to be of equivalent quality (i.e., securities rated at least BBB by S&P or Baa by Moody's) in the judgment of the Manager. The Fund is authorized to invest up to 5% of its total assets at the time of purchase in fixed income securities having a minimum rating no lower than Caa by Moody's or CCC by S&P ("high yield-high risk bonds"). Investment in high yield-high risk bonds involves substantial risk. Investments in high yield-high risk bonds will be made only when, in the judgment of the Manager, such securities provide attractive total return potential, relative to the risk of such securities, as compared to higher quality debt securities. Securities rated BB or lower by S&P or Ba or lower by Moody's are considered by those rating agencies to have varying degrees of speculative characteristics. Consequently, although high yield-high risk bonds can be expected to provide higher yields, such securities may be subject to greater market price fluctuations and risk of loss and principal than lower yielding, higher rated fixed income securities. The Fund will not invest in debt securities in the lowest rating categories (CC or lower for S&P or Ca or lower for Moody's) unless the Manager believes that the financial condition of the issuer or the protection afforded the particular securities is stronger than would otherwise be indicated by such low ratings. High yield-high risk bonds may be issued by less creditworthy companies or by larger, highly leveraged companies, and are frequently issued in corporate restructurings such as mergers and leveraged buy-outs. Such securities are particularly vulnerable to adverse changes in the issuer's industry and in general economic conditions. High yield-high risk bonds frequently are junior obligations of their issuers, so that in the event of the issuer's bankruptcy, claims of the holders of high yield-high risk bonds will be satisfied only after satisfaction of the claims of senior securityholders. While the high yield-high risk bonds in which the Fund may invest normally do not include securities which, at the time of investment, are in default or the issuers of which are in bankruptcy, there can be no assurance that such events will not occur after the Fund purchases a particular security, in which case the Fund may experience losses and incur costs. The terms "high yield-high risk" and "below investment grade bonds" are commonly known as "junk bonds." INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions and policies relating to the investment of its assets and its activities, which are fundamental policies and may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities (which for this purpose and under the Investment Company Act of 1940 means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares). The Fund may not: 1. Invest 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, or the Fund owns more than 10% of the outstanding voting securities of such issuer, except that such restriction shall not apply to securities issued or guaranteed by the Government of the United States or any of its agencies or instrumentalities. 2. Invest less than 65% of its total assets in equity and debt securities issued by domestic and foreign companies in the utilities industries, except during temporary defensive periods. 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 9 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 (iii) 10% of the Fund's total assets, taken at market value, would be invested in such securities. 5. Purchase or sell real estate (including real estate limited partnerships), except that the Fund may invest in securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which invest in real estate or interests therein. 6. 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 payment by the Fund of initial or variation margin in connection with futures or related options transactions, if applicable, shall not be considered the purchase of a security on margin. 7. Make short sales of securities or maintain a short position. 8. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, short-term commercial paper, certificates of deposit, bankers' acceptances and repurchase agreements and purchase and sale contracts shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities as set forth in (9) below. 9. Lend its portfolio securities in excess of 33 1/3% of its total assets, taken at market value; provided that such loans may only be made in accordance with the guidelines set forth above. 10. 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, and, if applicable, 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 or sale of futures or related options are deemed to be the issuance of a senior security.) The Fund will not purchase securities while borrowings exceed 5% (taken at market value) of its total assets. 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 and purchase and sale contracts maturing in more than seven days, if at the time of acquisition more than 10% of its net assets would be invested in such securities. Asset-backed securities which the Fund has the option to put to the issuer or a stand-by bank or broker and receive the principal amount or redemption price thereof less transaction costs on no more than seven days' notice or when the Fund has the right to convert such securities into a readily marketable security in which it could otherwise invest upon not less than seven days' notice are not subject to this restriction. 12. Underwrite securities of other issuers except insofar as the Fund technically may be deemed an underwriter under the Securities Act of 1933, as amended, 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 or development activities. 10 Additional investment restrictions adopted by the Fund, which may be changed by the Directors, provide that the Fund may not: (i) 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. (ii) 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. (iii) Invest in securities of corporate issuers 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. (iv) Write, purchase or sell puts, calls, straddles, spreads or combinations thereof, except to the extent described in the Fund's Prospectus and in this Statement of Additional Information, as amended from time to time. (v) 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. (vi) Invest in oil, gas or other mineral leases. The staff of the Commission has taken the position that purchased over-the- counter options ("OTC options") and the assets used as cover for written OTC options are illiquid securities. Therefore, the Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options if, as a result of such transaction, the sum of the market value of OTC options currently outstanding which are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding which were sold by the Fund and margin deposits on the Fund's existing OTC options on futures contracts exceed 10% of the total assets of the Fund, taken at market value, together with all other assets of the Fund which are illiquid or are not otherwise readily marketable. However, if the OTC option is sold by the Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is "in-the- money" (i.e., current market value of the underlying security minus the option's strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is "in-the-money." This policy as to OTC options is not a fundamental policy of the Fund and may be amended by the Directors of the Fund without the approval of the Fund's shareholders. However, the Fund will not change or modify this policy prior to the change or modification by the Commission staff of its position. 11 Portfolio securities of the Fund generally may not be purchased from, sold or loaned to the Manager or its affiliates or any of their directors, officers or employees, acting as principal, unless pursuant to a rule or exemptive order under the Investment Company Act of 1940. Because of the affiliation of the Manager with the Fund, the Fund is prohibited from engaging in certain transactions involving the Manager's affiliate, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), or its affiliates except for brokerage transactions permitted under the Investment Company Act of 1940 involving only usual and customary commissions or transactions pursuant to an exemptive order under the Investment Company Act of 1940. See "Portfolio Transactions and Brokerage." Without such an exemptive order, the Fund is prohibited from engaging in portfolio transactions with Merrill Lynch or its affiliates acting as principal and from purchasing securities in public offerings which are not registered under the Securities Act of 1933 in which such firms or any of their affiliates participate as an underwriter or dealer. MANAGEMENT OF THE FUND DIRECTORS AND OFFICERS The Directors and executive officers of the Fund and their principal occupations for at least the last five years are set forth below. Unless otherwise noted, the address of each executive officer and Director is Box 9011, Princeton, New Jersey 08543-9011. Arthur Zeikel--President and Director(1)(2)--President of the Manager since 1977 and Chief Investment Officer thereof since 1976; President and Chief Investment Officer of Fund Asset Management, L.P. ("FAM") since 1977; President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice President of Merrill Lynch since 1990 and Senior Vice President thereof from 1985 to 1990; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of Merrill Lynch Funds Distributor, Inc. ("MLFD" or the "Distributor"). Ronald W. Forbes--Director(2)--School of Business, BA 309, SUNY Albany, 1400 Washington Avenue, Albany, New York 12222. Professor of Finance, School of Business, State University of New York at Albany, since 1989, and Associate Professor prior thereto. Member, Task Force on Municipal Securities Markets, Twentieth Century Fund. Charles C. Reilly--Director(2)--9 Hampton Harbor Road, Hampton Bays, New York 11946. President and Chief Investment Officer of Verus Capital, Inc. from 1979- 1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973- 1990; Adjunct Professor, Columbia University Graduate School of Business since 1990; Adjunct Professor, Wharton School, University of Pennsylvania, 1990. Kevin A. Ryan--Director(2)--127 Commonwealth Avenue, Chestnut Hill, Massachusetts 02167. Professor of Education at Boston University since 1982; Founder and current Director of The Boston University Center for the Advancement of Ethics and Character; Formerly taught on the faculties of the University of Chicago, Stanford University and The Ohio State University. 12 Richard R. West--Director(2)--New York University Leonard N. Stern School, 44 West Fourth Street, Suite 11-160,, New York, New York 10012-1126. Professor of Finance, and Dean from 1984 to 1993, of New York University Leonard N. Stern School of Business Administration; Professor of Finance at the Amos Tuck School of Business Administration from 1976 to 1984 and Dean from 1976 to 1983; Director of Bowne & Co., Inc., Director of Vornado, Inc. (real estate holding corporation), Smith Corona Corporation (manufacturer of typewriters and word processors) and Alexander's Inc. (department store). Terry K. Glenn--Executive Vice President(1)(2)--Executive Vice President of the Manager and FAM since 1983; Executive Vice President of Princeton Services since 1993; President of the Distributor since 1986 and Director thereof since 1991. Norman R. Harvey--Senior Vice President(1)(2)--Senior Vice President of the Manager and FAM since 1982. Walter D. Rogers--Vice President(1)(2)--Vice President of the Manager since 1987; Vice President of Continental Insurance Asset Management from 1984 to 1987. Gerald M. Richard--Treasurer(1)(2)--Senior Vice President and Treasurer of the Manager and FAM since 1984; Senior Vice President and Treasurer of Princeton Services since 1993; Vice President of the Distributor since 1981, and Treasurer since 1984. Donald C. Burke--Vice President(1)(2)--Vice President and Director of Taxation of the Manager since 1990; Employee with Deloitte & Touche from 1982 until 1990. Patrick D. Sweeney--Secretary(1)(2)--Vice President of the Manager since 1990; Vice President and Associate Counsel of Security Pacific Merchant Bank from 1988 to 1990; Lawyer in private practice from 1981 to 1988. - -------- (1) Interested person, as defined in the Investment Company Act of 1940, of the Fund. (2) Such Director or officer is a director, trustee or officer of other investment companies for which the Manager or FAM acts as investment adviser. As of the date of this Statement of Additional Information, the officers and Directors of the Fund as a group (11 persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares of Common Stock of Merrill Lynch & Co., Inc. Pursuant to the terms of the management agreement with the Fund, the Manager pays all compensation of officers of the Fund as well as the fees of all Directors who are affiliated persons of the Manager. The Fund pays each Director not affiliated with the Manager a fee of $1,000 per year plus $400 per meeting attended, together with such Director's out-of-pocket expenses relating to attendance at meetings. The Fund also compensates members of its Audit and Nominating Committee, which consists of all of the Directors of the Fund who are not interested persons of the Fund, with a fee of $1,000 per year; the Chairman of the Audit and Nominating Committee receives an additional annual fee of $1,000 per year. For the fiscal year ended November 30, 1993, fees and expenses paid to the unaffiliated Directors aggregated $31,371. MANAGEMENT AND ADVISORY ARRANGEMENTS The Manager is a Delaware limited partnership and is owned and controlled by ML & Co., the parent of Merrill Lynch. Reference is made to "Management of the Fund--Management and Advisory Arrangements" in the Prospectus for certain information concerning the management and advisory arrangements of the Fund. ML & Co., Merrill Lynch Investment Management, Inc. and Princeton Services may be deemed "controlling persons" of the Manager as defined under the Investment Company Act of 1940 because of their power to exercise a controlling influence over its management policies. 13 Securities held by the Fund may also be held by, or be appropriate investments for, other funds or investment advisory clients for which the Manager or its affiliates act as an adviser. Because of different objectives or other factors, a particular security may be bought for one or more clients when one or more clients are selling the same security. If purchases or sales of securities by the Manager for the Fund or other funds for which it acts as investment adviser or for its advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Manager or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. The Fund has entered into a management agreement with the Manager (the "Management Agreement"). As discussed in the Prospectus, the Manager receives for its services to the Fund monthly compensation at the annual rate of 0.60% of the average daily net assets of the Fund. For the fiscal years ended November 30, 1993 and November 30, 1992, and the period December 28, 1990 (commencement of operations) to November 30, 1991, the total management fees paid by the Fund to the Manager aggregated $2,346,433, $939,280 and $468,312, respectively. California imposes limitations on the expenses of the Fund. These expense limitations require that the Manager reimburse the Fund in an amount necessary to prevent the ordinary operating expenses of the Fund (excluding interest, taxes, distribution fees, brokerage fees and commissions and extraordinary charges such as litigation costs) from exceeding 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the next $70 million of average daily net assets and 1.5% of the remaining average daily net assets. The Manager's obligation to reimburse the Fund is limited to the amount of the management fee. No fee payment will be made to the Manager during any fiscal year which will cause such expenses to exceed the most restrictive expense limitation applicable at the time of such payment. To date, no reimbursement of expenses has been required pursuant to the applicable expense limitation provisions discussed above. The Management Agreement obligates the Manager to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with investment and economic research, trading and investment management of the Fund, as well as the fees of all Directors of the Fund who are affiliated persons of the Manager or any of their affiliates. The Fund pays all other expenses incurred in the operation of the Fund, including, among other things, taxes, expenses for legal and auditing services, costs of printing proxies, stock certificates, shareholder reports and prospectuses and statements of additional information (except to the extent paid by the Distributor), charges of the Custodian, any Sub-custodian and Transfer Agent, expenses of redemption of shares, Securities and Exchange Commission fees, expenses of registering the shares under Federal, state or foreign laws, fees and expenses of unaffiliated Directors, accounting and pricing costs (including the daily calculation of net asset value, insurance, interest, brokerage costs, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Fund). Accounting services are provided to the Fund by the Manager and the Fund reimburses the Manager for its costs in connection with such services on a semi-annual basis. As required by the Fund's distribution agreement, the Distributor will pay the promotional expenses of the Fund incurred in connection with the offering of shares of the Fund. Certain expenses in connection with the distribution of Class B shares will be financed by the Fund pursuant to the Distribution Plan in compliance with Rule 12b-1 under the Investment Company Act of 1940. See "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares." 14 Duration and Termination. Unless earlier terminated as described below, the Management Agreement will remain in effect for two years from the date of its adoption. Thereafter, it will remain in effect from year to year if approved annually (a) by the Board of Directors or by a majority of the outstanding shares of the Fund and (b) by a majority of the Directors who are not parties to such contract or interested persons (as defined in the Investment Company Act of 1940) of any such party. Such contracts are not assignable and may be terminated without penalty on 60 days' written notice at the option of either party thereto or by the vote of the shareholders of the Fund. PURCHASE OF SHARES Reference is made to "Purchase of Shares" in the Prospectus for certain information as to the purchase of Fund shares. ALTERNATIVE SALES ARRANGEMENTS The Fund issues two classes of shares: Class A shares are sold to investors choosing the initial sales charge alternative and Class B shares are sold to investors choosing the deferred sales charge alternative. The two classes of shares each represent interests in the same portfolio of investments of the Fund, have the same rights and are identical in all respects except that Class B shares bear the expenses of the deferred sales arrangements and any expenses (including incremental transfer agency costs) resulting from such sales arrangements, and have exclusive voting rights with respect to the Rule 12b-1 distribution plan pursuant to which the account maintenance and distribution fees are paid. The two classes also have different exchange privileges. See "Shareholder Services--Exchange Privilege." The Fund has entered into separate distribution agreements with the Distributor in connection with the continuous offering of Class A and Class B shares of the Fund (the "Distribution Agreements"). The Distribution Agreements obligate the Distributor to pay certain expenses in connection with the offering of the Class A and Class B shares of the Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreements are subject to the same renewal requirements and termination provisions as the Management Agreement described above. INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES The Fund commenced the public offering of its Class A shares on December 28, 1990. The gross sales charges for the sale of Class A shares for the fiscal years ended November 30, 1993 and November 30, 1992, and the period December 28, 1990 (commencement of operations) to November 30, 1991, were $1,510,325, $488,917 and $1,105,621, respectively, of which the Distributor received $89,960, $12,177 and $14,201, respectively, and Merrill Lynch received $1,420,365, $476,740 and $1,091,420, respectively. The term "purchase," as used in the Prospectus and this Statement of Additional Information in connection with an investment in Class A shares of the Fund, refers to a single purchase by an individual, or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts, by an individual, his spouse and their children under the age of 21 years purchasing shares for his or their own account and to 15 single purchases by a trustee or other fiduciary purchasing shares for a single trust estate or single fiduciary account although more than one beneficiary is involved. The term "purchase" also includes purchases by any "company," as that term is defined in the Investment Company Act of 1940, but does not include purchases of any such company which has not been in existence for at least six months or which has no purpose other than the purchase of shares of the Fund or shares of other registered investment companies at a discount; provided, however, that it shall not include purchases by any group of individuals whose sole organizational nexus is that the participants therein are credit cardholders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser. REDUCED INITIAL SALES CHARGES--CLASS A SHARES Right of Accumulation. Reduced sales charges are applicable through a right of accumulation under which eligible investors are permitted to purchase Class A shares of the Fund at the offering price applicable to the total of (a) the dollar amount then being purchased plus (b) an amount equal to the then current net asset value or cost, whichever is higher, of the purchaser's combined holdings of the Class A shares and Class B shares of the Fund and of any other investment company with an initial sales charge or a deferred sales charge for which the Distributor acts as the distributor. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser's securities dealer, with sufficient information to permit confirmation of qualification. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Letter of Intention. Reduced sales charges are applicable to purchases aggregating $10,000 or more of the Class A shares of the Fund or any other investment company with an initial sales charge or a deferred sales charge for which the Distributor acts as the distributor made within a thirteen-month period starting with the first purchase pursuant to a Letter of Intention in the form provided in the Prospectus. The Letter of Intention is available only to investors whose accounts are maintained at the Fund's Transfer Agent. The Letter of Intention is not available to employee benefit plans for which Merrill Lynch provides plan participant record-keeping services. The Letter of Intention is not a binding obligation to purchase any amount of Class A shares; however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to a Letter of Intention may be included under a subsequent Letter of Intention executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class A shares of the Fund and of other investment companies with an initial sales charge or a deferred sales charge for which the Distributor acts as the distributor presently held, at cost or maximum offering price (whichever is higher), on the date of the first purchase under the Letter of Intention, may be included as a credit toward the completion of such Letter, but the reduced sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of Intention (minimum of $10,000), the investor will be notified and must pay, within 20 days of the expiration of such Letter, the difference between the sales charge on the Class A shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class A shares equal to at least five percent of the intended amount will be held in escrow during the thirteen-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intention must be at least five percent of the dollar amount of such Letter. If a purchase during the term of such Letter would otherwise be subject to a further reduced sales charge based on the right of accumulation, the purchaser will be entitled on that purchase and subsequent purchases to the reduced percentage sales 16 charge which would be applicable to a single purchase equal to the total dollar value of the Class A shares then being purchased under such Letter, but there will be no retroactive reduction of the sales charges on any previous purchase. The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intention will be deducted from the total purchases made under such Letter. An exchange from Merrill Lynch Government Fund, Merrill Lynch Treasury Fund, Merrill Lynch Institutional Fund, Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund, Merrill Lynch U.S.A. Government Reserves or Merrill Lynch U.S. Treasury Money Fund into the Fund that creates a sales charge will count toward completing a new or existing Letter of Intention from the Fund. Merrill Lynch BlueprintSM Program. Class A shares of the Fund are offered to participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). Blueprint is directed to small investors, group IRAs and participants in certain affinity groups such as credit unions and trade associations. Investors placing orders to purchase Class A shares of the Fund through Blueprint will acquire the Class A shares at net asset value plus a sales charge calculated in accordance with the Blueprint sales charge schedule (i.e., up to $300 at 5.5%, $300.01 up to $5,000 at 4.5% plus $3, and $5,000.01 or more at the standard sales charge rates disclosed in the Prospectus). In addition, Class A shares of the Fund are being offered at net asset value plus a sales charge of 1/2 of 1% for corporate or group IRA programs placing orders to purchase their Class A shares through Blueprint. Services, including the exchange privilege, available to Class A investors through Blueprint, however, may differ from those available to other investors in Class A shares. Orders for purchases and redemptions of Class A shares of the Fund may be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There are no minimum initial or subsequent purchase requirements for participants who are part of an automatic investment plan. Class A shares are offered at net asset value, with a waiver of the front-end sales charge, to participants in Blueprint through the Merrill Lynch Directed IRA Rollover Program ("IRA Rollover Program") available from Merrill Lynch Business Financial Services, a business unit of Merrill Lynch. The IRA Rollover Program is available to custodian to custodian rollover assets from Eligible Retirement Plans (see definition below) whose Trustee and/or Plan Sponsor offers the Merrill Lynch Directed IRA Rollover Program. Eligible Retirement Plans include: (a) plans qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code") with a salary reduction feature offering a menu of investments to plan participants, provided such plan initially has 1,000 or more employees eligible to participate in the plan (employees eligible to participate in retirement plans of the same sponsoring employer or its affiliates may be aggregated); or (b) tax qualified retirement plans within the meaning of Section 401(a) of the Code or deferred compensation plans within the meaning of Section 403(b) of the Code, provided the plan (i) initially invested $5 million or more in existing plan assets in portfolios, mutual funds or trusts advised by MLAM or its subsidiaries or (ii) has accumulated $5 million or more in existing plan assets invested in mutual funds advised by MLAM or its subsidiaries, which charge a front-end sales charge or contingent deferred sales charge (assets of retirement plans with the same sponsor or an affiliated sponsor may be aggregated). Additional information concerning purchases from Blueprint, including any annual fees and transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08980-0441. 17 Employer Sponsored Retirement and Savings Plans. Class A shares are offered at net asset value to employer sponsored retirement or savings plans, such as tax qualified retirement plans within the meaning of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), deferred compensation plans within the meaning of Sections 403(b) and 457 of the Code, other deferred compensation arrangements, VEBA plans, and non-qualified After Tax Savings and Investment programs, maintained on the Merrill Lynch Group Employee Services system, herein referred to as "Employer Sponsored Retirement or Savings Plans," provided the plan has $5 million or more in existing plan assets initially invested in portfolios, mutual funds or trusts advised by the Manager either directly or through an affiliate. Class A shares may also be offered at net asset value to Employer Sponsored Retirement or Savings Plans, provided the plan has accumulated $5 million or more in existing plan assets invested in mutual funds advised by the Manager charging a front-end sales charge or contingent deferred sales charge. Assets of Employer Sponsored Retirement or Savings Plans sponsored by the same sponsor or an affiliated sponsor may be aggregated. The Class A share reduced load breakpoints also apply to these aggregated assets. Class A shares may be offered at net asset value to multiple plans sponsored by the same sponsor or an affiliated sponsor provided that the addition of one or more of the multiple plans results in aggregate assets of $5 million or more invested in portfolios, mutual funds or trusts advised by the Manager either directly or through an affiliate. Employer Sponsored Retirement or Savings Plans are also offered Class A shares at net asset value, provided such plan initially has 1,000 or more employees eligible to participate in the plan. Employees eligible to participate in Employer Sponsored Retirement or Savings Plans of the same sponsoring employer or its affiliates may be aggregated. Tax qualified retirement plans within the meaning of Section 401(a) of the Code meeting any of the foregoing requirements and which are provided specialized services (e.g., plans whose participants may direct on a daily basis their plan allocations among a wide range of investments including individual corporate equities and other securities in addition to mutual fund shares) by the Merrill Lynch Blueprint SM Program, are offered Class A shares at a price equal to net asset value per share plus a reduced sales charge of 0.50%. Any Employer Sponsored Retirement or Savings Plan which does not meet the above described qualifications to purchase Class A shares at net asset value has the option of purchasing Class A shares at the sales charge schedule disclosed in the Prospectus, or if the Employer Sponsored Retirement or Savings Plan is a qualified retirement plan and meets the specified requirements, then it may purchase Class B shares with a waiver of the contingent deferred sales charge upon redemption. The minimum initial and subsequent purchase requirements are waived in connection with all the above referenced Employer Sponsored Retirement or Savings Plans. Purchase Privileges of Certain Persons. Directors of the Fund, directors and trustees of certain other Merrill Lynch-sponsored investment companies, directors of ML & Co., employees of ML & Co. and its subsidiaries, and any trust, pension, profit-sharing or other benefit plan for such persons, may purchase Class A shares of the Fund at net asset value. Under such programs, the Fund realizes economies of scale and reduction of sales-related expenses by virtue of familiarity with the Fund. Employees and directors or trustees wishing to purchase shares of the Fund must satisfy the Fund's suitability standards. Class A shares of the Fund will be offered at net asset value, without sales charge, to an investor who has a business relationship with a financial consultant who joined Merrill Lynch from another investment firm within six months prior to the date of purchase by such investor, if the following conditions are satisfied. First, the investor must purchase Class A shares of the Fund with proceeds from a redemption of shares of a mutual fund that was sponsored by the financial consultant's previous firm and imposed a sales charge either 18 at the time of purchase or on a deferred basis. Second, such redemption must have been made within 60 days prior to the investment in the Fund, and the proceeds from the redemption must have been maintained in the interim in cash or a money market fund. Class A shares of the Fund are also offered at net asset value, without sales charge, to an investor who has a business relationship with a Merrill Lynch financial consultant and who has invested in a mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as a selected dealer and where Merrill Lynch has either received or given notice that such arrangement will be terminated ("notice"), if the following conditions are satisfied. First, the investor must purchase Class A shares of the Fund with proceeds from a redemption of shares of such other mutual fund and such fund imposed a sales charge either at the time of purchase or on a deferred basis. Second, such purchase of Class A shares must be made within 90 days after notice. Closed-End Fund Option. Class A shares of the Fund and certain other mutual funds advised by the Manager or FAM (the "Eligible Class A shares") are offered at net asset value to shareholders of certain closed-end funds advised by the Manager or FAM who wish to reinvest the net proceeds of a sale of their closed-end fund shares of common stock in Eligible Class A shares, if the conditions set forth below are satisfied. First, the sale of closed-end fund shares must be made through Merrill Lynch, and the net proceeds therefrom must be immediately reinvested in Eligible Class A shares. Second, the closed-end fund shares must have either been acquired in the initial public offering or be shares representing dividends from shares of common stock acquired in such offering. Third, the closed-end fund shares must have been continuously maintained in a Merrill Lynch securities account. Fourth, there must be a minimum purchase of $250 to be eligible for the investment option. Class A shares of the Fund are offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. (formerly known as Merrill Lynch Prime Fund, Inc. ("Senior Floating Rate Fund")) who wish to reinvest the net proceeds from a sale of certain of their shares of common stock of Senior Floating Rate Fund in shares of the Fund. In order to exercise this investment option, Senior Floating Rate Fund shareholders must sell their Senior Floating Rate Fund shares to the Senior Floating Rate Fund in connection with a tender offer conducted by the Senior Floating Rate Fund and reinvest the proceeds immediately in the Fund. This investment option is available only with respect to the proceeds of Senior Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing to exercise this investment option will be accepted only on the day that the related Senior Floating Rate Fund tender offer terminates and will be effected at the net asset value of the Fund at such day. Acquisition of Certain Investment Companies. The public offering price of Class A shares may be reduced to the net asset value per Class A share in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company. The value of the assets or company acquired in a tax-free transaction may be adjusted in appropriate cases to reduce possible adverse tax consequences to the Fund which might result from an acquisition of assets having net unrealized appreciation which is disproportionately higher at the time of acquisition than the realized or unrealized appreciation of the Fund. TMA SM Managed Trusts. Class A shares are also offered to TMA SM Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services at net asset value plus a reduced sales charge of .75% of the offering price, which is .76% of the net amount invested. 19 DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES Distribution Plan. Reference is made to "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares--Distribution Plan" in the Prospectus for certain information with respect to the Distribution Plan of the Fund (the "Distribution Plan"). The payment of the distribution fee and account maintenance fee is subject to the provisions of Rule 12b-1 under the Investment Company Act of 1940. Among other things, the Distribution Plan provides that the Distributor shall provide and the Directors shall review quarterly reports of the disbursement of the account maintenance fees and distribution fees paid to the Distributor. In their consideration of the Distribution Plan, the Directors must consider all factors they deem relevant, including information as to the benefits of the Distribution Plan to the Fund and its Class B shareholders. The Distribution Plan further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of Directors who are not "interested persons" of the Fund, as defined in the Investment Company Act of 1940 (the "Independent Directors"), shall be committed to the discretion of the Independent Directors then in office. In approving the Distribution Plan in accordance with Rule 12b- 1, the Independent Directors concluded that there is reasonable likelihood that the Distribution Plan will benefit the Fund and its Class B shareholders. The Distribution Plan can be terminated at any time, without penalty, by the vote of a majority of the Independent Directors or by the vote of the holders of a majority of the outstanding Class B voting securities of the Fund. The Distribution Plan cannot be amended to increase materially the amount to be spent by the Fund without Class B shareholder approval, and all material amendments are required to be approved by the vote of Directors, including a majority of the Independent Directors who have no direct or indirect financial interest in the Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of the Distribution Plan and any report made pursuant to such plan for a period of not less than six years from the date of the Distribution Plan or such report, the first two years in an easily accessible place. During the fiscal year ended November 30, 1993, the Fund paid $2,574,752 under the Distribution Plan, an amount equal to 0.75% of the average daily net assets of the Class B shares for such fiscal year. All such amounts were paid to the Distributor and in turn were paid by the Distributor to Merrill Lynch to defray a portion of its costs incurred in rendering account maintenance and distribution services to the Fund, including advancement of sales commissions to its account executives for the sale of the Class B shares of the Fund. REDEMPTION OF SHARES Reference is made to "Redemption of Shares" in the Prospectus for certain information as to the redemption and repurchase of Fund shares. The right to redeem shares or to receive payment with respect to any such redemption may be suspended only for any period during which trading on the New York Stock Exchange is restricted as determined by the Commission or such Exchange is closed (other than customary weekend and holiday closings), for any period during which an emergency exists as defined by the Commission as a result of which disposal of portfolio securities or determination of the net asset value of the Fund is not reasonably practicable, and for such other periods as the Securities and Exchange Commission may by order permit for the protection of shareholders of the Fund. Shares are redeemable at the option of the Fund if, in the opinion of the Fund, ownership of the shares has or may become concentrated to the extent which would cause the Fund to be deemed a personal holding company within the meaning of the Code. 20 CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES As discussed in the Prospectus under "Purchase of Shares--Alternative Sale Arrangements--Deferred Sales Charge Alternative--Class B Shares," while Class B shares redeemed within four years of purchase are subject to a contingent deferred sales charge under most circumstances, the charge is waived on redemptions of Class B shares in connection with certain post-retirement withdrawals from an Individual Retirement Account ("IRA") or other retirement plan or following the death or disability of a Class B shareholder. Redemptions for which the waiver applies are: (a) any partial or complete redemption in connection with a distribution following retirement under a tax- deferred retirement plan or attaining age 59 1/2 in the case of an IRA or other retirement plan, or any redemption resulting from the tax-free return of an excess contribution to an IRA; or (b) any partial or complete redemption following the death or disability (as defined in the Code) of a Class B shareholder (including one who owns the Class B shares as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability. For the fiscal years ended November 30, 1993 and November 30, 1992, and the period December 28, 1990 (commencement of operations) to November 30, 1991, the Distributor received contingent deferred sales charges of $537,201, $311,445 and $149,244, respectively, all of which was paid to Merrill Lynch. Merrill Lynch Blueprint SM Program. Class B shares are offered to participants in the Merrill Lynch Blueprint SM Program ("Blueprint"). Blueprint is directed to small investors, group IRAs and participants in certain affinity groups such as trade associations and credit unions. Class B shares of the Fund are offered through Blueprint only to members of certain affinity groups. The contingent deferred sales charge is waived in connection with purchase orders placed through Blueprint. Services, including the exchange privilege, available to Class B shareholders through Blueprint, however, may differ from those available to other Class B investors. Orders for purchases and redemptions of Class B shares of the Fund will be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There is no minimum initial or subsequent purchase requirement for investors who are part of a Blueprint automatic investment plan. Additional information concerning these Blueprint programs, including any annual fees or transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. Employer Sponsored Retirement and Savings Plans. Any Employer Sponsored Retirement or Savings Plan which does not meet the above-described qualifications to purchase Class A shares at net asset value has the option of purchasing Class A shares at the sales charge schedule disclosed in the Prospectus, or if the Employer Sponsored Retirement or Savings Plan meets the following requirements, then it may purchase Class B shares with a waiver of the contingent deferred sales charge upon redemption. The contingent deferred sales charge is waived for any Eligible 401(k) Plan redeeming Class B shares. The contingent deferred sales charge is also waived for redemptions from 401(a) plans qualified under the Code, provided however, such plan has the same or an affiliated sponsoring employer as an Eligible 401(k) Plan purchasing MLAM or FAM-advised mutual fund Class B shares ("Eligible 401(a) Plan"). The contingent deferred sales charge is waived for any Class B shares which are purchased by an Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at the time of redemption. The minimum initial and subsequent purchase requirements are waived in connection with all the above- referenced Retirement Plans. 21 PORTFOLIO TRANSACTIONS AND BROKERAGE Reference is made to "Investment Objective and Policies--Other Investment Policies and Practices" in the Prospectus. Subject to policies established by the Board of Directors of the Fund, the Manager is primarily responsible for the execution of the Fund's portfolio transactions. In executing such transactions, the Manager seeks to obtain the best net results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm involved and the firm's risk in positioning a block of securities. Subject to obtaining the best price and execution, brokers who provide supplemental investment research to the Manager may receive orders for transactions by the Fund. Information so received will be in addition to and not in lieu of the services required to be performed by the Manager under the Management Agreement and the expenses of the Manager will not necessarily be reduced as a result of the receipt of such supplemental information. If in the judgment of the Manager the Fund will be benefitted by supplemental research services, the Manager is authorized to pay brokerage commissions to a broker furnishing such services which are in excess of commissions which another broker may have charged for effecting the same transaction. In addition, consistent with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. and policies established by the Directors of the Fund, the Manager may consider sales of shares of the Fund as a factor in the selection of brokers or dealers to execute portfolio transactions for the Fund. For the fiscal year ended November 30, 1993, the Fund paid total brokerage commissions of $435,246, of which $11,578 or 2.7% was paid to Merrill Lynch for effecting 2.0% of the aggregate amount of transactions in which the Fund paid brokerage commissions. For the fiscal year ended November 30, 1992, the Fund paid total brokerage commissions of $212,168, of which $4,605 or 2.17% was paid to Merrill Lynch for effecting 2.32% of the aggregate amount of transactions in which the Fund paid brokerage commissions. For the period December 28, 1990 (commencement of operations) to November 30, 1991, the Fund paid total brokerage commissions of $173,914, of which $9,120 or 5.2% was paid to Merrill Lynch for effecting 8.96% of the aggregate amount of transactions in which the Fund paid brokerage commissions. The Fund anticipates that its brokerage transactions involving securities of companies domiciled in countries other than the United States will be conducted primarily on the principal stock exchanges of such countries. Brokerage commissions and other transaction costs on foreign stock exchange transactions are generally higher than in the United States, although the Fund will endeavor to achieve the best net results in effecting its portfolio transactions. There is generally less governmental supervision and regulation of foreign stock exchanges and brokers than in the United States. The Fund invests in certain securities traded in the over-the-counter market and, where possible, deals directly with the dealers who make a market in the securities involved, except in those circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act of 1940, persons affiliated with the 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 accounts, affiliated persons of the Fund, including Merrill Lynch, will not serve as the Fund's dealer in such transactions. However, affiliated persons of the Fund may serve as its broker in over-the- counter transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions. The Fund's ability and decisions to purchase or sell portfolio securities may be affected by laws or regulations relating to the convertibility and repatriation of assets. Because the shares of the Fund are 22 redeemable on a daily basis in United States dollars, the Fund intends to manage its portfolio so as to give reasonable assurance that it will be able to obtain United States dollars to the extent necessary to meet anticipated redemptions. Under present conditions, it is not believed that these considerations will have any significant effect on its portfolio strategy. Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as recently amended, Merrill Lynch may execute transactions for the Fund on the floor of any national securities exchange provided that prior authorization of such transactions is obtained and Merrill Lynch furnishes a statement to the Fund at least annually setting forth the compensation it has received in connection with such transactions. Pursuant to prior Section 11(a) and Rule 11a2-2(T) thereunder, Merrill Lynch was not permitted to execute transactions for the Fund on the floor of any national securities exchange, but was allowed to effect such transactions through transmitting orders for execution, providing for clearance and settlement and arranging for the performance of such functions. Under prior Section 11(a) and as permitted by the Rule, the Fund entered into an agreement with the Manager and Merrill Lynch which permitted Merrill Lynch to retain compensation for effecting transactions for the Fund on national securities exchanges, and provided, among other things, that Merrill Lynch must furnish the Fund at least annually with a statement setting forth the total amount of all compensation retained by Merrill Lynch under the agreement. For the fiscal year ended November 30, 1993, the Fund effected 9 such portfolio transactions pursuant to such contract and received $5,074,828 as compensation in connection with such transactions. Because the recent amendments to Section 11(a) obviate the need for this type of agreement, the agreement has been terminated. The Directors have considered the possibilities of seeking to recapture for the benefit of the Fund brokerage commissions and other expenses of possible portfolio transactions by conducting portfolio transactions through affiliated entities. For example, brokerage commissions received by affiliated brokers could be offset against the advisory fee paid by the Fund. After considering all factors deemed relevant, the Directors made a determination not to seek such recapture. The Directors will reconsider this matter from time to time. DETERMINATION OF NET ASSET VALUE Reference is made to "Additional Information--Determination of Net Asset Value" in the Prospectus concerning the determination of net asset value. The net asset value of the shares of the Fund is determined once daily Monday through Friday as of 4:15 P.M. on each day the New York Stock Exchange is open for trading. The New York Stock Exchange is not open on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the afternoon of valuation. The net asset value is computed by dividing the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares outstanding at such time. Expenses, including the fees payable to the Manager and the Distributor, are accrued daily. The per share net asset value of the Class B shares generally will be lower than the per share net asset value of the Class A shares reflecting the daily expense accruals of the distribution and transfer agency fees applicable with respect to the Class B shares. It is expected, however, that the per share net asset value of the two classes will tend to converge immediately after the payment of dividends or distributions, which will differ by approximately the amount of the expense accrual differential between the classes. 23 Securities traded in the over-the-counter market are valued at the last available bid price or yield equivalents obtained from one or more dealers in the over-the-counter market prior to the time of valuation. When the Fund writes a call option, the amount of the premium received is recorded on the books of the Fund as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last asked price in the case of exchange-traded options or, in the case of options traded in the over-the-counter market, the average of the last asked price as obtained from one or more dealers. Options purchased by the Fund are valued at their last bid price in the case of exchange-traded options or in the case of options traded in the over-the- counter market, the average of the last bid price as obtained from two or more dealers. Portfolio securities which are traded on stock exchanges are valued at the last sale price on the principal market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Other investments, including futures contracts and related options, are stated at market value. Securities and assets for which market quotations are not readily available are valued at fair market value, as determined in good faith by or under the direction of the Board of Directors of the Fund, including valuations furnished by a pricing service retained by the Fund. Such valuations and procedures will be reviewed periodically by the Board of Directors. SHAREHOLDER SERVICES The Fund offers a number of shareholder services described below which are designed to facilitate investment in its shares. Full details as to each of such services and copies of the various plans described below can be obtained from the Fund, the Distributor or Merrill Lynch. Certain of these services are available only to United States investors. INVESTMENT ACCOUNT Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive quarterly statements from the Transfer Agent showing any reinvestments of dividends and capital gains distributions and any other activity in the account since the preceding statement. Shareholders also will receive separate confirmations for each purchase or sale transaction other than reinvestment of dividends and capital gains distributions. A shareholder may make additions to his Investment Account at any time by mailing a check directly to the Transfer Agent. Share certificates are issued only for full shares and only upon the specific request of the shareholder. Issuance of certificates representing all or only part of the full shares in an Investment Account may be requested by a shareholder directly from the Transfer Agent. Shareholders considering transferring their Class A shares from Merrill Lynch to another brokerage firm or financial institution should be aware that, if the firm to which the Class A shares are to be transferred will not take delivery of shares of the Company, a shareholder either must redeem the Class A shares so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class A shares. Shareholders interested in transferring their Class B shares from Merrill Lynch and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the shareholder. If the new brokerage firm is willing to accommodate the shareholder in this manner, the shareholder must request that he be issued certificates for his shares, and then must turn the certificates over to the new firm for re-registration as described in the preceding sentence. 24 AUTOMATIC INVESTMENT PLAN A shareholder may make additions to the Investment Account at any time by purchasing Class A or Class B shares at the applicable public offering price either through the shareholder's securities dealer or by mail directly to the Transfer Agent, acting as agent for such securities dealer. Voluntary accumulation can also be made through a service known as the Automatic Investment Plan whereby the Fund is authorized through pre-authorized checks of $50 or more to charge the regular bank account of the shareholder on a regular basis to provide systematic additions to the Investment Account of such shareholder. For investors who buy shares of the Fund through Merrill Lynch Blueprint SM Program, no minimum charge to the investors bank account is required. Investors who maintain CMA (R) accounts may arrange to have periodic investments made in the Fund, in the CMA (R) accounts or in certain related accounts in amounts of $100 or more through the CMA Automatic Investment Program. AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS Unless specific instructions are given as to the method of payment of dividends and capital gains distributions, dividends and distributions will be reinvested automatically in additional shares of the Fund. Such reinvestment will be at the net asset value of shares of the Fund, without sales charge, as of the close of business on the ex-dividend date of the dividend or distribution. Shareholders may elect in writing or by telephone (1-800-MER- FUND) to receive either their income dividends or capital gains distributions, or both, in cash, in which event payment will be mailed on or about the payment date. Shareholders may, at any time, notify the Transfer Agent in writing that they no longer wish to have their dividends and/or distributions reinvested in shares of the Fund or vice versa and, commencing ten days after the receipt by the Transfer Agent of such notice, those instructions will be effected. SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES A Class A shareholder may elect to make withdrawals from an Investment Account in the form of payments by check or through automatic payment by direct deposit to such shareholders's bank account, on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders who have acquired Class A shares of the Fund having a value, based on cost or the current offering price, of $5,000 or more, and monthly withdrawals for shareholders with Class A shares with such a value of $10,000 or more. At the time of each withdrawal payment, sufficient Class A shares are redeemed from those on deposit in the shareholder's account to provide the withdrawal payment specified by the shareholder. The shareholder may specify either a dollar amount or a percentage of the value of his Class A shares. Redemptions will be made at net asset value as determined at the close of business on the New York Stock Exchange on the 24th day of each month or the 24th day of the last month of each quarter, whichever is applicable. If the Exchange is not open for business on such date, the Class A shares will be redeemed at the close of business on the following business day. The check for the withdrawal payment will be mailed or the direct deposit for withdrawal payment will be made on the next business day following redemption. When a shareholder is making systematic withdrawals, dividends and distributions on all Class A shares in the Investment Account are reinvested automatically in Fund Class A shares. A shareholder's Systematic Withdrawal Plan may be terminated at any time, without charge or penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor. Withdrawal payments should not be considered as dividends, yield or income. Each withdrawal is a taxable event. If periodic withdrawals continuously exceed reinvested dividends, the shareholder's original 25 investment may be reduced correspondingly. Purchases of additional Class A shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Fund will not knowingly accept purchase orders for Class A shares of the Fund from investors who maintain a Systematic Withdrawal Plan unless such purchase is equal to at least one year's scheduled withdrawals or $1,200, whichever is greater. Periodic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals. A Class A shareholder whose shares are held within a CMA (R), CBA (R) or Retirement Account may elect to have shares redeemed on a monthly, bi-monthly, quarterly, semiannual or annual basis through the Systematic Redemption Program. The minimum fixed dollar amount redeemable is $25. The proceeds of systematic redemptions will be posted to the shareholder's account five business days after the date the shares are redeemed. Monthly systematic redemptions will be made at net asset value on the first Monday of each month, bi-monthly systematic redemptions will be made at net asset value on the first Monday of every other month, and quarterly, semiannual or annual redemptions are made at net asset value on the first Monday of months selected at the shareholder's option. If the first Monday of the month is a holiday, the redemption will be processed at net asset value on the next business day. The Systematic Redemption Program is not available if Fund shares are being purchased within the account pursuant to the Automatic Investment Program. For more information on the Systematic Redemption Program, eligible shareholders should contact their financial consultant. RETIREMENT PLANS Self-directed individual retirement accounts and other retirement plans are available from Merrill Lynch. Under these plans, investments may be made in the Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as in other securities. Merrill Lynch charges an initial establishment fee and an annual custodial fee for each account. Information with respect to these plans is available on request from Merrill Lynch. The minimum initial purchase to establish any such plan is $250 (except that the minimum initial purchase through the Merrill Lynch Blueprint SM Program is $100) and the minimum subsequent purchase is $1. Capital gains and income received in each of the plans referred to above are exempt from Federal taxation until distributed from the plans. Investors considering participation in any such plan should review specific tax laws relating thereto and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan. EXCHANGE PRIVILEGE Shareholders of the Fund may exchange their Class A or Class B shares of the Fund for shares of the same class of Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Insured Municipal Bond Fund, Merrill Lynch California Limited Maturity Municipal Bond Fund, Merrill Lynch California Municipal Bond Fund, Merrill Lynch Capital Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Federal Securities Trust, Merrill Lynch Florida Limited Maturity Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Fundamental 26 Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc. (residents of Arizona must meet investor suitability standards), Merrill Lynch Global Resources Trust (formerly Merrill Lynch Natural Resources Trust), Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc. (residents of Wisconsin must meet investor suitability standards), Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Municipal Intermediate Term Fund, Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund, Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New York Limited Maturity Municipal Bond Fund, Merrill Lynch New York Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond Fund, Merrill Lynch Ohio Municipal Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund, Merrill Lynch Pennsylvania Municipal Bond Fund, Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch Texas Municipal Bond Fund, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch World Income Fund, Inc. on the basis described below. In addition, Class A shareholders of the Fund may exchange their Class A shares for shares of Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money Fund and Merrill Lynch Ready Assets Trust (or Merrill Lynch Retirement Reserves Money Fund if the exchange occurs within certain retirement plans) (together the "Class A money market funds"), and Class B shareholders of the Fund may exchange their Class B shares for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund (together the "Class B money market funds") on the basis described below. It is contemplated that the exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the Distributor. The exchange privilege available to participants in the Merrill Lynch Blueprint SM Program may be different from that available to other investors. Under the exchange privilege, each of the funds with Class A shares outstanding offers to exchange its Class A shares ("new Class A shares") for Class A shares ("outstanding Class A shares") of any of the other funds, on the basis of relative net asset value per Class A share, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class A shares and the sales charge payable at the time of the exchange on the new Class A shares. With respect to outstanding Class A shares as to which previous exchanges have taken place, the "sales charge previously paid" shall include the aggregate of the sales charges paid with respect to such Class A shares in the initial purchase and any subsequent exchange. Class A shares issued pursuant to dividend reinvestment are sold on a no-load basis in each of the funds offering Class A shares. For purposes of the exchange privilege, dividend reinvestment Class A shares shall be exchanged into the Class A shares of the other funds or into shares of the Class A money market funds without a sales charge. The Fund's exchange privilege is modified with respect to purchases of Class A shares under the Merrill Lynch Mutual Fund Adviser Program. First, the initial allocation of assets is made under the program. Then, any subsequent exchange under the program of Class A shares of a fund for Class A shares of the Fund will be made solely on the basis of the relative net asset values of the shares being exchanged. Therefore, there will not be a charge for any difference between the sales charge previously paid on the shares of the other 27 fund and the sales charge payable on the shares of the Fund being acquired in the exchange under this program. In addition, each of the funds with Class B shares outstanding offers to exchange its Class B shares ("new Class B shares") for Class B shares ("outstanding Class B shares") of any of the other funds on the basis of relative net asset value per Class B share, without the payment of any contingent deferred sales charge that might otherwise be due on redemption of the outstanding shares. Class B shareholders of the Fund exercising the exchange privilege will continue to be subject to the Fund's contingent deferred sales charge schedule if such schedule is higher than the deferred sales charge schedule relating to the new Class B shares acquired through use of the exchange privilege. In addition, Class B shares of the Fund acquired through use of the exchange privilege will be subject to the Fund's contingent deferred sales charge schedule if such schedule is higher than the deferred sales charge schedule relating to the Class B shares of the fund from which the exchange has been made. For purposes of computing the sales load that may be payable on a disposition of the new Class B shares, the period of time that the outstanding Class B shares were held will count toward satisfaction of the holding period of the new Class B shares. For example, an investor may exchange Class B shares of the Fund for those of Merrill Lynch Global Resources Trust after having held the Fund's Class B shares for two and a half years. The 2% sales load that generally would apply to a redemption would not apply to the exchange. Three years later the investor may decide to redeem the Class B shares of Merrill Lynch Global Resources Trust and receive cash. There will be no contingent deferred sales load due on this redemption, since by "tacking" the two-and-a-half-year holding period of the Fund's Class B shares to the three year holding period for the Merrill Lynch Global Resources Trust Class B shares, the investor will be deemed to have held the new Class B shares for more than five years. Shareholders also may exchange Class A shares and Class B shares from any of the funds into shares of the Class A money market funds and Class B money market funds, respectively, but the period of time that Class B shares are held in a Class B money market fund will not count toward satisfaction of the holding period requirement for purposes of reducing the contingent deferred sales load. However, shares of a Class B money market fund which were acquired as a result of an exchange for Class B shares of a fund may, in turn, be exchanged back into Class B shares of any fund offering such shares, in which event the holding period for Class B shares of the fund will be aggregated with previous holding periods for purposes of reducing the contingent deferred sales load. Thus, for example, an investor may exchange Class B shares of the Fund for shares of Merrill Lynch Institutional Fund after having held the Class B shares for two and a half years and three years later decide to redeem the shares of Merrill Lynch Institutional Fund for cash. At the time of this redemption, the 2% contingent deferred sales load that would have been due had the Class B shares of the Fund been redeemed for cash rather than exchanged for shares of Merrill Lynch Institutional Fund will be payable. If, instead of such redemption the shareholder exchanged such shares for Class B shares of a fund which the shareholder continues to hold for an additional two and a half years, any subsequent redemption will not incur a contingent deferred sales load. The investment objectives of the other funds into which exchanges can be made are as follows: Merrill Lynch Adjustable Rate Securities Fund, High current income consistent with a policy Inc. ....................... of limiting the degree of fluctuation in net asset value by investing primarily in a portfolio of adjustable rate securities, consisting principally of mortgage-backed and asset-backed securities. 28 Merrill Lynch Americas Income Fund, Inc. ..... A high level of current income, consistent with prudent investment risk, by investing primarily in debt securities denominated in a currency of a country located in the West- ern Hemisphere (i.e., North and South Amer- ica and the surrounding waters). Merrill Lynch Arizona Limited Maturity Municipal Bond Fund.............. A portfolio of Merrill Lynch Multi-State Lim- ited Maturity Municipal Series Trust, a se- ries fund, whose objective is to provide as high a level of income exempt from Federal and Arizona income taxes as is consistent with prudent investment management through investment in a portfolio primarily of in- termediate-term investment grade Arizona Mu- nicipal Bonds. Merrill Lynch Arizona Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is to provide investors with as high a level of income exempt from Federal and Arizona income taxes as is consistent with prudent investment management. Merrill Lynch Balanced Fund for Investment and Retirement ................. As high a level of total investment return as is consistent with a relatively low level of risk through investment in common stocks and other types of securities, including fixed income securities and convertible securi- ties. Merrill Lynch Basic Value Fund, Inc. ................. Capital appreciation and, secondarily, income by investing in securities, primarily equi- ties, that are undervalued and therefore represent basic investment value. Merrill Lynch California Insured Municipal Bond Fund................... A portfolio of Merrill Lynch California Mu- nicipal Series Trust, a series fund, whose objective is as high a level of insured in- come exempt from Federal and California in- come taxes as is consistent with prudent in- vestment management. Merrill Lynch California Limited Maturity Municipal Bond Fund.............. A portfolio of Merrill Lynch Multi-State Lim- ited Maturity Municipal Series Trust, a se- ries fund, whose objective is to provide shareholders with as high a level of income exempt from Federal and California income taxes as is consistent with prudent invest- ment management through investment in a portfolio primarily of intermediate-term in- vestment grade California Municipal Bonds. 29 Merrill Lynch California Municipal Bond Fund......... A portfolio of Merrill Lynch California Mu- nicipal Series Trust, a series fund whose objective is as high a level of income ex- empt from Federal and California income taxes as is consistent with prudent invest- ment management. Merrill Lynch Capital Fund, Inc. ....................... The highest total investment return consis- tent with prudent risk through a fully man- aged investment policy utilizing equity, debt and convertible securities. Merrill Lynch Colorado Municipal Bond Fund.... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is as high a level of income ex- empt from Federal and Colorado income taxes as is consistent with prudent investment management. Merrill Lynch Corporate Bond Fund, Inc. ................. Current income from three separate diversi- fied portfolios of fixed income securities. Merrill Lynch Developing Capital Markets Fund, Long-term appreciation through investment in Inc. ....................... securities, principally equities, of issuers in countries having smaller capital markets. Merrill Lynch Dragon Fund, Inc. ....................... Capital appreciation primarily through in- vestment in equity and debt securities of companies domiciled in developing countries located in Asia and Pacific Basin other than Japan, Australia and New Zealand. Merrill Lynch Eurofund....... Capital appreciation primarily through in- vestment in equity securities of corpora- tions domiciled in Europe. Merrill Lynch Federal Securities Trust............ High current return through investments in U.S. Government and Government agency secu- rities, including GNMA mortgage-backed cer- tificates and other mortgage-backed Govern- ment securities. Merrill Lynch Florida Limited Maturity Municipal Bond Fund.............. A portfolio of Merrill Lynch Multi-State Lim- ited Maturity Municipal Series Trust, a se- ries fund, whose objective is as high a level of income exempt from Federal income taxes as is consistent with prudent invest- ment management while seeking to offer shareholders the opportunity to own securi- ties exempt from Florida intangible personal property taxes through investment in a port- folio primarily of intermediate-term invest- ment grade Florida Municipal Bonds. 30 Merrill Lynch Florida Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is as high a level of income ex- empt from Federal income taxes as is consis- tent with prudent investment management while seeking to offer shareholders the op- portunity to own securities exempt from Florida intangible personal property taxes. Merrill Lynch Fund For Tomorrow, Inc .............. Long-term growth through investment in a portfolio of good quality securities, pri- marily common stock, potentially positioned to benefit from demographic and cultural changes as they affect consumer markets. Merrill Lynch Fundamental Growth Fund, Inc. .......... Long-term growth through investment in a di- versified portfolio of equity securities in placing particular emphasis on companies that have exhibited an above-average growth rate in earnings. Merrill Lynch Global Allocation Fund, Inc........ High total return consistent with prudent risk, through a fully-managed investment policy utilizing United States and foreign equity, debt and money market securities, the combination of which will be varied from time to time both with respect to types of securities and markets in response to chang- ing market and economic trends. Merrill Lynch Global Bond Fund for Investment and Retirement.................. High total investment return from investment in government and corporate bonds denomi- nated in various currencies and multi-na- tional currency units. Merrill Lynch Global Convertible Fund, Inc....... High total return from investment primarily in an internationally diversified portfolio of convertible debt securities, convertible preferred stock and "synthetic" convertible securities consisting of a combination of debt securities or preferred stock and war- rants or options. Merrill Lynch Global Holdings, Inc. (residents of Arizona must meet investor suitability standards)............. The highest total investment return consis- tent with prudent risk through worldwide in- vestment in an internationally diversified portfolio of securities. 31 Merrill Lynch Global Resources Trust........ Long-term growth and protection of capital from investment in securities of domestic and foreign companies that possess substan- tial natural resource assets. Merrill Lynch Government Fund........................ A portfolio of Merrill Lynch Funds for Insti- tutions Series, a series fund, whose objec- tive is to provide current income consistent with liquidity and security of principal from investment in securities issued or guaranteed by the U.S. Government and its agencies and in repurchase agreements se- cured by such obligations. Merrill Lynch Growth Fund for Investment And Growth of capital and, secondarily, income Retirement............. from investment in a diversified portfolio of equity securities placing principal emphasis on those securities which management of the fund believes to be under- valued. Merrill Lynch Healthcare Fund, Inc. (residents of Wisconsin must meet investor suitability standards) ................. Capital appreciation through worldwide in- vestment in equity securities of companies that derive or are expected to derive a sub- stantial portion of their sales from prod- ucts and services in healthcare. Merrill Lynch Institutional Fund........................ A portfolio of Merrill Lynch Funds for Insti- tutions Series, a series fund, whose objec- tive is to provide maximum current income consistent with liquidity and the mainte- nance of a high-quality portfolio of money market securities. Merrill Lynch Institutional Tax-Exempt Fund............. A portfolio of Merrill Lynch Funds for Insti- tutions Series, a series fund, whose objec- tive is to provide current income exempt from Federal income taxes, preservation of capital and liquidity available from invest- ing in a diversified portfolio of short- term, high quality municipal bonds. Merrill Lynch International Equity Fund............ Capital appreciation and, secondarily, income by investing in a diversified portfolio of equity securities of issuers located in countries other than the United States. Merrill Lynch Latin America Fund, Inc. ............ Capital appreciation by investing primarily in Latin American equity and debt securi- ties. 32 Merrill Lynch Maryland Municipal Bond Fund.... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Maryland in- come taxes as is consistent with prudent in- vestment management. Merrill Lynch Massachusetts Limited Maturity Municipal Bond Fund.............. A portfolio of Merrill Lynch Multi-State Lim- ited Maturity Municipal Series Trust, a se- ries fund, whose objective is as high a level of income exempt from Federal and Mas- sachusetts income taxes as is consistent with prudent investment management through investment in a portfolio primarily of in- termediate-term investment grade Massachu- setts Municipal Bonds. Merrill Lynch Massachusetts Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is to provide investors with as high a level of income exempt from both Fed- eral and Massachusetts income taxes as is consistent with prudent investment manage- ment. Merrill Lynch Michigan Limited Maturity Municipal Bond Fund ............. A portfolio of Merrill Lynch Multi-State Lim- ited Municipal Series Trust, a series fund, whose objective is as high a level of income exempt from Federal and Michigan income taxes as is consistent with prudent invest- ment management through investment in a portfolio primarily of intermediate-term in- vestment grade Michigan Municipal Bonds. Merrill Lynch Michigan Municipal Bond Fund ... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is to provide as high a level of income exempt from Federal and Michigan in- come taxes as is consistent with prudent in- vestment management. Merrill Lynch Minnesota Municipal Bond Fund ........ A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is as high a level of income ex- empt from Federal and Minnesota income taxes as is consistent with prudent investment management. Merrill Lynch Municipal Bond Fund, Inc................... Tax-exempt income from three separate diver- sified portfolios of municipal bonds. 33 Merrill Lynch Municipal Intermediate Term Fund...... Currently the only portfolio of Merrill Lynch Municipal Series Trust, a series fund, whose objective is to provide as high a level as possible of income exempt from Federal in- come taxes by investing in investment grade obligations with a dollar weighted average maturity of five to twelve years. Merrill Lynch New Jersey Limited Maturity Municipal Bond Fund.............. A portfolio of Merrill Lynch Multi-State Lim- ited Maturity Municipal Series Trust, a se- ries fund, whose objective is as high a level of income exempt from Federal and New Jersey income taxes as is consistent with prudent investment management through a portfolio primarily of intermediate-term in- vestment grade New Jersey Municipal Bonds. Merrill Lynch New Jersey Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is as high a level of income ex- empt from Federal and New Jersey state in- come taxes as is consistent with prudent in- vestment management. Merrill Lynch New York Limited Maturity Municipal Bond Fund.............. A portfolio of Merrill Lynch Multi-State Lim- ited Maturity Municipal Series Trust, a se- ries fund, whose objective is as high a level of income exempt from Federal, New York State and New York City income taxes as is consistent with prudent investment man- agement through investment in a portfolio primarily of intermediate-term investment grade New York Municipal Bonds. Merrill Lynch New York Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is as high a level of income ex- empt from Federal, New York State and New York City income taxes as is consistent with prudent investment management. Merrill Lynch North Carolina Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is as high a level of income ex- empt from Federal and North Carolina income taxes as is consistent with prudent invest- ment management. Merrill Lynch Ohio Municipal Bond Fund................... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is to provide investors with as high a level of income exempt from both Fed- eral and Ohio income taxes as is consistent with prudent investment management. 34 Merrill Lynch Oregon Municipal Bond Fund.... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is to provide investors with as high a level of income exempt from both Fed- eral and Oregon income taxes as is consis- tent with prudent investment management. Merrill Lynch Pacific Fund, Inc......................... Capital appreciation by investing in equity securities of corporations domiciled in Far Eastern and Western Pacific countries, in- cluding Japan, Australia, Hong Kong, Singa- pore and the Philippines. Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund.............. A portfolio of Merrill Lynch Multi-State Lim- ited Maturity Municipal Series Trust, a se- ries fund, whose objective is to provide as high a level of income exempt from Federal and Pennsylvania income taxes as is consis- tent with prudent investment management through investment in a portfolio of inter- mediate-term investment grade Pennsylvania Municipal Bonds. Merrill Lynch Pennsylvania Municipal Bond Fund......... A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund, whose objective is as high a level of income ex- empt from Federal and Pennsylvania state in- come taxes as is consistent with prudent in- vestment management. Merrill Lynch Phoenix Fund, Inc. ....................... Long-term growth of capital by investing in equity and fixed income securities, includ- ing tax-exempt securities, of issuers in weak financial condition or experiencing poor operating results believed to be under- valued relative to the current or prospec- tive condition of such issuer. Merrill Lynch Ready Assets Trust....................... Preservation of capital, liquidity and the highest possible current income consistent with the foregoing objectives from the short-term money market securities in which the trust invests. Merrill Lynch Retirement Reserves Money Fund (available only if the exchange occurs within certain retirement plans)... Currently the only portfolio of Merrill Lynch Retirement Series Trust, a series fund, whose objectives are current income, preser- vation of capital and liquidity available from investing in a diversified portfolio of short-term money market securities. 35 Merrill Lynch Short-Term Global Income Fund, Inc. .. As high a level of current income as is con- sistent with prudent investment management from a global portfolio of high quality debt securities denominated in various currencies and multi-currency units having remaining ma- turities not exceeding three years. Merrill Lynch Special Value Fund, Inc.................. Long-term growth of capital from investments in securities, primarily common stocks, or relatively small companies believed to have special investment value and emerging growth companies regardless of size. Merrill Lynch Strategic Dividend Fund.............. Long-term total return from investment in div- idend paying common stocks which yield more than Standard & Poor's 500 Composite Stock Price Index. Merrill Lynch Technology Fund, Inc. ................ Capital appreciation through worldwide invest- ment in equity securities of companies that derive or are expected to derive a substan- tial portion of their sales from products and services in technology. Merrill Lynch Texas Municipal Bond Fund........ A portfolio of Merrill Lynch Multi-State Mu- nicipal Series Trust, a series fund whose ob- jective is to provide investors with as high a level of income exempt from Federal income taxes as is consistent with prudent invest- ment management by investing primarily in a portfolio of long-term, investment grade ob- ligations issued by the State of Texas, its political subdivisions, agencies and instru- mentalities. Merrill Lynch Treasury A portfolio of Merrill Lynch Funds For Insti- Fund....................... tutions Series, a series fund, whose objec- tive is to provide current income consistent with liquidity and security of principal from investment in direct obligations of the U.S. Treasury and up to 10% of its total assets in repurchase agreements secured by such obliga- tions. Merrill Lynch U.S.A. Government Reserves........ Preservation of capital, current income and liquidity available from investing in direct obligations of the U.S. Government and repur- chase agreements relating to such securities. Merrill Lynch U.S. Treasury Money Fund................. Preservation of capital, liquidity and current income through investment exclusively in a diversified portfolio of short-term market- able securities which are direct obligations of the U.S Treasury. 36 Merrill Lynch Utility Income Fund, Inc. ............ High current income through investment pri- marily in equity and debt securities issued by companies primarily engaged in the owner- ship or operation of facilities used to gen- erate, transmit or distribute electricity, telecommunications, gas or water. Merrill Lynch World Income Fund, Inc. ................. High current income by investing in a global portfolio of fixed income securities denomi- nated in various currencies, including mul- tinational currencies. Before effecting an exchange, shareholders of the Fund should obtain a currently effective prospectus of the fund into which the exchange is to be made. Exercise of the exchange privilege is treated as a sale for Federal income tax purposes and, depending on the circumstances, a short- or long-term capital gain or loss may be realized. In addition, a shareholder exchanging shares of any of the funds may be subject to a backup withholding tax unless such shareholder certifies under penalty of perjury that the taxpayer identification number on file with any such fund is correct and that he is not otherwise subject to backup withholding. See "Dividends, Distributions and Taxes" below. To exercise the exchange privilege, shareholders should contact their Merrill Lynch financial consultant, who will advise the Fund of the exchange, or, if the exchange does not involve a money market fund, the shareholder may write to the Transfer Agent requesting that the exchange be effected. Such letter must be signed exactly as the account is registered with signatures guaranteed by an "eligible guarantor institution" as such term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. Shareholders of the Fund, and shareholders of the other funds described above with shares for which certificates have not been issued, may exercise the exchange privilege by wire transfer through their securities dealers. The Fund reserves the right to require a properly completed Exchange Application. This exchange privilege may be modified or terminated in accordance with the rules of the Securities and Exchange Commission. The Fund reserves the right to limit the number of times an investor may exercise the exchange privilege. Certain funds may suspend the continuous offering of their shares to the general public at any time and may thereafter resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. DIVIDENDS, DISTRIBUTIONS AND TAXES DIVIDENDS AND DISTRIBUTIONS It is the Fund's intention to distribute all of its net investment income, if any. Dividends from such net investment income are paid quarterly. All net realized long- or short-term capital gains, if any, are distributed to the Fund's shareholders at least annually. From time to time, the Fund may declare a special distribution at or about the end of the calendar year in order to comply with a Federal income tax requirement that certain percentages of its ordinary income and capital gains be distributed during the taxable year. Premiums from expired call options written by the Fund and net gains from closing purchase transactions are treated as short-term capital gains for Federal income tax purposes. See "Shareholder Services--Reinvestment of Dividends and Capital Gains Distributions" for information concerning the manner in which dividends and distributions may be reinvested automatically in shares of the Fund. Shareholders may elect in writing to receive any such 37 dividends or distributions, or both, in cash. Dividends and distributions are taxable to shareholders as described below whether they are invested in shares of the Fund or received in cash. The per share dividends and distributions on Class B shares will be lower than the per share dividends and distributions on Class A shares as a result of the distribution and transfer agency fees applicable with respect to the Class B shares. See "Determination of Net Asset Value." TAXES The Fund has qualified and intends to continue to qualify for the special tax treatment afforded regulated investment companies ("RICs") under the Internal Revenue Code of 1986, as amended (the "Code"). As a RIC, the Fund will not be subject to Federal income tax on the part of its net ordinary income and net realized capital gains which it distributes to Class A and Class B shareholders ("shareholders"). In order to qualify, the Fund must among other things, (i) derive at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of securities, certain gains from foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies; (ii) derive less than 30% of its gross income from gains from the sale or other disposition of securities, options, futures, forward contracts and certain investments in foreign currencies held for less than three months; (iii) distribute at least 90% of its dividend, interest and certain other taxable income each year; (iv) at the end of each fiscal quarter maintain at least 50% of the value of its total assets in cash, government securities, securities of other RICs, and other securities of issuers which represent, with respect to each issuer, no more than 5% of the value of the Fund's total assets and 10% of the outstanding voting securities of such issuer; and (v) at the end of each fiscal quarter have no more than 25% of its assets invested in the securities (other than those of the government or other RICs) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same, similar or related trades and businesses. Dividends paid by the Fund from its ordinary income and distributions of the Fund's net realized short-term capital gains (together referred to hereafter as "ordinary income dividends") are taxable to shareholders as ordinary income. Distributions made from the Fund's net realized long-term capital gains (including long-term gains from certain transactions in futures and options) are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder has owned Fund shares. However, any loss on a subsequent sale or exchange of shares held for six months or less will be treated as long-term capital loss to the extent of any long-term capital gain distribution thereon. Not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amounts of any dividends or capital gains distributions. The portion of the Fund's ordinary income dividends which is attributable to dividends received by the Fund from U.S. corporations (other than dividends received on preferred stocks of public utilities) may be eligible for the 70% dividends received deduction allowed to corporations under the Code, if certain requirements are met. For this purpose, the Fund will allocate dividends eligible for the dividends received deduction between the Class A and Class B shareholders according to a method (which it believes is consistent with the Securities and Exchange Commission exemptive order permitting the issuance and sale of two classes of stock) that is based upon the gross income that is allocable to the Class A and Class B shareholders during the taxable year, or such other method as the Internal Revenue Service may prescribe. If the Fund pays a dividend in January which was declared in the previous October, November or December to shareholders of record on a date in such a month, then such dividend or distribution will be treated for tax purposes as being paid on December 31, and will be taxable to its shareholders on December 31 of the year in which the dividend was declared. 38 Under certain provisions of the Code, some shareholders may be subject to a 31% withholding tax on reportable dividends, capital gains distributions and redemption payments ("backup withholding"). Generally, shareholders subject to backup withholding will be those for whom a certified taxpayer identification number is not on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such shareholder is not otherwise subject to backup withholding taxes. Ordinary income dividends paid by the Fund to shareholders who are non- resident aliens or foreign entities generally will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Non-resident shareholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax. Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. Shareholders may be able to claim United States foreign tax credits with respect to such taxes, subject to certain provisions and limitations contained in the Code. If more than 50% in value of the Fund's total assets at the close of its taxable year consists of stock or securities of foreign corporations, the Fund will be eligible, and intends, to file an election with the Internal Revenue Service pursuant to which shareholders of the Fund will be required to include their proportionate share of such withholding taxes in their United States income tax returns as gross income, treat such proportionate share as taxes paid by them, and deduct such proportionate share in computing their taxable incomes or, alternatively, use them as foreign tax credits against their United States income taxes. The Fund will report annually to its shareholders the amount per share of such withholding taxes. For this purpose, the Fund will allocate foreign taxes and foreign source income between the Class A and Class B shareholders according to a method similar to that described above for the allocation of dividends eligible for the dividends received deduction. Shareholders will not be entitled to a loss on the sale or disposition of Class A or Class B shares of the Fund to the extent they acquire other Class A or Class B shares within a 61-day period beginning 30 days before and ending 30 days after such sale or disposition. If a shareholder exercises his exchange privilege within 90 days of acquiring Class A shares of the Fund to acquire shares in a second fund ("New Fund"), then the loss he can recognize on the exchange will be reduced (or the gain increased) to the extent the charge paid to the Fund reduces any charge he would have owed upon purchase of the shares of the New Fund in the absence of the exchange privilege. Instead, such charge will be treated as an amount paid for the New Fund shares. The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a calendar basis, and 98% of its capital gains, determined, in general, on an October 31 year end, plus certain undistributed amounts from previous years. While the Fund intends to distribute its income and capital gains in the manner necessary to avoid imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund's taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements. Tax Treatment of Options and Futures Transactions. The Fund may write, purchase or sell options or futures contracts. Unless the Fund is eligible to make and makes a special election, such options and futures contracts that are "Section 1256 contracts" will be "marked to market" for Federal income tax purposes at the end of each taxable year, i.e., each option or futures contract will be treated as sold for its fair market 39 value on the last day of the taxable year. In general, unless the special election referred to in the previous sentence is made, gain or loss from transactions in options and futures contracts will be 60% long-term and 40% short-term capital gain or loss. Code Section 1092, which applies to certain "straddles," may affect the taxation of the Fund's transactions in options and futures contracts. Under Section 1092, the Fund may be required to postpone recognition for tax purposes of losses incurred in certain closing transactions in options and futures. One of the requirements for qualification as a RIC is that less than 30% of the Fund's gross income may be derived from gains from the sale or other disposition of securities held for less than three months. Accordingly, the Fund may be restricted in effecting closing transactions within three months after entering into an option or futures contract. Special Rules for Certain Foreign Currency Transactions. In general, gains from "foreign currencies" and from foreign currency options, foreign currency futures and forward foreign exchange contracts relating to investments in stock, securities or foreign currencies will be qualifying income for purposes of determining whether the Fund qualifies as a RIC. It is currently unclear, however, who will be treated as the issuer of a foreign currency instrument or how foreign currency options, futures, forward foreign currency or forward foreign exchange contracts will be valued for purposes of the RIC diversification requirements applicable to the Fund. The Fund may request a private letter ruling from the Internal Revenue Service on some or all of these issues. Under Code Section 988, special rules are provided for certain transactions in a foreign currency other than the taxpayer's functional currency. (i.e., unless certain special rules apply, currencies other than the U.S. dollar). In general, foreign currency gains or losses from certain forward contracts not traded in the interbank market, from futures contracts that are not "regulated futures contracts," and from unlisted options will be treated as ordinary income or loss under Code Section 988. In certain circumstances, the Fund may elect capital gain or loss treatment for such transactions. In general, however, Code Section 988 gains or losses will increase or decrease the amount of the Fund's investment company taxable income available to be distributed to shareholders as ordinary income, rather than increasing or decreasing the amount of the Fund's net capital gain. Additionally, if Code Section 988 losses exceed other investment company taxable income during a taxable year, the Fund would not be able to make any ordinary dividend distributions, and any distributions made before the losses were realized but in the same taxable year would be recharacterized as a return of capital to shareholders, thereby reducing each shareholder's basis in his Fund shares. The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative or administrative action either prospectively or retroactively. Dividends and capital gains distributions also may be subject to state and local taxes. Shareholders are urged to consult their own tax advisers regarding specific questions as to Federal, state, local or foreign taxes. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in the Fund. 40 PERFORMANCE DATA From time to time the Fund may include its average annual total return and other total return data in advertisements or information furnished to present or prospective shareholders. Total return figures are based on the Fund's historical performance and are not intended to indicate future performance. Average annual total return is determined separately for Class A and Class B shares in accordance with a formula specified by the Securities and Exchange Commission. Average annual total return quotations for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return is computed assuming all dividends and distributions are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class A shares and the contingent deferred sales charge that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B shares. The Fund also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical $1,000 investment. Such data will be computed as described above, except that (i) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (ii) the maximum applicable sales charges will not be included. Actual annual or annualized total return data generally will be lower than average annual total return data since the average rates of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time. Set forth below is total return information for the Class A and Class B shares of the Fund for the periods indicated.
CLASS A SHARES CLASS B SHARES ----------------------------------- ----------------------------------- REDEEMABLE VALUE REDEEMABLE VALUE EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD ------ ----------------------------------- ----------------------------------- Average Annual Total Return (including maximum applicable sales charge) One Year Ended November 30, 1993............... 13.88% $1,138.80 16.86% $1,168.60 December 28, 1990 (Inception) to November 30, 1993............... 11.88% $1,389.00 13.07% $1,432.40 ANNUAL TOTAL RETURN (EXCLUDING MAXIMUM APPLICABLE SALES CHARGES) Year Ended November 30, 1993................... 21.80% $1,218.00 20.86% $1,208.60 Year Ended November 30, 1992................... 10.05% $1,100.50 9.20% $1,092.00 December 28, 1990 (Inception) to November 30, 1991............... 10.83% $1,108.30 10.05% $1,100.50 AGGREGATE TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES CHARGES) December 28, 1990 (Inception) to November 30, 1993............... 38.90% $1,389.00 43.24% $1,432.40
41 In order to reflect the reduced sales charges in the case of Class A shares or the waiver of the contingent deferred sales charge in the case of Class B shares applicable to certain investors, as described under "Purchase of Shares" and "Redemption of Shares," respectively, the total return data quoted by the Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may not take into account the contingent deferred sales charge and therefore may reflect greater total return since, due to the reduced sales charges or the waiver of sales charges, a lower amount of expenses may be deducted. From time to time, the Fund may include the Fund's Morningstar risk-adjusted performance rating in advertisements or supplemental sales literature. GENERAL INFORMATION DESCRIPTION OF SHARES The Fund was incorporated under Maryland law on September 26, 1990. It has an authorized capital of 200,000,000 shares of Common Stock, par value $0.10 per share, divided into two classes, designated Class A and Class B Common Stock, each of which consists of 100,000,000 shares. Both Class A and Class B Common Stock represent an interest in the same assets of the Fund and are identical in all respects except that the Class B shares bear certain expenses related to the account maintenance and distribution of such shares and have exclusive voting rights with respect to matters relating to such account maintenance and distribution expenditures. The Fund has received an order from the Commission permitting the issuance and sale of two classes of Common Stock. The Board of Directors of the Fund may classify and reclassify the shares of the Fund into additional classes of Common Stock at a future date. The creation of additional classes would require an additional order from the Commission. There is no assurance that such an additional order will be issued. Shareholders are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on the election of Directors and any other matter submitted to a shareholder vote. The Fund does not intend to hold meetings of shareholders in any year in which the Investment Company Act of 1940 does not require shareholders to act upon any of the following matters: (i) election of Directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of selection of independent accountants. Also, the by-laws of the Fund require that a special meeting of stockholders be held upon the written request of at least 10% of the outstanding shares of the Fund entitled to vote at such meeting. Voting rights for Directors are not cumulative. Shares issued are fully paid and non-assessable and have no preemptive or conversion rights. Redemption rights are discussed elsewhere herein and in the Prospectus. Each share is entitled to participate equally in dividends and distributions declared by the Fund and in the net assets of the Fund upon liquidation or dissolution after satisfaction of outstanding liabilities. Stock certificates are issued by the Transfer Agent only on specific request. Certificates for fractional shares are not issued in any case. The Manager provided the initial capital for the Fund by purchasing 5,000 shares of each class of stock for an aggregate of $100,000. Such shares were acquired for investment and can only be disposed of by redemption. The organizational expenses of the Fund will be paid by the Fund and amortized over a period not exceeding five years. The proceeds realized by the Manager upon redemption of any of such shares will be reduced by the proportionate amount of the unamortized organizational expenses which the number of shares redeemed bears to the number of shares initially purchased. 42 COMPUTATION OF OFFERING PRICE PER SHARE The offering price for Class A and Class B shares of the Fund, based on the value of the Fund's net assets as of November 30, 1993, is calculated as follows:
CLASS A CLASS B ----------- ------------ Net Assets......................................... $81,717,754 $596,454,500 =========== ============ Number of Shares Outstanding....................... 6,180,960 45,285,324 =========== ============ Net Asset Value Per Share (net assets divided by number of shares outstanding)..................... $ 13.22 $ 13.17 Sales Charge (for Class A shares: 6.50% of offering price (6.95% of net asset value per share))*...... $ 0.92 $ ** ----------- ------------ Offering Price..................................... $ 14.14 $ 13.17 =========== ============
- -------- * Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable. ** Class B shares are not subject to an initial sales charge but may be subject to a contingent deferred sales charge on redemption of shares within four years of purchase. See "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares" in the Prospectus. INDEPENDENT AUDITORS Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, have been selected as the independent auditors of the Fund. The selection of independent auditors is subject to ratification by the Fund's shareholders in years when an annual meeting of shareholders is held. In addition, employment of such auditors may be terminated without any penalty by vote of a majority of the outstanding shares of the Fund at a meeting called for the purpose of terminating such employment. The independent auditors are responsible for auditing the annual financial statements of the Fund. CUSTODIAN The Chase Manhattan Bank, N.A., acts as the Custodian of the Fund's assets. Under its contract with the Fund, the Custodian is authorized to establish separate accounts in foreign currencies and to cause foreign securities owned by the Fund to be held in its offices outside the United States and with certain foreign banks and securities depositories. The Custodian is responsible for safeguarding and controlling the Fund's cash and securities, handling the receipt and delivery of securities and collecting interest and dividends on the Fund's investments. TRANSFER AGENT Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening, maintenance and servicing of shareholder accounts. See "Management of the Fund--Transfer Agency Services" in the Prospectus. LEGAL COUNSEL Shereff, Friedman, Hoffman & Goodman, 919 Third Avenue, New York, New York 10022, is counsel for the Fund. 43 REPORTS TO SHAREHOLDERS The fiscal year of the Fund ends November 30 of each year. The Fund sends to its shareholders at least quarterly reports showing the Fund's portfolio and other information. An annual report, containing financial statements audited by independent auditors, is sent to shareholders each year. After the end of each year shareholders will receive Federal income tax information regarding dividends and capital gains distributions. ADDITIONAL INFORMATION The Prospectus and this Statement of Additional Information do not contain all the information set forth in the Registration Statement and the exhibits relating thereto, which the Company has filed with the Securities and Exchange Commission, Washington, D.C., under the Securities Act of 1933 and the Investment Company Act of 1940, to which reference is hereby made. Under a separate agreement Merrill Lynch has granted the Fund the right to use the "Merrill Lynch" name and has reserved the right to withdraw its consent to the use of such name by the Fund at any time or to grant the use of such name to any other company, and the Fund has granted Merrill Lynch, under certain conditions, the use of any other name it might assume in the future, with respect to any corporation organized by Merrill Lynch. To the knowledge of the Fund, no person or entity owned beneficially 5% or more of the Fund's shares on February 28, 1994. 44 APPENDIX RATINGS OF FIXED INCOME SECURITIES DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. BAA Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. BA Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and therefore not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds which are rated B generally lack characteristics of desirable investments. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. 45 DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS The term "commercial paper" as used by Moody's means promissory obligations not having an original maturity in excess of nine months. Moody's makes no representations as to whether such commercial paper is by any other definition "commercial paper" or is exempt from registration under the Securities Act of 1933, as amended. Moody's Commercial Paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's makes no representation that such obligations are exempt from registration under the Securities Act of 1933, nor does it represent that any specific note is a valid obligation of a rated issuer or issued in conformity with any applicable law. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Issuers rated PRIME-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. PRIME-1 repayment capacity will normally be evidenced by the following characteristics: --Leading market positions in well established industries --High rates of return on funds employed --Conservative capitalization structures with moderate reliance on debt and ample asset protection --Broad margins in earnings coverage of fixed financial charges and high internal cash generation --Well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated PRIME-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated PRIME-3 (or related supporting institutions) have an acceptable capacity for repayment of short-term promissory obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated NOT PRIME do not fall within any of the Prime rating categories. If an issuer represents to Moody's that its Commercial Paper obligations are supported by the credit of another entity or entities, then the name or names of such supporting entity or entities are listed within parentheses beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting entity or entities. In assigning ratings to such issuers, Moody's evaluates the financial strength of the indicated affiliated corporations, commercial banks, insurance companies, foreign governments or other entities, but only as one factor in the total rating assessment. Moody's makes no representation and gives no opinion on the legal validity or enforceability of any support arrangement. You are cautioned to review with your counsel any questions regarding particular support arrangements. 46 DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS Because of the fundamental differences between preferred stocks and bonds, a variation of the bond rating symbols is being used in the quality ranking of preferred stocks. The symbols, presented below, are designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stocks occupy a junior position to bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks. Preferred stock rating symbols and their definitions are as follows: aaa An issue which is rated "aaa" is considered to be a top-quality pre- ferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of preferred stocks. aa An issue which is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is reasonable assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future. a An issue which is rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater than in the "aaa" and "aa" classifications, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels. baa An issue which is rated "baa" is considered to be medium grade, nei- ther highly protected nor poorly secured. Earnings and asset protec- tion appear adequate at present but may be questionable over any great length of time. ba An issue which is rated "ba" is considered to have speculative ele- ments and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class. b An issue which is rated "b" generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small. caa An issue which is rated "caa" is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments. ca An issue which is rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with little likelihood of even- tual payment. c This is the lowest rated class of preferred or preference stock. Is- sues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating classification from "aa" through "b" in its preferred stock rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. 47 DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") CORPORATE DEBT RATINGS A Standard & Poor's corporate or municipal rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other reasons. The ratings are based, in varying degrees, on the following considerations: (1) likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest-rated issues only in small degree. A Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher-rated categories. Debt rated BB, B, CCC, CC and C are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. BB Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payment. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. B Debt rated B has a greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. 48 CCC Debt rated CCC has a current identifiable vulnerability to default, and is dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayments of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B-rating. CC The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC rating. C The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed but debt service payments are continued. CI The rating CI is reserved for income bonds on which no interest is being paid. D Debt rated D is in default. The D rating is assigned on the day an interest or principal payment is missed. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. Plus (+) or minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major ratings categories. Provisional ratings: The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood or risk of default upon failure of such completion. The investor should exercise judgment with respect to such likelihood and risk. L The letter "L" indicates that the rating pertains to the principal amount of those bonds to the extent that the underlying deposit collateral is insured by the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance Corp. and interest is adequately collateralized. * Continuance of the rating is contingent upon Standard & Poor's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows. NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. Debt Obligations of Issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties. BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations issued by the Comptroller of the Currency, bonds rated in the top four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade" ratings) are generally regarded as eligible for bank investment. In addition, the laws of various states governing legal investments impose certain rating or other standards for obligations eligible for investment by savings banks, trust companies, insurance companies and fiduciaries generally. 49 DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. The four categories are as follows: A Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety. A-1 This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation. A-2 Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated "A-1". A-3 Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues rated "B" are regarded as having only adequate capacity for timely payment. However, such capacity may be damaged by changing conditions or short-term adversities. C This rating is assigned to short-term debt obligations with a doubtful capacity for payment. D This rating indicates that the issue is either in default or is expected to be in default upon maturity. The commercial paper rating is not a recommendation to purchase or sell a security. The ratings are based on current information furnished to Standard & Poor's by the issuer or obtained from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information. DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS A Standard & Poor's preferred stock rating is an assessment of the capacity and willingness of an issuer to pay preferred stock dividends and any applicable sinking fund obligations. A preferred stock rating differs from a bond rating inasmuch as it is assigned to an equity issue, which issue is intrinsically different from, and subordinated to, a debt issue. Therefore, to reflect this difference, the preferred stock rating symbol will normally not be higher than the bond rating symbol assigned to, or that would be assigned to, the senior debt of the same issuer. The preferred stock ratings are based on the following considerations: I. Likelihood of payment--capacity and willingness of the issuer to meet the timely payment of preferred stock dividends and any applicable sinking fund requirements in accordance with the terms of the obligation. II. Nature of, and provisions of, the issue. III. Relative position of the issue in the event of bankruptcy, reorganization, or other arrangements affecting creditors' rights. AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred stock issue and indicates an extremely strong capacity to pay the preferred stock obligations. AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed income security. The capacity to pay preferred stock obligations is very strong, although not as overwhelming as for issues rated "AAA." 50 A An issue rated "A" is backed by a sound capacity to pay the preferred stock obligations, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the preferred stock obligations. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to make payments for a preferred stock in this category than for issues in the "A" category. BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, B as predominantly speculative with respect to the issuer's capacity to CCC pay preferred stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the highest degree of speculation. While such issues will likely have some quality and protection characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. CC The rating "CC" is reserved for a preferred stock issue in arrears on dividends or sinking fund payments but that is currently paying. C A preferred stock rated "C" is a non-paying issue. D A preferred stock rated "D" is a non-paying issue with the issuer in default on debt instruments. NR indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy. Plus (+) or minus (-): To provide more detailed indications of preferred stock quality, the ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. The preferred stock ratings are not a recommendation to purchase or sell a security, inasmuch as market price is not considered in arriving at the rating. Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and dividend rankings for common stocks. The ratings are based on current information furnished to Standard & Poor's by the issuer, and obtained by Standard & Poor's from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information. 51 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Merrill Lynch Global Utility Fund, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Merrill Lynch Global Utility Fund, Inc. as of November 30, 1993, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for the two-year period then ended and the period December 28, 1990 (commencement of operations) to November 30, 1991. These financial statements and the financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at November 30, 1993 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Merrill Lynch Global Utility Fund, Inc. as of November 30, 1993, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche Princeton, New Jersey December 31, 1993 52 SCHEDULE OF INVESTMENTS (in US Dollars)
Shares Value Percent of COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets Argentina Telecommunications 132,479 ++++Telecom Argentina Stet S.A. (ADR)++ $ 4,726,664 $ 6,193,393 0.9% 123,213 ++++Telefonica de Argentina S.A. (ADR)++ 4,464,581 6,653,502 1.0 Total Common Stocks in Argentina 9,191,245 12,846,895 1.9 Australia Utilities--Gas 2,267,000 Australian Gas & Light Co., Ltd. 5,711,381 6,952,152 1.0 Total Common Stocks in Australia 5,711,381 6,952,152 1.0 Austria Utilities--Gas 32,150 Energie Versorgung Niederoesterreich AG (EVN) 2,718,269 3,852,246 0.6 Total Common Stocks in Austria 2,718,269 3,852,246 0.6 Canada Telecommunications 127,200 BCE, Inc. (ADR)++ 4,678,103 4,356,600 0.6 Utilities--Electric 425,600 Nova Scotia Power Co. 4,007,620 4,140,078 0.6 Utilities--Gas 552,700 Transcanada Pipeline Co. Ltd. (ADR)++ 8,288,749 8,221,413 1.2 Total Common Stocks in Canada 16,974,472 16,718,091 2.4 Chile Telecommunications 80,700 Compania de Telefonos de Chile, S.A. (ADR)++ 5,531,550 6,778,800 1.0 Utilities--Electric 176,600 ++++Distribuidora Chilectra Metropolitana, S.A. (ADR)++ 4,708,327 5,496,675 0.8 12,000 Enersis S.A. (ADR)++ 216,000 235,500 0.0 ----------- ------------ ---- 4,924,327 5,732,175 0.8 Total Common Stocks in Chile 10,455,877 12,510,975 1.8 France Utilities--Water 20,928 Compagnie Generale des Eaux (Bonus Rights) (1) 0 729,403 0.1 20,928 Compagnie Generale des Eaux (Ord.) 8,793,918 9,191,602 1.4 Total Common Stocks in France 8,793,918 9,921,005 1.5 Hong Kong Telecommunications 7,644,000 Hong Kong Telecommunications PLC 12,600,067 14,546,806 2.1 Utilities--Electric 2,461,200 China Light & Power Co., Ltd. 12,282,332 14,497,327 2.1 1,552,000 Hong Kong Electric Holdings, Ltd. 3,897,526 5,243,990 0.8 ----------- ------------ ---- 16,179,858 19,741,317 2.9 Utilities--Gas 2,068,000 The Hong Kong & China Gas Co. Ltd. 4,350,783 5,140,216 0.8 Total Common Stocks in Hong Kong 33,130,708 39,428,339 5.8 Italy Telecommunications 1,675,800 Italgas Torino 4,845,444 4,434,787 0.7 2,924,700 Societa Finanziara Telefonica S.p.A. (STET) 5,439,622 4,828,837 0.7 5,351,250 Societa Italiana Esercizio Telecom S.p.A. (SIP) 7,584,134 9,649,795 1.4 Total Common Stocks in Italy 17,869,200 18,913,419 2.8 Malaysia Telecommunications 1,344,000 Telekom Malaysia BHD 9,184,414 10,090,642 1.5 Total Common Stocks in Malaysia 9,184,414 10,090,642 1.5 Mexico Telecommunications 134,900 Telefonos de Mexico S.A. de C.V. (ADR)++ 7,053,717 7,520,675 1.1 Total Common Stocks in Mexico 7,053,717 7,520,675 1.1 New Zealand Telecommunications 209,300 Telecom Corporation of New Zealand Ltd. (ADR)++ 7,213,264 8,947,575 1.3 Total Common Stocks in New Zealand 7,213,264 8,947,575 1.3 Philippines Telecommunications 129,500 Philippine Long Distance Telephone Co. (ADR)++ 5,250,051 7,899,500 1.2 Total Common Stocks in the Philippines 5,250,051 7,899,500 1.2
53 Spain Telecommunications 512,300 Telefonica de Espana S.A. 5,828,343 6,109,633 0.9 Utilities--Electric 147,800 Empresa Nacional de Electricidad, S.A. (ADR)++ 4,797,399 6,687,950 1.0 1,062,500 Iberdrola I S.A. 6,796,570 6,886,225 1.0 ----------- ------------ ---- 11,593,969 13,574,175 2.0 Total Common Stocks in Spain 17,422,312 19,683,808 2.9 Thailand Telecommunications 15,000 ++++TelecomAsia Corporation Public Co., Ltd. PLC (ADR)++ 328,050 328,050 0.0 Total Common Stocks in Thailand 328,050 328,050 0.0 United Kingdom Telecommunications 1,330,860 British Telecommunications PLC (Part Pay) 3,557,997 4,346,063 0.6 800,000 British Telecommunications PLC (Ord.) 5,573,765 5,580,408 0.8 Total Common Stocks in the United Kingdom 9,131,762 9,926,471 1.4 United States Telecommunications 111,200 American Telephone & Telegraph Co. 6,407,214 6,074,300 0.9 110,400 Ameritech Corp. 8,274,518 8,445,600 1.2 151,700 Bell Atlantic Corp. 8,027,948 9,102,000 1.3 163,400 BellSouth Corp. 9,162,908 9,334,225 1.4 257,700 GTE Corp. 9,016,758 9,567,113 1.4 205,700 NYNEX Corp. 8,342,529 8,767,962 1.3 175,100 Pacific Telesis Group 7,853,346 9,936,925 1.5 216,900 Southwestern Bell Corp. 7,422,726 9,218,250 1.4 319,900 US West, Inc. 14,757,846 14,955,325 2.2 ----------- ------------ ---- 79,265,793 85,401,700 12.6 Utilities--Electric 326,000 Allegheny Power System, Inc. 8,652,910 8,516,750 1.3 220,200 Boston Edison Co. 5,789,754 6,330,750 0.9 210,000 Central & SouthWest Corp. 5,840,299 6,247,500 0.9 231,200 Consolidated Edison Co. of New York 7,260,774 7,196,100 1.1 146,900 Detroit Edison Co. 4,899,043 4,737,525 0.7 110,250 Dominion Resources, Inc. 4,427,302 4,878,562 0.7 190,000 Duke Power Co. 8,095,413 7,980,000 1.2 267,500 Entergy Corp. 8,646,550 9,864,062 1.5 414,800 General Public Utilities Corp. 11,683,837 12,340,300 1.8 339,100 Houston Industries, Inc. 15,787,663 15,386,662 2.3 338,600 Long Island Lighting Co. 8,537,882 8,041,750 1.2 259,800 NIPSCO Industries, Inc. 6,905,271 8,248,650 1.2 235,000 New York State Electric & Gas Corp. 8,459,615 7,079,375 1.0 196,700 Northeast Utilities Co. 5,253,338 4,597,862 0.7 385,600 PSI Resources, Inc. 9,257,252 9,929,200 1.5 342,000 PacifiCorp 6,846,153 6,498,000 1.0 164,800 Pennsylvania Power & Light Co. 4,428,338 4,429,000 0.7 440,000 Philadelphia Electric Co. 12,186,735 12,320,000 1.8 100,400 Public Service Co. of Colorado 3,003,442 2,999,450 0.4 186,300 Rochester Gas & Electric Corp. 4,775,302 4,890,375 0.7 300,000 SCEcorp 6,765,509 6,112,500 0.9 202,100 Southern Co. 6,989,691 8,740,825 1.3 188,300 Texas Utilities Co. 7,596,591 8,049,825 1.2 203,300 Western Resources Co. 6,442,514 6,886,788 1.0 ----------- ----------- ---- 178,531,178 182,301,811 27.0
54 SCHEDULE OF INVESTMENTS (concluded) (in US Dollars)
Shares Value Percent of COUNTRY Industries Held Common Stocks Cost (Note 1a) Net Assets United States Utilities--Gas 130,000 The Brooklyn Union Gas Co. $ 3,371,550 $ 3,412,500 0.5% (concluded) 240,000 The Coastal Corp. 6,414,080 6,450,000 1.0 144,600 Consolidated Natural Gas Co. 6,463,720 6,669,675 1.0 236,300 El Paso Natural Gas Co. 8,352,615 8,565,875 1.3 399,100 Enron Corp. 8,119,749 12,421,988 1.8 258,300 NICOR Inc. 5,661,173 7,103,250 1.0 115,000 New Jersey Resources Corp. 3,262,177 2,975,625 0.4 250,000 Questar Corp. 6,792,478 8,218,750 1.2 338,300 Sonat, Inc. 7,262,851 10,445,012 1.5 116,300 Washington Gas Light Co. 4,016,691 4,753,762 0.7 365,000 Williams Co., Inc. 6,931,607 9,900,625 1.5 ----------- ------------ ---- 66,648,691 80,917,062 11.9 Total Common Stocks in the United States 324,445,662 348,620,573 51.5 Total Investments in Common Stocks 484,874,302 534,160,416 78.7 Face Amount Fixed-Income Securities Australia Miscellaneous US$ 7,960,000 Telstra Corp., Ltd., 6.50% due 7/31/2003 8,115,578 7,971,940 1.2 Total Fixed-Income Securities in Australia 8,115,578 7,971,940 1.2 Canada Utilities--Electric 2,000,000 Hydro-Quebec, 9.23% due 12/04/2000 2,038,540 2,327,282 0.3 Total Fixed-Income Securities in Canada 2,038,540 2,327,282 0.3 Japan Telecommunications 4,000,000 Nippon Telegraph & Telephone Corp., 9.50% due 7/27/1998 4,244,380 4,578,884 0.7 Total Fixed-Income Securities in Japan 4,244,380 4,578,884 0.7 Korea Telecommunications 2,500,000 Korea Telecom, 7.40% due 12/01/1999 2,499,500 2,593,768 0.4 Utilities--Electric 6,000,000 Korea Electric Power Corp., 6.38% due 12/01/2003 5,913,060 5,838,378 0.9 Total Fixed-Income Securities in Korea 8,412,560 8,432,146 1.3 United States Telecommunications 4,000,000 Rochester Telephone Corp., 9.50% due 6/01/2000 4,111,200 4,712,520 0.7 Utilities--Electric 4,000,000 Consumer Power Co., 8.875% due 11/15/1999 4,190,000 4,502,784 0.7 4,000,000 Niagara Mohawk Power Corp., 9.50% due 6/01/2000 4,197,640 4,700,960 0.7 ----------- ------------ ---- 8,387,640 9,203,744 1.4 Total Fixed-Income Securities in the United States 12,498,840 13,916,264 2.1 Total Investments in Fixed-Income Securities 35,309,898 37,226,516 5.6 Short-Term Securities United States Commercial 25,000,000 Cooper Industries, Inc., 3.05% Paper* due 12/07/1993 24,987,292 24,987,292 3.7 20,000,000 Daimler Benz AG, 3.07% due 12/15/1993 19,976,122 19,976,122 2.9 30,000,000 PHH Corp., 3.08% due 12/16/1993 29,961,500 29,961,500 4.4
55 22,100,000 Preferred Receivables Funding Corp., 3.10% due 12/22/1993 22,060,036 22,060,036 3.3 ----------- ------------ ---- 96,984,950 96,984,950 14.3 Repurchase Agreement** 25,262,000 Carroll McEntee & McGinley Inc., purchased on 11/30/1993 to yield 3.20% to 12/01/1993 25,262,000 25,262,000 3.7 Total Investments in Short-Term Securities 122,246,950 122,246,950 18.0 Total Investments $642,431,150 693,633,882 102.3 ============ Liabilities in Excess of Other Assets (15,461,628) (2.3) ------------ ----- Net Assets $678,172,254 100.0% ============ ===== *Commercial Paper is traded on a discount basis; the interest rates shown are the discount rates paid at the time of purchase by the Fund. **Repurchase Agreements are fully collateralized by US Government or Agency Obligations. (1)The rights may be exercised until 12/20/1993. ++American Depositary Receipt (ADR). ++++Restricted securities as to resale. The value of the Fund's investment in restricted securities was approximately $18,672,000, representing 2.8% of net assets.
Acquisition Value Issue Date Cost (Note 1a) Distribuidora Chilectra $ 4,708,327 $ 5,496,675 Metropolitana, S.A. (ADR) 2/12/92 Telecom Argentina Stet S.A. (ADR) 3/23/92 4,726,664 6,193,393 TelecomAsia Corporation Public Co., Ltd. PLC (ADR) 11/15/93 328,050 328,050 Telefonica de Argentina S.A. (ADR) 12/17/91 4,464,581 6,653,502 Total $14,227,622 $18,671,620 =========== ============ See Notes to Financial Statements.
56 STATEMENT OF ASSETS AND LIABILITIES
As of November 30, 1993 Assets: Investments, at value (identified cost--$642,431,150) (Note 1a) $ 693,633,882 Cash 85,947 Receivables: Capital shares sold $ 3,950,744 Dividends 2,423,076 Interest 674,535 7,048,355 ----------- Deferred organization expenses (Note 1f) 43,526 Prepaid registration fees and other assets (Note 1f) 40,218 -------------- Total assets 700,851,928 -------------- Liabilities: Payables: Securities purchased 20,375,446 Capital shares redeemed 1,304,378 Distributor (Note 2) 390,450 Investment adviser (Note 2) 355,527 22,425,801 ----------- Accrued expenses and other liabilities 253,873 -------------- Total liabilities 22,679,674 -------------- Net Assets: Net assets $ 678,172,254 ============== Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $ 618,096 Consist of: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 4,528,532 Paid-in capital in excess of par 616,869,380 Undistributed investment income--net 3,052,683 Undistributed realized capital gains on investments and foreign currency transactions--net 1,900,387 Unrealized appreciation on investments and foreign currency transactions--net 51,203,176 -------------- Net assets $ 678,172,254 ============== Net Asset Class A--Based on net assets of $81,717,754 and 6,180,960 shares outstanding $ 13.22 Value: ============== Class B--Based on net assets of $596,454,500 and 45,285,324 shares outstanding $ 13.17 ============== STATEMENT OF OPERATIONS For the Year Ended November 30, 1993 Investment Dividends (net of $333,875 foreign withholding tax) $ 13,141,884 Income Interest and discount earned 4,046,159 (Notes 1d & 1e): -------------- Total income 17,188,043 -------------- Expenses: Distribution fees--Class B (Note 2) $ 2,574,752 Investment advisory fees (Note 2) 2,346,433 Transfer agent fees--Class B (Note 2) 306,683 Registration fees (Note 1f) 195,864
57 Printing and shareholder reports 103,861 Accounting services (Note 2) 81,576 Custodian fees 79,514 Professional fees 64,219 Transfer agent fees--Class A (Note 2) 34,960 Directors' fees and expenses 31,371 Amortization of organization expenses (Note 1f) 20,892 Other 11,547 ------------ Total expenses 5,851,672 -------------- Investment income--net 11,336,371 -------------- Realized & Realized gain from: Unrealized Investments--net 4,662,953 Gain on Foreign currency transactions 53,369 4,716,322 Investments and ------------ Foreign Currency Change in unrealized appreciation on: Transactions-- Investments--net 37,511,259 Net (Notes 1b, Foreign currency transactions 6,895 37,518,154 1e & 3): ------------ -------------- Net realized and unrealized gain on investments and foreign currency transactions 42,234,476 -------------- Net Increase in Net Assets Resulting from Operations $ 53,570,847 ============== STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended November 30, Increase (Decrease) in Net Assets: 1993 1992 Operations: Investment income--net $ 11,336,371 $ 5,967,216 Realized gain (loss) on investments and foreign currency transactions--net 4,716,322 (1,675,682) Change in unrealized appreciation on investments and foreign currency transactions--net 37,518,154 7,399,602 ------------ ------------ Net increase in net assets resulting from operations 53,570,847 11,691,136 ------------ ------------ Dividends & Investment income--net: Distributions Class A (1,417,410) (991,785) to Shareholders Class B (8,066,873) (4,581,932) (Note 1g): Realized gain on investments--net: Class A (33,059) -- Class B (223,915) -- ------------ ------------ Net decrease in net assets resulting from dividends and distributions to shareholders (9,741,257) (5,573,717) ------------ ------------ Capital Share Net increase in net assets derived from capital share Transactions transactions 404,174,719 112,505,457 (Note 4): ------------ ------------ Net Assets: Total increase in net assets 448,004,309 118,622,876 Beginning of year 230,167,945 111,545,069 ------------ ------------ End of year* $678,172,254 $230,167,945 ============ ============ *Undistributed investment income--net $ 3,052,683 $ 1,200,595 ============ ============ See Notes to Financial Statements.
58 FINANCIAL HIGHLIGHTS
Class A Class B For the For the Period Period The following per share data and ratios have been For the Dec. 28 For the Dec. 28 derived from information provided in the Year Ended 1990++ to Year Ended 1990++ to financial statements. November 30, Nov. 30, November 30, Nov. 30, 1993 1992 1991 1993 1992 1991 Increase (Decrease) in Net Asset Value: Per Share Net asset value, beginning of period $ 11.23 $ 10.67 $ 10.00 $ 11.20 $ 10.65 $ 10.00 Operating ------- ------- ------- -------- -------- ------- Performance: Investment income--net .40 .47 .49 .33 .39 .40 Realized and unrealized gain on investments and foreign currency transactions--net++++ 2.01 .57 .56 1.98 .57 .58 ------- ------- ------- -------- -------- ------- Total from investment operations 2.41 1.04 1.05 2.31 .96 .98 Less dividends and distributions: ------- ------- ------- -------- -------- ------- Investment income--net (.41) (.48) (.38) (.33) (.41) (.33) Realized gain on investments--net (.01) -- -- (.01) -- -- ------- ------- ------- -------- -------- ------- Total dividends and distributions (.42) (.48) (.38) (.34) (.41) (.33) ------- ------- ------- -------- -------- ------- Net asset value, end of period $ 13.22 $ 11.23 $ 10.67 $ 13.17 $ 11.20 $ 10.65 ======= ======= ======= ======== ======== ======= Total Investment Based on net asset value per share 21.80% 10.05% 10.83%+++ 20.86% 9.20% 10.05%+++ Return:** ======= ======= ======= ======== ======== ======= Ratios to Average Expenses, excluding distribution fees .82% 1.01% 1.28%* .84% 1.02% 1.29%* Net Assets: ======= ======= ======= ======== ======== ======= Expenses .82% 1.01% 1.28%* 1.59% 1.77% 2.04%* ======= ======= ======= ======== ======== ======= Investment income--net 3.57% 4.47% 5.57%* 2.81% 3.65% 4.78%* ======= ======= ======= ======== ======== ======= Supplemental Net assets, end of period (in thousands) $81,718 $29,772 $20,579 $596,455 $200,396 $90,966 Data: ======= ======= ======= ======== ======== ======= Portfolio turnover 8.92% 30.91% 20.51% 8.92% 30.91% 20.51% ======= ======= ======= ======== ======== ======= *Annualized. **Total investment returns exclude the effects of sales loads. ++Commencement of Operations. ++++Foreign currency transaction amounts have been reclassified to conform to the 1993 presentation. +++Aggregate total investment return. See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Merrill Lynch Global Utility Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund offers both Class A and Class B Shares. Class A Shares are sold with a front-end sales (c) Options--When the Fund sells an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. 59 charge. Class B Shares may be subject to a contingent deferred sales charge. Both classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class B Shares bear certain expenses related to the distribution of such shares and have exclusive voting rights with respect to matters relating to such distribution expenditures. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of Securities--Securities traded in the over-the- counter market are valued at the last available bid price or yield equivalents obtained from one or more dealers in the over-the-counter market prior to the time of valuation. Portfolio securities which are traded on stock exchanges are valued at the last sale price on the principal market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Options written are valued based upon the last asked price in the case of exchange-traded options or, in the case of options traded in the over-the-counter market, at the average of the last asked price as obtained from one or more dealers. Options purchased by the Fund are valued at their last bid price in the case of exchange-traded options or, in the case of options traded in the over-the-counter market, at the average of the last bid price as obtained from two or more dealers. Other investments, including futures contracts and related options, are stated at market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund, including valuations furnished by a pricing service retained by the Fund. Short-term securities are valued at amortized cost, which approxi- mates market value. (b) Foreign Currency Transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realize or valuing (unrealized) such transactions expressed in foreign currencies into US dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. The Fund is authorized to enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. Such contracts are not entered on the Fund's records. However, the effect on operations is recorded from the date the Fund enters into such contracts. Premium or discount is amortized over the life of the contracts. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction is less than or exceeds the premiums paid or received). Written and purchased options are non-income producing investments. (d) Income Taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (e) Security Transactions and Investment Income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Interest income (including amortization of discount) is recognized on the accrual basis. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Realized gains and losses on security transactions are determined on the identified cost basis. (f) Deferred Organization Expenses and Prepaid Registration Fees-- Deferred organization expenses are charged to expense over a five-year period. Prepaid registration fees are charged to expense as the related shares are issued. (g) Dividends and Distributions--Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. (h) Reclassification--Certain 1992 amounts have been reclassified to conform to the 1993 presentation. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Asset Management ("MLAM"). MLAM is the name under which Merrill Lynch Investment Management, Inc. ("MLIM") does business. MLIM is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. The Fund has also entered into a Distribution Agreement with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of MLIM. MLAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operation of the Fund. For 60 NOTES TO FINANCIAL STATEMENTS (concluded) such services, the Fund pays a monthly fee of 0.60%, on an annual basis, of the average daily value of the Fund's net assets. The most restrictive annual expense limitation requires that the Investment Adviser reimburse the Fund to the extent the Fund's expenses (excluding interest, taxes, distribution fees, brokerage fees and commissions, and extraordinary items) exceed 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the next $70 million of average daily net assets and 1.5% of the average daily net assets in excess thereof. MLAM's obligation to reimburse the Fund is limited to the amount of the advisory fee. No fee payment will be made to the Investment Adviser during any fiscal year which will cause such expenses to exceed the most restrictive expense limitation applicable at the time of such payment. Effective January 1, 1994, the investment advisory business of MLAM reorganized from a corporation to a limited partnership. The general partner of MLAM is Princeton Services, Inc., an indirect wholly-owned subsidiary of Merrill Lynch & Co. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 pursuant to which MLFD receives a fee from the Fund at the end of each month at the annual rate of 0.75% of the average daily net assets of the Class B Shares of the Fund. This fee is to compensate the Distributor for the services it provides and the expenses borne by the Distributor under the Distribution Agreement. As authorized by the Plan, the Distributor has entered into an agreement with Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S") which provides for the compensation of MLPF&S for providing distribution-related services to the Fund. For the year ended November 30, 1993, MLFD earned $2,574,752 under the Plan, all of which was paid to MLPF&S pursuant to the agreement. For the year ended November 30, 1993, MLFD earned underwriting discounts of $89,960, and MLPF&S earned dealer concessions of $1,420,365 on sales of Class A Shares. MLPF&S also received contingent deferred sales charges of $537,201 relating to Class B Share transactions and $99,827 in commissions on the execution of portfolio security transactions for the Fund during the period. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of Merrill Lynch & Co., Inc., is the Fund's transfer agent. Accounting services are provided to the Fund by MLAM at cost. Certain officers and/or directors of the Fund are officers and/or directors of MLIM, MLPF&S, FDS, MLFD, and/or Merrill Lynch & Co., Inc. As of November 30, 1993, net unrealized appreciation for Federal income tax purposes aggregated $51,202,732, of which $57,866,566 related to appreciated securities and $6,663,834 related to depreciated securities. At November 30, 1993, the aggregate cost of investments for Federal income tax purposes was $642,431,150. 4. Capital Stock Transactions: Net increase in net assets derived from capital share transactions was $404,174,719 and $112,505,457 for the years ended November 30, 1993 and November 30, 1992, respectively. Transactions in capital shares for Class A and Class B shares were as follows: Class A Shares for the Year Ended Dollar November 30, 1993 Shares Amount Shares sold 4,349,217 $ 56,997,490 Shares issued to shareholders in reinvestment of dividends and distributions 85,983 1,081,152 --------- ------------ Total issued 4,435,200 58,078,642 Shares redeemed (905,090) (11,584,655) --------- ------------ Net increase 3,530,110 $ 46,493,987 ========= ============ Class A Shares for the Year Ended Dollar November 30, 1992 Shares Amount Shares sold 1,310,420 $ 14,652,320 Shares issued to shareholders in reinvestment of dividends 67,282 724,651 --------- ------------ Total issued 1,377,702 15,376,971 Shares redeemed (655,555) (7,180,713) --------- ------------ Net increase 722,147 $ 8,196,258 ========= ============ Class B Shares for the Year Ended Dollar November 30, 1993 Shares Amount Shares sold 30,702,352 $399,813,619 Shares issued to shareholders in reinvestment of dividends and distributions 501,195 6,292,835 ---------- ------------ Total issued 31,203,547 406,106,454 Shares redeemed (3,809,433) (48,425,722) ---------- ------------ Net increase 27,394,114 $357,680,732 ========== ============ 61 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended November 30, 1993 were $355,323,536 and $29,824,441, respectively. Net realized and unrealized gains (losses) as of November 30, 1993 were as follows: Realized Unrealized Gains (Losses) Gains Long-term investments $ 4,662,955 $ 51,202,732 Short-term investments (2) -- Foreign currency transactions 53,369 444 ------------ ------------ Total $ 4,716,322 $ 51,203,176 ============ ============ Class B Shares for the Year Ended Dollar November 30, 1992 Shares Amount Shares sold 11,092,786 $123,538,723 Shares issued to shareholders in reinvestment of dividends 291,061 3,142,568 ---------- ------------ Total issued 11,383,847 126,681,291 Shares redeemed (2,034,872) (22,372,092) ---------- ------------ Net increase 9,348,975 $104,309,199 ========== ============ 5. Subsequent Event: On December 15, 1993, the Fund's Board of Directors declared an ordinary income dividend of $0.124013 per Class A Share and a $0.099074 per Class B Share, and a capital gains distribution of $0.026921 per Class A and Class B Share, payable on December 23, 1993, to shareholders of record as of December 15, 1993. 62 [THIS PAGE INTENTIONALLY LEFT BLANK] 63 TABLE OF CONTENTS
PAGE IN THIS STATEMENT --------- Investment Objective and Policies................ 2 Portfolio Strategies In- volving Options and Futures................ 2 Other Investment Policies and Practices. 7 Investment Restrictions. 9 Management of the Fund... 12 Directors and Officers.. 12 Management and Advisory Arrangements........... 13 Purchase of Shares....... 15 Alternative Sales Ar- rangements............. 15 Initial Sales Charge Al- ternative--Class A Shares................. 15 Reduced Initial Sales Charges--Class A Shares................. 16 Deferred Sales Charge Alternative--Class B Shares................. 20 Redemption of Shares..... 20 Contingent Deferred Sales Charge--Class B Shares................. 21 Portfolio Transactions and Brokerage........... 22 Determination of Net As- set Value............... 23 Shareholder Services..... 24 Investment Account...... 24 Automatic Investment Plan................... 25 Automatic Reinvestment of Dividends and Capi- tal Gains Distributions.......... 25 Systematic Withdrawal Plans--Class A Shares.. 25 Retirement Plans........ 26 Exchange Privilege...... 26 Dividends, Distributions and Taxes............... 37 Dividends and Distribu- tions.................. 37 Taxes................... 38 Performance Data......... 41 General Information...... 42 Description of Shares... 42 Computation of Offering Price per Share.............. 43 Independent Auditors.... 43 Custodian............... 43 Transfer Agent.......... 43 Legal Counsel........... 43 Reports to Shareholders. 44 Additional Information.. 44 Appendix................. 45 Independent Auditors' Re- port.................... 52 Financial Statements..... 53
Code #11280 STATEMENT OF ADDITIONAL INFORMATION [ART] - ------------------------------------------------------------------------------- MERRILL LYNCH GLOBAL UTILITY FUND, INC. March 29, 1994 Distributor: Merrill Lynch Funds Distributor, Inc. PART C. OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS. (A) FINANCIAL STATEMENTS: Contained in Part A, the Prospectus: Financial Highlights for each of the years in the two-year period ended November 30, 1993 and the period December 28, 1990 (commence- ment of operations) to November 30, 1991. Contained in Part B, the Statement of Additional Information: Schedule of Investments as of November 30, 1993. Statement of Assets and Liabilities as of November 30, 1993. Statement of Operations for the year ended November 30, 1993. Statement of Changes in Net Assets for the years ended November 30, 1993 and November 30, 1992. Financial Highlights for each of the years in the two-year period ended November 30, 1993 and the period December 28, 1990 (commence- ment of operations) to November 30, 1991. Notes to Financial Statements. (B) EXHIBITS:
EXHIBIT NUMBER ------- 1 --Articles of Incorporation of Registrant. (a) 2 --Amended and Restated By-Laws of Registrant. 3 --None. 4(a) --Specimen Certificate for shares of Class A Common Stock of Registrant. (a) (b) --Specimen Certificate for shares of Class B Common Stock of Registrant. (a) (c) --Instruments Defining Rights of Shareholders. 5 --Management Agreement between Registrant and Merrill Lynch Asset Management. (f) 6(a) --Class A Shares Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc. (f) (b) --Class B Shares Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc. (f) 7 --None. 8 --Custody Agreement between Registrant and The Chase Manhattan Bank, N.A. (f) 9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement between Registrant and Financial Data Services, Inc. (f) (b) --License Agreement Relating to Use of Name between Merrill Lynch & Co., Inc. and Registrant. (f) 10 --Opinion and consent of Shereff, Friedman, Hoffman & Goodman, counsel for Registrant. (b) 11 --Consent of Deloitte & Touche, independent auditors for the Registrant. 12 --None. 13 --Certificate of Merrill Lynch Asset Management. (c) 14(a) --Prototype Individual Retirement Account Plan, Simplified Employee Pension Plan and Corporate Individual Retirement Account Plan available from Merrill Lynch, Pierce, Fenner & Smith Incorporated. (d) (b) --Prototype Merrill Lynch Tax-Deferred Basic (TM) Retirement Plan available from Merrill Lynch, Pierce, Fenner & Smith Incorporated. (e) 15 --Amended and Restated Distribution Plan of the Registrant and Distribution Plan Sub-Agreement. 16 --Schedule for computation of each performance quotation for Class A and Class B Shares provided in the Registration Statement in response to Item 22. (f)
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EXHIBIT NUMBER ------- 17 --Other Exhibits (g) Powers of Attorney for Officers and Directors Arthur Zeikel Gerald M. Richard Ronald W. Forbes Charles C. Reilly Kevin A. Ryan Richard R. West
- -------- (a) Incorporated by reference to respective exhibits to the Fund's initial Registration Statement (File No. 33-37103). (b) Incorporated by reference to Exhibit 10 in Pre-Effective Amendment No. 2 to the Fund's Registration Statement (File No. 33-37103). (c) Incorporated by reference to Exhibit 13 in Pre-Effective Amendment No. 2 to the Fund's Registration Statement (File No. 33-37103). (d) Incorporated by reference to Exhibit 14 to Pre-Effective Amendment No. 1 to the Registration Statement under the Securities Act of 1933 on Form N-1 (File No. 2-74584) of Merrill Lynch Retirement Series Trust, filed on January 26, 1982. (e) Incorporated by reference to Exhibit 14 to Post-Effective Amendment No. 3 to the Registration Statement under the Securities Act of 1933 on Form N-1A (File No. 2-74584) of Merrill Lynch Retirement Series Trust, filed on December 29, 1983. (f) Incorporated by reference to respective exhibits to Post-Effective Amendment No.1 to the Fund's Registration Statement (File No. 33-37103). (g) Incorporated by reference to Exhibit 17 to Post-Effective Amendment No. 3 to the Fund's Registration Statement (File No. 33-37103). ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT. Not Applicable. ITEM 26. NUMBER OF HOLDERS OF SECURITIES
NUMBER OF RECORD HOLDERS TITLE OF CLASS FEBRUARY 28, 1994 -------------- ----------------- Class A Common Stock, par value $.10 per share........... 133 Class B Common Stock, par value $.10 per share........... 846
ITEM 27. INDEMNIFICATION. Reference is made to Article VI of Registrant's Articles of Incorporation, Article VI of Registrant's Amended and Restated By-Laws (the "By-Laws") and Section 2-418 of the Maryland General Corporation Law and Section 9 of the Distribution Agreements. Article VI of the By-Laws provides that each officer and Director of the Registrant shall be indemnified by the Registrant to the full extent permitted under the General Laws of the State of Maryland, except that such indemnity shall not protect any such person against any liability to the Registrant or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Absent a court determination that an officer or director seeking indemnification was not liable on the merits or guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, the decision by the Registrant to indemnify such person must be based upon the reasonable determination of independent counsel or non-party independent directors, after review of the facts, that such officer or director is not guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. C-2 Each officer and director of the Registrant claiming indemnification with the scope of Article VI of the By-Laws shall be entitled to advances from the Registrant for payment of the reasonable expenses incurred by him in connection with proceedings to which he is a party in the manner and to the full extent permitted under the General Laws of the State of Maryland; provided, however, that the person seeking indemnification shall provide to the Registrant a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Registrant has been met and a written undertaking to repay any such advance, if it should ultimately be determined that the standard of conduct has not been met, and provided further that at least one of the following additional conditions is met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the Registrant for his undertaking; (b) the Registrant is insured against losses arising by reason of the advance; (c) a majority of a quorum of non-party independent directors, or independent legal counsel in a written opinion, shall determine, based on a review of facts readily available to the Registrant at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification. The Registrant may purchase insurance on behalf of an officer or director protecting such person to the full extent permitted under the General Laws of the State of Maryland from liability arising from his activities as officer or director of the Registrant. The Registrant, however, may not purchase insurance on behalf of any officer or director of the Registrant that protects or purports to protect such person from liability to the Registrant or to its stockholders to which such officer or director would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. The Registrant may indemnify or purchase insurance to the extent provided in Article VI on behalf of an employee or agent who is not an officer or director of the Registrant. In Section 9 of the Distribution Agreement relating to the securities being offered hereby, the Registrant agrees to indemnify the Distributor and each person, if any, who controls the Distributor within the meaning of the Securities Act of 1933 (the "Act"), against certain types of civil liabilities arising in connection with the Registration Statement or Prospectus and Statement of Additional Information. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant and the principal underwriter pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant and the principal underwriter in connection with the successful defense of any action, suit or proceeding) is asserted by such Director, officer or controlling person or the principal underwriter in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER. Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), acts as the investment adviser for the following companies: Convertible Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch C-3 High Income Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable Series Funds, Inc. Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as the investment adviser for the following registered investment companies: Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial Institutions Series Trust, Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc., and Worldwide DollarVest, Inc. The address of each of these investment companies is Box 9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of MLAM and FAM is also Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street, New York, New York 10281. Set forth below is a list of each executive officer and partner of the Manager indicating each business, profession, vocation or employment of a substantial nature in which each such person or entity has been engaged since December 31, 1991, for such person's or entity's own account or in the capacity of director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of all or substantially all of the investment companies described in the preceding paragraph. Mr. Zeikel is a director of substantially all of such companies, and Mr. Glenn is a director of certain of such companies. Messrs. Durnin, Giordano, Harvey, Hewitt and Monagle are directors or officers of one or more of such companies.
OTHER SUBSTANTIAL BUSINESS, NAME POSITION WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT ---- ------------------------- ---------------------------------- ML & Co.............. Limited Partner Financial Services Holding Company Merrill Lynch Invest- ment Management, Inc................. Limited Partner Investment Advisory Services
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OTHER SUBSTANTIAL BUSINESS, NAME POSITION WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT ---- ------------------------- ---------------------------------- Princeton Services, General Partner General Partner of FAM Inc................. ("Princeton Servic- es") Arthur Zeikel........ President President of FAM; President and Director of Princeton Services; Director of MLFD; Executive Vice President of ML & Co.; Executive Vice President of Merrill Lynch Terry K. Glenn....... Executive Vice President Executive Vice President of FAM; Executive Vice President and Director of Princeton Services; President and Director of MLFD; President of Princeton Administrators Bernard J. Durnin.... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services Vincent R. Giordano.. Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services Elizabeth Griffin.... Senior Vice President Senior Vice President of FAM Norman R. Harvey..... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services N. John Hewitt....... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services Philip L. Kirstein... Senior Vice President, Senior Vice President, General General Counsel and Counsel and Secretary of FAM; Secretary Senior Vice President, General Counsel, Director and Secretary of Princeton Services; Director of MLFD Ronald M. Kloss...... Senior Vice President Senior Vice President and Controller and Controller of FAM; Senior Vice President and Controller of Princeton Services Joseph T. Monagle, Senior Vice President Senior Vice President of FAM; Senior Jr.................. Vice President of Princeton Services Gerald M. Richard.... Senior Vice President Senior Vice President and Treasurer and Treasurer of FAM; Senior Vice President and Treasurer of Princeton Services; Vice President and Treasurer of MLFD Richard L. Rufener... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services; Vice President of FAM Ronald L. Welburn.... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services Anthony Wiseman...... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton Services
ITEM 29. PRINCIPAL UNDERWRITERS. (a) MLFD acts as the principal underwriter for the Registrant and for each of the open-end investment companies referred to in the first paragraph of Item 28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., C-5 MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Summit Cash Reserves Fund, The Municipal Fund Accumulation Program, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Special Value Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch World Income Fund, Inc., Merrill Lynch Federal Securities Trust, Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest, Inc. (b) Set forth below is information concerning each director and officer of MLFD. The principal business address of each such person is Box 9011, Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook, Aldrich, Graczyk, Fatseas, Maguire, Schera and Wasel is One Financial Center, Boston, Massachusetts 02111-2665.
(2) (3) POSITIONS AND POSITIONS AND (1) OFFICES WITH OFFICES WITH NAME MLFD REGISTRANT ---- ------------- ------------- Terry K. Glenn.......... President Executive Vice President Arthur Zeikel........... Director President and Director Philip L. Kirstein...... Director None William E. Aldrich...... Senior Vice President None Robert W. Crook......... Senior Vice President None Michael J. Brady........ Vice President None Sharon Creveling........ Vice President and Assistant Treasurer None Mark A. DeSario......... Vice President None James J. Fatseas........ Vice President None Stanley Graczyk......... Vice President None Debra W. Landsman-Yaros. Vice President None Michelle T. Lau......... Vice President None Gerald M. Richard....... Vice President and Treasurer Treasurer Richard L. Rufener...... Vice President None Salvatore Venezia....... Vice President None William Wasel........... Vice President None Mark A. Maguire......... Assistant Vice President None Patricia A. Schera...... Assistant Vice President None Robert Harris........... Secretary None
(c) Not applicable. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS. All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the rules thereunder are maintained at the offices of the Registrant and its Transfer Agent. C-6 ITEM 31. MANAGEMENT SERVICES. Other than as set forth under the caption "Management of the Fund--Management and Advisory Arrangements" in the Prospectus constituting Part A of the Registration Statement and under "Management of the Fund--Management and Advisory Arrangements" in the Statement of Additional Information constituting Part B of the Registration Statement, Registrant is not party to any management-related service contact. ITEM 32. UNDERTAKINGS. The Registrant will furnish each person to whom a Prospectus is delivered with a copy of Registrant's latest annual report to shareholders, upon request and without charge. C-7 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, AND STATE OF NEW YORK, ON THE 28TH DAY OF MARCH, 1994. Merrill Lynch Global Utility Fund, Inc. Registrant /s/ Arthur Zeikel By__________________________________ (ARTHUR ZEIKEL, President) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST- EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURES TITLE DATE /s/ Arthur Zeikel President (Principal - ------------------------------------- Executive Officer) March 28, 1994 (ARTHUR ZEIKEL) and Director /s/ Gerald M. Richard Treasurer (Principal March 28, 1994 - ------------------------------------- Financial and Accounting Officer) (GERALD M. RICHARD) * Director - ------------------------------------- (RONALD W. FORBES) * Director - ------------------------------------- (CHARLES C. REILLY) * Director - ------------------------------------- (KEVIN A. RYAN) * Director - ------------------------------------- (RICHARD R. WEST) * This Amendment has been signed by each of the persons so indicated by the undersigned as Attorney-in-Fact. *By /s/ Arthur Zeikel ---------------------------------- (ARTHUR ZEIKEL, Attorney-in-Fact) March 28, 1994 C-8 INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED EXHIBIT NUMBER DESCRIPTION PAGE -------------- ----------- ------------ (2) --Amended and Restated By-Laws of Registrant..... (4)(c) --Instruments Defining Rights of Shareholders.... (11) --Consent of Deloitte & Touche, independent auditors to the Registrant..................... (15) --Amended and Restated Distribution Plan of Registrant and Distribution Plan Sub-Agreement.
PAGE WHERE GRAPHIC APPEARS DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE - ---------- ----------------------------------------- PROBC PICTURE OF UTILITIES SURROUNDING SAIBC A GLOBE
EX-99.2 2 AMENDED BY-LAWS EXHIBIT 99.2 AMENDED BY-LAWS OF MERRILL LYNCH GLOBAL UTILITY FUND, INC. ARTICLE I Offices ------- Section 1. Principal Office. The principal office of the Corporation ---------------- shall be in the City of Baltimore, State of Maryland. Section 2. Principal Executive Office. The principal executive office of -------------------------- the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New Jersey 08536. Section 3. Other Offices. The Corporation may have such other offices in ------------- such places as the Board of Directors may from time to time determine. ARTICLE II Meetings of Stockholders ------------------------ Section 1. Annual Meeting. So long as the Corporation is registered as an -------------- investment company under the Investment Company Act of 1940 (such term to include the rules and regulations promulgated under the Investment Company Act of 1940 unless otherwise specified or the context otherwise requires), annual meetings of the stockholders shall not be held, except where required to be held by the Investment Company Act of 1940 or by the Maryland General Corporation Law or when called by the Board of Directors or by an officer or officers authorized to take such action by the Board of Directors. If in any calendar year the Corporation is required or elects to hold an annual meeting, the meeting shall be held on such day, not a Saturday, Sunday or legal holiday, as the Board of Directors or the officer or officers calling the meeting may prescribe. At each such annual meeting, the stockholders shall elect a Board of Directors and transact such other business as may properly come before the meeting. The provisions of these By-Laws which contemplate the holding of an annual meeting of stockholders shall be suspended during any calendar year in which no annual meeting of stockholders is held. Section 2. Special Meetings. Special meetings of the stockholders, unless ---------------- otherwise provided by law or by the Articles of Incorporation, may be called for any purpose or purposes by a majority of the Board of Directors, the President, or on the written request of the holders of the outstanding shares of capital stock of the Corporation entitled to vote at such meeting to the extent permitted by Maryland law. Section 3. Place of Meetings. The annual meeting and any special meeting ----------------- of the stockholders shall be held at such place within the United States as the Board of Directors may from time to time determine. Section 4. Notice of Meetings; Waiver of Notice. Notice of the place, ------------------------------------ date and time of the holding of each annual and special meeting of the stockholders and the purpose or purposes of each special meeting shall be given personally or by mail, not less than ten nor more than ninety days before the date of such meeting, to each stockholder entitled to vote at such meeting and to each other stockholder entitled to notice of the meeting. Notice by mail shall be deemed to be duly given when deposited in the United States mail addressed to the stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Notice of any meeting of stockholders shall be deemed waived by any stockholder who shall attend such meeting in person or by proxy, or who shall, either before or after the meeting, submit a signed waiver of notice which is filed with the records of the meeting. When a meeting is adjourned to another time and place, unless the Board of Directors, after the adjournment, shall fix a new record date for an adjourned meeting, or the adjournment is for more than one hundred and twenty days after the original record date, notice of such adjourned meeting need not be given if the time and place to which the meeting shall be adjourned were announced at the meeting at which the adjournment is taken. Section 5. Quorum. At all meetings of the stockholders, the holders of a ------ majority of the shares of stock of the Corporation entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for the transaction of any business, except as otherwise provided by statute or by the Articles of Incorporation. In the absence of a quorum no business may be transacted, except that the holders of a majority of the shares of stock present in person or by proxy and entitled to vote may adjourn the meeting from time to time, without notice other than announcement thereat except as otherwise required by these By-Laws, until the holders of the requisite amount of shares of stock shall be so present. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. The absence from any meeting, in person or by proxy, of holders of the number of shares of stock of the Corporation in excess of a majority thereof which may be required by the laws of the State of Maryland, the Investment Company Act of 1940, as amended, or other applicable statute, the Articles of Incorporation, or these By-Laws, for action upon any given matter shall not prevent action at such meeting upon any other matter or matters which may properly come before the meeting, if there shall be present thereat, in person or by proxy, holders of the number of shares of stock of the Corporation required for action in respect of such other matter or matters. Section 6. Organization. At each meeting of the stockholders, the ------------ Chairman of the Board (if one has been designated by the Board), or in his absence or inability to act, the President, or in the absence or inability to act of the Chairman of the Board and the President, a Vice President, shall act as chairman of the meeting. The Secretary, or in his absence or 2 inability to act, any person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes thereof. Section 7. Order of Business. The order of business at all meetings of ----------------- the stockholders shall be as determined by the chairman of the meeting. Section 8. Voting. Except as otherwise provided by statute or the ------ Articles of Incorporation, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of such stock standing in his name on the record of stockholders of the Corporation as of the record date determined pursuant to Section 9 of this Article or if such record date shall not have been so fixed, then at the later of (i) the close of business on the day on which notice of the meeting is mailed or (ii) the thirtieth day before the meeting. Each stockholder entitled to vote at any meeting of stock holders may authorize another person or persons to act for him by a proxy signed by such stockholder or his attorney-in-fact. No proxy shall be valid after the expiration of eleven months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where such proxy states that it is irrevocable and where an irrevocable proxy is permitted by law. Except as otherwise provided by statute, the Articles of Incorporation or these By-Laws, any corporate action to be taken by vote of the stockholders shall be authorized by a majority of the total votes cast at a meeting of stockholders by the holders of shares present in person or represented by proxy and entitled to vote on such action. If a vote shall be taken on any question other than the election of directors, which shall be by written ballot, then unless required by statute or these By-Laws, or determined by the chairman of the meeting to be advisable, any such vote need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. Section 9. Fixing of Record Date. The Board of Directors may set a record --------------------- date for the purpose of determining stockholders entitled to vote at any meeting of the stockholders. The record date, which may not be prior to the close of business on the day the record date is fixed, shall be not more than ninety nor less than ten days before the date of the meeting of the stockholders. All persons who were holders of record of shares at such time, and not others, shall be entitled to vote at such meeting and any adjournment thereof. Section 10. Inspectors. The Board may, in advance of any meeting of ---------- stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If the inspectors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting may, and on the request of any stockholder entitled to vote thereat shall, appoint inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath to execute faithfully the duties of inspector at such meeting with strict impartiality and 3 according to the best of his ability. The inspectors shall determine the number of shares outstanding and the voting powers of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as inspector of an election of directors. Inspectors need not be stockholders. Section 11. Consent of Stockholders in Lieu of Meeting. Except as ------------------------------------------ otherwise provided by statute or the Articles of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if the following are filed with the records of stockholders meetings: (i) a unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and (ii) a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote thereat. ARTICLE III Board of Directors ------------------ Section 1. General Powers. Except as otherwise provided in the Articles -------------- of Incorporation, the business and affairs of the Corporation shall be managed under the direction of the Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors except as conferred on or reserved to the stockholders by law or by the Articles of Incorporation or these By-Laws. Section 2. Number of Directors. The number of directors shall be fixed ------------------- from time to time by resolution of the Board of Directors adopted by a majority of the Directors then in office; provided, however, that the number of directors shall in no event be less than three nor more than fifteen. Any vacancy created by an increase in directors may be filled in accordance with Section 6 of this Article III. No reduction in the number of directors shall have the effect of removing any director from office prior to the expiration of his term unless such director is specifically removed pursuant to Section 5 of this Article III at the time of such decrease. Directors need not be stockholders. Section 3. Term of Directors. The term of office of each director shall ----------------- be from the time of his election and qualification until the annual election of directors next succeeding his election and until his successor shall have been elected and shall have qualified, or until his death, or until he shall have resigned, or until December 31 of the year in which he shall have reached 4 seventy-two years of age, or until he shall have been removed as hereinafter provided in these By-Laws, or as otherwise provided by statute or the Articles of Incorporation. Section 4. Resignation. A director of the Corporation may resign at any ----------- time by giving written notice of his resignation to the Board or the Chairman of the Board or the President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. Removal of Directors. Any director of the Corporation may be -------------------- removed for cause (but not without cause) by the stockholders by a vote of seventy-five percent (75%) of the outstanding shares of capital stock then entitled to vote in the election of directors. Section 6. Vacancies. Subject to the provisions of the Investment Company --------- Act of 1940, as amended, any vacancies in the Board, whether arising from death, resignation, removal, an increase in the number of directors or any other cause, shall be filled by a vote of the Board of Directors in accordance with the Articles of Incorporation. Section 7. Place of Meetings. Meetings of the Board may be held at such ----------------- place as the Board may from time to time determine or as shall be specified in the notice of such meeting. Section 8. Regular Meeting. Regular meetings of the Board may be held --------------- without notice at such time and place as may be determined by the Board of Directors. Section 9. Special Meetings. Special meetings of the Board may be called ---------------- by two or more directors of the Corporation or by the Chairman of the Board or the President. Section 10. Telephone Meetings. Members of the Board of Directors or of ------------------ any committee thereof may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Subject to the provisions of the Investment Company Act of 1940, as amended, participation in a meeting by these means constitutes presence in person at the meeting. Section 11. Notice of Special Meetings. Notice of each special meeting of -------------------------- the Board shall be given by the Secretary as hereinafter provided, in which notice shall be stated the time and place of the meeting. Notice of each such meeting shall be delivered to each director, either personally or by telephone or any standard form of telecommunication, at least twenty-four hours before the time at which such meeting is to be held, or by first-class mail, postage prepaid, addressed to him at his residence or usual place of business, at least three days before the day on which such meeting is to be held. Section 12. Waiver of Notice of Meetings. Notice of any special meeting ---------------------------- need not be given to any director who shall, either before or after the meeting, sign a written waiver of 5 notice which is filed with the records of the meeting or who shall attend such meeting. Except as otherwise specifically required by these By-Laws, a notice or waiver or notice of any meeting need not state the purposes of such meeting. Section 13. Quorum and Voting. One-third, but not less than two, of the ----------------- members of the entire Board shall be present in person at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and except as otherwise expressly required by statute, the Articles of Incorporation, these By-Laws, the Investment Company Act of 1940, as amended, or other applicable statute, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. In the absence of a quorum at any meeting of the Board, a majority of the directors present thereat may adjourn such meeting to another time and place until a quorum shall be present thereat. Notice of the time and place of any such adjourned meeting shall be given to the directors who were not present at the time of the adjournment and, unless such time and place were announced at the meeting at which the adjournment was taken, to the other directors. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Section 14. Organization. The Board may, by resolution adopted by a ------------ majority of the entire Board, designate a Chairman of the Board, who shall preside at each meeting of the Board. In the absence or inability of the Chairman of the Board to preside at a meeting, the President or, in his absence or inability to act, another director chosen by a majority of the directors present, shall act as chairman of the meeting and preside thereat. The Secretary (or, in his absence or inability to act, any person appointed by the Chairman) shall act as secretary of the meeting and keep the minutes thereof. Section 15. Written Consent of Directors in Lieu of a Meeting. Subject to ------------------------------------------------- the provisions of the Investment Company Act of 1940, as amended, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writings or writing are filed with the minutes of the proceedings of the Board or committee. Section 16. Compensation. Directors may receive compensation for services ------------ to the Corporation in their capacities as directors or otherwise in such manner and in such amounts as may be fixed from time to time by the Board. Section 17. Investment Policies. It shall be the duty of the Board of ------------------- Directors to direct that the purchase, sale, retention and disposal of portfolio securities and the other investment practices of the Corporation are at all times consistent with the investment policies and restrictions with respect to securities investments and otherwise of the Corporation, as recited in the Prospectus of the Corporation included in the registration statement of the Corporation relating to the initial public offering of its capital stock, as filed with the Securities and Exchange Commission (or as such investment policies and restrictions may be modified by the 6 Board of Directors, or, if required, by majority vote of the stockholders of the Corporation in accordance with the Investment Company Act of 1940, as amended) and as required by the Investment Company Act of 1940, as amended. The Board however, may delegate the duty of management of the assets and the administration of its day to day operations to an individual or corporate management company and/or investment adviser pursuant to a written contract or contracts which have obtained the requisite approvals, including the requisite approvals of renewals thereof, of the Board of Directors and/or the stockholders of the Corporation in accordance with the provisions of the Investment Company Act of 1940, as amended. ARTICLE IV Committees ---------- Section 1. Executive Committee. The Board may, by resolution adopted by a ------------------- majority of the entire board, designate an Executive Committee consisting of two or more of the directors of the Corporation, which committee shall have and may exercise all the powers and authority of the Board with respect to all matters other than: (a) the submission to stockholders of any action requiring authorization of stockholders pursuant to statute or the Articles of Incorporation; (b) the filling of vacancies on the Board of Directors; (c) the fixing of compensation of the directors for serving on the Board or on any committee of the Board, including the Executive Committee; (d) the approval or termination of any contract with an investment adviser or principal underwriter, as such terms are defined in the Investment Company Act of 1940, as amended, or the taking of any other action required to be taken by the Board of Directors by the Investment Company Act of 1940, as amended; (e) the amendment or repeal of these By-Laws or the adoption of new By- Laws; (f) the amendment or repeal of any resolution of the Board which by its terms may be amended or repealed only by the Board; (g) the declaration of dividends and the issuance of capital stock of the Corporation; and (h) the approval of any merger or share exchange which does not require stockholder approval. 7 The Executive Committee shall keep written minutes of its proceedings and shall report such minutes to the Board. All such proceedings shall be subject to revision or alteration by the Board; provided, however, that third parties shall not be prejudiced by such revision or alteration. Section 2. Other Committees of the Board. The Board of Directors may from ----------------------------- time to time, by resolution adopted by a majority of the whole Board, designate one or more other committees of the Board, each such committee to consist of two or more directors and to have such powers and duties as the Board of Directors may, by resolution, prescribe. Section 3. General. One third, but not less than two, of the members of ------- any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority present shall be the act of such committee. The Board may designate a chairman of any committee and such chairman or any two members of any committee may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any member of any committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The Board shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority or power of the Board in the management of the business or affairs of the Corporation. ARTICLE V Officers, Agents and Employees ------------------------------ Section 1. Number of Qualifications. The officers of the Corporation ------------------------ shall be a President, who shall be a director of the Corporation, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors. The Board of Directors may elect or appoint one or more Vice Presidents and may also appoint such other officers, agents and employees as it may deem necessary or proper. Any two or more offices may be held by the same person, except the offices of President and Vice President, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Such officers shall be elected by the Board of Directors each year at its first meeting held after the annual meeting of stockholders, each to hold office until the meeting of the stockholders and until his successor shall have been duly elected and shall have qualified, or until his death, or until he shall have resigned, or have been removed, as herein after provided in these By-Laws. The Board may from time to time elect, or delegate to the President the power to appoint, such officers (including one or more Assistant 8 Vice Presidents, one or more Assistant Treasurers and one or more Assistant Secretaries) and such agents, as may be necessary or desirable for the business of the Corporation. Such officers and agents shall have such duties and shall hold their offices for such terms as may be prescribed by the Board or by the appointing authority. Section 2. Resignations. Any officer of the Corporation may resign at any ------------ time by giving written notice of resignation to the Board, the Chairman of the Board, President or the Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall be necessary to make it effective. Section 3. Removal of Officer, Agent or Employee. Any officer, agent or ------------------------------------- employee of the Corporation may be removed by the Board of Directors with or without cause at any time, and the Board may delegate such power of removal as to agents and employees not elected or appointed by the Board of Directors. Such removal shall be without prejudice to such person's contract rights, if any, but the appointment of any person as an officer, agent or employee of the Corporation shall not of itself create contract rights. Section 4. Vacancies. A vacancy in any office, whether arising from --------- death, resignation, removal or any other cause, may be filled for the unexpired portion of the term of the office which shall be vacant, in the manner prescribed in these By-Laws for the regular election or appointment to such office. Section 5. Compensation. The compensation of the officers of the ------------ Corporation shall be fixed by the Board of Directors, but this power may be delegated to any officer in respect of other officers under his control. Section 6. Bonds or Other Security. If required by the Board, any ----------------------- officer, agent or employee of the Corporation shall give a bond or other security for the faithful performance of his duties, in such amount and with such surety or sureties as the Board may require. Section 7. President. The President shall be the chief executive officer --------- of the Corporation. In the absence of the Chairman of the Board (or if there be none), he shall preside at all meetings of the stockholders and of the Board Directors. He shall have, subject to the control of the Board of Directors, general charge of the business and affairs of the Corporation. He may employ and discharge employees and agents of the Corporation, except such as shall be appointed by the Board, and he may delegate these powers. Section 8. Vice President. Each Vice President shall have such powers and -------------- perform such duties as the Board of Directors or the President may from time to time prescribe. Section 9. Treasurer. The Treasurer shall: --------- 9 (a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation, except those which the Corporation has placed in the custody of a bank or trust company or member of a national securities exchange (as that term is defined in the Securities Exchange Act of 1934, as amended) pursuant to a written agreement designating such bank or trust company or member of a national securities exchange as custodian of the property of the Corporation; (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; (c) cause all moneys and other valuable to be deposited to the credit of the Corporation; (d) receive, and give receipts for, moneys due and payable, to the Corporation from any source whatsoever; (e) disburse the funds of the Corporation and supervise the investment of its funds as ordered or authorized by the Board, taking proper vouchers therefor; and (f) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board or the President. Section 10. Secretary. The Secretary shall --------- (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board, the committees of the Board and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board or the President. 10 Section 11. Delegation of Duties. In case of the absence of any officer -------------------- of the Corporation, or for any other reason that the Board may deem sufficient, the Board may confer for the time being, the powers or duties, or any of them, of such officer upon any other officer or upon any director. ARTICLE VI Indemnification --------------- Each officer and director of the Corporation shall be indemnified by the Corporation to the full extent permitted under the General Laws of the State of Maryland, except that such indemnity shall not protect any such person against any liability to the Corporation or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Absent a court determination that an officer or director seeking indemnification was not liable on the merits or guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office, the decision by the Corporation to indemnify such person must be based upon the reasonable determination of independent legal counsel or the vote of a majority of a quorum of the directors who are neither "interested persons", as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the proceeding ("non- party independent directors"), after review of the facts, that such officer or director is not guilty of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Each officer and director of the Corporation claiming indemnification within the scope of this Article VI shall be entitled to advances from the Corporation for payment of the reasonable expenses incurred by him in connection with proceedings to which he is a party in the manner and to the full extent permitted under the General Laws of the State of Maryland; provided, however, that the person seeking indemnification shall provide to the Corporation a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met and a written undertaking to repay any such advance, if it should ultimately be determined that the standard of conduct has not been met, and provided further that at least one of the following additional conditions is met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the Corporation for his undertaking; (b) the Corporation is insured against losses arising by reason of the advance; (c) a majority of a quorum of non-party independent directors, or independent legal counsel in a written opinion, shall determine, based on a review of facts readily available to the Corporation at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification. The Corporation may purchase insurance on behalf of an officer or director protecting such person to the full extent permitted under the General Laws of the State of Maryland, from liability arising from his activities as officer or director of the Corporation. The 11 Corporation, however, may not purchase insurance on behalf of any officer or director of the Corporation that protects or purports to protect such person from liability to the Corporation or to its stockholders to which such officer or director would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. The Corporation may indemnify, make advances or purchase insurance to the extent provided in this Article VI on behalf of an employee or agent who is not an officer or director of the Corporation. ARTICLE VII Capital Stock ------------- Section 1. Stock Certificates. Each holder of stock of the Corporation ------------------ shall be entitled upon request to have a certificate or certificates, in such form as shall be approved by the Board, representing the number of shares of stock of the Corporation owned by him, provided, however that certificates for fractional shares will not be delivered in any case. The certificates representing shares of stock shall be signed by or in the name of the Corporation by the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal of the Corporation. Any or all of the signatures or the seal on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate shall be issued, it may be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were still in the office at the date of issue. Section 2. Books of Account and Record of Stockholders. There shall be ------------------------------------------- kept at the principal executive office of the Corporation correct and complete books and records of account of all the business and transactions of the Corporation. There shall be made available upon request of any stockholder, in accordance with Maryland law, a record containing the number of shares of stock issued during a specified period not to exceed twelve months and the consideration received by the Corporation for each such share. Section 3. Transfer of Shares. Transfer of shares of stock of the ------------------ Corporation shall be made on the stock records of the Corporation only by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate of certificates, if issued, for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in whose name any share or shares stand on the record of stockholders as the owner of such share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions, and 12 to vote as such owner, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in any such share or shares on the part of any other person. Section 4. Regulations. The Board may make such additional rules and ----------- regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates for shares of stock to bear the signature or signatures of any of them. Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any ----------------------------------------- certificates representing shares of stock of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall alleged to have been lost or destroyed or which shall have been mutilated, and the Board may, in its description, require such owner or his legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties, as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim they may be made against it on account of the alleged loss or destruction of any such certificate, or issuance of a new certificate. Anything herein to the contrary notwithstanding, the Board, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of Maryland. Section 6. Fixing of a Record Date for Dividends and Distribution. The ------------------------------------------------------ Board may fix, in advance, a date not more than ninety days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of interests or evidences of interests arising out of any changes, conversion or exchange of common stock or other securities, as the record date for the determination of the stockholders entitled to receive any such dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests. Section 7. Information to Stockholders and Others. Any stockholder of the -------------------------------------- Corporation or his agent may inspect and copy during usual business hours the Corporation's By-Laws, minutes of the proceedings of its stockholders, annual statements of its affairs, and voting trust agreements on file at its principal office. ARTICLE VIII Seal ---- The Seal of the Corporation shall be circular in form and shall bear, in addition to any other emblem or device approved by the Board of Directors, the name of the 13 Corporation, the year of its incorporation and the words "Corporate Seal" and "Maryland". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE IX Fiscal Year ----------- Unless otherwise determined by the Board, the fiscal year of the Corporation shall end on the 30th day of November. ARTICLE X Depositories and Custodians --------------------------- Section 1. Depositories. The funds of the Corporation shall be deposited ------------ with such banks or other depositories as the Board of Directors of the Corporation may from time to time determine. Section 2. Custodians. All securities and other investments shall be ---------- deposited in the safe keeping of such banks or other companies as the Board of Directors of the Corporation may from time to time determine. Every arrangement entered into with any bank or other company for the safe keeping of the securities and investments of the Corporation shall contain provisions complying with the Investment Company Act of 1940, as amended, and the general rules and regulations thereunder. ARTICLE XI Execution of Instruments ------------------------ Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts, -------------------------- acceptances, bills of exchange and other orders or obligations for the payment of money shall be signed by such officer or officers or person or persons as the Board of Directors by resolution shall from time to time designate. Section 2. Sale or Transfer of Securities. Stock certificates, bonds or ------------------------------ other securities at any time owned by the Corporation may be held on behalf of the Corporation or sold, transferred or otherwise disposed of subject to any limits imposed by these By-Laws and pursuant to authorization by the Board and, when so authorized to be held on behalf of the Corporation or sold, transferred or otherwise disposed of, may be transferred from the name of 14 the Corporation by the signature of the President or a Vice President or the Treasurer or pursuant to any procedure approved by the Board of Directors, subject to applicable law. ARTICLE XII Independent Public Accountants ------------------------------ The firm of independent public accountants which shall sign or certify the financial statements of the Corporation which are filed with the Securities and Exchange Commission shall be selected annually by the Board of Directors and ratified by the stockholders in accordance with the provisions of the Investment Company Act of 1940, as amended. ARTICLE XIII Annual Statement ---------------- The books of account of the Corporation shall be examined by an independent firm of public accountants at the close of each annual period of the Corporation and at such other times as may be directed by the Board. A report to the stockholders based upon each such examination shall be mailed to each stockholder of the Corporation of record on such date with respect to each report as may be determined by the Board, at his address as the same appears on the books of the Corporation. Such annual statement shall also be available at the annual meeting of stockholders and be placed on file at the Corporation's principal office in the State of Maryland. Each such report shall show the assets and liabilities of the Corporation as of the close of the annual or quarterly period covered by the report and the securities in which the funds of the Corporation were then invested. Such report shall also show the Corporation's income and expenses for the period from the end of the Corporation's preceding fiscal year to the close of the annual or quarterly period covered by the report and any other information required by the Investment Company Act of 1940, as amended, and shall set forth such other matters as the Board or such firm of independent public accountants shall determine. ARTICLE XIV Amendments ---------- These By-Laws or any of them may be amended, altered or repealed at any regular meeting of the stockholders or at any special meeting of the stockholders by a favorable vote of the holders of at least seventy-five percent (75%) of the outstanding shares of capital stock of the Corporation entitled to be voted on the matter, provided that notice of the proposed amendment, alteration or repeal be contained in the notice of such special meeting. These By-Laws may also be amended, altered or repealed by the affirmative vote of a majority of the 15 Board of Directors at any regular or special meeting of the Board of Directors, except any particular By-Law which is specified as not subject to alteration or repeal by the Board of Directors, subject to the requirements of the Investment Company Act of 1940, as amended. 16 EX-99.4(C) 3 INSTRUMENTS DEFINING RIGHTS OF SHAREHOLDERS EXHIBIT 99.4(C) INSTRUMENTS DEFINING RIGHTS OF SHAREHOLDERS Copies of instruments defining the rights of shareholders, including the relevant portions of the Articles of Incorporation and By-Laws of Registrant: Excerpts from: ARTICLES OF INCORPORATION OF MERRILL LYNCH GLOBAL UTILITY FUND, INC. ARTICLE III PURPOSES AND POWERS ------------------- The purpose or purposes for which the Corporation is formed and the business or objects to be transacted, carried on and promoted by it are as follows: (1) ... (2) ... (3) To issue and sell shares of its own capital stock in such amounts and on such terms and conditions, for such purposes and for such amount or kind of consideration now or hereafter permitted by the General Laws of the State of Maryland and by these Articles of Incorporation, as its Board of Directors may determine; provided, however, that the value of the consideration per share to be received by the Corporation upon the sale or other disposition of any shares of its capital stock shall not be less than the net asset value per share of such capital stock outstanding at the time of such event. (4) To redeem, purchase or otherwise acquire, hold, dispose of, resell, transfer, reissue or cancel (all without the vote or consent of the stockholders of the Corporation) shares of its capital stock, in any manner and to the extent now or hereafter permitted the General Laws of the State of Maryland and by these Articles of Incorporation. (5) ... ARTICLE V CAPITAL STOCK ------------- (1) The total number of shares of capital stock which the Corporation shall have authority to issue is Two Hundred Million (200,000,000) shares, of the par value of Ten Cents ($.10) per share and of the aggregate par value of Twenty Million Dollars ($20,000,000). The capital stock initially is classified into two classes, consisting of One Hundred Million (100,000,000) shares of Class A Common Stock and One Hundred Million (100,000,000) shares of Class B Common Stock. (2) The Board of Directors may classify and reclassify any unissued shares of capital stock 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 -2- or terms or conditions of redemption of such shares of stock and pursuant to such classification or reclassification to increase or decrease the number of authorized shares of any existing class or series. (3) Unless otherwise expressly provided in the charter of the Corporation, including any Articles Supplementary creating any class or series of capital stock, the holders of each class or series of capital stock shall be entitled to dividends and distributions in such amounts and at such times as may be determined by the Board of Directors, and the dividends and distributions paid with respect to the various classes or series of capital stock may vary among such classes and series. Expenses related to the distribution of, and other identified expenses that should properly be allocated to, the shares of a particular class or series of capital stock may be charged to and borne solely by such class or series and the bearing of expenses solely by a class or series of capital stock may be appropriately reflected (in a manner determined by the Board of Directors) and cause differences in the net asset value attributable to, and the dividend, redemption and liquidation rights of, the shares of each class or series of capital stock. (4) Unless otherwise expressly provided in the charter of the Corporation, including any Articles Supplementary creating any class or series of capital stock, on each matter submitted to a vote of stockholders, each holder of a share of capital stock of the Corporation shall be entitled to one vote for each share -3- standing in such holder's name on the books of the Corporation, irrespective of the class or series thereof, and all shares of all classes and series shall vote together as a single class; provided, however, that (a) as to any matter with respect to which a separate vote of any class or series is required by the Investment Company Act of 1940, as amended, and in effect from time to time, or any rules, regulations or orders issued thereunder, or by the Maryland General Corporation Law, such requirement as to a separate vote by that class or series shall apply in lieu of a general vote of all classes and series as described above, (b) in the event that the separate vote requirements referred to in (a) above apply with respect to one or more classes or series, then, subject to paragraph (c) below, the shares of all other classes and series not entitled to a separate class vote shall vote as a single class, and (c) as to any matter which does not affect the interest of a particular class or series, such class or series shall not be entitled to any vote and only the holders of shares of the one or more affected classes and series shall be entitled to vote. (5) Notwithstanding any provisions of the Maryland General Corporation Law requiring a greater proportion than a majority of the votes of all classes or series of capital stock of the Corporation (or of any class or series entitled to vote thereon as a separate class or series) to take or authorize any action, the Corporation is hereby authorized (subject to the requirements of the Investment Company Act of 1940, as amended, -4- and in effect from time to time, and any rules, regulations and orders issued thereunder) to take such action upon the concurrence of a majority of the aggregate number of shares of capital stock of the Corporation entitled to vote thereon (or a majority of the aggregate number of shares of a class or series entitled to vote thereon as a separate class or series). (6) Unless otherwise expressly provided in the charter of the Corporation, including any Articles Supplementary creating any class or series of capital stock, in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of all classes and series of capital stock of the Corporation shall be entitled, after payment or provision for payment of the debts and other liabilities of the Corporation, to share ratably in the remaining net assets of the Corporation. (7) Any fractional shares shall carry proportionately all the rights of a whole share, excepting any right to receive a certificate evidencing such fractional share, but including, without limitation, the right to vote and the right to receive dividends. (8) All persons who shall acquire stock in the Corporation shall acquire the same subject to the provisions of the charter and By-Laws of the Corporation. As used in the charter of the Corporation, the terms "charter" and "Articles of Incorporation" shall mean and include the Articles of Incorporation of the Corporation as amended, supplemented and -5- restated from time to time by Articles of Amendment, Articles Supplementary, Articles of Restatement or otherwise. ARTICLE VI PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE CORPORATION AND OF THE DIRECTORS AND STOCKHOLDERS ------------------------------------- (1) ... (2) The Board of Directors of the Corporation is hereby empowered to authorize the issuance from time to time of shares of capital stock, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable, subject to such limitations as may be set forth in these Articles of Incorporation or in the By-Laws of the Corporation or in the General Laws of the State of Maryland. (3) No holder of stock of the Corporation shall, as such holder, have any right to purchase or subscribe for any shares of the capital stock of the Corporation or any other security of the Corporation which it may issue or sell (whether out of the number of shares authorized by these Articles of Incorporation or out of any shares of the capital stock of the Corporation acquired by it after the issue thereof, or otherwise) other than such right, if any, as the Board of Directors, in its discretion, may determine. (4) ... (5) ... -6- ARTICLE VII REDEMPTION ---------- Each holder of shares of capital stock of the Corporation shall be entitled to require the Corporation to redeem all or any part of the shares of capital stock of the Corporation standing in the name of such holder on the books of the Corporation, and all shares of capital stock issued by the Corporation shall be subject to redemption by the Corporation, at the redemption price of such shares as in effect from time to time as may be determined by the Board of Directors of the Corporation in accordance with the provisions hereof, subject to the right of the Board of Directors of the Corporation to suspend the right of redemption of shares of capital stock of the Corporation or postpone the date of payment of such redemption price in accordance with the provisions of applicable law. The redemption price of shares of capital stock of the Corporation shall be the net asset value thereof as determined by the Board of Directors of the Corporation from time to time in accordance with the provisions of applicable law, less such redemption or other charge, if any, as may be fixed by resolution of the Board of Directors of the Corporation. Payment of the redemption price shall be made in cash by the Corporation at such time and in such manner as may be determined from time to time by the Board of Directors of the Corporation. -------------------------------------- -7- Excerpts from: AMENDED AND RESTATED BY-LAWS OF MERRILL LYNCH GLOBAL UTILITY FUND, INC. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ Section 1. Annual Meeting. So long as the Corporation is registered -------------- as an investment company under the Investment Company Act of 1940 (such term to include the rules and regulations promulgated under the Investment Company Act of 1940 unless otherwise specified or the context otherwise requires), annual meetings of the stockholders shall not be held, except where required to be held by the Investment Company Act of 1940 or by the Maryland General Corporation Law or when called by the Board of Directors or by an officer or officers authorized to take such action by the Board of Directors. If in any calendar year the Corporation is required or elects to hold an annual meeting, the meeting shall be held on such day, not a Saturday, Sunday or legal holiday, as the Board of Directors or the officer or officers calling the meeting may prescribe. At each such annual meeting, the stockholders shall elect a Board of Directors and transact such other business as may properly come before the meeting. The provisions of these By-Laws which contemplate the holding of an annual meeting of stockholders shall be suspended -8- during any calendar year in which no annual meeting of stockholders is held. Section 2. Special Meetings. Special meetings of the stockholders, ---------------- unless otherwise provided by law or by the Articles of Incorporation, may be called for any purpose or purposes by a majority of the Board of Directors, the President, or on the written request of the holders of the outstanding shares of capital stock of the Corporation entitled to vote at such meeting to the extent permitted by Maryland law. Section 3. Place of Meetings. The annual meeting and any special ----------------- meeting of the stockholders shall be held at such place within the United States as the Board of Directors may from time to time determine. Section 4. Notice of Meetings; Waiver of Notice. Notice of the ------------------------------------ place, date and time of the holding of each annual and special meeting of the stockholders and the purpose or purposes of each special meeting shall be given personally or by mail, not less than ten nor more than ninety days before the date of such meeting, to each stockholder entitled to vote at such meeting and to each other stockholder entitled to notice of the meeting. Notice by mail shall be deemed to be duly given when deposited in the United States mail addressed to the stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Notice of any meeting of stockholders shall be deemed waived by any stockholder who shall attend such meeting in -9- person or by proxy, or who shall, either before or after the meeting, submit a signed waiver of notice which is filed with the records of the meeting. When a meeting is adjourned to another time and place, unless the Board of Directors, after the adjournment, shall fix a new record date for an adjourned meeting, or the adjournment is for more than one hundred and twenty days after the original record date, notice of such adjourned meeting need not be given if the time and place to which the meeting shall be adjourned were announced at the meeting at which the adjournment is taken. Section 5. Quorum. At all meetings of the stockholders, the holders ------ of a majority of the shares of stock of the Corporation entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for the transaction of any business, except as otherwise provided by statute or by the Articles of Incorporation. In the absence of a quorum no business may be transacted, except that the holders of a majority of the shares of stock present in person or by proxy and entitled to vote may adjourn the meeting from time to time, without notice other than announcement thereat except as otherwise required by these By-Laws, until the holders of the requisite amount of shares of stock shall be so present. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. The absence from any meeting, in person or by proxy, of holders of the number of shares of stock of the -10- Corporation in excess of a majority thereof which may be required by the laws of the State of Maryland, the Investment Company Act of 1940, as amended, or other applicable statute, the Articles of Incorporation, or these By-Laws, for action upon any given matter shall not prevent action at such meeting upon any other matter or matters which may properly come before the meeting, if there shall be present thereat, in person or by proxy, holders of the number of shares of stock of the Corporation required for action in respect of such other matter or matters. Section 6. Organization. At each meeting of the stockholders, the ------------ Chairman of the Board (if one has been designated by the Board), or in his absence or inability to act, the President, or in the absence or inability to act of the Chairman of the Board and the President, a Vice President, shall act as chairman of the meeting. The Secretary, or in his absence or inability to act, any person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes thereof. Section 7. Order of Business. The order of business at all meetings ----------------- of the stockholders shall be as determined by the chairman of the meeting. Section 8. Voting. Except as otherwise provided by statute or the ------ Articles of Incorporation, each holder of record of shares of stock of the Corporation having voting power shall be entitled at each meeting of the stockholders to one vote for every share of such stock standing in his name on the record of -11- stockholders of the Corporation as of the record date determined pursuant to Section 9 of this Article or if such record date shall not have been so fixed, then at the later of (i) the close of business on the day on which notice of the meeting is mailed or (ii) the thirtieth day before the meeting. Each stockholder entitled to vote at any meeting of stockholders may authorize another person or persons to act for him by a proxy signed by such stockholder or his attorney-in-fact. No proxy shall be valid after the expiration of eleven months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where such proxy states that it is irrevocable and where an irrevocable proxy is permitted by law. Except as otherwise provided by statute, the Articles of Incorporation or these By-Laws, any corporate action to be taken by vote of the stockholders shall be authorized by a majority of the total votes cast at a meeting of stockholders by the holders of shares present in person or represented by proxy and entitled to vote on such action. If a vote shall be taken on any question other than the election of directors, which shall be by written ballot, then unless required by statute or these By-Laws, or determined by the chairman of the meeting to be advisable, any such vote need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. -12- Section 9. Fixing of Record Date. The Board of Directors may set a --------------------- record date for the purpose of determining stockholders entitled to vote at any meeting of the stockholders. The record date, which may not be prior to the close of business on the day the record date is fixed, shall be not more than ninety nor less than ten days before the date of the meeting of the stockholders. All persons who were holders of record of shares at such time, and not others, shall be entitled to vote at such meeting and any adjournment thereof. Section 10. Inspectors. The Board may, in advance of any meeting of ---------- stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If the inspectors shall not be so appointed or if any of them shall fail to appear or act, the chairman of the meeting may, and on the request of any stockholder entitled to vote thereat shall, appoint inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares outstanding and the voting powers of each, the number of shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to -13- conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting or any stockholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as inspector of an election of directors. Inspectors need not be stockholders. Section 11. Consent of Stockholders in Lieu of Meeting. Except as ------------------------------------------ otherwise provided by statute or the Articles of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if the following are filed with the records of stockholders meetings: (i) a unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and (ii) a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote thereat. ARTICLE VII CAPITAL STOCK ------------- Section 1. Stock Certificates. Each holder of stock of the ------------------ Corporation shall be entitled upon request to have a certificate or certificates, in such form as shall be approved by -14- the Board, representing the number of shares of stock of the Corporation owned by him, provided, however, that certificates for fractional shares will not be delivered in any case. The certificates representing shares of stock shall be signed by or in the name of the Corporation by the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal of the Corporation. Any or all of the signatures or the seal on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate shall be issued, it may be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were still in the office at the date of issue. Section 2. Books of Account and Record of Stockholders. There shall ------------------------------------------- be kept at the principal executive office of the Corporation correct and complete books and records of account of all the business and transactions of the Corporation. There shall be made available upon request of any stockholder, in accordance with Maryland law, a record containing the number of shares of stock issued during a specified period not to exceed twelve months and the consideration received by the Corporation for each such share. Section 3. Transfer of Shares. Transfer of shares of stock of the ------------------ Corporation shall be made on the stock records of -15- the Corporation only by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and on surrender of the certificate or certificates, if issued, for such shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person in whose name any share or shares stand on the record of stockholders as the owner of such share or shares for all purposes, including, without limitation, the rights to receive dividends or other distributions, and to vote as such owner, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in any such share or shares on the part of any other person. Section 4. Regulations. The Board may make such additional rules and ----------- regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer agents or one or more transfer clerks and one or more registrars and may require all certificates for shares of stock to bear the signature or signatures of any of them. Section 5. Lost, Destroyed or Mutilated Certificates. The holder of ----------------------------------------- any certificates representing shares of stock of -16- the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of such certificate, and the Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it which the owner thereof shall alleged to have been lost or destroyed or which shall have been mutilated, and the Board of Directors may, in its description, require such owner or his legal representatives to give to the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties, as the Board in its absolute discretion shall determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate, or issuance of a new certificate. Anything herein to the contrary notwithstanding, the Board, in its absolute discretion, may refuse to issue any such new certificate, except pursuant to legal proceedings under the laws of the State of Maryland. Section 6. Fixing of a Record Date for Dividends and Distributions. ------------------------------------------------------- The Board may fix, in advance, a date not more than ninety days preceding the date fixed for the payment of any dividend or the making of any distribution or the allotment of rights to subscribe for securities of the Corporation, or for the delivery of evidences of interests or evidences of interests arising out of any changes, conversion or exchange of common stock or other securities, as the record date for the determination of the stockholders entitled to receive any such -17- dividend, distribution, allotment, rights or interests, and in such case only the stockholders of record at the time so fixed shall be entitled to receive such dividend, distribution, allotment, rights or interests. Section 7. Information to Stockholders and Others. Any stockholder -------------------------------------- of the Corporation or his agent may inspect and copy during usual business hours the Corporation's By-Laws, minutes of the proceedings of its stockholders, annual statements of its affairs, and voting trust agreements on file at its principal office. -18- EX-99.11 4 CONSENT OF DELOITTE & TOUCHE EXHIBIT 99.11 INDEPENDENT AUDITORS' CONSENT Merrill Lynch Global Utility Fund, Inc.: We consent to the use in Post-Effective Amendment No. 5 to Registration Statement No. 33-37103 of our report dated December 31, 1993 appearing in the Statement of Additional Information, which is a part of such Registration Statement, and to the reference to us under the caption "Financial Highlights" appearing in the Prospectus, which also is a part of such Registration Statement. Deloitte & Touche Princeton, New Jersey March 25, 1994 EX-99.15 5 AMENDED AND RESTATED CLASS B DISTRIBUTION PLAN EXHIBIT 99.15 AMENDED AND RESTATED CLASS B DISTRIBUTION PLAN OF MERRILL LYNCH GLOBAL UTILITY FUND, INC. PURSUANT TO RULE 12b-1 DISTRIBUTION PLAN made as of the 14th day of November, 1990 and amended and restated as of September 2, 1992, by and between Merrill Lynch Global Utility Fund, Inc., a Maryland corporation (the "Fund"), and Merrill Lynch Funds Distributor, Inc., a Delaware corporation ("MLFD"). W I T N E S S E T H: ------------------- WHEREAS, the Fund is engaged in business as an open-end investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"); and WHEREAS, MLFD is a securities firm engaged in the business of selling shares of investment companies either directly to purchasers or through other securities dealers; and WHEREAS, the Fund has entered into a Class B Shares Distribution Agreement with MLFD, pursuant to which MLFD acts as the exclusive distributor and representative of the Fund in the offer and sale of Class B shares of common stock, par value $0.10 per share (the "Class B shares"), of the Fund to the public; WHEREAS, the Fund has entered into a Class B Distribution Plan (the "Prior Plan") pursuant to Rule 12b-1 under the Investment Company Act; and WHEREAS, the Fund desires to adopt this Amended and Restated Class B Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to MLFD with respect to the Fund's Class B shares; and WHEREAS, the Directors of the Fund have determined that there is a reasonable likelihood that adoption of the Plan will benefit the Fund and its Class B shareholders; NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby agrees to the terms of, the Plan in accordance with Rule 12b-1 under the Investment Company Act on the following terms and conditions: 1. The Fund shall pay MLFD an account maintenance fee under the Plan at the end of each month at the annual rate of 0.25% of average daily net assets of the Fund relating to Class B shares to compensate MLFD and securities firms with which MLFD enters into related agreements pursuant to Paragraph 3 hereof ("Sub- Agreements") for account maintenance activities with respect to Class B shareholders of the Fund. 2. The Fund shall pay MLFD a distribution fee under the Plan at the end of each month at the annual rate of 0.50% of average daily net assets of the Fund relating to Class B shares to compensate MLFD and securities firms with which MLFD enters into related Sub-Agreements for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class B shares of the Fund. Such expenditures may consist of sales commissions to financial consultants for selling Class B shares of the Fund, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Fund and the costs of preparing and distributing promotional materials. The distribution fee may also be used to pay the financing costs of carrying the unreimbursed expenditures described in this Paragraph 2. Payment of the distribution fee described in this Paragraph 2 shall be subject to any limitations set forth in the applicable regulation of the National Association of Securities Dealers, Inc. 3. The Fund hereby authorizes MLFD to enter into Sub-Agreements with certain securities firms ("Securities Firms"), including Merrill Lynch, Pierce, Fenner & Smith Incorporated, to provide compensation to such Securities Firms for activities and services of the type referred to in Paragraphs 1 and 2 hereof. MLFD may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above- mentioned activities and services. Such Sub-Agreement shall provide that the Securities Firms shall provide MLFD with such information as is reasonably necessary to permit MLFD to comply with the reporting requirements set forth in Paragraph 4 hereof. 2 4. MLFD shall provide the Fund for review by the Board of Directors, and the Directors shall review, at least quarterly, a written report complying with the requirements of Rule 12b-1 regarding the disbursement of the account maintenance fee and the distribution fee during such period. 5. The Plan will be submitted for approval by a vote of at least a majority, as defined in the Investment Company Act, of the outstanding Class B voting securities of the Fund held by the public. 6. The Plan shall not take effect until it has been approved, together with any related agreements, by (a) the Directors of the Fund and (b) those Directors of the Fund who are not "interested persons" of the Fund, as defined in the Investment Company Act, and have no direct or indirect financial interest in the operation of the Plan or any agreements related to it (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for the purpose of voting on the Plan and such related agreements. 7. The Plan shall continue in effect for so long as such continuance is specifically approved at least annually in the manner provided for approval of the Plan in Paragraph 6. 8. The Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Directors, or by vote of a majority of the outstanding Class B voting securities of the Fund. 9. The Plan may not be amended to increase materially the rate of payments by the Fund provided for herein unless such amendment is approved by at least a majority, as defined in the Investment Company Act, of the outstanding Class B voting securities of the Fund, and the Directors of the Fund in the manner provided for in Paragraph 6 hereof, and no material amendment to the Plan shall be made unless approved in the manner provided for approval and annual renewal in Paragraph 6 hereof. 10. While the Plan is in effect, the selection and nomination of Directors who are not interested persons, as defined in the Investment Company Act, of the Fund shall be committed to the discretion of the Directors who are not interested persons. 3 11. The Fund shall preserve copies of the Plan and any related agreements and all reports made pursuant to Paragraph 4 hereof, for a period of not less than six years from the date of the Plan, or the agreements or such report, as the case may be, the first two years in an easily accessible place. IN WITNESS WHEREOF, the parties hereto have executed this Plan as of the date first above written. MERRILL LYNCH GLOBAL UTILITY FUND, INC. By_____________________________________ MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By_____________________________________ 4 AMENDED AND RESTATED CLASS B SHARES DISTRIBUTION PLAN SUB-AGREEMENT AGREEMENT made as of the 14th day of November, 1990 and amended and restated as of September 2, 1992 by and between Merrill Lynch Funds Distributor, Inc. ("MLFD") and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Securities Firm"). W I T N E S S E T H ------------------- WHEREAS, MLFD has entered into an agreement with Merrill Lynch Global Utility Fund, Inc., a Maryland corporation (the "Fund"), pursuant to which it acts as the exclusive distributor for the sale of Class B shares of common stock, par value $0.10 per share (the "Class B shares"), of the Fund; and WHEREAS, MLFD and the Fund have entered into an Amended and Restated Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") pursuant to which MLFD receives an account maintenance fee from the Fund at the annual rate of 0.25% of average daily net assets of the Fund relating to Class B shares for account maintenance activities related to Class B shares of the Fund and a distribution fee from the Fund at the annual rate of 0.50% of average daily net assets of the Fund relating to Class B shares for providing sales and promotional activities and services related to the distribution of Class B shares of the Fund; and WHEREAS, MLFD desires the Securities Firm to perform certain account maintenance activities and sales and promotional activities and services for the Fund's Class B shareholders and the Securities Firm is willing to perform such activities and services; NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereby agree as follows: 1. The Securities Firm shall provide account maintenance activities with respect to the Class B shares of the Fund of the types referred to in Paragraph 1 of the Plan. 2. The Securities Firm shall provide sales and promotional activities and services with respect to the sale of the Class B shares of the Fund, and incur distribution expenditures, of the types referred to in Paragraph 2 of the Plan. 3. As compensation for its activities and services performed under this Sub- Agreement, MLFD shall pay the Securities Firm an account maintenance fee and a distribution fee at the end of each calendar month in an amount agreed upon by the parties hereto. 4. The Securities Firm shall provide MLFD, at least quarterly, such information as reasonably requested by MLFD to enable MLFD to comply with the reporting requirements of Rule 12b-1 regarding the disbursement of the account maintenance fee and the distribution fee during such period referred to in Paragraph 4 of the Plan. 5. This Sub-Agreement shall not take effect until it has been approved by votes of a majority of both (a) the Directors of the Fund and (b) those Directors of the Fund who are not "interested persons" of the Fund, as defined in the Act, and have no direct or indirect financial interest in the operation of the Plan, this Agreement or any agreements related to the Plan or this Agreement (the "Rule 12b-1 Directors"), cast in person at a meeting or meetings called for the purpose of voting on this Agreement. 6. This Agreement shall continue in effect for as long as such continuance is specifically approved at least annually in the manner provided for approval of the Plan in Paragraph 6. 7. This Agreement shall automatically terminate in the event of its assignment or in the event of the termination of the Plan or any amendment of the Plan that requires such termination. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. MERRILL LYNCH FUNDS DISTRIBUTOR, INC. By ________________________________ MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By _______________________________ -----END PRIVACY-ENHANCED MESSAGE-----