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