<PAGE>
PROSPECTUS
FEBRUARY 27, 1998
MERRILL LYNCH GLOBAL VALUE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800
Merrill Lynch Global Value Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks long-term capital
appreciation by investing primarily in equity securities of issuers located in
various foreign countries and the United States that Merrill Lynch Asset
Management, L.P., the manager of the Fund ("MLAM" or the "Manager"), believes
represent investment value. The Manager will seek to identify securities whose
market prices are low when compared to certain valuation measurements, and,
therefore, represent investment value. The Fund may employ a variety of
techniques, including derivative investments, to hedge against market and
currency risk or gain exposure to equity markets. There can be no assurance
that the Fund's investment objective will be achieved. For more information on
the Fund's investment objective and policies, see "Investment Objective and
Policies" on page 13.
Investments on an international basis in foreign securities markets involve
risks and special considerations not typically associated with investments in
securities of United States issuers. See "Risk Factors and Special
Considerations."
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing SM System" on page 3.
----------------
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], and other securities dealers that have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). To permit the Fund to invest the net
proceeds from the sale of its shares in an orderly manner, the Fund may, from
time to time, suspend the sale of its shares, except for dividend
reinvestments. The minimum initial purchase is $1,000 and the minimum
subsequent purchase is $50, except that for retirement plans, the minimum
initial purchase is $100 and the minimum subsequent purchase is $1, and for
participants in certain fee-based programs, the minimum initial purchase is
$500 and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through Merrill Lynch
Financial Data Services, Inc. (the "Transfer Agent") are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated February 27, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Commission maintains a Web
site (http://www.sec.gov) that contains the Statements of Additional
Information, material incorporated by reference and other information
regarding the Fund. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price)................................. 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments.......................... None None None None
Deferred Sales Charge (as a percentage
of original purchase price or None(d) 4.0% during the first 1.0% None(d)
redemption proceeds, whichever is year, decreasing 1.0% for one year(f)
lower)................................. annually thereafter to 0.0%
after the fourth year(e)
Exchange Fee............................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees(g)...................... 0.75% 0.75% 0.75% 0.75%
Rule 12b-l Fees(h):
Account Maintenance Fees.............. None 0.25% 0.25% 0.25%
Distribution Fees..................... None 0.75% 0.75% None
(Class B shares
convert to Class D
shares automatically after
approximately eight
years and cease being
subject to distribution
fees)
Other Expenses(i):
Shareholder Servicing Costs(j)........ 0.10% 0.12% 0.12% 0.10%
Other................................. 0.12% 0.12% 0.12% 0.12%
----- ----- ----- -----
Total Other Expenses................ 0.22% 0.24% 0.24% 0.22%
----- ----- ----- -----
Total Fund Operating Expenses........... 0.97% 1.99% 1.99% 1.22%
===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors, including
existing Class A shareholders, certain retirement plans and certain
participants in fee-based programs. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares" on page 26 and
"Shareholder Services--Fee-Based Programs" on page 39.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares" on page 29.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares" on page 26.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge instead may be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs" on page 39.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs" on page 39.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs" on page 39.
(g) See "Management of the Fund--Management and Advisory Arrangements" on page
22.
(h) See "Purchase of Shares--Distribution Plans" on page 32.
(i) For the fiscal year ended October 31, 1997.
(j) See "Management of the Fund--Transfer Agency Services" on page 24.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including the maximum
$52.50 initial sales charge (Class A and
Class D shares only) and assuming (1) the
Total Fund Operating Expenses for each class
set forth on page 2; (2) a 5% annual return
throughout the periods; and (3) redemption at
the end of the period (including any
applicable CDSC for Class B and Class C
shares):
Class A..................................... $62 $82 $103 $165
Class B..................................... $60 $82 $107 $212*
Class C..................................... $30 $62 $107 $232
Class D..................................... $64 $89 $116 $192
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A..................................... $62 $82 $103 $165
Class B..................................... $20 $62 $107 $212*
Class C..................................... $20 $62 $107 $232
Class D..................................... $64 $89 $116 $192
</TABLE>
- --------
* Assumes conversion of Class B shares to Class D shares approximately eight
years after initial purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Transfer Agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more
3
<PAGE>
than 50 registered investment companies advised by the Manager or its
affiliate, Fund Asset Management, L.P. ("FAM"). Funds advised by the Manager
or FAM that utilize the Merrill Lynch Select Pricing SM System are referred to
herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees, if any, applicable
to each class provide for the financing of the distribution of the shares of
the Fund. The distribution-related revenues paid with respect to a class will
not be used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase
of Shares."
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
See footnotes on next page.
4
<PAGE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. See "Class
A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten-year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Other eligible investors include certain
retirement plans and participants in certain fee-based programs. In
addition, Class A shares of the Fund will be offered at net asset
value to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries
(the term "subsidiaries," when used herein with respect to ML & Co.,
includes the Manager, FAM and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.) and their
directors and employees, and to members of the Boards of MLAM-advised
mutual funds. The maximum initial sales charge is 5.25%, which is
reduced for purchases of $25,000 and over and waived for purchases by
certain retirement plans and participants in connection with certain
fee-based programs. Purchases of $1,000,000 or more may not be subject
to an initial sales charge, but if the initial sales charge is waived,
such purchases may be subject to a 1.0% CDSC if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. Sales charges also are
reduced under a right of accumulation that takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A
and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class B shares, as well as a CDSC if they are
redeemed within four years of purchase. Such CDSC may be modified in
connection with certain fee-based programs. Approximately eight years
after issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to the same account maintenance
fee of 0.25% but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert
into Class D shares automatically after approximately ten years. If
Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the
5
<PAGE>
conversion period applicable to the Class B shares acquired in the
exchange will apply, as will the Class D account maintenance fee of the
acquired fund upon the conversion, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net asset
values of the shares of the two classes on the Conversion Date (as
defined below), without the imposition of any sales load, fee or other
charge. Conversion of Class B shares to Class D shares will not be
deemed a purchase or sale of the shares for Federal income tax purposes.
Shares purchased through reinvestment of dividends on Class B shares
also will convert automatically to Class D shares. The conversion period
for dividend reinvestment shares and the conversion and holding periods
for certain retirement plans is modified as described under "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares also are
subject to a 1.0% CDSC if they are redeemed within one year after
purchase. Such CDSC may be waived in connection with certain fee-
based programs. Although Class C shares are subject to a CDSC for
only one year (as compared to four years for Class B shares), Class C
shares have no conversion feature and, accordingly, an investor that
purchases Class C shares will be subject to distribution fees that
will be imposed on Class C shares for an indefinite period subject to
annual approval by the Fund's Board of Directors and regulatory
limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC
when they are redeemed. The maximum initial sales charge is 5.25%,
which is reduced for purchases of $25,000 and over. Purchases of
$1,000,000 or more may not be subject to an initial sales charge, but
if the initial sales charge is waived, such purchases may be subject
to a 1.0% CDSC if the shares are redeemed within one year after
purchase. Such CDSC may be waived in connection with certain fee-
based programs. The schedule of initial sales charges and reductions
for Class D shares is the same as the schedule for Class A shares,
except that there is no waiver for purchases in connection with
certain fee-based programs. Class D shares also will be issued upon
conversion of Class B shares as described above under "Class B." See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors that prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative that are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares because there is an account maintenance
fee imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive
6
<PAGE>
because similar sales charge reductions are not available with respect to the
CDSCs imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges that expect to
maintain their investment for an extended period of time also may decide to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors that previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other MLAM-
advised mutual funds, those previously purchased Class A shares, together with
Class B, Class C and Class D share holdings, will count toward a right of
accumulation that may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class
C account maintenance and distribution fees will cause Class B and Class C
shares to have higher expense ratios, pay lower dividends and have lower total
returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors that do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance and distribution fees; however, the ongoing account maintenance and
distribution fees potentially may be offset to the extent any return is
realized on the additional funds initially invested in Class B or Class C
shares. In addition, Class B shares will be converted into Class D shares of
the Fund after a conversion period of approximately eight years, and thereafter
investors will be subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forego the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges."
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the audits of the financial statements of the Fund by Deloitte & Touche
LLP, independent auditors. Financial statements for the fiscal period November
1, 1997 to December 31, 1997 and for the fiscal year ended October 31, 1997,
and the independent auditors' reports thereon, are included in the Statement
of Additional Information. Further information about the performance of the
Fund is contained in the Fund's most recent annual report to shareholders
which may be obtained, without charge, by calling or writing the Fund at the
telephone number or address on the front cover of this Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A++ CLASS B++ CLASS C++ CLASS D++
------------------------- ------------------------- ------------------------- -------------------------
FOR THE PERIOD FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD FOR THE
NOV. 1, 1997 YEAR ENDED NOV. 1, 1997 YEAR ENDED NOV. 1, 1997 YEAR ENDED NOV. 1, 1997 YEAR ENDED
TO DEC. 31, OCT. 31, TO DEC. 31, OCT. 31, TO DEC. 31, OCT. 31, TO DEC. 31, OCT. 31,
1997 1997+ 1997 1997+ 1997 1997+ 1997 1997+
-------------- ---------- -------------- ---------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase
(Decrease) in Net
Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 11.83 $ 10.00 $ 11.72 $ 10.00 $ 11.72 $ 10.00 $ 11.80 $ 10.00
------- ------- ---------- ---------- -------- -------- -------- --------
Investment income
(loss)--net....... .01 .17 (.01) .09 (.01) .09 .01 .18
Realized and
unrealized gain on
investments and
foreign currency
transactions--
net............... .72 1.71 .73 1.67 .73 1.67 .72 1.67
------- ------- ---------- ---------- -------- -------- -------- --------
Total from
investment
operations........ .73 1.88 .72 1.76 .72 1.76 .73 1.85
------- ------- ---------- ---------- -------- -------- -------- --------
Less dividends and
distributions:
Investment
income--net..... (.11) (.05) (.03) (.04) (.03) (.04) (.09) (.05)
Realized gain on
investments--
net............. (.44) -- (.44) -- (.44) -- (.44) --
------- ------- ---------- ---------- -------- -------- -------- --------
Total dividends
and
distributions..... (.55) (.05) (.47) (.04) (.47) (.04) (.53) (.05)
------- ------- ---------- ---------- -------- -------- -------- --------
Net asset value,
end of period..... $ 12.01 $ 11.83 $ 11.97 $ 11.72 $ 11.97 $ 11.72 $ 12.00 $ 11.80
======= ======= ========== ========== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share... 6.19%# 18.91% 6.14%# 17.62% 6.14%# 17.62% 6.20%# 18.56%
======= ======= ========== ========== ======== ======== ======== ========
RATIOS TO AVERAGE
NET ASSETS:
Expenses.......... .96%* .97% 1.98%* 1.99% 1.98%* 1.99% 1.21%* 1.22%
======= ======= ========== ========== ======== ======== ======== ========
Investment income
(loss)--net....... .54%* 1.88% (.49%)* .84% (.49%)* .83% .28%* 1.62%
======= ======= ========== ========== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands)........ $63,075 $53,776 $1,251,956 $1,179,125 $229,601 $217,341 $258,868 $237,791
======= ======= ========== ========== ======== ======== ======== ========
Portfolio
turnover.......... 24.49% 77.65% 24.49% 77.65% 24.49% 77.65% 24.49% 77.65%
======= ======= ========== ========== ======== ======== ======== ========
Average commission
rate paid##....... $ .0391 $ .0351 $ .0391 $ .0351 $ .0391 $ .0351 $ .0391 $ .0351
======= ======= ========== ========== ======== ======== ======== ========
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ The Fund commenced operations on November 1, 1996.
++ Based on average shares outstanding during the period.
# Aggregate total investment return.
## Includes commissions paid in foreign currencies, which have been converted
into U.S. dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
8
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
GENERAL
Because a substantial portion of the Fund's assets may be invested in
securities of non-U.S. issuers, an investor in the Fund should be aware of
certain risk factors and special considerations relating to international
investing, which may involve risks that are not typically associated with
investments in securities of U.S. issuers. Consequently, the Fund should be
considered as a means of diversifying an investment portfolio and not in itself
a balanced investment program.
INVESTING ON AN INTERNATIONAL BASIS
Specific Risks. Investing on an international basis involves certain risks
not involved in domestic investments, including fluctuations in foreign
exchange rates, future political and economic developments, different legal
systems and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. Securities prices in different countries are
subject to different economic, financial, political and social factors. Since
the Fund invests heavily in securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign currency exchange rates will
affect the value of securities in the Fund and the unrealized appreciation or
depreciation of investments. Currencies of certain countries may be volatile
and, therefore, may affect the value of securities denominated in such
currencies. In addition, with respect to certain foreign countries, there is
the possibility of expropriation of assets, confiscatory taxation, difficulty
in obtaining or enforcing a court judgment, economic, political or social
instability or diplomatic developments that could affect investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rates of inflation, capital reinvestment, resources, self-sufficiency
and balance of payments position. Certain foreign investments also may be
subject to foreign withholding taxes. These risks often are heightened for
investments in smaller, emerging capital markets.
As a result of these potential risks, the Manager may determine that,
notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Fund may
invest in countries in which foreign investors, including the Manager, have had
no or limited prior experience.
Public Information. Many of the securities held by the Fund will not be
registered with the Commission, nor will the issuers thereof be subject to the
reporting requirements of such agency. Accordingly, there may be less publicly
available information about a foreign issuer than about a U.S. issuer and such
foreign issuers may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those of U.S. issuers. As a
result, traditional investment measurements, such as price/earnings ratios, as
used in the United States, may not be applicable to certain smaller, emerging
foreign capital markets. Foreign issuers, and issuers in smaller, emerging
capital markets in particular, generally are not subject to uniform accounting,
auditing and financial reporting standards or to practices and requirements
comparable to those applicable to domestic issuers.
Trading Volume, Clearance and Settlement. Foreign financial markets, while
often growing in trading volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices may be more volatile than securities of comparable
domestic
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companies. Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
failed to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Further, satisfactory custodial
services for investment securities may not be available in some countries
having smaller, emerging capital markets, which may result in the Fund
incurring additional costs and delays in transporting and custodying such
securities outside such countries. Delays in settlement could result in periods
when assets of the Fund are uninvested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems or the risk of intermediary counterparty failures could cause the Fund
to miss attractive investment opportunities. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in the value of such portfolio security or,
if the Fund has entered into a contract to sell the security, in possible
liability to the purchaser.
Government Supervision and Regulation. There generally is less governmental
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the United States. For example, there may be no
comparable provisions under certain foreign laws to insider trading and similar
investor protection securities laws that apply with respect to securities
transactions consummated in the United States. Further, brokerage commissions
and other transaction costs on foreign securities exchanges generally are
higher than in the United States.
Depositary Receipts. The Fund may purchase sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts") or other
securities convertible into securities of foreign issuers. Depositary Receipts
may not necessarily be denominated in the same currency as the underlying
securities into which they may be converted. In addition, the issuers of the
securities underlying unsponsored Depositary Receipts are not obligated to
disclose material information in the United States, and, therefore, there may
be less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts. Depositary Receipts also involve the risks of other investments in
foreign securities, as discussed above.
Restrictions on Foreign Investment. Some countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons in a company to only a
specific class of securities that may have less advantageous terms than
securities of the company available for purchase by nationals. Certain
countries may restrict investment opportunities in issuers or industries deemed
important to national interests.
A number of countries have authorized the formation of closed-end investment
companies to facilitate indirect foreign investment in their capital markets.
In accordance with the Investment Company Act of 1940, as amended (the
"Investment Company Act"), the Fund may invest up to 10% of its total assets in
securities of closed-end investment companies, not more than 5% of which may be
invested in any one such company. This restriction on investments in securities
of closed-end investment companies may limit opportunities for the Fund to
invest indirectly in certain smaller capital markets. Shares of certain closed-
end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If
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the Fund acquires shares in closed-end investment companies, shareholders would
bear both their proportionate share of expenses in the Fund (including
investment advisory fees) and, indirectly, the expenses of such closed-end
investment companies. The Fund also may seek, at its own cost, to create its
own investment entities under the laws of certain countries.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act limits the Fund's ability to
invest in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from "securities related
activities," as defined by the rules thereunder. These provisions may also
restrict the Fund's investments in certain foreign banks and other financial
institutions.
Foreign Sub-custodians and Securities Depositories. Rules adopted under the
Investment Company Act permit the Fund to maintain its foreign securities and
cash in the custody of certain eligible non-U.S. banks and securities
depositories. Certain banks in foreign countries may not be eligible sub-
custodians for the Fund, in which event the Fund may be precluded from
purchasing securities in certain foreign countries in which it otherwise would
invest or the Fund may incur additional costs and delays in providing
transportation and custody services for such securities outside of such
countries. The Fund may encounter difficulties in effecting on a timely basis
portfolio transactions with respect to any securities of issuers held outside
their countries. Other banks that are eligible foreign sub-custodians may be
recently organized or otherwise lack extensive operating experience. In
addition, in certain countries there may be legal restrictions or limitations
on the ability of the Fund to recover assets held in custody by foreign sub-
custodians in the event of the bankruptcy of the sub-custodian.
BORROWING
The Fund may borrow up to 33 1/3% of its total assets, taken at market value,
but only from banks as a temporary measure for extraordinary or emergency
purposes, including to meet redemptions (so as not to force the Fund to
liquidate securities at a disadvantageous time) or to settle securities
transactions. The Fund will not purchase securities at any time when borrowings
exceed 5% of its total assets, except (a) to honor prior commitments or (b) to
exercise subscription rights when outstanding borrowings have been obtained
exclusively for settlements of other securities transactions. The purchase of
securities while borrowings are outstanding will have the effect of leveraging
the Fund. Such leveraging increases the Fund's exposure to capital risk, and
borrowed funds are subject to interest costs that will reduce net income.
DERIVATIVE INVESTMENTS
In order to seek to hedge various portfolio positions or to gain exposure to
equity markets, the Fund may invest in certain instruments that may be
characterized as derivatives. These investments include various types of
options transactions, futures and options thereon and currency transactions.
Such investments also may consist of swap agreements and indexed securities.
The Fund has express limitations on the percentage of its assets that may be
committed to certain of such investments. Other such investments have no
express quantitative limitations, although they may be made solely for hedging
purposes, not for speculation, and may in some cases require limitations as to
the type of permissible counterparty to the transaction. Swap agreements entail
the risk that a counterparty will default on its payment obligations to the
Fund thereunder.
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Investments in indexed securities subject the Fund to the risks associated with
changes in the particular indices, which may include losses of amounts
invested. Options transactions involve the potential loss of the opportunity to
profit from any price increase in the underlying security above the option
exercise price or the potential loss of the premium paid for an option.
Similarly, utilization of futures and options thereon and currency transactions
involves the risk of imperfect correlation in movements in the price of
futures, options or currency hedge and movements in the price of the securities
or currency which are the subject of the hedge. For a further discussion of the
risks associated with these investments, see "Investment Objective and
Policies--Description of Certain Investments--Swap Agreements" on page 16, "--
Indexed and Inverse Securities" on page 16, "--Other Investment Policies and
Practices--Portfolio Strategies Involving Futures, Options and Forward Foreign
Exchange Transactions" on page 17 and the Appendix to this Prospectus,
"Investment Practices Involving the Use of Options, Futures and Foreign
Exchange" on page 46.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in securities that lack an
established secondary trading market or otherwise are considered illiquid.
Liquidity of a security relates to the ability to dispose easily of the
security and the price to be obtained upon disposition of the security, which
may be less than would be obtained for a comparable more liquid security.
Investment of the Fund's assets in illiquid securities may restrict the ability
of the Fund to dispose of its investments in a timely fashion and for a fair
price as well as its ability to take advantage of market opportunities. The
risks associated with illiquidity will be particularly acute in situations in
which the Fund's operations require cash, such as when the Fund redeems shares
or pays dividends, and could result in the Fund borrowing to meet short-term
cash requirements or incurring capital losses on the sale of illiquid
investments. Further, issuers whose securities are not publicly traded are not
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. Illiquid securities may
trade at a discount from comparable, more liquid investments. In making
investments in such securities, the Fund may obtain access to material, non-
public information which may restrict the Fund's ability to conduct portfolio
transactions in such securities. In addition, the Fund may invest in privately
placed securities that may or may not be freely transferable under the laws of
the applicable jurisdiction or due to contractual restrictions on resale. See
"Investment Objective and Policies--Description of Certain Investments--
Illiquid Securities" on page 15.
WITHHOLDING AND OTHER TAXES
Income and capital gains on securities held by the Fund may be subject to
withholding and other taxes imposed by certain jurisdictions, which would
reduce the return to the Fund on those securities. The Fund intends, unless
ineligible, to elect to "pass-through" to the Fund's shareholders the amount of
foreign taxes paid by the Fund. The taxes passed through to shareholders will
be included in each shareholder's income and could potentially be offset by
either a deduction or a credit. Certain shareholders, including non-U.S.
shareholders, will not be entitled to the benefit of a deduction or credit with
respect to foreign taxes paid by the Fund. Non-U.S. shareholders may
nevertheless be subject to withholding tax on the foreign taxes included in
their income. Other taxes, such as transfer taxes, may be imposed on the Fund,
but would not give rise to a credit or deduction for shareholders.
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NON-DIVERSIFICATION
The Fund is classified as a non-diversified investment company under the
Investment Company Act, which means that the Fund is not limited by the
Investment Company Act in the proportion of its assets that may be invested in
the obligations of a single issuer. Thus, the Fund may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
as a result, will be subject to greater risk of loss with respect to its
portfolio securities. The Fund, however, intends to comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. See
"Additional Information--Taxes" on page 41 and "Investment Restrictions" on
page 20.
FEES AND EXPENSES
The management fee (at the annual rate of 0.75% of the Fund's average daily
net assets) and other operating expenses of the Fund may be higher than the
management fees and operating expenses of other mutual funds managed by the
Manager and other investment advisers or of investment companies investing
exclusively in the securities of U.S. issuers. The management fees and
operating expenses, however, are believed by the Manager to be comparable to
expenses of other open-end management investment companies that invest on a
global basis with investment objectives similar to the investment objective of
the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in equity securities of issuers located in
various foreign countries and the United States that the Manager believes
represent investment value. This investment objective is a fundamental policy
of the Fund and may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act. There can be no assurance that the Fund's investment
objective will be achieved.
The premise of the Fund's investment approach is that securities may be more
likely to have investment value during those periods when their market prices
are depressed in relation to their inherent value. This premise is often
referred to as "contrarian" because it searches for investment opportunities
among securities that may be viewed unfavorably by investors generally.
The Manager believes that the pricing mechanisms of the global securities
markets lack total efficiency and have a tendency to inflate prices of
securities in favorable market climates and depress prices in unfavorable
climates. Depressed market prices result when companies, industries,
currencies, or global securities markets are "out of favor" because of widely-
held negative investment expectations. As a result, disfavored securities may
be less susceptible to price volatility caused by unanticipated adverse events,
but they may especially benefit from advantageous events when they are selling
at prices below their inherent value.
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Investors often try to calculate the inherent value of equity securities by
reference to a number of different measurements, including present or
anticipated book value, cash flow, earnings and yield, and such financial
ratios as price/earnings, price/sales, price/capital expenditures, and
enterprise value/earnings before interest, taxes, depreciation and amortization
(EBITDA). The Manager will seek to identify securities whose market prices are
low when compared to such valuation measurements, and therefore represent
investment value.
The Fund will emphasize investments in equity securities, primarily common
stock, and, to a lesser extent, securities convertible into common stock,
preferred stock, rights to subscribe for common stock and other investments the
return on which is determined by the performance of a common stock or a basket
or index of common stocks. Under normal market conditions, at least 65% of the
Fund's total assets will be invested in equity securities of issuers from at
least three different countries that the Manager believes represent investment
value.
DESCRIPTION OF CERTAIN INVESTMENTS
Temporary Investments. The Fund reserves the right, as a temporary defensive
measure, to hold in excess of 35% of its total assets in cash or cash
equivalents in U.S. dollars or foreign currencies and investment grade, short-
term securities including money market securities denominated in U.S. dollars
or foreign currencies ("Temporary Investments"). Under certain adverse
investment conditions, the Fund may restrict the markets in which its assets
will be invested and may increase the proportion of assets invested in
Temporary Investments. Investments made for defensive purposes will be
maintained only during periods in which the Manager determines that economic or
financial conditions are adverse for holding or being fully invested in equity
securities. A portion of the Fund normally would be held in Temporary
Investments in anticipation of investment in equity securities or to provide
for possible redemptions.
Depositary Receipts. The Fund may invest in the securities of foreign issuers
in the form of Depositary Receipts or other securities convertible into
securities of foreign issuers. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. ADRs are receipts typically issued by an American bank or
trust company that evidence ownership of underlying securities issued by a
foreign corporation. EDRs are receipts issued in Europe that evidence a similar
ownership arrangement. GDRs are receipts issued throughout the world that
evidence a similar arrangement. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradeable both in the
U.S. and in Europe and are designed for use throughout the world. The Fund may
invest in unsponsored Depositary Receipts. The issuers of unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States, and, therefore, there may be less information available
regarding such issuers and there may not be a correlation between such
information and the market value of the Depositary Receipts.
Warrants. The Fund may invest in warrants, which are securities permitting,
but not obligating, their holder to subscribe for other securities. Warrants do
not carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holders to purchase, and they do not
represent any rights in the assets of the issuer. As a result, an investment in
warrants may be considered more speculative than certain other types of
investments. In addition, the value of a warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to its expiration date.
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Convertible Securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
several unique investment characteristics such as (i) higher yields than common
stocks, but lower yields than comparable nonconvertible securities, (ii) a
lesser degree of fluctuation in value than the underlying stock since they have
fixed-income characteristics and (iii) the potential for capital appreciation
if the market price of the underlying common stock increases. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a
convertible security held by the Fund is called for redemption, the Fund may be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.
Illiquid Securities. The Fund may invest up to 15% of its net assets in
securities that lack an established secondary trading market or otherwise are
considered illiquid. The Fund may invest in securities of issuers that are sold
in private placement transactions between the issuers and their purchasers and
that are neither listed on an exchange nor traded in other established markets.
In many cases, privately placed securities will be subject to contractual or
legal restrictions on transfer. As a result of the absence of a public trading
market, privately placed securities in turn may be less liquid or illiquid and
more difficult to value than publicly traded securities. To the extent that
privately placed securities may be resold in privately negotiated transactions,
the prices realized from the sales, due to illiquidity, could be less than
those originally paid by the Fund or less than their fair market value. In
addition, issuers whose securities are not publicly traded may not be subject
to the disclosure and other investor protection requirements that may be
applicable if their securities were publicly traded. If any privately placed
securities held by the Fund are required to be registered under the securities
laws of one or more jurisdictions before being resold, the Fund may be required
to bear the expenses of registration. Certain of the Fund's investments in
private placements may consist of direct investments and may include
investments in smaller, less-seasoned issuers, which may involve greater risks.
These issuers may have limited product lines, markets or financial resources,
or they may be dependent on a limited management group. In making investments
in such securities, the Fund may obtain access to material nonpublic
information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.
The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act. The Board of Directors has determined to
treat as liquid Rule 144A securities that are freely tradeable in their primary
markets offshore. The Board of Directors may adopt guidelines and delegate to
the Manager the daily function of determining and monitoring liquidity of
restricted securities. The Board of Directors, however, will retain sufficient
oversight and be ultimately responsible for the determinations. Since it is not
possible to predict with assurance exactly how this market for restricted
securities sold and offered under Rule 144A will develop, the Board of
Directors will carefully monitor the Fund's investments in these securities,
focusing on such factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.
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Swap Agreements. The Fund is authorized to enter into equity swap agreements,
which are contracts in which one party agrees to make periodic payments based
on the change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on a fixed or
variable interest rate or the change in market value of a different equity
security, basket of equity securities or equity index. For example, swap
agreements may be used to invest in a market without owning or taking physical
custody of securities in circumstances in which direct investment is restricted
for legal reasons or is otherwise impractical. The swap agreement will be
structured to provide for early termination in the event, for example, that the
Fund desires to lock in appreciation.
Swap agreements entail the risk that a party will default on its payment
obligations to the Fund thereunder. The Fund will seek to lessen the risk to
some extent by entering into a transaction only with financial institutions
that have capital of at least $50 million or whose obligations are guaranteed
by an entity having capital of at least $50 million. Swap agreements also bear
the risk that the Fund will not be able to meet its obligation to the
counterparty. The Fund, however, will deposit in a segregated account with its
custodian liquid securities, cash or cash equivalents or other assets permitted
to be so segregated by the Commission in an amount equal to or greater than the
market value of the liabilities under the swap agreement or the amount it would
have cost the Fund initially to make an equivalent direct investment, plus or
minus any amount the Fund is obligated to pay or is to receive under the swap
agreement. The Fund will enter into a swap transaction only if, immediately
following the time the Fund enters into the transaction, the aggregate notional
principal amount of swap transactions to which the Fund is a party would not
exceed 5% of the Fund's total assets.
Indexed and Inverse Securities. The Fund may invest in securities the
potential return of which is based on the change in particular measurements of
value or rate (an "index"). As an illustration, the Fund may invest in a debt
security that pays interest and returns principal based on the change in the
value of a securities index or a basket of securities, or based on the relative
changes of two indices. In addition, the Fund may invest in securities the
potential return of which is based inversely on the change in an index. For
example, the Fund may invest in securities that pay a higher rate of interest
when a particular index decreases and pay a lower rate of interest (or do not
fully return principal) when the value of the index increases. If the Fund
invests in such securities, it may be subject to reduced or eliminated interest
payments or loss of principal in the event of an adverse movement in the
relevant index or indices.
Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities.
The Fund believes that indexed and inverse securities may provide portfolio
management flexibility that permits the Fund to seek enhanced returns, hedge
other portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.
Investment in Other Investment Companies. The Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Fund. In accordance with the Investment Company Act, the Fund
may invest up to 10% of its total assets in securities of other investment
companies.
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In addition, under the Investment Company Act the Fund may not own more than 3%
of the total outstanding voting stock of any investment company and not more
than 5% of the value of the Fund's total assets may be invested in the
securities of any investment company. If the Fund acquires shares in investment
companies, shareholders would bear both their proportionate share of expenses
in the Fund (including management and advisory fees) and, indirectly, the
expenses of such investment companies (including management and advisory fees).
Investments by the Fund in wholly owned investment entities created under the
laws of certain countries will not be deemed an investment in other investment
companies.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Futures, Options and Forward Foreign Exchange
Transactions. The Fund is authorized to engage in certain investment practices
involving the use of options, futures and foreign exchange, which may expose
the Fund to certain risks. These investment practices and the associated risks
are described in detail in the Appendix attached to this Prospectus.
Portfolio Transactions. Subject to policies established by the Board of
Directors of the Fund, the Manager is primarily responsible for the execution
of the Fund's portfolio transactions. Since portfolio transactions may be
effected on foreign securities exchanges, the Fund may incur settlement delays
on certain of such exchanges. See "Risk Factors and Special Considerations." In
executing portfolio transactions, the Manager seeks to obtain the best net
results for the Fund, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm involved and the firm's risk
in positioning a block of securities. While the Manager generally seeks
reasonably competitive fees, commissions or spreads, the Fund does not
necessarily pay the lowest fee, commission or spread available. The Fund may
invest in certain securities traded in the over-the-counter ("OTC") market and,
where possible, will deal directly with the dealers who make a market in the
securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as principal
for their own account. On occasion, securities may be purchased directly from
the issuer. Such portfolio securities are generally traded on a net basis and
do not normally involve either brokerage commissions or transfer taxes.
Securities firms may receive brokerage commissions on certain portfolio
transactions, including futures, options and options on futures transactions
and the purchase and sale of underlying securities upon exercise of options.
The Fund has no obligation to deal with any broker or group of brokers in the
execution of transactions in portfolio securities. Subject to obtaining the
best price and execution, securities firms that provide supplemental investment
research to the Manager, 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 Manager under the
Management Agreement and the expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information.
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Commission. Affiliated persons of the Fund, and affiliated
persons of such affiliated persons, may serve as the Fund's broker in
transactions conducted on an exchange and in OTC transactions conducted on an
agency
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basis and may receive brokerage commissions from the Fund. In addition, the
Fund may not purchase securities during the existence of any underwriting
syndicate for such securities of which Merrill Lynch is a member or in a
private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Directors of the Fund that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. In addition, consistent with the Conduct Rules of the
NASD, the Fund may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the
Fund. It is expected that the majority of the shares of the Fund will be sold
by Merrill Lynch. Costs associated with transactions in foreign securities are
generally higher than in the United States, although the Fund will endeavor to
achieve the best net results in effecting its portfolio transactions.
The Fund anticipates that its brokerage transactions involving securities of
issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States. See "Risk
Factors and Special Considerations."
The Fund's ability and decisions to purchase and sell portfolio securities
may be affected by foreign laws and regulations relating to the convertibility
and repatriation of assets.
Lending of Portfolio Securities. The Fund from time to time may lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government.
Such collateral will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. This limitation is
a fundamental policy, and it may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, as defined
in the Investment Company Act. During the period of such a loan, the Fund
typically receives the income on both the loaned securities and the collateral
and thereby increases its yield. In certain circumstances, the Fund may
receive a flat fee. Such loans are terminable at any time, and the borrower,
after notice, will be required to return borrowed securities within five
business days. In the event that the borrower defaults on its obligation to
return borrowed securities because of insolvency or otherwise, the Fund could
experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Portfolio Turnover. Generally, the Fund does not purchase securities for
short-term trading profits. However, the Fund may dispose of securities
without regard to the time they have been held when such actions, for
defensive or other reasons, appear advisable to the Manager in light of a
change in circumstances in general market, economic or financial conditions.
As a result of its investment policies, the Fund may engage in a substantial
number of portfolio transactions. Accordingly, while the Fund anticipates that
its annual portfolio turnover rate should not exceed 100% under normal
conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the
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<PAGE>
time of acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. High portfolio turnover involves
certain tax consequences and correspondingly greater transaction costs in the
form of dealer spreads and brokerage commissions, which are borne directly by
the Fund.
When-Issued Securities and Forward Commitment Transactions. The Fund may
purchase or sell securities that it is entitled to receive on a when-issued
basis, and it may purchase or sell securities for delayed delivery. These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future to secure what is considered an
advantageous yield and price to the Fund at the time of entering into the
transaction. Although the Fund has not established any limit on the percentage
of its assets that may be committed in connection with such transactions, the
Fund will maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other liquid securities denominated
in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
amount of its commitments in connection with such purchase transactions.
There can be no assurance that a security purchased on a when-issued basis or
purchased or sold for delayed delivery will be issued, and the value of the
security, if issued, on the delivery date may be more or less than its purchase
price. The Fund may bear the risk of a decline in the value of such security
and may not benefit from an appreciation in the value of the security during
the commitment period.
Standby Commitment Agreements. The Fund, from time to time, may enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of equity securities that may be
issued and sold to the Fund at the option of the issuer. The price of the
security is fixed at the time of the commitment. At the time of entering into
the agreement, the Fund is paid a commitment fee, regardless of whether or not
the security is ultimately issued, which is typically approximately 0.50% of
the aggregate purchase price of the security that the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a price that is
considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and presently will limit
its investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its net assets taken at the time of
acquisition of such a commitment. The Fund at all times will maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other liquid securities denominated in U.S. dollars or
non-U.S. currencies in an aggregate amount equal to the purchase price of the
securities underlying a commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security thereafter
will be reflected in the calculation of the Fund's net asset value. The cost
basis of the
19
<PAGE>
security will be adjusted by the amount of the commitment fee. In the event the
security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees, upon entering into the
contract with the Fund, to repurchase a security (typically a security issued
or guaranteed by the U.S. Government) at a mutually agreed-upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed yield for the Fund insulated from fluctuations in the market value of
the underlying security during such period although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. Repurchase agreements and purchase and
sale contracts may be entered into only with financial institutions that (i)
have, in the opinion of the Manager, substantial capital relative to the Fund's
exposure, or (ii) have provided the Fund with a third-party guaranty or other
credit enhancement. A purchase and sale contract is similar to a repurchase
agreement, but purchase and sale contracts, unlike repurchase agreements,
allocate interest on the underlying security to the purchaser during the term
of the agreement. In all instances, the Fund takes possession of the underlying
securities when investing in repurchase agreements or purchase and sale
contracts. Nevertheless, if the seller were to default on its obligation to
repurchase a security under a repurchase agreement or purchase and sale
contract and the market value of the underlying security at such time was less
than the Fund had paid to the seller, the Fund would realize a loss. The Fund
may not invest more than 15% of its net assets in repurchase agreements or
purchase and sale contracts maturing in more than seven days, together with all
other illiquid securities.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that are
described in the Statement of Additional Information. Investment restrictions
and policies that are fundamental policies may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (a) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its total assets, taken at market value at the time of each
investment, in the securities of issuers in any particular industry (excluding
the U.S. Government and its agencies and instrumentalities). Investment
restrictions and policies that are non-fundamental policies may be changed by
the Board of Directors without shareholder approval. As a non-fundamental
policy, the Fund may not borrow money or pledge its assets, except that the
Fund (a) may borrow from a bank as a temporary measure for extraordinary or
emergency purposes or to meet redemptions in amounts not exceeding 33 1/3%
(taken at market value) of its total assets and pledge its assets to secure
such borrowings, (b) may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of portfolio securities and (c) may
purchase securities on margin to the extent permitted by applicable law.
(However, at the present time, applicable law prohibits the Fund from
purchasing securities on margin.) (The deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts or
options transactions is not considered to be the purchase of a security on
margin.) The purchase of securities while borrowings are outstanding will have
the effect of leveraging the Fund. Such
20
<PAGE>
leveraging or borrowing increases the Fund's exposure to capital risk, and
borrowed funds are subject to interest costs which will reduce net income.
As a non-fundamental policy, the Fund will not invest in securities that
cannot readily be resold because of legal or contractual restrictions or that
are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its net assets taken at market value would be
invested in such securities. Notwithstanding the foregoing, the Fund may
purchase without regard to this limitation securities that are not registered
under 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. The Board of
Directors may adopt guidelines and delegate to the Manager the daily function
of determining and monitoring liquidity of restricted securities. The Board has
determined that securities which are freely tradeable in their primary market
outside of the United States should be deemed liquid. The Board, however, will
retain sufficient oversight and be ultimately responsible for the
determinations.
NON-DIVERSIFIED STATUS
The Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act in
the proportion of its assets that it may invest in securities of a single
issuer. The Fund's investments will be limited, however, in order to qualify
for the special treatment afforded "regulated investment companies" under the
Code. See "Additional Information--Taxes." To qualify, the Fund will comply
with certain requirements, including limiting its investments so that at the
close of each quarter of the taxable year (i) not more than 25% of the market
value of the Fund's total assets will be invested in the securities of a single
issuer and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer, and the Fund will not own more than 10% of
the outstanding voting securities of a single issuer. A fund that elects to be
classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets. To
the extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's net asset value may fluctuate to a greater extent
than that of a diversified investment company as a result of changes in the
financial condition or in the market's assessment of the issuers, and the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than a diversified company.
For purposes of the diversification requirements set forth above with respect
to regulated investment companies, and to the extent required by the
Commission, the Fund, as non-fundamental policy, will consider securities
issued or guaranteed by the government of any one foreign country as the
obligations of a single issuer.
21
<PAGE>
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of whom
are not "interested persons," as defined in the Investment Company Act, of the
Fund. The Board of Directors of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies under Maryland law and the
Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel*--Chairman of the Manager and its affiliate, FAM; Chairman and
Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of ML & Co.
Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).
Edward H. Meyer--Chairman of the Board, President and Chief Executive Officer
of Grey Advertising Inc.
Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.
Richard R. West--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
MLAM acts as the manager of the Fund and provides the Fund with management
and investment advisory services. The Manager is owned and controlled by ML &
Co., a financial services holding company and the parent of Merrill Lynch. The
Manager or its affiliate, FAM, acts as the investment adviser to more than 100
registered investment companies and also offers portfolio management services
to individuals and institutions. As of January 31, 1998, the Manager and FAM
had a total of approximately $287.0 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
the Manager. The principal business address of the Manager is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
The Fund has entered into a management agreement (the "Management Agreement")
with the Manager. The Management Agreement provides that, subject to the
direction of the Board of Directors of the Fund, the Manager is responsible for
the actual management of the Fund's portfolio and will constantly review the
Fund's holdings in light of its own research analysis and that from other
relevant sources. The responsibility for making decisions to buy, sell or hold
a particular security rests with the Manager, subject to review by the Board of
Directors. The Manager provides the portfolio managers for the Fund, who
consider analyses
22
<PAGE>
from various sources (including brokerage firms with which the Fund does
business), make the necessary investment decisions and place orders for
transactions accordingly. The Manager also is obligated to perform certain
administrative and management services for the Fund and is obligated to provide
all of the office space, facilities, equipment and personnel necessary to
perform its duties under the Management Agreement.
The Manager receives for its services to the Fund monthly compensation at the
annual rate of 0.75% of the average daily net assets of the Fund. For the
fiscal period November 1, 1997 to December 31, 1997, the fee paid by the Fund
to the Manager was $2,189,146 (based on average daily net assets of
approximately $1.7 billion). For the fiscal year ended October 31, 1997, the
fee paid by the Fund to the Manager was $9,957,530 (based on an average daily
net assets of approximately $1.3 billion).
The Manager has also entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an
indirect, wholly-owned subsidiary of ML & Co. and an affiliate of the Manager,
pursuant to which the Manager pays MLAM U.K. a fee for providing investment
advisory services to the Manager with respect to the Fund in an amount to be
determined from time to time by the Manager and MLAM U.K. but in no event in
excess of the amount the Manager actually receives for providing services to
the Fund pursuant to the Management Agreement. For the fiscal period November
1, 1997 to December 31, 1997, and for the fiscal year ended October 31, 1997,
no fees were paid by the Manager to MLAM U.K. pursuant to such agreement. MLAM
U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Stephen I. Silverman, Senior Vice President of the Fund, is the Fund's
Portfolio Manager. Mr. Silverman has been a First Vice President of the Manager
since 1997 and Portfolio Manager of the Manager and its corporate predecessors
since 1983. Mr. Silverman was a Vice President of the Manager and its corporate
predecessors from 1983 to 1997. Mr. Silverman has been primarily responsible
for the day-to-day management of the Fund's investment portfolio since it
commenced operations.
The Fund pays certain expenses incurred in its operations, including, among
other things, the management fee; legal and audit fees; unaffiliated Directors'
fees and expenses; registration fees; custodian and transfer agency fees;
accounting and pricing costs; and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Also, accounting services are provided to the Fund by the Manager, and the Fund
reimburses the Manager for its costs in connection with such services on a
semi-annual basis. For the fiscal period November 1, 1997 to December 31, 1997,
the Fund reimbursed the Manager $16,901 for accounting services. For the fiscal
period November 1, 1997 to December 31, 1997, the annualized ratio of total
expenses to average net assets for Class A, Class B, Class C and Class D shares
was 0.96%, 1.98%, 1.98% and 1.21%, respectively. For the fiscal year ended
October 31, 1997, the Fund reimbursed the Manager $191,495 for such accounting
services. For the fiscal year ended October 31, 1997, the ratio of total
expenses to average net assets for Class A, Class B, Class C and Class D shares
was 0.97%, 1.99%, 1.99% and 1.22%, respectively.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act that incorporates the Code of
Ethics of the Manager (together, the "Codes"). The Codes significantly restrict
the personal investing activities of all employees of the Manager and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
23
<PAGE>
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Manager include a ban on acquiring any securities in a "hot"
initial public offering and a prohibition from profiting on short-term trading
in securities. In addition, no employee may purchase or sell any security that
at the time is being purchased or sold (as the case may be), or to the
knowledge of the employee is being considered for purchase or sale, by any
fund advised by the Manager. Furthermore, the Codes provide for trading
"blackout periods" which prohibit trading by investment personnel of the Fund
within periods of trading by the Fund in the same (or equivalent) security (15
or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $11.00 per Class
A or Class D account and up to $14.00 per Class B or Class C account and is
entitled to reimbursement for certain transaction charges and out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing a beneficial
interest of a person in the relevant share class or a record keeping system,
provided the record keeping system is maintained by a subsidiary of ML & Co.
For the fiscal period November 1, 1997 to December 31, 1997, and for the
fiscal year ended October 31, 1997, the total fees paid by the Fund to the
Transfer Agent were $335,183 and $1,444,814, respectively, pursuant to the
Transfer Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of the Manager, FAM and Merrill Lynch, acts as
the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50,
except that for retirement plans, the minimum initial purchase is $100 and the
minimum subsequent purchase is $1 and, for participants in certain fee-based
programs, the minimum initial purchase is $500 and the minimum subsequent
purchase is $50.
The Fund offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis, depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing SM System, as described
24
<PAGE>
below. The applicable offering price for purchase orders is based upon the net
asset value of the Fund next determined after receipt of the purchase orders
by the Distributor. As to purchase orders received by securities dealers prior
to the close of business on the New York Stock Exchange (the "NYSE")
(generally, 4:00 p.m., New York time), which includes orders received after
the close of business on the previous day, the applicable offering price will
be based on the net asset value determined as of 15 minutes after the close of
business on the NYSE on that day, provided the Distributor in turn receives
the order from the securities dealer prior to 30 minutes after the close of
business on the NYSE on that day. If the purchase orders are not received by
the Distributor prior to 30 minutes after the close of business on the NYSE on
that day, such orders shall be deemed received on the next business day. The
Fund or the Distributor may suspend the continuous offering of the Fund's
shares of any class at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to
time. Any order may be rejected by the Distributor or the Fund. Neither the
Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $5.35) to confirm a sale of shares to such
customers. Purchases made directly through the Transfer Agent are not subject
to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System, which permits each investor to choose the method of
purchasing shares that he or she believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares
and other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a CDSC and ongoing distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing SM System
is set forth under "Merrill Lynch Select Pricing SM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges do not affect the net
asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares are calculated in the same manner at the same time and will differ only
to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid (except that Class B shareholders may vote
on any material changes to expenses charged under the Class D Distribution
Plan). See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services--Exchange Privilege."
25
<PAGE>
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- ------------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- ------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares, certain retirement
plans and certain fee-based programs was modified. Also, Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will
be tacked onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
26
<PAGE>
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES CHARGE AS SALES CHARGE AS SELECTED DEALERS
PERCENTAGE OF PERCENTAGE* OF AS PERCENTAGE OF
THE OFFERING THE NET AMOUNT THE OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ------------------ --------------- --------------- ----------------
<S> <C> <C> <C>
Less than $25,000............ 5.25% 5.54% 5.00%
$25,000 but less than
$50,000..................... 4.75 4.99 4.50
$50,000 but less than
$100,000.................... 4.00 4.17 3.75
$100,000 but less than
$250,000.................... 3.00 3.09 2.75
$250,000 but less than
$1,000,000.................. 2.00 2.04 1.80
$1,000,000 and over**........ 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases by certain retirement plan
investors and participants in connection with certain fee-based programs.
If the sales charge is waived in connection with a purchase of $1,000,000
or more, such purchase may be subject to a 1.0% CDSC if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. A sales charge of 0.75% will be charged on
purchases of $1,000,000 or more of Class A or Class D shares by certain
employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times, the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
The proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
During the fiscal period November 1, 1997 to December 31, 1997, the Fund
sold 751,738 Class A shares for aggregate net proceeds of $9,068,512. The
gross sales charges for the sale of Class A shares of the Fund for the period
were $142, of which $3 and $139 were received by the Distributor and Merrill
Lynch, respectively. During the fiscal year ended October 31, 1997, the Fund
sold 5,152,431 Class A shares for aggregate net proceeds of $57,303,237. The
gross sales charges for the sale of Class A shares of the Fund for the year
were $914, of which $49 and $865 were received by the Distributor and Merrill
Lynch, respectively. During the fiscal period November 1, 1997 to December 31,
1997, the Fund sold 1,489,446 Class D shares for aggregate net proceeds of
$18,112,269. The gross sales charges for the sale of Class D shares of the
Fund for the period were $78,699, of which $4,932 and $73,767 were received by
the Distributor and Merrill Lynch, respectively. During the fiscal year ended
October 31, 1997, the Fund sold 22,812,954 Class D shares for aggregate net
proceeds of $235,349,723. The gross sales charges for the sale of Class D
shares of the Fund for the period were $1,442,391, of which $96,252 and
$1,346,139 were received by the Distributor and Merrill Lynch, respectively.
The Distributor received no CDSCs for either period with respect to
redemptions within one year after purchase of Class A or Class D shares
purchased subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A
27
<PAGE>
shares of the Fund in a shareholder account, including participants in the
Merrill Lynch Blueprint SM program, are entitled to purchase additional Class
A shares of the Fund in that account. Certain employer-sponsored retirement or
savings plans, including eligible 401(k) plans, may purchase Class A shares at
net asset value provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by the Manager or any
of its affiliates. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of
foreign owned banking institutions provided that the program or the branch has
$3 million or more initially invested in MLAM-advised mutual funds. Also
eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMA SM Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. In addition,
Class A shares are offered at net asset value to ML & Co. and its subsidiaries
and their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares
of certain MLAM-advised closed-end funds in their initial offerings who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions set forth in the Statement of Additional
Information are met. In addition, Class A shares of the Fund and certain other
MLAM-advised mutual funds are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set
forth in the Statement of Additional Information are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted
by such funds in shares of the Fund and certain other MLAM-advised mutual
funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services--Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access SM Accounts
available through authorized employers. Subject to certain conditions, Class A
and Class D shares are offered at net asset value to shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal
Bond Fund, Inc., and Class A shares are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc., who wish to
reinvest in shares of the Fund the net proceeds from a sale of certain of
their shares of common stock, pursuant to tender offers conducted by those
funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint SM Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
28
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately eight years after Class B shares
are issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, automatically are converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Class B and
Class C shares are both subject to an account maintenance fee of 0.25% of net
assets and a distribution fee of 0.75% of net assets as discussed below under
"Distribution Plans." The proceeds from the ongoing account maintenance fees
are used to compensate the Distributor and Merrill Lynch (pursuant to a sub-
agreement) for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of Class B and Class C shares,
such as the payment of compensation to financial consultants for selling Class
B and Class C shares from the dealers' own funds. The combination of the CDSC
and the ongoing distribution fee facilitates the ability of the Fund to sell
the Class B and Class C shares without a sales charge being deducted at the
time of purchase. Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to the
same account maintenance fee but no distribution fee; Class B shares of certain
other MLAM-advised mutual funds into which exchanges may be made convert into
Class D shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services--
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
29
<PAGE>
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC AS
A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
------------------- ----------------
<S> <C>
0-1................................................... 4.00%
1-2................................................... 3.00
2-3................................................... 2.00
3-4................................................... 1.00
4 and thereafter...................................... None
</TABLE>
For the fiscal period November 1, 1997 to December 31, 1997, the Distributor
received CDSCs of $295,557 with respect to redemptions of Class B shares, all
of which were paid to Merrill Lynch. For the fiscal year ended October 31,
1997, the Distributor received CDSCs of $1,162,975 with respect to redemptions
of Class B shares, all of which were paid to Merrill Lynch. Additional CDSCs
payable to the Distributor may have been waived or converted to a contingent
obligation in connection with a shareholder's participation in certain fee-
based programs.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible applicable
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as redemption.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans and
in connection with certain group plans. The CDSC also is waived for any Class B
shares that are purchased by eligible 401(k) or eligible 401(a) plans that are
rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA
and held in such account at the time of redemption. The Class B CDSC also is
waived for any Class B shares purchased within
30
<PAGE>
qualifying Employee Access SM Accounts. The Class B CDSC also is waived for
any Class B shares that are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information. The terms of the CDSC may be modified in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as
a percentage of the dollar amount subject thereto. The charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions. The Class C CDSC may be waived in connection
with certain fee-based programs. See "Shareholder Services--Fee-Based
Programs." For the fiscal period November 1, 1997 to December 31, 1997, the
Distributor received CDSCs of $9,766 with respect to redemptions of Class C
shares, all of which were paid to Merrill Lynch. For the fiscal year ended
October 31, 1997, the Distributor received CDSCs of $122,657 with respect to
redemptions of Class C shares, all of which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares of the Fund will be converted
automatically into Class D shares of the Fund. Class D shares are subject to
an ongoing account maintenance fee of 0.25% of net assets but are not subject
to the distribution fee that is borne by Class B shares. Automatic conversion
of Class B shares into Class D shares will occur at least once each month (on
the "Conversion Date") on the basis of the relative net asset values of the
shares of the two classes on the Conversion Date, without the imposition of
any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase of the Class D shares or a sale of the
Class B 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. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the
Fund held in the account on the Conversion Date will be converted to Class D
shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event that such certificates
31
<PAGE>
are not received by the Transfer Agent at least one week prior to the
Conversion Date, the related Class B shares will convert to Class D shares on
the next scheduled Conversion Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchase Class B
shares through certain retirement plans which qualify for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.
The Conversion Period also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this
32
<PAGE>
regard, the purpose and function of the ongoing distribution fees and the CDSC
are the same as those of the initial sales charges with respect to the Class A
and Class D shares of the Fund in that the deferred sales charges provide for
the financing of the distribution of the Fund's Class B and Class C shares.
For the fiscal period November 1, 1997 to December 31, 1997, the Fund paid
the Distributor $2,035,049 pursuant to the Class B Distribution Plan (based on
average daily net assets subject to such Class B Distribution Plan of
approximately $1.2 billion), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class B shares. For the fiscal period November 1, 1997 to
December 31, 1997, the Fund paid the Distributor $373,926 pursuant to the
Class C Distribution Plan (based on average daily net assets subject to such
Class C Distribution Plan of approximately $223.7 million), all of which was
paid to Merrill Lynch for providing account maintenance and distribution-
related activities and services in connection with Class C shares. For the
fiscal period November 1, 1997 to December 31, 1997, the Fund paid the
Distributor $102,950 pursuant to the Class D Distribution Plan (based on
average daily net assets subject to such Class D Distribution Plan of
approximately $246.4 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.
For the fiscal year ended October 31, 1997, the Fund paid the Distributor
$9,355,347 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $935.5
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection
with Class B shares. For the fiscal year ended October 31, 1997, the Fund paid
the Distributor $1,696,508 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $169.7 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. For the fiscal year ended October 31, 1997,
the Fund paid the Distributor $484,472 pursuant to the Class D Distribution
Plan (based on average daily net assets subject to such Class D Distribution
Plan of approximately $193.8 million), all of which was paid to Merrill Lynch
for providing account maintenance activities in connection with Class D
shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount
of expenses incurred, and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year
on a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotional and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation.
As of December 31, 1996, the last date for which fully allocated accrual
data is available, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues by
approximately $22,103,000 (2.88% of Class B net assets at that date). As of
December 31, 1997, direct cash expenses for the period since the commencement
of operations of Class B shares exceeded direct cash revenues by $1,268,987
33
<PAGE>
(.10% of Class B net assets at that date). As of December 31, 1996, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for
the period since the commencement of operations of Class C shares exceeded
fully allocated accrual revenues by approximately $1,058,000 (.77% of Class C
net assets at that date). As of December 31, 1997, direct cash revenues for
the period since the commencement of operations of Class C shares exceeded
direct cash expenses by $1,486,337 (.65% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or
distribution of each class of shares separately. The initial sales charges,
the account maintenance fee, the distribution fee and/or the CDSCs received
with respect to one class will not be used to subsidize the sale of shares of
another class. Payments of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares."
Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Conduct Rules of the NASD imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by
the Class B and Class C shares, but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable
to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fees and the CDSCs). In connection with the Class B shares, the
Distributor voluntarily has agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund will
not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance
fee. In certain circumstances, the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances, payments in excess of the amount payable under the NASD formula
will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of
34
<PAGE>
shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so, without charge, by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares deposited
with the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be redeemed. Redemption
requests should not be sent to the Fund. The redemption request in either event
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as such name(s) appear on the Transfer Agent's
register or on the certificates, as the case may be. The signature(s) on the
redemption request must be guaranteed by an "eligible guarantor institution"
(including, for example, Merrill Lynch branch offices and certain other
financial institutions) as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain instances,
the Transfer Agent may require additional documents, such as, but not limited
to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash or certified check drawn on a U.S. bank) has been
collected for the purchase of such shares. Normally, this delay will not exceed
10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is received by the dealer prior to the close of business on the
NYSE (generally, 4:00 p.m., New York time) on the day received and that such
request is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE in order to obtain that
day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the
35
<PAGE>
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up
to the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be
reinstated to the Transfer Agent within 30 days after the date the request for
redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place
purchase orders for the Fund's shares through the Merrill Lynch Blueprint SM
Program. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or to change options with respect thereto, can be obtained
from the Fund by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch. Certain of these services are available only
to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive, at least quarterly, statements from the
Transfer Agent. The statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The statements also will
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the Class
A or Class D shares are to be transferred will not take delivery of shares of
the Fund, a shareholder either must redeem the Class A or Class D shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or
36
<PAGE>
Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he or she be issued certificates for
such shares and then must turn the certificates over to the new firm for re-
registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an IRA from Merrill
Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the retirement account is to be transferred will not take
delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to
the account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from his or
her Investment Account in the form of payments by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis. A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program, subject to certain conditions. With respect to redemptions
of Class B or Class C shares pursuant to a systematic withdrawal plan, the
maximum number of Class B or Class C shares that can be redeemed from an
account annually shall not exceed 10% of the value of shares of such class in
that account at the time the election to join the systematic withdrawal plan
was made. Any CDSC that otherwise might be due on such redemption of Class B or
Class C shares will be waived. Shares redeemed pursuant to a systematic
withdrawal plan will be redeemed in the same order as Class B or Class C shares
are otherwise redeemed. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Contingent Deferred Sales Charges--
Class B Shares" and "--Contingent Deferred Sales Charges--Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares."
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be made
to an investor's Investment Account by pre-arranged charges of $50 or more to
his or her regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are automatically reinvested in
full and fractional shares of the Fund, without sales charge, at the net asset
value per share next determined after the close of business on the NYSE on the
ex-dividend date of such dividend or distribution. A shareholder, at any time,
by written notification to Merrill Lynch if the shareholder's account is
maintained with Merrill Lynch or by written notification or by telephone (1-
800-MER-FUND) to the Transfer Agent if the shareholder's account is maintained
with the Transfer Agent, may elect to have subsequent dividends, or both
dividends and capital
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gains distributions, paid in cash, rather than reinvested, in which event
payment will be mailed on or about the payment date. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution or
redemption checks. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed on redemptions of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in the account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in
which the exchange is made or is otherwise eligible to purchase Class A shares
of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period of the newly acquired shares of
the other fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares
are held in a money market fund, however, will not count toward satisfaction
of the holding period requirement for reduction of any CDSC imposed on such
shares, if any, and, with respect to Class B shares, toward satisfaction of
the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares.
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In addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the MLAM-
advised mutual fund from which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B
and Class C shares and the maximum sales charge in the case of Class A and
Class D shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance and distribution fees and any incremental transfer agency costs
relating to each class of shares will be borne exclusively by that class. The
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Fund will include performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual
or annualized total return data generally will be lower than average annual
total return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements directed to investors whose purchases are
subject to reduced sales charges in the case of Class A and Class D shares or
waiver of the CDSC in the case of Class B and Class C shares (such as investors
in certain retirement plans), performance data may take into account the
reduced, and not the maximum, sales charge or may not take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or waiver of the CDSC, a lower amount of expenses may be
deducted. See "Purchase of Shares." The Fund's total return may be expressed
either as a percentage or as a dollar amount in order to illustrate the effect
of such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to the Standard & Poor's
500 Index, the Financial Times/Standard & Poor's Actuarial World Indices, the
Morgan Stanley Capital International Indices, the Dow Jones Industrial Average,
or to performance data published by Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine, Fortune
Magazine or other industry publications. In addition, from time to time the
Fund may include the Fund's risk-adjusted performance ratings assigned by
Morningstar Publications, Inc. in advertising or supplemental sales literature.
As with other performance data, performance comparisons should not be
considered representative of the Fund's relative performance for any future
period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all of its net
investment income, if any. Dividends from such net investment income are paid
at least annually. All net realized capital gains, if any, are distributed as
dividends to the Fund's shareholders at least annually. The per share dividends
and distributions on each class of shares will be reduced as a result of any
account maintenance, distribution and transfer agency fees applicable to that
class. See "Additional Information--Determination of Net Asset Value."
Dividends and distributions will be reinvested automatically in shares of the
Fund at net asset value
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without a sales charge. However, a shareholder whose account is maintained at
the Transfer Agent or whose account is maintained through Merrill Lynch may
elect in writing to receive any such dividends or distributions, or both, in
cash. Dividends and distributions are taxable to shareholders as discussed
below whether they are reinvested in shares of the Fund or received in cash.
From time to time, the Fund may declare a special distribution at or about the
end of the calendar year in order to comply with Federal tax requirements that
certain percentages of its ordinary income and capital gains be distributed
during the year. Capital gains distributions will be automatically reinvested
in shares unless the shareholder elects to receive such distributions in cash.
Gains or losses attributable to certain foreign currency transactions may
increase or decrease the amount of the Fund's income available for distribution
to shareholders. If such losses exceed other ordinary income during a taxable
year, (a) the Fund would not be able to make any ordinary income dividend
distributions and (b) all or a portion of distributions made before the losses
were realized but in the same taxable year would be recharacterized as returns
of capital to shareholders, rather than as ordinary income dividends, thereby
reducing each shareholder's tax basis in the Fund shares for Federal income tax
purposes and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's tax basis in Fund shares (assuming
the shares were held as a capital asset). For a detailed discussion of the
Federal tax considerations relevant to foreign currency transactions, see
"Additional Information--Taxes."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income
dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. If the Fund pays
a dividend in January which was declared in the previous October, November or
December to shareholders of record on a
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specified date in one of such months, then such dividend will be treated for
tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Fund. In addition, recent legislation permits a foreign
tax credit to be claimed with respect to withholding tax on a dividend only if
the shareholder meets certain holding period requirements. If more than 50% in
value of the Fund's total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible, and intends, to
file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate shares
of such withholding taxes in their U.S. income tax returns as gross income,
treat such proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. In the case of
foreign taxes passed through by a RIC, the holding period requirements referred
to above must be met by both the shareholder and the RIC. No deductions for
foreign taxes, moreover, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes and other
information needed to claim the foreign tax credit.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of the distributions from such a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes
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on excess distributions. However, such election may cause the Fund to recognize
income in a particular year in excess of the distributions received from such
PFICs. Alternatively, under recent legislation the Fund could elect to "mark to
market" at the end of each taxable year all shares that it holds in PFICs. If
it made this election, the Fund would recognize as ordinary income any increase
in the value of such shares over their adjusted basis and as ordinary loss any
decrease in such value to the extent it did not exceed prior increases. By
making the mark-to-market election, the Fund could avoid imposition of the
interest charge with respect to its distributions from PFICs, but in any
particular year might be required to recognize income in excess of the
distributions it received from PFICs and its proceeds from dispositions of PFIC
stock.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from financial futures contracts
that are not "regulated futures contracts" and from unlisted options will
generally be treated as ordinary income or loss. Such Code Section 988 gains or
losses will generally increase or decrease the amount of the Fund's investment
company taxable income available to be distributed to shareholders as ordinary
income. Additionally, if Code Section 988 losses exceed other investment
company taxable income during a taxable year, the Fund would not be able to
make any ordinary income dividend distributions, and all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than the
shareholder's tax basis in Fund shares (assuming that the shares were held as a
capital asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period for the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
----------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends also may be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
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Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m. New York time), on each day during which the NYSE is open for
trading. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation.
The net asset value per share is computed by dividing the sum of the market
values of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time to the nearest cent. Expenses, including the
management fees payable to the Manager and any account maintenance and/or
distribution fees payable to the Distributor, are accrued daily. The per share
net asset value of Class A shares generally will be higher than the per share
net asset value of shares of the other classes, reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; in addition, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and
Class C shares, reflecting the daily expense accruals of the distribution and
higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions, which will differ by approximately
the amount of the expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Long positions in securities traded in the OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Short positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation.
Securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books
of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars at the prevailing market
rates as obtained from one or more dealers. Other investments, including
futures contracts and related options, are valued at market value. Securities
and assets for which market quotations are not readily available are valued at
fair value as
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determined in good faith by or under the direction of the Board of Directors of
the Fund. Such valuations and procedures will be reviewed periodically by the
Board of Directors.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on March 8, 1996. As of the date
of this Prospectus, the Fund has an authorized capital of 600,000,000 shares of
Common Stock, par value $0.10 per share, divided into four classes, designated
Class A, Class B, Class C and Class D Common Stock. Class A, Class C and Class
D each consists of 100,000,000 shares and Class B consists of 300,000,000
shares. Shares of Class A, Class B, Class C and Class D represent interests in
the same assets of the Fund and are identical in all respects except that Class
B, Class C and Class D shares bear certain expenses relating to the account
maintenance associated with such shares, and Class B and Class C shares bear
certain expenses relating to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to distribution and/or
account maintenance expenditures, as applicable. See "Purchase of Shares." The
Board of Directors of the Fund may classify and reclassify the shares of the
Fund into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matters submitted to a shareholder vote. The Fund does not intend to
hold an annual meeting of shareholders in any year in which the Investment
Company Act does not require shareholders to act upon any of the following
matters: (i) election of Directors; (ii) approval of an investment advisory
agreement; (iii) approval of a distribution agreement; and (iv) ratification of
selection of independent auditors. Also, the by-laws of the Fund require that a
special meeting of shareholders be held upon the written request of at least
10% of the outstanding shares of the Fund entitled to vote at such meeting, if
such request is in compliance with applicable Maryland law. Voting rights for
Directors are not cumulative. Shares issued are fully paid and non-assessable
and have no preemptive rights. Shares have the conversion rights described in
this Prospectus. Each share of Common Stock is entitled to participate equally
in dividends and distributions declared by the Fund and in the net assets of
the Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities, except that, as noted above, Class B, Class C and Class D shares
bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this matter, please call your Merrill Lynch
Financial Consultant or Merrill Lynch Financial Data Services, Inc. at
(800) 637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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APPENDIX
INVESTMENT PRACTICES INVOLVING THE USE OF OPTIONS, FUTURES AND FOREIGN EXCHANGE
The Fund is authorized to engage in certain investment practices involving
the use of options, futures and foreign exchange, as described below. Such
instruments, which may be regarded as derivatives, are referred to collectively
herein as "Strategic Instruments."
OPTIONS ON SECURITIES AND SECURITIES INDICES
Purchasing Options The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of which
is substantially correlated with securities held in its portfolio. When the
Fund purchases a put option, in consideration for an up-front payment (the
"option premium"), the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase
of a put option limits the Fund's risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. In the event the market value of the portfolio
holdings underlying the put option increases rather than decreases, however,
the Fund will lose the option premium and will consequently realize a lower
return on the portfolio holdings than would have been realized without the
purchase of the put.
The Fund is also authorized to purchase call options on securities it intends
to purchase or securities indices the performance of which substantially
correlates with the performance of the types of securities it intends to
purchase. When the Fund purchases a call option, in consideration for the
option premium, the Fund acquires a right to purchase from another party
specified securities at the exercise price on or before the expiration date, in
the case of an option on securities, or to receive from another party a payment
based on the amount a specified securities index increases beyond a specified
level on or before the expiration date, in the case of an option on a
securities index. The purchase of a call option may protect the Fund from
having to pay more for a security as a consequence of increases in the market
value for the security during a period when the Fund is contemplating its
purchase, in the case of an option on a security, or attempting to identify
specific securities in which to invest in a market the Fund believes to be
attractive, in the case of an option on an index (an "anticipatory hedge"). In
the event the Fund determines not to purchase a security underlying a call
option, however, the Fund may lose the entire option premium.
The Fund may also purchase put or call options in connection with closing out
put or call options it has previously sold. However, the Fund will not purchase
options on securities if, as a result of such purchase, the aggregate cost
(option premiums paid) of all outstanding options on securities held by the
Fund would exceed 5% of the market value of the Fund's total assets.
Writing Options. The Fund is authorized to write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
is substantially correlated with securities held in its portfolio. When the
Fund writes a call option, in return for an option premium, the Fund gives
another party the right
46
<PAGE>
to buy specified securities owned by the Fund at the exercise price on or
before the expiration date, in the case of an option on securities, or agrees
to pay to another party an amount based on any gain in a specified securities
index beyond a specified level on or before the expiration date, in the case of
an option on a securities index. The Fund may write call options to earn
income, through the receipt of option premiums. In the event the party to which
the Fund has written an option fails to exercise its rights under the option
because the value of the underlying securities is less than the exercise price,
the Fund will partially offset any decline in the value of the underlying
securities through the receipt of the option premium and will realize a greater
return than would have been realized on the underlying securities alone. By
writing a call option, however, the Fund limits its ability to sell the
underlying securities, and gives up the opportunity to profit from any increase
in the value of the underlying securities beyond the exercise price, while the
option remains outstanding.
The Fund may also write put options on securities or securities indices. When
the Fund writes a put option, in return for an option premium, the Fund gives
another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party the amount of any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income, through the receipt of option premiums. In the event
the party to which the Fund has written an option fails to exercise its right
under the option because the value of the underlying securities is greater than
the exercise price, the Fund will profit by the amount of the option premium.
Buy writing a put option, however, the Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of the
security at the time of exercise as long as the put option is outstanding.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying securities falls below the exercise
price, which loss potentially may substantially exceed the amount of option
premium received by the Fund for writing the put option. The Fund may write a
put option on a security or a securities index as an anticipatory hedge or in
connection with trading strategies involving combinations of options, for
example, the sale and purchase of options with identical expiration dates on
the same security or index but different exercise prices (a technique called a
"spread").
The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options, Futures and Currency Instruments"
below. A call option will also be considered covered if the Fund owns the
securities it would be required to deliver upon exercise of the option (or, in
the case of an option on a securities index, securities which substantially
replicate the performance of such index) or owns a call option, warrant or
convertible instrument which is immediately exercisable for, or convertible
into, such security.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against
their
47
<PAGE>
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater risk of counterparty default. See "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Investments" below.
FUTURES
The Fund may engage in transactions in futures, including stock index futures
contracts and financial futures contracts, and options thereon. Financial
futures contracts are standardized, exchange-traded contracts which obligate a
purchaser to take delivery, and a seller to make delivery, of a specific amount
of a commodity at a specified future date at a specified price. Stock index
futures contracts are similar to other futures contracts except that they do
not require actual delivery of securities but instead result in cash settlement
based on the difference in value of the index between the time the contract was
entered into and the time of its settlement.
No price is paid upon entering into a futures contract. Rather, upon
purchasing or selling a futures contract the Fund is required to deposit
collateral ("margin") equal to a percentage (generally less than 10%) of the
contract value. Each day thereafter until the futures position is closed, the
Fund will pay additional margin representing any loss experienced as a result
of the futures position the prior day or be entitled to a payment representing
any profit experienced as a result of the futures position the prior day.
The sale of a futures contract for hedging purposes limits the Fund's risk of
loss through a decline in the market value of portfolio holdings correlated
with the futures contract prior to the expiration date of the futures contract.
In the event the market value of the portfolio holdings correlated with the
futures contract increases rather than decreases, however, the Fund will
realize a loss on the futures position and a lower return on the portfolio
holdings than would have been realized without the purchase of the futures
contract.
The purchase of a futures contract as an anticipatory hedge may protect the
Fund from having to pay more for securities as a consequence of increases in
the market value for such securities during a period when the Fund was
attempting to identify specific securities in which to invest in a market the
Fund believes to be attractive. In the event that such securities decline in
value or the Fund determines not to complete an anticipatory hedge transaction
in a futures contract, however, the Fund may realize a loss relating to the
futures position.
The Fund will limit transactions in futures and options on futures to the
extent necessary to prevent the Fund from being deemed a "commodity pool" under
regulations of the Commodity Futures Trading Commission.
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in forward foreign exchange transactions, purchase and
sell options on currencies and purchase and sell currency futures and related
options thereon (collectively, "Currency Instruments") for the purpose of
hedging against the decline in the value of currencies in which its portfolio
holdings are denominated against the United States dollar.
48
<PAGE>
Forward foreign exchange transactions are OTC contracts to purchase or sell a
specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. The Fund will enter into
foreign exchange transactions for the purpose of hedging either a specific
transaction or a portfolio position. The Fund may enter into a forward foreign
exchange transaction for purposes of hedging a specific transaction by, for
example, entering into a contract to purchase a currency needed to settle a
security transaction or entering into a contract to sell a currency in which
the Fund anticipates receiving a dividend or distribution. The Fund may enter
into a foreign exchange transaction for purposes of hedging a portfolio
position by selling forward a currency in which a portfolio position of the
Fund is denominated or by entering into a contract to purchase a currency in
which the Fund anticipates acquiring a portfolio position in the near future.
The Fund may also hedge against the decline in the value of a currency
against the United States dollar through use of currency futures or options
thereon. Currency futures are similar to forward foreign exchange transactions
except that futures are standardized, exchange-traded contracts. See "Futures"
above.
The Fund may also hedge against the decline in the value of a currency
against the United States dollar through the use of currency options. Currency
options are similar to options on securities, but in consideration for an
option premium the writer of a currency option is obligated to sell (in the
case of a call option) or purchase (in the case of a put option) a specified
amount of a specified currency on or before the expiration date for a specified
amount of another currency. The Fund may engage in transactions in options on
currencies either on exchanges or OTC markets. See "Options on Securities and
Securities Indices--Types of Options" above and "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments" below.
When entering into a transaction in a Currency Instrument, the Fund will not
hedge a currency substantially in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities
sales), or has committed to or anticipates purchasing, which are denominated in
such currency. In addition, the Fund will not incur potential net liabilities
of more than 33 1/3% of its total assets from Currency Instruments.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective. To the extent that the Fund hedges against
anticipated currency movements which do not occur, the Fund may realize losses,
and lower its total return, as a result of its hedging transactions.
Furthermore, the Fund will only engage in hedging activities from time to time
and may not be engaging in hedging activities when movements in currency
exchange rates occur. It may not be possible for the Fund to hedge against
currency exchange rate movements, even if correctly anticipated, in the event
that (i) the currency exchange rate movement is so generally anticipated that
the Fund is not able to enter into a hedging transaction at an effective price
or (ii) the currency exchange rate movement relates to a market with respect to
which Currency Instruments are not available (such as certain developing
markets) and it is not possible to engage in effective foreign currency
hedging.
49
<PAGE>
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY INSTRUMENTS
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments
and the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments the
Fund will experience a gain or loss which will not be completely offset by
movements in the value of the hedged instruments.
The Fund intends to enter transactions involving Strategic Instruments only
if there appears to be a liquid secondary market for such instruments or, in
the case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments." However,
there can be no assurance that, at any specific time, either a liquid secondary
market will exist for a Strategic Instrument or the Fund will otherwise be able
to sell such instrument at an acceptable price. It may therefore not be
possible to close a position in a Strategic Instrument without incurring
substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign exchange
transactions, futures transactions, sales of put options) may expose the Fund
to potential losses which exceed the amount originally invested by the Fund in
such instruments. When the Fund engages in such a transaction, the Fund will
deposit in a segregated account at its custodian liquid securities with a value
at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Commission). Such
segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Fund's
exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS
Certain Strategic Instruments traded in OTC markets, including OTC options,
may be substantially less liquid than other instruments in which the Fund may
invest. The absence of liquidity may make it difficult or impossible for the
Fund to sell such instruments promptly at an acceptable price. The absence of
liquidity may also make it more difficult for the Fund to ascertain a market
value for such instruments. The Fund will therefore acquire illiquid OTC
instruments (i) if the agreement pursuant to which the instrument is purchased
contains a formula price at which the instrument may be terminated or sold or
(ii) for which the Manager anticipates the Fund can receive on each business
day at least two independent bids or offers, unless a quotation from only one
dealer is available, in which case that dealer's quotation may be used.
The staff of the Commission has taken the position that purchased OTC options
and the assets underlying written OTC options are illiquid securities. The Fund
has therefore adopted an investment policy pursuant to which it will not
purchase or sell OTC options (including OTC options on futures contracts) if,
as a result of such transactions, the sum of the market value of OTC options
currently outstanding which are held by the Fund, the market value of the
securities underlying OTC call options currently outstanding which have been
sold by the Fund and margin deposits on the Fund's outstanding OTC options
exceeds 15% of the total assets of the Fund, taken at market value, together
with all other assets of the Fund which are deemed to be illiquid or are
otherwise not readily marketable. However, if an OTC option is sold by the Fund
to a dealer in U.S. government securities recognized as a "primary dealer" by
the Federal Reserve Bank of New York and the Fund has the unconditional
contractual right to repurchase such OTC option at a
50
<PAGE>
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's exercise price).
Because Strategic Instruments traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Strategic Instruments traded in OTC markets only with financial institutions
which have substantial capital or which have provided the Fund with a third-
party guaranty or other credit enhancement. In particular, the Fund will engage
in OTC Options, including OTC foreign currency options and options on foreign
currency futures, only with member banks of the Federal Reserve System and
primary dealers in U.S. Government Securities or with affiliates of such banks
or dealers that have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
The Fund may not use any Strategic Instrument to gain exposure to an asset or
class of assets that it would be prohibited from purchasing directly by its
investment restrictions.
51
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52
<PAGE>
MERRILL LYNCH GLOBAL VALUE FUND, INC. -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Global Value Fund, Inc. and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................... 4. ................................
2. .................................... 5. ................................
3. .................................... 6. ................................
Name...........................................................................
First Name Initial Last
Name
Name of Co-Owner (if any)......................................................
First Name Initial Last
Name
Address........................................................................
.................................................... Date......................
(Zip Code)
Occupation............................. Name and Address of Employer ......
...................................
...................................
....................................... ...................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Long-Term Capital
Ordinary Income Dividends Gains
[_] Reinvest
SELECT ONE:
[_] Cash
SELECT ONE:
[_] Reinvest
[_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Global Value Fund, Inc.
Authorization Form.
SPECIFY TYPE OF ACCOUNT (check one): [_] checking [_] savings
Name on your Account ..........................................................
Bank Name .....................................................................
Bank Number ........................ Account Number ...........................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor .................................. Date.................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
53
<PAGE>
MERRILL LYNCH GLOBAL VALUE FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
[Social Security Number or Taxpayer Identification Number]
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Additional Information--Taxes") either because I have not been notified
that I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Global Value Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13-month period which will
equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund's prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Global Value Fund, Inc. held as security.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number.......................
Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
- - - our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
shareholder's signature.
- - - .....................................
Dealer Name and Address
This form when completed should be
mailed to: By: .................................
Authorized Signature of Dealer
Merrill Lynch Global Value Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc. ----- ------
P.O. Box 45289 ----- ------- ...........
Jacksonville, Florida 32232-5289 F/C Last Name
Branch Code F/C No.
----- ---------
----- ---------
Dealer's
Customer A/C No.
54
<PAGE>
MERRILL LYNCH GLOBAL VALUE FUND, INC. -- AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL PLAN OR THE
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(Please Print)
Name of Owner.......................... [Social Security Number or]
First Name Initial Last Taxpayer Identification
Name Number
Name of Co-Owner (if any)..............
First Name Initial Last Name
Address................................ Account Number ....................
(if existing account)
.......................................
(Zip Code)
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (See terms and conditions in the Statement of
Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
Merrill Lynch Global Value Fund, Inc. at cost or current offering price.
Withdrawals to be made either (check one) [_] Monthly on the 24th day of each
month, or [_] Quarterly on the 24th day of March, June, September and
December. If the 24th falls on a weekend or holiday, the next succeeding
business day will be utilized. Begin systematic withdrawals in
or as soon as possible thereafter.
(month)
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: $ of
(check one) [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (check one)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner..................................... Date..................
Signature of Co-Owner (if any).................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
- -------
* Annual withdrawal cannot exceed 10% of the value of shares of such class
held in the account at the time the election to join the systematic
withdrawal plan is made.
55
<PAGE>
MERRILL LYNCH GLOBAL VALUE FUND, INC. -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase (choose one):
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Global Value Fund, Inc. subject to the terms set forth below.
In the event that I am not eligible to purchase Class A shares, I understand
that Class D shares will be purchased.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
DRAWN BY MERRILL LYNCH FINANCIAL
YOU ARE HEREBY AUTHORIZED TO DRAW AN DATA SERVICES, INC.
ACH DEBIT EACH MONTH ON MY BANK
ACCOUNT FOR INVESTMENT IN MERRILL
LYNCH GLOBAL VALUE FUND, INC. AS
INDICATED BELOW:
To...............................Bank
(Investor's Bank)
Amount of each ACH debit $........ Bank Address.........................
Account No. ...................... City...... State...... Zip Code......
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month beginning request and authorize you to pay and
or as soon thereafter as charge to my account ACH debits
possible. drawn on my account by and payable
(month) to Merrill Lynch Financial Data
I agree that you are drawing these Services, Inc. I agree that your
ACH debits voluntarily at my request rights in respect to each such debit
and that you shall not be liable for shall be the same as if it were a
any loss arising from any delay in check drawn on you and signed
preparing or failure to prepare any personally by me. This authority is
such debit. If I change banks or to remain in effect until revoked
desire to terminate or suspend this personally by me in writing. Until
program, I agree to notify you you receive such notice, you shall
promptly in writing. I hereby be fully protected in honoring any
authorize you to take any action to such debit. I further agree that if
correct erroneous ACH debits of my any such debit be dishonored,
bank account or purchases of Fund whether with or without cause and
shares including liquidating shares whether intentionally or
of the Fund and crediting my bank inadvertently, you shall be under no
account. I further agree that if a liability.
debit is not honored upon
presentation, Merrill Lynch Financial ............ .....................
Data Services, Inc. is authorized to Date Signature of
discontinue immediately the Automatic Depositor
Investment Plan and to liquidate
sufficient shares held in my account ............ .....................
to offset the purchase made with the Bank Signature of Depositor
dishonored debit. Account (If joint account,
Number both must sign)
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
56
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MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fee Table................................................................. 2
Merrill Lynch Select Pricing SM System.................................... 3
Financial Highlights...................................................... 8
Risk Factors and Special Considerations................................... 9
Investment Objective and Policies......................................... 13
Description of Certain Investments....................................... 14
Other Investment Policies and Practices.................................. 17
Investment Restrictions................................................... 20
Non-Diversified Status................................................... 21
Management of the Fund.................................................... 22
Board of Directors....................................................... 22
Management and Advisory Arrangements..................................... 22
Code of Ethics........................................................... 23
Transfer Agency Services................................................. 24
Purchase of Shares........................................................ 24
Initial Sales Charge Alternatives--
Class A and Class D Shares.............................................. 26
Deferred Sales Charge Alternatives--
Class B and Class C Shares.............................................. 29
Distribution Plans....................................................... 32
Redemption of Shares...................................................... 34
Redemption............................................................... 35
Repurchase............................................................... 35
Reinstatement Privilege--
Class A and Class D Shares.............................................. 36
Shareholder Services...................................................... 36
Investment Account....................................................... 36
Systematic Withdrawal Plans.............................................. 37
Automatic Investment Plans............................................... 37
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 37
Exchange Privilege....................................................... 38
Fee-Based Programs....................................................... 39
Performance Data.......................................................... 39
Additional Information.................................................... 40
Dividends and Distributions.............................................. 40
Taxes.................................................................... 41
Determination of Net Asset Value......................................... 44
Organization of the Fund................................................. 45
Shareholder Reports...................................................... 45
Shareholder Inquiries.................................................... 45
Appendix.................................................................. 46
Options on Securities and Securities Indices............................. 46
Futures.................................................................. 48
Foreign Exchange Transactions............................................ 48
Risk Factors in Options, Futures and Currency Instruments................ 50
Additional Risk Factors of OTC Transactions; Limitations on the Use of
OTC Strategic Instruments............................................... 50
Additional Limitations on the Use of Strategic Instruments............... 51
Authorization Form........................................................ 53
</TABLE>
Code #19001-0298
LOGO MERRILL LYNCH
Merrill Lynch
Global Value Fund, Inc.
[ART]
PROSPECTUS
February 27, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GLOBAL VALUE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800
----------------
Merrill Lynch Global Value Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks long-term capital
appreciation by investing primarily in equity securities of issuers located in
various foreign countries and the United States that Merrill Lynch Asset
Management, L.P., the manager of the Fund ("MLAM" or the "Manager"), believes
represent investment value. The Manager will seek to identify securities whose
market prices are low when compared to certain valuation measurements, and
which, therefore, represent investment value. The Fund may employ a variety of
techniques, including derivative investments, to hedge against market and
currency risk and gain exposure to equity markets. There can be no assurance
that the Fund's investment objective will be achieved.
----------------
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated February
27, 1998 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing to the Fund at the above telephone number or address.
This Statement of Additional Information has been incorporated by reference
into the Prospectus. Capitalized terms used but not defined herein have the
same meanings as in the Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is February 27, 1998.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in equity securities of issuers located in
various foreign countries and the United States that the Manager believes
represent investment value. Reference is made to "Investment Objective and
Policies" in the Prospectus for a discussion of the investment objective and
policies of the Fund.
For purposes of the Fund's investment objective, an issuer ordinarily would
be considered to be located in the country under the laws of which it is
organized or where the primary trading market of its securities is located. The
Fund, however, may consider an issuer to be located in a country, without
reference to its domicile or to the primary trading market of its securities,
when at least 50% of its non-current assets, capitalization, gross revenues or
profits in any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such country.
The Fund also may consider a security that is denominated in a particular
country's currency to be a security of an issuer in such country without
reference to the principal trading market of the security or to the location of
its issuer. Additionally, the Fund may consider a derivative product tied to
securities or issuers located in a particular country to be the security of an
issuer in that country. The Fund also may consider investment companies to be
located in the country or countries in which they primarily make their
portfolio investments.
The securities markets of many countries at times in the past have moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce
risk for the Fund's portfolio as a whole. This negative correlation also may
offset unrealized gains the Fund has derived from movements in a particular
market. To the extent the various markets move independently, total portfolio
volatility is reduced when the various markets are combined into a single
portfolio. Of course, movements in the various securities markets may be offset
by changes in foreign currency exchange rates. Exchange rates frequently move
independently of securities markets in a particular country. As a result, gains
in a particular securities market may be affected by changes in exchange rates.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, the Manager will effect portfolio transactions without regard
to holding period if, in its judgment, such transactions are advisable in light
of a change in circumstances of a particular company or within a particular
industry or in general market, economic or financial conditions. As a result of
the investment policies described in the Prospectus, the Fund's portfolio
turnover rate may be higher than that of other investment companies.
Accordingly, while the Fund anticipates that its annual portfolio turnover rate
should not exceed 100% under normal conditions, it is impossible to predict
portfolio turnover rates. The portfolio turnover rate is calculated by dividing
the lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. For the fiscal year ended October
31, 1997, the Fund's portfolio turnover rate was 77.65%. For the fiscal period
November 1, 1997 to December 31, 1997, the Fund's portfolio turnover rate was
24.49%.
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are
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redeemable on a daily basis on each day the Fund determines its net asset value
in U.S. dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. See "Redemption of Shares." Under
present conditions, the Manager does not believe that these considerations will
have any significant effect on its portfolio strategy, although there can be no
assurance in this regard.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Futures, Options and Forward Foreign Exchange
Transactions. The Fund is authorized to engage in certain investment practices
involving the use of options, futures and foreign exchange that may expose the
Fund to certain risks. These investment practices and the associated risks are
described in detail in the Appendix attached to the Prospectus.
Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act, which means that the Fund is not limited
by such Act in the proportion of its assets that it may invest in securities of
a single issuer. The Fund's investments are limited, however, in order to allow
the Fund to qualify as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended (the "Code"). See "Taxes." To qualify, the
Fund complies with certain requirements, including limiting its investments so
that at the close of each quarter of the taxable year (i) not more than 25% of
the market value of the Fund's total assets will be invested in the securities
of a single issuer and (ii) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer. A fund that elects to be
classified as "diversified" under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets. To
the extent that the Fund assumes large positions in the securities of a small
number of issuers, the Fund's net asset value may fluctuate to a greater extent
than that of a diversified company as a result of changes in the financial
condition or in the market's assessment of the issuers, and the Fund may be
more susceptible to any single economic, political or regulatory occurrence
than a diversified company.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other liquid securities denominated in U.S. dollars or non-U.S. currencies in
an aggregate amount equal to the amount of its commitment in connection with
such purchase transactions.
There can be no assurance that a security purchased on a when-issued basis or
purchased or sold through a forward commitment will be issued, and the value of
the security, if issued, on the delivery date may be more or less than its
purchase price. The Fund may bear the risk of a decline in the value of such
security and may not benefit from an appreciation in the value of the security
during the commitment period.
Standby Commitment Agreements. The Fund, from time to time, may enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of equity securities which may be
issued and sold to the Fund at the option of the issuer. The price of the
security
3
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is fixed at the time of the commitment. At the time of entering into the
agreement the Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued, which is typically approximately 0.50% of the
aggregate purchase price of the security that the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a price that is
considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and presently will limit
its investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its net assets taken at the time of
acquisition of such a commitment. The Fund at all times will maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other liquid securities denominated in U.S. dollars or
non-U.S. currencies in an aggregate amount equal to the purchase price of the
securities underlying a commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security thereafter
will be reflected in the calculation of the Fund's net asset value. The cost
basis of the security will be adjusted by the amount of the commitment fee. In
the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements and purchase and sale contracts may be entered into only
with financial institutions which (i) have, in the opinion of the Manager,
substantial capital relative to the Fund's exposure, or (ii) have provided the
Fund with a third-party guaranty or other credit enhancement. Under a
repurchase agreement or a purchase and sale contract, the seller agrees, upon
entering into the contract with the Fund, to repurchase the security at a
mutually agreed-upon time and price in a specified currency, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period although
it may be affected by currency fluctuations. In the case of repurchase
agreements, the price at which the trades are conducted do not reflect accrued
interest on the underlying obligation; whereas, in the case of purchase and
sale contracts, the prices take into account accrued interest. Such agreements
usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured
by the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
4
<PAGE>
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate, the rate of return to the Fund shall be dependent upon
intervening fluctuations of the market value of such securities and the accrued
interest on the securities. In such event, the Fund would have rights against
the seller for breach of contract with respect to any losses arising from
market fluctuations following the failure of the seller to perform. While the
substance of purchase and sale contracts is similar to repurchase agreements,
because of the different treatment with respect to accrued interest and
additional collateral, management believes that purchase and sale contracts are
not repurchase agreements as such term is understood in the banking and
brokerage community. The Fund may not invest more than 15% of its net assets in
repurchase agreements or purchase and sale contracts maturing in more than
seven days together with all other illiquid investments.
Lending of Portfolio Securities. Subject to the investment restrictions set
forth in the Prospectus and herein, the Fund may lend securities from its
portfolio to approved borrowers and receive collateral in cash or securities
issued or guaranteed by the U.S. Government, which collateral is maintained at
all times in an amount equal to at least 100% of the current market value of
the loaned securities. The purpose of such loans is to permit the borrowers to
use such securities for delivery to purchasers when such borrowers have sold
short. If cash collateral is received by the Fund, it is invested in short-term
money market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to the Fund as collateral, the Fund and the borrower negotiate a rate for the
loan premium to be received by the Fund for lending its portfolio securities.
In either event, the total return on the Fund's portfolio is increased by loans
of its portfolio securities. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time, and the borrower, after
notice, will be required to return borrowed securities within five business
days. The Fund may pay reasonable finder's, administrative and custodial fees
in connection with such loans. With respect to the lending of portfolio
securities, there is the risk of failure by the borrower to return the
securities involved in such transactions.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of fundamental and non-fundamental restrictions
and policies relating to the investment of its assets and its activities. The
fundamental policies set forth below may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities (which,
for this purpose and under the Investment Company Act, means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares). The Fund may not:
1. 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 (excluding the U.S. Government and its agencies and
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 to be the making of
investments for the purpose of exercising control or management.
5
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3. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances and repurchase agreements and purchase and
sale contracts and any similar instruments shall not be deemed to be the
making of a loan, and except further that the Fund may lend its portfolio
securities, provided that the lending of portfolio securities may be made
only in accordance with applicable law and the guidelines set forth in the
Prospectus and this Statement of Additional Information, as they may be
amended from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that the Fund (i) 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) may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities and (iv) 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 the Prospectus and this
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.
7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act"), in selling portfolio securities.
8. 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 the Fund registering as a commodity
pool operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently allows the 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. Investments by
the Fund in wholly-owned investment entities created under the laws of
certain countries will not be deemed an investment in other investment
companies. As a matter of policy, however, the Fund will not purchase
shares of any registered open-end investment company or registered unit
investment trust, in reliance on Section 12(d)(1)(F) or (G) (the "fund of
funds") provision of the Investment Company Act, at any time
6
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the Fund's shares are owned by another investment company that is part of
the same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund does not, however,
currently intend to engage in short sales, except short sales "against the
box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions, or which cannot otherwise be marketed,
redeemed, put to the issuer or to a third party, if at the time of
acquisition more than 15% of its net assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the Securities Act
and determined to be liquid by the Board of Directors are not subject to
the limitations set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (6) above, borrow
money or pledge its assets, except that the Fund (a) may borrow from a bank
as a temporary measure for extraordinary or emergency purposes or to meet
redemptions in amounts not exceeding 33 1/3% (taken at market value) of its
total assets and pledge its assets to secure such borrowings, (b) may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (c) may purchase securities
on margin to the extent permitted by applicable law. However, at the
present time, applicable law prohibits the Fund from purchasing securities
on margin. The deposit or payment by the Fund of initial or variation
margin in connection with financial futures contracts or options
transactions is not considered to be the purchase of a security on margin.
The purchase of securities while borrowings are outstanding will have the
effect of leveraging the Fund. Such leveraging or borrowing increases the
Fund's exposure to capital risk, and borrowed funds are subject to interest
costs which will reduce net income. The Fund will not purchase securities
while borrowings exceed 5% of its total assets.
Portfolio securities of the Fund generally may not be purchased from, sold or
loaned to the Manager or its affiliates or any of their directors, officers or
employees, acting as principal, unless pursuant to a rule or exemptive order
under the Investment Company Act.
The staff of the Commission has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an investment policy pursuant to which it will
not purchase or sell OTC options if, as a result of any such transaction, the
sum of the market value of OTC options currently outstanding that are held by
the Fund, the market value of the underlying securities covered by OTC call
options currently outstanding that were sold by the Fund and margin deposits on
the Fund's existing OTC options on financial futures contracts exceeds 15% of
the net assets of the Fund, taken at market value, together with all other
assets of the Fund that are illiquid or are not otherwise readily marketable.
However, if the OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less
the amount by which the option is "in-the-money" (i.e., current market value of
the underlying securities minus the option's strike price). The repurchase
price with the primary dealers is typically a formula price which is generally
based on a multiple of the premium received for the option, plus the amount by
7
<PAGE>
which the option is "in-the-money." This policy as to OTC options is not a
fundamental policy of the Fund and may be amended by the Board of Directors of
the Fund without the approval of the Fund's shareholders. However, the Fund
will not change or modify this policy prior to the change or modification by
the Commission staff of its position.
In addition, as a non-fundamental policy which may be changed by the Board of
Directors and to the extent required by the Commission or its staff, the Fund
will, for purposes of investment restriction (1), treat securities issued or
guaranteed by the government of any one foreign country as the obligations of a
single issuer.
As another non-fundamental policy, the Fund will not invest in securities
that are (a) subject to material legal restrictions on repatriation of assets
or (b) cannot be readily resold because of legal or contractual restrictions or
which are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its net assets, taken at market value, would
be invested in such securities.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions and
Brokerage." Without such an exemptive order, the Fund would be prohibited from
engaging in portfolio transactions with Merrill Lynch or its affiliates acting
as principal.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio manager of
the Fund, including their ages and their principal occupations for at least the
last five years, is set forth below. Unless otherwise noted, the address of the
portfolio manager and of each executive officer and Director is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
Arthur Zeikel (65)--President and Director(1)(2)--Chairman of the Manager
(which term, as used herein, includes its corporate predecessors) and Chairman
of Fund Asset Management, L.P. ("FAM," which term, as used herein, includes its
corporate predecessors) since 1997; President of the Manager and FAM from 1977
to 1997; Chairman of Princeton Services, Inc. ("Princeton Services") since 1997
and Director thereof since 1993; President of Princeton Services from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since
1990.
Donald Cecil (71)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
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Edward H. Meyer (71)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly (66)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
Richard R. West (60)--Director(2)--Box 604, Genoa, Nevada 89411. Professor
of Finance since 1984, Dean from 1984 to 1993 and currently Dean Emeritus of
New York University Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate
holding company) and Alexander's, Inc. (real estate company).
Edward D. Zinbarg (63)--Director(2)--5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Executive Vice President of The Prudential Insurance
Company of America from 1988 to 1994; former Director of Prudential
Reinsurance Company and former Trustee of the Prudential Foundation.
Terry K. Glenn (57)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Merrill Lynch Funds
Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and Director
thereof since 1991; President of Princeton Administrators, L.P. since 1988.
Norman R. Harvey (64)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
Stephen I. Silverman (47)--Senior Vice President and Portfolio
Manager(1)(2)--First Vice President of the Manager since 1997; Vice President
of the Manager from 1983 to 1997; Portfolio Manager of the Manager since 1983.
Donald C. Burke (37)--Vice President(1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager from 1990 to 1997; Director
of Taxation of the Manager and FAM since 1990.
Gerald M. Richard (48)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Vice President of the Distributor since 1981
and Treasurer thereof since 1984.
Barbara G. Fraser (54)--Secretary(1)(2)--First Vice President of the Manager
and FAM since 1996; Vice President of the Manager from 1994 to 1996; attorney
in private practice from 1991 to 1994.
- --------
(1)Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Manager or its affiliate,
FAM, acts as investment adviser or manager.
At January 31, 1998, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund, owned an aggregate of less than 1% of the
outstanding shares of Common Stock of ML & Co.
9
<PAGE>
COMPENSATION OF DIRECTORS
The Fund pays each Director who is not affiliated with the Manager (each, a
"non-affiliated Director") a fee of $3,500 per year plus $500 per Board meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all of the non-
affiliated Directors, at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. For the fiscal year ended October 31, 1997, fees and expenses
paid to the non-affiliated Directors aggregated $37,950. For the fiscal period
November 1, 1997 to December 31, 1997, fees and expenses paid to such non-
affiliated Directors aggregated $22,284.
The following table sets forth, for the fiscal year ended October 31, 1997,
compensation paid by the Fund to the non-affiliated Directors, and for the
calendar year ended December 31, 1997, the aggregate compensation paid by all
registered investment companies advised by the Manager and its affiliate, FAM
("MLAM/FAM-Advised Funds") to the non-affiliated Directors.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM FUND AND
RETIREMENT OTHER
BENEFITS ACCRUED MLAM/FAM-ADVISED
COMPENSATION AS PART OF FUNDS FUNDS PAID TO
NAME OF DIRECTOR FROM FUND EXPENSES DIRECTORS(1)
---------------- ------------ ---------------- ----------------
<S> <C> <C> <C>
Donald Cecil................... $8,500 None $280,350
Edward H. Meyer................ $6,000 None $222,100
Charles C. Reilly.............. $7,500 None $313,000
Richard R. West................ $7,500 None $290,000
Edward D. Zinbarg.............. $7,500 None $133,500
</TABLE>
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(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (33 registered investment companies consisting of 33 portfolios); Mr.
Meyer (33 registered investment companies consisting of 33 portfolios); Mr.
Reilly (46 registered investment companies consisting of 59 portfolios);
Mr. West (47 registered investment companies consisting of 69 portfolios);
and Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities held by the Fund also may be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Manager or its affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its other advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or its affiliates during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.
10
<PAGE>
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). As described in the Prospectus, the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.75%
of the average daily net assets of the Fund. For the fiscal period November 1,
1997 to December 31, 1997, the total advisory fees paid by the Fund to the
Manager aggregated $2,189,146. For the fiscal year ended October 31, 1997, the
total advisory fees paid by the Fund to the Manager aggregated $9,957,530.
The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Fund connected with investment and economic research,
trading and investment management of the Fund, as well as the fees of all
Directors of the Fund who are affiliated persons of the Manager or its
affiliates. The Fund pays all other expenses incurred in its operation,
including, among other things, taxes; expenses for legal and auditing services;
costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent
paid by the Distributor); charges of the custodian, any sub-custodian and
transfer agent; expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of unaffiliated Directors; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. For the fiscal period
November 1, 1997 to December 31, 1997, the Fund reimbursed the Manager $16,901
for accounting services. For the fiscal year ended October 31, 1997, the amount
of such reimbursement was $191,495. The Distributor will pay certain
promotional expenses of the Fund incurred in connection with the offering of
its shares. Certain expenses in connection with the distribution of Class B,
Class C and Class D shares will be financed by the Fund pursuant to
distribution plans in compliance with Rule 12b-1 under the Investment Company
Act. See "Purchase of Shares--Distribution Plans."
As described in the Prospectus, the Manager has also entered into a sub-
advisory agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") pursuant to which MLAM U.K. provides investment advisory services to the
Manager with respect to the Fund. For the fiscal period November 1, 1997 to
December 31, 1997 and for the fiscal year ended October 31, 1997, no fees were
paid by the Manager to MLAM U.K. pursuant to such agreement.
The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services.ML & Co. and Princeton Services are "controlling persons" of
the Manager as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies. Similarly, the following entities
may be considered "controlling persons" of MLAM U.K.: Merrill Lynch Europe
Limited (MLAM U.K.'s parent), a subsidiary of ML International Holdings, a
subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement and the sub-advisory agreement will continue in effect for
a period of two years from the date of execution and will remain in effect from
year to year thereafter if approved annually (a) by the Board of Directors of
the Fund or by a majority of the outstanding shares of the Fund and (b) by a
majority of the Directors who are not parties to such contracts or "interested
persons" (as defined in the Investment Company Act) of any such party. Such
contracts are not assignable and may be terminated without penalty on 60 days'
written notice at the option of either party thereto or by the vote of a
majority of the shareholders of the Fund.
11
<PAGE>
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives, and shares of Class B and
Class C are sold to investors choosing the deferred sales charge alternatives.
Each Class A, Class B, Class C and Class D share represents an identical
interest in the investment portfolio of the Fund, and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid
(except that Class B shares may vote on any material changes to the expenses
charged under the Class D Distribution Plan). Each class has different
exchange privileges. See "Shareholder Services--Exchange Privilege."
The Merrill Lynch Select Pricing SM System is used by more than 50
registered investment companies advised by the Manager or an affiliate, FAM.
Funds advised by the Manager or FAM that utilize the Merrill Lynch Select
Pricing SM System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Management
Agreement described under "Management of the Fund--Management and Advisory
Arrangements."
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The Fund sells its Class A and Class D shares through the Distributor and
Merrill Lynch, as dealers. The gross sales charges for the sale of Class A
shares for the fiscal period November 1, 1997 to December 31, 1997, were $142,
of which $3 and $139 were received by the Distributor and Merrill Lynch,
respectively. The gross sales charges for the sale of Class A shares for the
fiscal year ended October 31, 1997, were $914, of which $49 and $865 were
received by the Distributor and Merrill Lynch, respectively. The gross sales
charges for the sale of Class D shares for the fiscal period November 1, 1997
to December 31, 1997, were $78,699, of which $4,932 and $73,767 were received
by the Distributor and Merrill Lynch, respectively. The gross sales charges
for the sale of Class D shares for the fiscal year ended October 31, 1997,
were $1,442,391, of which $96,252 and $1,346,139 were received by the
Distributor and Merrill Lynch, respectively. During such periods, the
Distributor received no contingent deferred sales charges ("CDSCs") with
respect to redemptions within one year after purchase of Class A or Class D
shares purchased subject to a front-end sales charge waiver.
12
<PAGE>
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for
a single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment
adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and of other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or
its affiliate, FAM, who purchased such closed-end fund shares prior toOctober
21, 1994 (the date the Merril Lynch Select Pricing SM System commenced
operations), and wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in Eligible Class A Shares, if the
conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994, and wish
to reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to buy Class A shares) or Class D shares
of the Fund and other MLAM-advised mutual funds ("Eligible Class D Shares"),
if the following conditions are met: first, the sale of the closed-end fund
shares must be made through Merrill Lynch, and the net proceeds therefrom must
be reinvested immediately in Eligible Class A or Class D Shares; second, the
closed-end fund shares must either have been acquired in the initial public
offering or be shares representing dividends from shares of common stock
acquired in such offering; third, the closed-end fund shares must have been
maintained continuously in a Merrill Lynch securities account; and fourth,
there must be a minimum purchase of $250 to be eligible for the investment
option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the above-
referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of the Fund. This investment option is available only with
respect to eligible shares as to which no Early Withdrawal Charge or CDSC
(each as defined in the eligible fund's prospectus) is applicable. Purchase
orders from eligible fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related tender offer
terminates and will be effected at the net asset value of the designated class
of the Fund on such day.
13
<PAGE>
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being
purchased plus (b) an amount equal to the then current net asset value or cost,
whichever is higher, of the purchaser's combined holdings of all classes of
shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at Merrill Lynch Financial Data Services, Inc., the
Fund's transfer agent (the "Transfer Agent"). The Letter of Intention is not
available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A or Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter, but the reduced sales charge applicable to the
amount covered by such Letter will be applied only to new purchases. If the
total amount of shares purchased does not equal the amount stated in the Letter
of Intention (minimum of $25,000), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the
Letter. Class A or Class D shares equal to at least five percent of the
intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of the
dollar amount of such Letter. If a purchase during the term of such Letter
otherwise would be subject to a further reduced sales charge based on the right
of accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to that further reduced percentage sales charge that would be
applicable to a single purchase equal to the total dollar value of the Class A
or Class D shares then being purchased under such Letter, but there will be no
retroactive reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-
advised money market Fund into the Fund that creates a sales charge will count
toward completing a new or existing Letter of Intention from the Fund.
14
<PAGE>
Merrill Lynch Blueprint SM Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint SM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group IRAs and participants in certain affinity
groups such as credit unions, trade associations and benefit plans. Investors
placing orders to purchase Class A or Class D shares of the Fund through
Blueprint will acquire the Class A or Class D shares at net asset value plus a
sales charge calculated in accordance with the Blueprint sales charge schedule
(i.e., up to $5,000 at 3.50% and $5,000.01 or more at the standard sales
charge rates disclosed in the Prospectus). In addition, Class A or Class D
shares of the Fund are being offered at net asset value plus a sales charge of
.50% of 1% for corporate or group IRA programs placing orders to purchase
their Class A or Class D shares through Blueprint. Services, including the
exchange privilege, available to Class A and Class D investors through
Blueprint, however, may differ from those available to other investors in
Class A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(as defined below) whose trustee and/or plan sponsor has entered into a
Merrill Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of
an automatic investment plan. Additional information concerning purchases
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
Employee Access SM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access SM Accounts available through authorized employers. The
initial minimum for such accounts is $500, except that the initial minimum for
shares purchased for such accounts pursuant to the Automatic Investment
Program is $50.
Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes the Manager, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.) and their directors and
employees and any trust, pension, profit-sharing or other benefit plan for
such persons may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment
15
<PAGE>
firm within six months prior to the date of purchase by such investor if the
following conditions are satisfied: first, the investor must advise Merrill
Lynch that it will purchase Class D shares of the Fund with proceeds from a
redemption of a mutual fund that was sponsored by the Financial Consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in cash
or a money market fund.
Class D shares of the Fund also are offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such fund was subject to a sales charge either at the time of purchase or on
a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer, if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from a redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
be maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund that might result from an
acquisition of assets having net unrealized appreciation that is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities that (i) meet
the investment objectives and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities at all times shall remain within
its control); and (iii) are liquid securities, the value of which is readily
ascertainable, that are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
16
<PAGE>
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, each Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the account
maintenance fees and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Directors must consider all
factors that they deem relevant, including information as to the benefits of
the Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan may be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders, and all material amendments are required to
be approved by the vote of the Directors, including a majority of the
Independent Directors who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that purpose. Rule
12b-1 further requires that the Fund preserve copies of each Distribution Plan
and any report made pursuant to such plan for a period of not less than six
years from the date of such Distribution Plan or such report, the first two
years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge
17
<PAGE>
rule limits the aggregate of distribution fee payments and CDSCs payable by
the Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C
shares, computed separately (defined to exclude shares issued pursuant to
dividend reinvestments and exchanges), plus (2) interest on the unpaid balance
for the respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received from
the payment of the distribution fee and the CDSC). In connection with the
Class B shares, the Distributor voluntarily has agreed to waive interest
charges on the unpaid balance in excess of 0.50% of eligible gross sales.
Consequently, the maximum amount payable to the Distributor (referred to as
the "voluntary maximum") in connection with the Class B shares is 6.75% of
eligible gross sales. The Distributor retains the right to stop waiving the
interest charges at any time. To the extent payments would exceed the
voluntary maximum, the Fund will not make further payments of the distribution
fee with respect to Class B shares, and any CDSCs will be paid to the Fund
rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances, the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances, payments in excess of the amount
payable under the NASD formula will not be made.
The following table sets forth comparative information as of December 31,
1997, with respect to the Class B and Class C shares of the Fund, indicating
the maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to Class B shares, the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1997
---------------------------------------------------------------------------------
ALLOWABLE ALLOWABLE AMOUNTS ANNUAL
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE DISTRIBUTION
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID FEE AT CURRENT
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE NET ASSET LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD
NOVEMBER 1, 1996 (COM-
MENCEMENT OF OPERA-
TIONS) TO DECEMBER 31,
1997:
Under NASD Rule as
Adopted................ $942,113 $58,882 $5,074 $63,956 $10,172 $53,784 $9,340
Under Distributor's Vol-
untary Waiver.......... $942,113 $58,882 $4,711 $63,593 $10,172 $53,421 $9,340
CLASS C SHARES, FOR THE
PERIOD
NOVEMBER 1, 1996 (COM-
MENCEMENT OF OPERA-
TIONS) TO DECEMBER 31,
1997:
Under NASD Rule as
Adopted................ $199,892 $12,493 $1,035 $13,528 $ 1,685 $11,843 $1,722
</TABLE>
- --------
(1) Purchase price of all eligible Class B or Class C shares sold during
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares--Distribution Plans" in the Prospectus. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFA SM) Program (the "MFA Program").
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum (with respect to Class
B and Class C shares) or the voluntary maximum (with respect to Class B
shares).
18
<PAGE>
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days after the tender of such
shares only for periods during which trading on the NYSE is restricted as
determined by the Commission or the NYSE is closed (other than customary
weekend and holiday closings), for any period during which an emergency exists,
as defined by the Commission, as a result of which disposal of portfolio
securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission by order
may permit for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in certain instances
including in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or on
redemptions of Class B shares following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies in the case of such
withdrawals are: (a) any partial or complete redemption in connection with a
tax-free distribution following retirement under a tax-deferred retirement plan
or attaining age 59 1/2 in the case of an IRA or other retirement plan, or part
of a series of equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) or any redemption resulting from the tax-free
return of an excess contribution to an IRA; or (b) any partial or complete
redemption following the death or disability (as defined in the Code) of a
Class B shareholder (including one who owns the Class B shares as joint tenant
with his or her spouse), provided the redemption is requested within one year
of the death or initial determination of disability. For the fiscal period
November 1, 1997 to December 31, 1997, the Distributor received CDSCs of
$295,557 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. For the fiscal year ended October 31, 1997, the Distributor
received CDSCs of $1,162,975 with respect to redemptions of Class B shares, all
of which were paid to Merrill Lynch. Additional CDSCs payable to the
Distributor during these periods may have been waived or converted to a
contingent obligation in connection with a shareholder's participation in
certain fee-based programs. For the fiscal period November 1, 1997 to December
31, 1997 and for the fiscal year ended October 31, 1997 the Distributor
received CDSCs of $9,766 and $122,657, respectively, with respect to
redemptions of Class C shares, all of which were paid to Merrill Lynch.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in Blueprint SM. Blueprint is directed to small investors, group
IRAs and participants in certain affinity groups such as trade associations and
credit unions. Class B shares of the Fund are offered through Blueprint only to
members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B investors through Blueprint, however, may
differ from those available to other investors in Class B shares. Orders for
purchases and redemptions of Class B shares of the Fund will be grouped for
execution purposes which, in some circumstances, may involve the
19
<PAGE>
execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There is no minimum initial or
subsequent purchase requirement for investors who are part of the Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Blueprint SM Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. In executing such transactions,
the Manager seeks to obtain the best net results for the Fund, taking into
account such factors as price (including the applicable brokerage commission
or dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved and the firm's risk in positioning a block of
securities. While the Manager 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 execution of transactions in portfolio securities. Subject to
obtaining the best price and execution, brokers who provide supplemental
investment research to the Manager may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Manager under the Management
Agreement and the expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information. It is possible that
certain supplementary investment research so received will primarily benefit
one or more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary
of the research or services received as a result of portfolio transactions
effected for such other accounts or investment companies. In addition,
consistent with the Conduct Rules of the NASD and policies established by the
Board of Directors of the Fund, the Manager may consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Fund.
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily
consist of assessments and analyses of the business or prospects of a company,
industry or economic sector. Information so received will be in addition to
and not in lieu of the services required to be performed by the Manager under
the Management Agreement. If, in the judgment of the Manager, the Fund will
benefit from supplemental research services, the Manager is authorized to pay
brokerage commissions to a broker furnishing such services that are in excess
of commissions that another broker may have charged for effecting the same
transaction. The expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information, and the Manager may
use such information in servicing its other accounts. Whether or not a
particular broker-dealer sells shares of the Fund neither qualifies nor
disqualifies such broker-dealer to execute transactions for the Fund.
For the fiscal period November 1, 1997 to December 31, 1997, the Fund paid
total brokerage commissions of $1,271,103, of which $175,875 or 13.84% was
paid to Merrill Lynch for effecting 13.18% of the aggregate dollar amount of
transactions in which the Fund paid brokerage commissions. For the fiscal year
ended October 31, 1997, the Fund paid total brokerage commissions of
$6,527,182, of which $396,160 or 6.07% was paid to Merrill Lynch for effecting
4.54% of the aggregate dollar amount of transactions in which the Fund paid
brokerage commissions.
20
<PAGE>
The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Fund will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less government supervision and regulation of foreign stock
exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other securities convertible into foreign
equity securities. ADRs, EDRs and GDRs may be listed on stock exchanges or
traded in over-the-counter markets in the United States or Europe, as the case
may be. ADRs, like other securities traded in the United States, as well as
GDRs traded in the United States, will be subject to negotiated commission
rates.
The Fund may invest in securities traded in the OTC markets and intends to
deal directly with the dealers who make markets in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons are prohibited from
dealing with the Fund as principal in the purchase and sale of securities
unless a permissive order allowing such transactions is obtained from the
Commission. Since transactions in the OTC market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons, including Merrill Lynch and its affiliates, in
connection with such transactions. However, affiliated persons of the Fund may
serve as its broker in OTC transactions conducted on an agency basis provided
that, among other things, the fee or commission received by such affiliated
broker is reasonable and fair compared to the fee or commission received by
non-affiliated brokers in connection with comparable transactions. In addition,
the Fund may not purchase securities during the existence of any underwriting
syndicate for such securities of which Merrill Lynch is a member or in a
private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Directors of the Fund that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. See "Investment Objective and Policies--Investment
Restrictions."
The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable assurance that it will be able to obtain U.S. dollars to the
extent necessary to meet anticipated redemptions. Under present conditions, it
is not believed that these considerations will have any significant effect on
its portfolio strategies.
The Board of Directors has considered the possibility of seeking to recapture
for the benefit of the Fund brokerage commissions and other expenses of
possible portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
21
<PAGE>
Section 11(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), generally prohibits members of the U.S. national
securities exchanges from executing exchange transactions for their affiliates
and institutional accounts that they manage unless the member (i) has obtained
prior express authorization from the account to effect such transactions, (ii)
at least annually furnishes the account with the aggregate compensation
received by the member in effecting such transactions, and (iii) complies with
any rules the Commission has prescribed with respect to the requirements of
clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch
acting as a broker for the Fund in any of its portfolio transactions executed
on any such securities exchange of which it is a member, appropriate consents
have been obtained from the Fund and annual statements as to aggregate
compensation will be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund will be determined by the
Manager once daily Monday through Friday, as of 15 minutes after the close of
business on the NYSE (generally, 4:00 p.m., New York time), on each day during
which the NYSE is open for trading. The NYSE is not open on New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. Net asset value is computed by
dividing the value of the securities held by the Fund plus any cash or other
assets (including interest and dividends accrued but not yet received) minus
all liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the investment advisory fees and
any account maintenance and/or distribution fees, are accrued daily. The per
share net asset value of Class B, Class C and Class D shares generally will be
lower than the per share net asset value of Class A shares, reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class B
and Class C shares generally will be lower than the per share net asset value
of Class D shares, reflecting the daily expense accruals of the distribution
fees and higher transfer agency fees applicable with respect to Class B and
Class C shares of the Fund. It is expected, however, that the per share net
asset value of the four classes will tend to converge (although not necessarily
meet) immediately after the payment of dividends or distributions, which will
differ by approximately the amount of the expense accrual differentials between
the classes.
Portfolio securities, including ADRs, EDRs or GDRs, that are traded on stock
exchanges are valued at the last sale price (regular way) on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market. Long positions in securities
traded in the OTC market are valued at the last available bid price in the OTC
market prior to the time of valuation. Short positions in securities traded in
the OTC market are valued at the last available ask price in the OTC market
prior to the time of valuation.
22
<PAGE>
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
When the Fund writes an option, the amount of the premium received is recorded
on the books of the Fund as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including financial futures
contracts and related options, are stated at market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund. Such valuations and procedures will be reviewed
periodically by the Board of Directors.
Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Directors.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below and instructions
as to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund, the Distributor or
Merrill Lynch. Certain of these services are available only to U.S. investors.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
"Investment Account" and will receive, at least quarterly, statements from the
Transfer Agent. The statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of income dividends. The
statements also will show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for
each purchase or sale transaction other than automatic investment purchases and
the reinvestment of income dividends.
Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A
23
<PAGE>
or Class D shares. Shareholders interested in transferring their Class B or
Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he or she be issued certificates for the shares and then
must turn the certificates over to the new firm for re-registration as
described in the preceding sentence. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the retirement account is to be transferred
will not take delivery of shares of the Fund, a shareholder must either redeem
the shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue
to maintain a retirement account at Merrill Lynch for those shares. A
shareholder may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent.
AUTOMATIC INVESTMENT PLANS
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if an eligible Class A investor as described in
the Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer or by mail
directly to the Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known as the Fund's
Automatic Investment Plan whereby the Fund is authorized through pre-
authorized checks or automated clearing house debits of $50 or more to charge
the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. An
investor whose shares of the Fund are held within a CMA(R) or CBA(R) account
may arrange to have periodic investments made in the Fund in amounts of $100
or more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of the shares of the
Fund, without a sales charge, as of the close of business on the ex-dividend
date of the dividend or distribution. Shareholders may elect in writing to
receive their dividends or capital gains distributions, or both, in cash, in
which event payment will be mailed on or about the payment date. Cash payments
also can be directly deposited to the shareholder's bank account. The Fund is
not responsible for any failure of delivery to the shareholder's address of
record and no interest will accrue on amounts represented by uncashed
distribution or redemption checks.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained by Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if the shareholder's account
is maintained by the Transfer Agent that they no longer wish to have their
dividends and/or distributions reinvested in shares of the Fund or vice versa,
and commencing ten days after receipt by the Transfer Agent of such notice,
those instructions will be effected.
24
<PAGE>
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based upon
cost or the current offering price, of $5,000 or more, and monthly withdrawals
are available for shareholders with shares having such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined at the close of business of the NYSE (currently 4:00 p.m., New York
time) on the 24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. If the NYSE is not open for business on such
date, the shares will be redeemed at the close of business on the following
business day. The check for the withdrawal payment will be mailed or the direct
deposit of the withdrawal payment will be made on the next business day
following redemption. When a shareholder is making systematic withdrawals,
dividends on all shares in his or her Investment Account automatically are
reinvested in shares of the Fund. A shareholder's Systematic Withdrawal Plan
may be terminated at any time, without charge or penalty, by the shareholder,
the Fund, the Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
A shareholder whose shares are held within a CMA(R), CBA(R) or Retirement
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the CMA(R) or CBA(R) Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $50. The proceeds of
systematic redemptions will be posted to the shareholder's account three
business days after the date the shares are redeemed. All redemptions are made
at net asset value. A shareholder may elect to have his or her shares redeemed
on the first, second, third or fourth Monday of each month, in the case of
monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the CMA(R) or CBA(R) Systematic Redemption Program,
eligible shareholders should contact their Merrill Lynch Financial Consultant.
25
<PAGE>
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the
same order as Class B or Class C shares are otherwise redeemed. See "Purchase
of Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "--Contingent Deferred
Sales Charges--Class C Shares" in the Prospectus. Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last
Class B shares in an account to Class D shares, the systematic withdrawal plan
will automatically be applied thereafter to Class D shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares" in the Prospectus; if an
investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill
Lynch Select Pricing SM System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in
which the exchange is made or is otherwise eligible to purchase Class A shares
of the second fund. Class B, Class C and Class D shares will be exchangeable
with shares of the same class of other MLAM-advised mutual funds. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period of the newly acquired shares of
the other fund as more fully described below. Class A, Class B, Class C and
Class D shares also will be exchangeable for shares of certain MLAM-advised
money market funds as follows: Class A shares may be exchanged for shares of
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund
(available only for exchanges within certain retirement plans), Merrill Lynch
U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class
B, Class C and Class D shares may be exchanged for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are
26
<PAGE>
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any, between
the sales charge previously paid on the outstanding Class A or Class D shares
and the sales charge payable at the time of the exchange on the new Class A or
Class D shares. With respect to outstanding Class A or Class D shares as to
which previous exchanges have taken place, the "sales charge previously paid"
shall include the aggregate of the sales charges paid with respect to such
Class A or Class D shares in the initial purchase and any subsequent exchange.
Class A or Class D shares issued pursuant to dividend reinvestment are sold on
a no-load basis in each of the funds offering Class A or Class D shares. For
purposes of the exchange privilege, Class A and Class D shares acquired through
dividend reinvestment shall be deemed to have been sold with a sales charge
equal to the sales charge previously paid on the Class A or Class D shares on
which the dividend was paid. Based on this formula, Class A and Class D shares
of the Fund generally may be exchanged into Class A or Class D shares of the
other funds or into shares of certain money market funds with a reduced or
without a sales charge.
In addition, each of the funds with Class B or Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding Class B or Class C
shares. Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B or Class C shares of the Fund
acquired through use of the exchange privilege will be subject to the Fund's
CDSC schedule if such schedule is higher than the CDSC schedule relating to the
Class B or Class C shares of the fund from which the exchange has been made.
For purposes of computing the sales charge that may be payable on a disposition
of the new Class B or Class C shares, the holding period for the outstanding
Class B or Class C shares is "tacked" to the holding period of the new Class B
or Class C shares. For example, an investor may exchange Class B shares of the
Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund")
after having held the Fund's Class B shares for two and a half years. The 2%
CDSC that generally would apply to a redemption would not apply to the
exchange. Three years later the investor may decide to redeem the Class B
shares of Special Value Fund and receive cash. There will be no CDSC due on
this redemption, since by "tacking" the two and a half year holding period of
Fund Class B shares to the three year holding period for the Special Value Fund
Class B shares, the investor will be deemed to have held the Special Value Fund
Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC, or with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund that were
acquired as a result of an exchange for Class B or Class C shares of the Fund,
in turn, may be exchanged back into Class B or Class C shares, respectively, of
any fund offering such shares, in which event the holding period for Class B or
Class C shares of the newly-acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund after having held the Fund Class B shares for two and a half
years and three years later decide to redeem the shares of Merrill
27
<PAGE>
Lynch Institutional Fund for cash. At the time of this redemption, the 2.0%
CDSC that would have been due had the Class B shares of the Fund been redeemed
for cash rather than exchanged for shares of Merrill Lynch Institutional Fund
will be payable. If instead of such redemption the shareholder exchanged such
shares for Class B shares of a fund that the shareholder continues to hold for
an additional two and a half years, any subsequent redemption would not incur a
CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised funds with
shares for which certificates have not been issued, may exercise the exchange
privilege by wire through their securities dealers. The Fund reserves the right
to require a properly completed Exchange Application. This exchange privilege
may be modified or terminated in accordance with the rules of the Commission.
The Fund reserves the right to limit the number of times an investor may
exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares to the general public at any time and thereafter may
resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.
28
<PAGE>
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income
dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. For this purpose,
the Fund will allocate dividends eligible for the dividends received deduction
among the Class A, Class B, Class C and Class D shareholders according to a
method (which it believes is consistent with the Commission rule permitting the
issuance and sale of multiple classes of stock) that is based on the gross
income allocable to Class A, Class B, Class C and Class D shareholders during
the taxable year, or such other method as the Internal Revenue Service may
prescribe. If the Fund pays a dividend in January that was declared in the
previous October, November or December to shareholders of record on a specified
date in one of such months, then such dividend will be treated for tax purposes
as being paid by the Fund and received by its shareholders on December 31 of
the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends, and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. In addition, recent
legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend only if the shareholder meets certain holding
period requirements. If more than 50% in value of the Fund's total assets at
the close of its taxable year consists of securities of foreign corporations,
the Fund will be eligible, and intends, to file an election with the Internal
Revenue Service pursuant to which shareholders of the Fund will be required to
include their proportionate shares of such withholding taxes in their U.S.
income tax returns as gross income, treat such proportionate shares as taxes
paid by them and deduct such proportionate shares in computing their taxable
incomes or, alternatively, use them as foreign tax credits against their U.S.
income taxes. In the case of foreign taxes passed through by a RIC, the holding
period requirements referred to above must be met by both the shareholder and
the RIC. No deductions for foreign taxes, moreover, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is
a nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes and other information needed to claim
29
<PAGE>
the foreign tax credit. For this purpose, the Fund will allocate foreign taxes
and foreign source income among the Class A, Class B, Class C and Class D
shareholders according to a method similar to that described above for the
allocation of dividends eligible for the dividends received deduction.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period for the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61 day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income determined on a calendar year basis and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of the distributions from such a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under recent legislation
the Fund could elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such shares over
their adjusted basis and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases. By making the mark-to-market
election, the Fund could avoid imposition of the interest charge with respect
to its distributions from PFICs, but in any particular year might be required
to recognize income in excess of the distributions it received from PFICs and
its proceeds from dispositions of PFIC stock.
30
<PAGE>
TAX TREATMENT OF FUTURES, OPTIONS AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell futures, options or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or financial futures contract
will be treated as sold for its fair market value on the last day of the
taxable year. Unless such contract is a non-equity option or a regulated
futures contract for a non-U.S. currency for which the Fund elects to have gain
or loss treated as ordinary gain or loss under Code Section 988 (as described
below), gain or loss from Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of distributions
to shareholders. The mark-to-market rules outlined above, however, will not
apply to certain transactions entered into by the Fund solely to reduce the
risk of changes in price or interest or currency exchange rates with respect to
its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in futures,
options, forward foreign exchange contracts and equity swaps. Under Section
1092, the Fund may be required to postpone recognition for tax purposes of
losses incurred in certain sales of securities and certain closing transactions
in futures, options, forward foreign exchange contracts and equity swaps.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. Dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion
of distributions made before the losses were
31
<PAGE>
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares and resulting in a capital gain for any shareholder who received a
distribution greater than such shareholder's tax basis in Fund shares (assuming
the shares were held as a capital asset). These rules and the mark-to-market
rules described above, however, will not apply to certain transactions entered
into by the Fund solely to reduce the risk of currency fluctuations with
respect to its investments.
The Treasury Department has the authority to issue regulations concerning the
recharacterization of principal repayments and interest payments with respect
to debt obligations issued in hyperinflationary currencies, which may include
the currencies of certain countries in which the Fund intends to invest. To
date, no such regulations have been issued.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends also may be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs that
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends are reinvested
and taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A and Class D shares
and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class
C shares.
32
<PAGE>
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1997............... 17.50% $1,175.00 18.80% $1,188.00
Inception (November 1,
1996) to December 31,
1997................... 16.65% $1,196.40 18.48% $1,218.30
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1997............... 24.01% $1,240.10 22.80% $1,228.00
Inception (November 1,
1996) to December 31,
1996................... 1.82% $1,018.20 1.66% $1,016.60
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (November 1,
1996) to December 31,
1997................... 19.64% $1,196.40 21.83% $1,218.30
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1997............... 21.80% $1,218.00 17.21% $1,172.10
Inception (November 1,
1996) to December 31,
1997................... 20.99% $1,248.40 16.37% $1,193.00
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended December
31, 1997............... 22.80% $1,228.00 23.71% $1,237.10
Inception (November 1,
1996) to December 31,
1996................... 1.66% $1,016.60 1.78% $1,017.80
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (November 1,
1996) to December 31,
1997................... 24.84% $1,248.40 19.30% $1,193.00
</TABLE>
In order to reflect the reduced sales charges in the case of Class A or Class
D shares, or the waiver of the CDSC in the case of Class B or Class C shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares," respectively, the total return data quoted by the Fund
in
33
<PAGE>
advertisements directed to such investors may take into account reduced, and
not the maximum, sales charge or may not take into account the CDSC and,
therefore, may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on March 8, 1996. As of the date
of this Statement of Additional Information, the Fund has an authorized capital
of 600,000,000 shares of Common Stock, par value $0.10 per share, divided into
four classes, designated Class A, Class B, Class C and Class D Common Stock.
Class A, Class C and Class D each consists of 100,000,000 shares and Class B
consists of 300,000,000 shares. Shares of Class A, Class B, Class C and Class D
Common Stock represent interests in the same assets of the Fund and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions except that the Class B, Class C and Class D shares bear certain
expenses related to the account maintenance and/or distribution of such shares
and have exclusive voting rights with respect to matters relating to such
account maintenance and/or distribution expenditures. The Board of Directors of
the Fund may classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held in the election of Directors and on any other
matters submitted to a vote of shareholders. The Fund does not intend to hold
annual meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to elect Directors. Also, the by-laws of the Fund
require that a special meeting of shareholders be held upon the written request
of at least 10% of the outstanding shares of the Fund entitled to vote at such
meeting, if they comply with applicable Maryland law. Voting rights for
Directors are not cumulative. Shares issued are fully paid and non-assessable
and have no preemptive rights. Redemption and conversion rights are discussed
elsewhere herein and in the Prospectus. Each share of Class A, Class B, Class C
and Class D Common Stock is entitled to participate equally in dividends and
distributions declared by the Fund and in the net assets of the Fund upon
liquidation or dissolution after satisfaction of outstanding liabilities. Stock
certificates are issued by the Transfer Agent only on specific request.
Certificates for fractional shares are not issued in any case. Shareholders
may, in accordance with Maryland law, cause a meeting of shareholders to be
held for the purpose of voting on the removal of Directors at the request of
25% of the outstanding shares of the Fund. A director may be removed at a
special meeting of shareholders by a vote of a majority of the votes entitled
to be cast for the election of Directors.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of common stock of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund were paid by the Fund and are being amortized over a
period not exceeding five years. The proceeds realized by the Manager upon the
redemption of any of the shares initially purchased by it will be reduced by
the proportional amount of the unamortized organizational expenses that the
number of such initial shares being redeemed bears to the number of shares
initially purchased.
34
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on December 31, 1997 and October 31, 1997 and its shares outstanding on
those dates is calculated as set forth below:
As of December 31, 1997:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets................ $63,075,336 $1,251,956,493 $229,600,929 $258,867,662
=========== ============== ============ ============
Number of Shares Outstand-
ing...................... 5,251,108 104,624,133 19,189,181 21,570,616
=========== ============== ============ ============
Net Asset Value Per Share
(net assets divided by a
number of shares
outstanding)............. $ 12.01 $ 11.97 $ 11.97 $ 12.00
Sales Charge (for Class A
and Class D shares: 5.25%
of offering price; (5.54%
of net asset value per
share))*................. .67 ** ** .66
----------- -------------- ------------ ------------
Offering Price............ $ 12.68 $ 11.97 $ 11.97 $ 12.66
=========== ============== ============ ============
As of October 31, 1997:
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets................ $53,775,510 $1,179,124,848 $217,341,363 $237,791,407
=========== ============== ============ ============
Number of Shares Outstand-
ing...................... 4,547,095 100,568,058 18,537,933 20,149,261
=========== ============== ============ ============
Net Asset Value Per Share
(net assets divided by a
number of shares
outstanding)............. $ 11.83 $ 11.72 $ 11.72 $ 11.80
Sales Charge (for Class A
and Class D shares: 5.25%
of offering price; (5.54%
of net asset value per
share))*................. .66 ** ** .65
----------- -------------- ------------ ------------
Offering Price............ $ 12.49 $ 11.72 $ 11.72 $ 12.45
=========== ============== ============ ============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus
and "Redemption of Shares--Deferred Sales Charges--Class B and Class C
Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the Independent Directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
35
<PAGE>
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized, among other things, to
establish separate accounts in foreign currencies and to cause foreign
securities owned by the Fund to be held in its offices outside of the United
States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund--Transfer Agency Services" in
the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on December 31 (formerly October 31) of each
year. The Fund sends to its shareholders, at least semi-annually, reports
showing the Fund's portfolio and other information. An annual report,
containing financial statements audited by independent auditors, is sent to
shareholders each year. After the end of each year shareholders will receive
Federal income tax information regarding dividends and capital gains
distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act, and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted ML & Co. under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by ML & Co.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on January 31, 1998.
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Global Value Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Global Value Fund, Inc. as of
October 31, 1997, the related statements of operations and changes in net
assets and the financial highlights for the year ended October 31, 1997. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our 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 financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Global Value Fund, Inc. as of October 31, 1997, the results of its operations,
the changes in its net assets, and the financial highlights for the year ended
October 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 12, 1997
37
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
NORTH Shares Value Percent of
AMERICA Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States Diversified 3,450,000 Westinghouse Electric
Operations Corporation $ 61,738,204 $ 91,209,375 5.4%
Financial Services 1,485,000 Federal National Mortgage
Association 58,560,791 71,929,687 4.3
570,000 J.P. Morgan & Company, Inc. 62,920,976 62,557,500 3.7
620,000 Washington Mutual, Inc. 34,548,199 42,392,500 2.5
-------------- -------------- ------
156,029,966 176,879,687 10.5
Food 366,300 Wrigley (Wm.) Jr.
Company (Class B) 25,168,429 26,510,962 1.6
Food Merchandising 2,414,000 American Stores Company 60,081,759 62,009,625 3.7
Insurance 690,000 Horace Mann Educators Corp. 25,535,781 38,812,500 2.3
Medical Products 1,144,000 Baxter International, Inc. 61,537,393 52,910,000 3.1
Telecommunications 586,700 ++Teleport Communications
Group Inc. (Class A) 27,972,114 28,308,275 1.7
Utilities--Electric, 2,202,100 Houston Industries, Inc. 49,617,722 47,895,675 2.8
Gas & Water
Total Investments in
North America 467,681,368 524,536,099 31.1
PACIFIC
BASIN/ASIA
Australia Leisure 10,076,186 Village Roadshow Limited
(Preferred) (Class A) 27,215,280 18,827,505 1.1
Property 1,147,500 Lend Lease Corporation 21,243,272 23,561,058 1.4
Total Investments in Australia 48,458,552 42,388,563 2.5
Japan Automobiles 124,000 Suzuki Motor Corporation 1,058,449 1,320,356 0.1
Capital Goods 2,855,000 Mitsubishi Heavy
Industries, Ltd. 14,616,188 14,036,311 0.8
Electrical 883,400 Chudenko Corporation 21,793,001 21,532,002 1.3
Construction 795,000 Kinden Corporation 9,753,962 9,920,140 0.6
-------------- ------------- ------
31,546,963 31,452,142 1.9
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
<S> <S> <C> <S> <C> <C> <C>
Electronics 1,690,000 Matsushita Electric
Industrial Company, Ltd. 28,894,269 28,398,636 1.7
400,000 Sony Corporation 36,894,499 33,241,827 1.9
-------------- -------------- ------
65,788,768 61,640,463 3.6
Insurance 1,829,000 Dai-Tokyo Fire & Marine
Insurance Co., Ltd. 7,878,152 7,850,961 0.5
784,000 Nichido Fire & Marine
Insurance Co., Ltd. 4,117,378 5,067,532 0.3
1,300,000 Sumitomo Marine & Fire
Insurance Co., Ltd. 10,316,345 8,673,155 0.5
850,000 Tokio Marine & Fire
Insurance Co., Ltd. 10,618,405 8,485,151 0.5
-------------- -------------- ------
32,930,280 30,076,799 1.8
Office Equipment 1,987,000 Canon, Inc. 47,474,231 48,265,868 2.9
Total Investments in Japan 193,414,879 186,791,939 11.1
Total Investments in the
Pacific Basin/Asia 241,873,431 229,180,502 13.6
WESTERN
EUROPE
France Food--Diversified 302,000 Groupe Danone S.A. 43,350,953 46,203,643 2.7
Total Investments in France 43,350,953 46,203,643 2.7
Germany Airlines 3,957,200 Lufthansa AG 66,424,269 69,246,974 4.1
Electric Products 1,241,500 Siemens AG 82,182,413 76,578,774 4.6
Total Investments in Germany 148,606,682 145,825,748 8.7
Ireland Banking 3,800,000 Allied Irish Banks PLC 29,461,508 32,001,898 1.9
9,500 Allied Irish Banks PLC (ADR)* 482,133 483,312 0.0
Total Investments in Ireland 29,943,641 32,485,210 1.9
Italy Financial Services 1,610,000 Istituto Mobiliare
Italiano S.p.A. (Ordinary) 16,269,349 14,425,021 0.8
Insurance 3,302,000 Assicurazioni Generali S.p.A. 71,360,717 73,961,830 4.4
Total Investments in Italy 87,630,066 88,386,851 5.2
Netherlands Telecommunications 625,500 Koninklijke PTT Nederland N.V. 23,557,331 23,921,297 1.4
Total Investments in the
Netherlands 23,557,331 23,921,297 1.4
Switzerland Food--Diversified 68,800 Nestle S.A. (Registered) 76,406,314 97,271,516 5.8
Insurance 155,000 Zurich Insurance Group 44,779,878 64,199,212 3.8
Pharmaceuticals 36,000 Novartis AG (Registered) 42,062,908 56,573,271 3.3
Total Investments in
Switzerland 163,249,100 218,043,999 12.9
United Beverages 9,560,000 Guinness PLC 73,020,852 85,481,772 5.1
Kingdom
Financial Services 3,628,800 Mercury Asset Management
Group PLC 80,411,027 80,052,925 4.7
Food--Diversified 10,100,000 Cadbury Schweppes PLC 91,146,039 101,662,560 6.0
Utilities-- 3,245,000 United Utilities PLC 32,322,019 39,658,170 2.4
Electric,
Gas & Water
Total Investments in the
United Kingdom 276,899,937 306,855,427 18.2
Total Investments in
Western Europe 773,237,710 861,722,175 51.0
</TABLE>
39
<PAGE>
Merrill Lynch Global Value Fund, Inc., October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
SHORT-TERM Face Value Percent of
SECURITIES Amount Issue Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Commercial $21,718,000 General Motors Acceptance
Paper** Corp., 5.75% due 11/03/1997 $ 21,711,062 $ 21,711,062 1.3%
Total Investments in
Short-Term Securities 21,711,062 21,711,062 1.3
Total Investments $1,504,503,571 1,637,149,838 97.0
==============
Unrealized Depreciation on Forward Foreign Exchange Contracts++++ (4,273,495) (0.3)
Other Assets Less Liabilities 55,156,785 3.3
-------------- ------
Net Assets $1,688,033,128 100.0%
============== ======
<FN>
*American Depositary Receipts (ADR).
**Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
++Non-income producing security.
++++Forward foreign exchange contracts as of October 31, 1997 were
as follows:
<CAPTION>
Unrealized
Foreign Appreciation
Currency Expiration (Depreciation)
Purchased Date (Note 1c)
<S> <C> <S> <C>
Chf 3,341,304 January 1998 $ 84,483
DM 12,599,872 January 1998 (336,643)
Frf 25,039,501 January 1998 60,784
Pound Sterling 3,066,000 January 1998 147,591
YEN 4,914,943,198 January 1998 (1,486,585)
Total (US$ Commitment--$62,095,363) (1,530,370)
-----------
Foreign
Currency Sold
Chf 218,010,167 January 1998 $ (598,485)
Chf 16,625,000 August 1998 (490,461)
DM 205,746,631 January 1998 256,906
Frf 371,183,000 January 1998 3,661,868
Pound Sterling 138,698,880 January 1998 (9,076,615)
Lit 97,882,627,500 October 1998 (1,228,150)
Nlg 52,295,660 January 1998 1,227,038
YEN 13,023,536,143 January 1998 3,504,774
Total (US$ Commitment--$778,096,772) (2,743,125)
-----------
Total Unrealized Depreciation on
Forward Foreign Exchange Contracts--Net $(4,273,495)
===========
See Notes to Financial Statements.
</TABLE>
40
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of October 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,504,503,571) (Note 1a) $1,637,149,838
Cash 166
Foreign cash (Note 1b) 71,756,228
Receivables:
Dividends $ 3,673,583
Capital shares sold 2,402,826 6,076,409
--------------
Deferred organization expenses (Note 1g) 157,230
Prepaid registration fees and other assets (Note 1g) 78,141
--------------
Total assets 1,715,218,012
--------------
Liabilities: Unrealized depreciation on forward foreign
exchange contracts (Note 1c) 4,273,495
Payables:
Securities purchased 17,101,625
Capital shares redeemed 2,149,711
Distributor (Note 2) 1,284,551
Investment adviser (Note 2) 1,116,614 21,652,501
--------------
Accrued expenses and other liabilities 1,258,888
--------------
Total liabilities 27,184,884
--------------
Net Assets: Net assets $1,688,033,128
==============
Net Assets Class A Shares of Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 454,710
Class B Shares of Common Stock, $0.10 par value,
300,000,000 shares authorized 10,056,806
Class C Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 1,853,793
Class D Shares of Common Stock, $0.10 par value,
100,000,000 shares authorized 2,014,926
Paid-in capital in excess of par 1,469,175,588
Undistributed investment income--net 10,195,652
Undistributed realized capital gains on investments and
foreign currency transations--net 63,319,495
Unrealized appreciation on investments and foreign
currency transactions--net 130,962,158
--------------
Net assets $1,688,033,128
==============
Net Asset Class A--Based on net assets of $53,775,510 and
Value: 4,547,095 shares outstanding $ 11.83
==============
Class B--Based on net assets of $1,179,124,848 and
100,568,058 shares outstanding $ 11.72
==============
Class C--Based on net assets of $217,341,363 and
18,537,933 shares outstanding $ 11.72
==============
Class D--Based on net assets of $237,791,407 and
20,149,261 shares outstanding $ 11.80
==============
See Notes to Financial Statements.
</TABLE>
41
<PAGE>
Merrill Lynch Global Value Fund, Inc., October 31, 1997
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended October 31, 1997++
<S> <S> <C> <C>
Investment Dividends (net of $2,588,136 foreign withholding tax) $ 27,596,209
Income Interest and discount earned 9,902,447
(Notes 1e & 1f): ------------
Total income 37,498,656
------------
Expenses: Investment advisory fees (Note 2) 9,957,530
Account maintenance and distribution fees--Class B (Note 2) 9,355,347
Account maintenance and distribution fees--Class C (Note 2) 1,696,508
Transfer agent fees--Class B (Note 2) 1,047,174
Registration fees (Note 1g) 739,842
Custodian fees 513,563
Account maintenance fees--Class D (Note 2) 484,472
Transfer agent fees--Class C (Note 2) 193,464
Accounting services (Note 2) 191,495
Transfer agent fees--Class D (Note 2) 178,244
Printing and shareholder reports 161,582
Amortization of organization expenses--net (Note 1g) 39,307
Professional fees 38,989
Directors' fees and expenses 37,950
Transfer agent fees--Class A (Note 2) 25,932
Pricing fees 6,367
Other 8,724
------------
Total expenses 24,676,490
------------
Investment income--net 12,822,166
------------
Realized & Realized gain from:
Unrealized Gain Investments--net $ 63,319,496
(Loss) on Foreign currency transactions--net 1,202,141 64,521,637
Investments & ------------
Foreign Currency Unrealized appreciation/depreciation on:
Transactions--Net Investments--net 132,646,267
(Notes 1b, 1c, Foreign currency transactions--net (1,684,109) 130,962,158
1f & 3): ------------ ------------
Net realized and unrealized gain on investments and
foreign currency transactions 195,483,795
------------
Net Increase in Net Assets Resulting from Operations $208,305,961
============
</TABLE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
Increase (Decrease) in Net Assets: For the Year Ended October 31, 1997++
<S> <S> <C>
Operations: Investment income--net $ 12,822,166
Realized gain on investments and foreign currency
transactions--net 64,521,637
Unrealized appreciation on investments and foreign
currency transactions--net 130,962,158
--------------
Net increase in net assets resulting from operations 208,305,961
--------------
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C>
Dividends to Investment income--net:
Shareholders Class A (72,233)
(Note 1h): Class B (2,571,571)
Class C (463,638)
Class D (721,214)
--------------
Net decrease in net assets resulting from dividends to shareholders (3,828,656)
--------------
Capital Share Net increase in net assets derived from capital share transactions 1,483,455,823
Transactions --------------
(Note 4):
Net Assets: Total increase in net assets 1,687,933,128
Beginning of period 100,000
--------------
End of period* $1,688,033,128
==============
<FN>
*Undistributed investment income--net (Note 1i) $ 10,195,652
==============
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended
October 31, 1997++
Increase (Decrease) in Net Asset Value: Class A** Class B** Class C** Class D**
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period. $ 10.00 $ 10.00 $ 10.00 $ 10.00
Operating -------- ---------- -------- --------
Performance: Investment income--net .17 .09 .09 .18
Realized and unrealized gain on
investments and foreign currency
transactions--net 1.71 1.67 1.67 1.67
-------- ---------- -------- --------
Total from investment operations 1.88 1.76 1.76 1.85
-------- ---------- -------- --------
Less dividends from investment
income--net (.05) (.04) (.04) (.05)
-------- ---------- -------- --------
Net asset value, end of period $ 11.83 $ 11.72 $ 11.72 $ 11.80
======== ========== ======== ========
Total Investment Based on net asset value per share 18.91% 17.62% 17.62% 18.56%
Return:* ======== ========== ======== ========
Ratios to Average Expenses .97% 1.99% 1.99% 1.22%
Net Assets: ======== ========== ======== ========
Investment income--net 1.88% .84% .83% 1.62%
======== ========== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 53,776 $1,179,125 $217,341 $237,791
======== ========== ======== ========
Portfolio turnover 77.65% 77.65% 77.65% 77.65%
======== ========== ======== ========
Average commission rate paid++++ $ .0351 $ .0351 $ .0351 $ .0351
======== ========== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
**Based on average shares outstanding during the period.
++The Fund commenced operations on November 1, 1996.
++++Includes commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange rate on the
date of the transaction. Such conversions may significantly affect
the rate shown.
See Notes to Financial Statements.
</TABLE>
43
<PAGE>
Merrill Lynch Global Value Fund, Inc., October 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Value Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. Prior to commencement of
operations on November 1, 1996, the Fund had no operations other
than those relating to organizational matters and the issue of
10,000 capital shares of the Fund to Merrill Lynch Asset Management,
L.P. ("MLAM") for $100,000. The Fund offers four classes of shares
under the Merrill Lynch Select Pricing SM System. Shares of Class A
and Class D are sold with a front-end sales charge. Shares of Class
B and Class C may be subject to a contingent deferred sales charge.
All classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to
the account maintenance of such shares, and Class B and Class C
Shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of securities--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including financial futures
contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily
available are valued at their fair value as determined in good faith
by or under the direction of the Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
44
<PAGE>
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
(d) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank of
the Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additions to such
securities daily to ensure that the contract is fully collateralized.
(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(f) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(i) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting for
foreign currency transactions. Accordingly, current year's permanent
book/tax differences of $1,202,142 have been reclassified between
undistributed net realized capital gains and undistributed net
investment income. These reclassifications have no effect on net
assets or net asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
MLAM. The general partner of MLAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 0.75%, on an annual basis,
of the average daily value of the Fund's net assets.
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services
45
<PAGE>
to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class B
and Class C shareholders.
Merrill Lynch Global Value Fund, Inc., October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
For the period November 1, 1996 (commencement of operations) to
October 31, 1997, MLFD earned underwriting discounts and MLPF&S
earned dealer concessions on sales of the Fund's Class A and Class D
Shares as follows:
MLFD MLPF&S
Class A $ 49 $ 865
Class D $96,252 $1,346,139
For the period November 1, 1996 to October 31, 1997, MLPF&S received
contingent deferred sales charges of $1,230,604 and $122,657 relating
to transactions in Class B and Class C Shares, respectively. Furthermore,
MLPF&S received contingent deferred sales charges of $10,000 relating
to transactions subject to front-end sales charge waivers in
Class D Shares.
In addition, MLPF&S received $396,160 in commissions on the
execution of portfolio security transactions for the Fund for the
period November 1, 1996 to October 31, 1997.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period November 1, 1996 to October 31, 1997 were
$2,263,937,637 and $844,464,820, respectively.
Net realized and unrealized gains (losses) as of October 31, 1997
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 63,319,692 $ 132,646,267
Short-term investments (196) --
Forward foreign exchange contracts -- (4,273,495)
Foreign currency transactions 1,202,141 2,589,386
------------ -------------
Total $ 64,521,637 $ 130,962,158
============ =============
As of October 31, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $132,646,267, of which $168,345,842
related to appreciated securities and $35,699,575 related to
depreciated securities. The aggregate cost of investments at October
31, 1997 for Federal income tax purposes was $1,504,503,571.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $1,483,455,823 for the period November 1, 1996 to October 31,
1997.
Transactions in capital shares for each class were as follows:
Class A Shares for the Period Dollar
November 1, 1996++ to October 31, 1997 Shares Amount
Shares sold 5,152,431 $ 57,303,237
Shares issued to shareholders in
reinvestment of dividends 6,207 62,009
------------ -------------
Total issued 5,158,638 57,365,246
Shares redeemed (614,043) (6,856,145)
------------ -------------
Net increase 4,544,595 $ 50,509,101
============ =============
[FN]
++Prior to November 1, 1996 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class B Shares for the Period Dollar
November 1, 1996++ to October 31, 1997 Shares Amount
Shares sold 109,016,851 $1,127,788,851
Shares issued to shareholders in
reinvestment of dividends 211,285 2,110,732
------------ --------------
Total issued 109,228,136 1,129,899,583
Automatic conversion of shares (207,246) (2,300,318)
Shares redeemed (8,455,332) (92,416,446)
------------ --------------
Net increase 100,565,558 $1,035,182,819
============ ==============
[FN]
++Prior to November 1, 1996 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class C Shares for the Period Dollar
November 1, 1996++ to October 31, 1997 Shares Amount
Shares sold 20,686,388 $ 214,642,345
Shares issued to shareholders in
reinvestment of dividends 39,137 390,984
------------ -------------
Total issued 20,725,525 215,033,329
Shares redeemed (2,190,092) (23,679,275)
------------ -------------
Net increase 18,535,433 $ 191,354,054
============ =============
[FN]
++Prior to November 1, 1996 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
46
<PAGE>
Class D Shares for the Period Dollar
November 1, 1996++ to October 31, 1997 Shares Amount
Shares sold 22,812,954 $ 235,349,723
Automatic conversion of shares 206,573 2,300,318
Shares issued to shareholders
in reinvestment of dividends 62,231 621,693
------------ -------------
Total issued 23,081,758 238,271,734
Shares redeemed (2,934,997) (31,861,885)
------------ -------------
Net increase 20,146,761 $ 206,409,849
============ =============
[FN]
++Prior to November 1, 1996 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
5. Commitments:
At October 31, 1997, the Fund had entered into foreign exchange
contracts, in addition to the contracts listed on the Schedule of
Investments, under which it had agreed to purchase foreign currency
with an approximate value of $10,254,000.
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Global Value Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Global Value Fund, Inc. as of
December 31, 1997, the related statements of operations for the period November
1, 1997 to December 31, 1997 and for the year ended October 31, 1997 and
changes in net assets and the financial highlights for the period November 1,
1997 to December 31, 1997 and for the year ended October 31, 1997. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Global Value Fund, Inc. as of December 31, 1997, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 10, 1998
48
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
NORTH Shares Value Percent of
AMERICA Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Canada Trans- 1,150,000 Canadian National Railway
portation-- Company $ 54,035,092 $ 54,337,500 3.0%
Road & Rail
Total Investments in Canada 54,035,092 54,337,500 3.0
United States Broadcasting 2,529,600 CBS Corporation (a) 44,671,094 74,465,100 4.1
& Publishing
Electrical & 72,100 Central & South West
Electronics Corporation 1,807,373 1,951,206 0.1
Electronic 1,661,200 ++Lattice Semiconductor
Components, Corporation 86,510,974 78,699,350 4.4
Instruments
Financial 1,485,000 Federal National Mortgage
Services Association 58,560,791 84,737,812 4.7
570,000 Morgan (J.P.) & Co., Inc. 62,920,976 64,338,750 3.6
-------------- -------------- ------
121,481,767 149,076,562 8.3
Food & 7,200 ++Ralston-Ralston Purina Group 672,795 669,150 0.0
Household 366,300 Wrigley (Wm.) Jr. Company
Products (Class B) 25,168,429 29,143,744 1.6
-------------- -------------- ------
25,841,224 29,812,894 1.6
Health & 1,144,000 Baxter International, Inc. 61,537,393 57,700,500 3.2
Personal Care
Insurance 247,100 Chubb Corporation 18,640,971 18,686,937 1.0
1,380,000 Horace Mann Educators Corp. 25,535,781 39,243,750 2.2
-------------- -------------- ------
44,176,752 57,930,687 3.2
Merchandising 2,414,000 American Stores Company 60,081,759 49,637,875 2.8
Telecommuni- 841,200 ++Teleport Communications
cations Group Inc. (Class A) 39,424,614 46,160,850 2.5
226,800 ++Teligent, Inc. (Class A) 5,214,200 5,499,900 0.3
-------------- -------------- ------
44,638,814 51,660,750 2.8
Utilities-- 2,202,100 Houston Industries Inc. 49,617,722 58,768,544 3.3
Electric & Gas
Total Investments in the
United States 540,364,872 609,703,468 33.8
Total Investments in
North America 594,399,964 664,040,968 36.8
PACIFIC
BASIN/ASIA
Australia Leisure & 11,705,286 Village Roadshow Limited
Tourism (Preferred) (Class A) 30,548,199 24,049,165 1.3
Real Estate 1,677,500 Lend Lease Corporation Ltd. 31,375,054 32,761,575 1.8
Total Investments in Australia 61,923,253 56,810,740 3.1
Japan Appliances & 1,690,000 Matsushita Electric
Household Industrial Co., Ltd. 28,894,269 24,782,342 1.3
Durables 400,000 Sony Corporation 36,894,499 35,623,800 2.0
-------------- -------------- ------
65,788,768 60,406,142 3.3
Automobiles 101,000 Suzuki Motor Corporation 862,124 915,010 0.1
</TABLE>
49
<PAGE>
Merrill Lynch Global Value Fund, Inc., December 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
PACIFIC BASIN/ Shares Value Percent of
ASIA (concluded) Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Japan Construction & 932,400 Chudenko Corporation $ 22,844,840 $ 20,401,843 1.1%
(concluded) Housing 795,000 Kinden Corporation 9,753,962 8,484,069 0.5
-------------- -------------- ------
32,598,802 28,885,912 1.6
Data 2,166,000 Canon Inc. 51,626,097 50,553,858 2.8
Processing &
Reproduction
Electronic 1,276,000 Murata Manufacturing
Components, Company, Ltd. 39,076,429 32,132,668 1.8
Instruments
Health & 1,097,000 Sankyo Company, Limited 26,165,419 24,845,681 1.4
Personal Care
Insurance 3,197,000 Dai-Tokyo Fire & Marine
Insurance Co., Ltd. 12,962,391 10,996,207 0.6
784,000 Nichido Fire & Marine
Insurance Co., Ltd. 4,117,378 4,093,052 0.2
1,300,000 Sumitomo Marine & Fire
Insurance Co., Ltd. 10,316,345 6,886,756 0.4
850,000 Tokio Marine & Fire
Insurance Co., Ltd. 10,618,405 9,658,349 0.5
-------------- -------------- ------
38,014,519 31,634,364 1.7
Machinery & 2,855,000 Mitsubishi Heavy
Engineering Industries, Ltd. 14,616,187 11,924,146 0.7
Total Investments in Japan 268,748,345 241,297,781 13.4
Total Investments in the
Pacific Basin/Asia 330,671,598 298,108,521 16.5
WESTERN EUROPE
Denmark Telecommuni- 342,900 Tele Danmark A/S 20,849,363 21,272,954 1.2
cations
Total Investments in Denmark 20,849,363 21,272,954 1.2
France Food & 302,000 Groupe Danone S.A. 43,350,953 53,937,531 3.0
Household 275,000 Groupe Danone S.A. (ADR)* 8,525,000 9,831,250 0.6
Products
Total Investments in France 51,875,953 63,768,781 3.6
Germany Trans- 3,957,200 Lufthansa AG 66,424,269 75,896,931 4.2
portation--
Airlines
Total Investments in Germany 66,424,269 75,896,931 4.2
Ireland Banking 3,800,000 Allied Irish Banks PLC 29,461,508 36,245,015 2.0
9,500 Allied Irish Banks PLC (ADR)* 482,133 551,000 0.0
Total Investments in Ireland 29,943,641 36,796,015 2.0
Italy Banking 1,610,000 Istituto Mobiliare Italiano
S.p.A. (Ordinary) 16,269,348 19,110,332 1.1
Insurance 2,002,000 Assicurazioni Generali S.p.A. 43,076,815 49,167,364 2.7
Total Investments in Italy 59,346,163 68,277,696 3.8
Netherlands Financial 2,065,500 ING Groep N.V. 88,449,393 86,996,301 4.8
Services
Telecommuni- 79,550 Koninklijke PTT Nederland N.V. 2,898,301 3,319,161 0.2
cations
Total Investments in the
Netherlands 91,347,694 90,315,462 5.0
Switzerland Food & 68,800 Nestle S.A. (Registered) 76,406,314 103,188,215 5.7
Household
Products
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Health & 33,000 Novartis AG (Registered) 38,585,999 53,586,845 3.0
Personal Care
Insurance 81,000 Zurich Insurance Group 23,711,108 38,626,927 2.1
Total Investments in
Switzerland 138,703,421 195,401,987 10.8
United Kingdom Beverages & 10,100,000 Cadbury Schweppes PLC 91,146,039 101,775,049 5.7
Tobacco 7,103,100 Diageo PLC (b) 55,258,352 65,275,980 3.6
Total Investments in the
United Kingdom 146,404,391 167,051,029 9.3
Total Investments in
Western Europe 604,894,895 718,780,855 39.9
SHORT-TERM Face
SECURITIES Amount Issue
Commercial $20,000,000 CIT Group Holdings, Inc.
Paper** (The), 6.75% due 1/02/1998 19,996,250 19,996,250 1.1
80,637,000 General Motors Acceptance
Corp., 6.75% due 1/02/1998 80,621,881 80,621,881 4.5
Total Investments in
Short-Term Securities 100,618,131 100,618,131 5.6
Total Investments $1,630,584,588 1,781,548,475 98.8
==============
Unrealized Appreciation on Forward Foreign Exchange Contracts++++ 26,135,116 1.4
Liabilities in Excess of Other Assets (4,183,171) (0.2)
-------------- ------
Net Assets $1,803,500,420 100.0%
============== ======
<FN>
*American Depositary Receipts (ADR).
**Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
(a)Formerly known as Westinghouse Electric Corporation.
(b)Formerly known as Guinness PLC.
++Non-income producing security.
++++Forward foreign exchange contracts as of December 31, 1997 were
as follows:
Unrealized
Appreciation
Foreign Expiration (Depreciation)
Currency Purchased Date (Note 1c)
Chf 58,164,706 January 1998 $ (613,905)
DM 86,345,427 January 1998 (1,384,248)
Frf 25,039,501 January 1998 (138,606)
Pound Sterling 125,179,232 January 1998 (898,090)
Lit 17,526,100,000 October 1998 (49,009)
YEN 4,914,943,198 January 1998 (5,016,076)
------------
Total (US$ Commitment--$353,431,584) (8,099,934)
============
Foreign Currency Sold
Chf 218,010,166 January 1998 $ 7,274,618
Chf 16,625,000 August 1998 94,033
Chf 367,200 December 1998 5,009
DM 205,746,631 January 1998 5,910,791
Frf 371,183,000 January 1998 6,617,603
Pound Sterling 138,698,880 January 1998 (4,800,529)
Lit 97,882,627,500 October 1998 1,124,076
Nlg 52,295,661 January 1998 2,487,360
Nlg 123,706,663 December 1998 638,191
YEN 19,609,079,681 January 1998 14,681,154
YEN 2,137,785,214 December 1998 202,744
Total (US$ Commitment--$911,043,902) 34,235,050
------------
Total Unrealized Appreciation on
Forward Foreign Exchange Contracts--Net $ 26,135,116
============
See Notes to Financial Statements.
</TABLE>
51
<PAGE>
Merrill Lynch Global Value Fund, Inc., December 31, 1997
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$1,630,584,588)
(Note 1a) $1,781,548,475
Unrealized appreciation on forward foreign exchange
contracts (Note 1d) 26,135,116
Cash 693
Foreign cash (Note 1c) 2,031,504
Receivables:
Capital shares sold $ 5,648,368
Securities sold 5,319,374
Dividends 2,713,885 13,681,627
--------------
Deferred organization expenses (Note 1g) 150,678
Prepaid registration fees and other assets (Note 1g) 90,504
--------------
Total assets 1,823,638,597
--------------
Liabilities: Payables:
Securities purchased 14,556,803
Capital shares redeemed 1,730,686
Distributor (Note 2) 1,381,461
Investment adviser (Note 2) 1,204,789 18,873,739
--------------
Accrued expenses 1,264,438
--------------
Total liabilities 20,138,177
--------------
Net Assets: Net assets $1,803,500,420
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 525,111
Class B Shares of Common Stock, $0.10 par value, 300,000,000
shares authorized 10,462,413
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 1,918,918
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 2,157,062
Paid-in capital in excess of par 1,550,328,488
Undistributed investment income--net 1,800,224
Undistributed realized capital gains on investments and
foreign currency transations--net 59,267,361
Unrealized appreciation on investments and foreign
currency transactions--net 177,040,843
--------------
Net assets $1,803,500,420
==============
Net Asset Class A--Based on net assets of $63,075,336 and 5,251,108
Value: shares outstanding $ 12.01
==============
Class B--Based on net assets of $1,251,956,493 and 104,624,133
shares outstanding $ 11.97
==============
Class C--Based on net assets of $229,600,929 and 19,189,181
shares outstanding $ 11.97
==============
Class D--Based on net assets of $258,867,662 and 21,570,616
shares outstanding $ 12.00
==============
See Notes to Financial Statements.
</TABLE>
52
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
For the Period For the
Nov. 1, 1997 to Year Ended
Dec. 31, 1997 Oct. 31, 1997++
<S> <S> <C> <C>
Investment Dividends* $ 3,746,985 $ 27,596,209
Income Interest and discount earned 609,344 9,902,447
(Notes 1e & 1f): ------------ ------------
Total income 4,356,329 37,498,656
------------ ------------
Expenses: Investment advisory fees (Note 2) 2,189,146 9,957,530
Account maintenance and distribution fees--Class B (Note 2) 2,035,049 9,355,347
Account maintenance and distribution fees--Class C (Note 2) 373,926 1,696,508
Transfer agent fees--Class B (Note 2) 239,981 1,047,174
Custodian fees 169,266 513,563
Account maintenance fees--Class D (Note 2) 102,950 484,472
Professional fees 49,759 38,989
Transfer agent fees--Class C (Note 2) 45,232 193,464
Transfer agent fees--Class D (Note 2) 40,355 178,244
Registration fees (Note 1g) 29,331 739,842
Printing and shareholder reports 26,336 161,582
Directors' fees and expenses 22,284 37,950
Accounting services (Note 2) 16,901 191,495
Transfer agent fees--Class A (Note 2) 9,615 25,932
Amortization of organization expenses--net (Note 1g) 6,551 39,307
Pricing fees 1,244 6,367
Other 3,285 8,724
------------ ------------
Total expenses 5,361,211 24,676,490
------------ ------------
Investment income (loss)--net (1,004,882) 12,822,166
------------ ------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 59,267,498 63,319,496
(Loss) on Foreign currency transactions--net (1,471,392) 1,202,141
Investments & Change in unrealized appreciation/depreciation on:
Foreign Currency Investments--net 18,317,620 132,646,267
Transactions--Net Foreign currency transactions--net 27,761,065 (1,684,109)
(Notes 1c, 1d, ------------ ------------
1f & 3): Net realized and unrealized gain on investments
and foreign currency transactions 103,874,791 195,483,795
------------ ------------
Net Increase in Net Assets Resulting from Operations $102,869,909 $208,305,961
============ ============
<FN>
*Net of foreign withholding tax $ 18,335 $ 2,588,136
============ ============
++The Fund commenced operations on November 1, 1996.
See Notes to Financial Statements.
</TABLE>
53
<PAGE>
Merrill Lynch Global Value Fund, Inc., December 31, 1997
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Period For the
Nov. 1, 1997 to Year Ended
Dec. 31, Oct. 31,
Increase (Decrease) in Net Assets: 1997 1997++
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ (1,004,882) $ 12,822,166
Realized gain on investments and foreign
currency transactions--net 57,796,106 64,521,637
Changes in unrealized appreciation/depreciation
on investments and foreign currency
transactions--net 46,078,685 130,962,158
-------------- --------------
Net increase in net assets resulting from operations 102,869,909 208,305,961
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (549,581) (72,233)
Shareholders Class B (2,957,634) (2,571,571)
(Note 1h): Class C (551,700) (463,638)
Class D (1,860,239) (721,214)
Realized gain on investments--net:
Class A (2,139,606) --
Class B (44,190,132) --
Class C (8,093,819) --
Class D (8,896,075) --
-------------- --------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (69,238,786) (3,828,656)
-------------- --------------
Capital Share Net increase in net assets derived from capital
Transactions share transactions 81,836,169 1,483,455,823
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 115,467,292 1,687,933,128
Beginning of period 1,688,033,128 100,000
-------------- --------------
End of period* $1,803,500,420 $1,688,033,128
============== ==============
<FN>
*Undistributed investment income--net (Note 1i) $ 1,800,224 $ 10,195,652
============== ==============
++The Fund commenced operations on November 1, 1996.
See Notes to Financial Statements.
</TABLE>
54
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A++++ Class B++++
The following per share data and For the For the For the For the
ratios have been derived from information Period Year Period Year
provided in the financial statements. Nov. 1, 1997 Ended Nov. 1, 1997 Ended
to Dec. 31, Oct. 31, to Dec. 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1997 1997++ 1997 1997++
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period. $ 11.83 $ 10.00 $ 11.72 $ 10.00
Operating ---------- ---------- ---------- ----------
Performance: Investment income (loss)--net .01 .17 (.01) .09
Realized and unrealized gain on investments
and foreign currency transactions--net .72 1.71 .73 1.67
---------- ---------- ---------- ----------
Total from investment operations .73 1.88 .72 1.76
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.11) (.05) (.03) (.04)
Realized gain on investments--net (.44) -- (.44) --
---------- ---------- ---------- ----------
Total dividends and distributions (.55) (.05) (.47) (.04)
---------- ---------- ---------- ----------
Net asset value, end of period $ 12.01 $ 11.83 $ 11.97 $ 11.72
========== ========== ========== ==========
Total Investment Based on net asset value per share 6.19%+++ 18.91% 6.14%+++ 17.62%
Return:** ========== ========== ========== ==========
Ratios to Average Expenses .96%* .97% 1.98%* 1.99%
Net Assets: ========== ========== ========== ==========
Investment income (loss)--net .54%* 1.88% (.49%)* .84%
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 63,075 $ 53,776 $1,251,956 $1,179,125
Data: ========== ========== ========== ==========
Portfolio turnover 24.49% 77.65% 24.49% 77.65%
========== ========== ========== ==========
Average commission rate paid++++++ $ .0391 $ .0351 $ .0391 $ .0351
========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
++The Fund commenced operations on November 1, 1996.
++++Based on average shares outstanding.
++++++Includes commissions paid in foreign currencies, which have
been converted into US dollars using the prevailing exchange rate on
the date of the transaction. Such conversions may significantly
affect the rate shown.
</TABLE>
55
<PAGE>
Merrill Lynch Global Value Fund, Inc., December 31, 1997
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C++++ Class D++++
The following per share data and For the For the For the For the
ratios have been derived from information Period Year Period Year
provided in the financial statements. Nov. 1, 1997 Ended Nov. 1, 1997 Ended
to Dec. 31, Oct. 31, to Dec. 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1997 1997++ 1997 1997++
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period. $ 11.72 $ 10.00 $ 11.80 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income (loss)--net (.01) .09 .01 .18
Realized and unrealized gain on
investments and foreign currency
transactions--net 73 1.67 .72 1.67
-------- -------- -------- --------
Total from investment operations .72 1.76 .73 1.85
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.03) (.04) (.09) (.05)
Realized gain on investments--net (.44) -- (.44) --
-------- -------- -------- --------
Total dividends and distributions (.47) (.04) (.53) (.05)
-------- -------- -------- --------
Net asset value, end of period $ 11.97 $ 11.72 $ 12.00 $ 11.80
======== ======== ======== ========
Total Investment Based on net asset value per share 6.14%+++ 17.62% 6.20%+++ 18.56%
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.98%* 1.99% 1.21%* 1.22%
Net Assets: ======== ======== ======== ========
Investment income (loss)--net (.49%)* .83% .28%* 1.62%
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $229,601 $217,341 $258,868 $237,791
Data: ======== ======== ======== ========
Portfolio turnover 24.49% 77.65% 24.49% 77.65%
======== ======== ======== ========
Average commission rate paid++++++ $ .0391 $ .0351 $ .0391 $ .0351
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
++The Fund commenced operations on November 1, 1996.
++++Based on average shares outstanding.
++++++Includes commissions paid in foreign currencies, which have
been converted into US dollars using the prevailing exchange rate on
the date of the transaction. Such conversions may significantly
affect the rate shown.
</TABLE>
56
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Global Value Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. Prior to commencement of
operations on November 1, 1996, the Fund had no operations other
than those relating to organizational matters and the issue of
10,000 capital shares of the Fund to Merrill Lynch Asset Management,
L.P. ("MLAM") for $100,000. The Fund has changed its fiscal year end
from October 31 to December 31. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of securities--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including financial futures
contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily
available are valued at their fair value as determined in good faith
by or under the direction of the Fund's Board of Directors.
(b) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank of
the Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additions to such
securities daily to ensure that the contract is fully
collateralized.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(d) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
57
<PAGE>
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
Merrill Lynch Global Value Fund, Inc., December 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(f) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(i) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$1,471,392 have been reclassified between undistributed net realized
capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
MLAM. The general partner of MLAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 0.75%, on an annual basis,
of the average daily value of the Fund's net assets.
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribu-tion
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
58
<PAGE>
For the period November 1, 1997 to December 31, 1997, MLFD earned
underwriting discounts and direct commissions and MLPF&S earned
dealer concessions on sales of the Fund's Class A and Class D Shares
as follows:
MLFD MLPF&S
Class A $ 3 $ 139
Class D $4,932 $73,767
For the period November 1, 1997 to December 31, 1997, MLPF&S
received contingent deferred sales charges of $398,297 and $9,766
relating to transactions in Class B and Class C Shares,
respectively.
In addition, MLPF&S received $406,084 in commissions on the
execution of portfolio security transactions for the Fund for the
period November 1, 1997 to December 31, 1997.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period November 1, 1997 to December 31, 1997 were
$392,163,634 and $404,263,836, respectively.
Net realized and unrealized gains (losses) as of December 31, 1997
were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 59,267,498 $ 150,963,887
Forward foreign exchange contracts -- 26,135,116
Foreign currency transactions (1,471,392) (58,160)
------------ ------------
Total $ 57,796,106 $177,040,843
============ ============
As of December 31, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $148,122,904, of which $205,674,525
related to appreciated securities and $57,551,621 related to
depreciated securities. The aggregate cost of investments at
December 31, 1997 for Federal income tax purposes was
$1,633,425,571.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $81,836,169 and $1,483,455,823 for the period November 1, 1997
to December 31, 1997 and for the year ended October 31, 1997,
respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Period Dollar
November 1, 1997 to December 31, 1997 Shares Amount
Shares sold 751,738 $ 9,068,512
Shares issued to shareholders in
reinvestment of dividends and
distributions 114,753 1,374,743
------------ --------------
Total issued 866,491 10,443,255
Shares redeemed (162,478) (1,970,638)
------------ --------------
Net increase 704,013 $ 8,472,617
============ ==============
Class A Shares for the Period Dollar
November 1, 1996++ to October 31, 1997 Shares Amount
Shares sold 5,152,431 $ 57,303,237
Shares issued to shareholders in
reinvestment of dividends 6,207 62,009
------------ --------------
Total issued 5,158,638 57,365,246
Shares redeemed (614,043) (6,856,145)
------------ --------------
Net increase 4,544,595 $ 50,509,101
============ ==============
[FN]
++Prior to November 1, 1996 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class B Shares for the Period Dollar
November 1, 1997 to December 31, 1997 Shares Amount
Shares sold 3,154,767 $ 38,080,734
Shares issued to shareholders in
reinvestment of dividends and
distributions 3,339,542 39,874,138
------------ --------------
Total issued 6,494,309 77,954,872
Automatic conversion of shares (82,508) (986,113)
Shares redeemed (2,355,726) (28,418,784)
------------ --------------
Net increase 4,056,075 $ 48,549,975
============ ==============
Class B Shares for the Period Dollar
November 1, 1996++ to October 31, 1997 Shares Amount
Shares sold 109,016,851 $1,127,788,851
Shares issued to shareholders in
reinvestment of dividends 211,285 2,110,732
------------ --------------
Total issued 109,228,136 1,129,899,583
Automatic conversion of shares (207,246) (2,300,318)
Shares redeemed (8,455,332) (92,416,446)
------------ --------------
Net increase 100,565,558 $1,035,182,819
============ ==============
[FN]
++Prior to November 1, 1996 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
59
<PAGE>
Merrill Lynch Global Value Fund, Inc., December 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Period Dollar
November 1, 1997 to December 31, 1997 Shares Amount
Shares sold 571,308 $ 6,886,306
Shares issued to shareholders in
reinvestment of dividends and
distributions 629,854 7,520,456
------------ --------------
Total issued 1,201,162 14,406,762
Shares redeemed (549,914) (6,625,250)
------------ --------------
Net increase 651,248 $ 7,781,512
============ ==============
Class C Shares for the Period Dollar
November 1, 1996++ to October 31, 1997 Shares Amount
Shares sold 20,686,388 $ 214,642,345
Shares issued to shareholders in
reinvestment of dividends 39,137 390,984
------------ --------------
Total issued 20,725,525 215,033,329
Shares redeemed (2,190,092) (23,679,275)
------------ --------------
Net increase 18,535,433 $ 191,354,054
============ ==============
[FN]
++Prior to November 1, 1996 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class D Shares for the Period Dollar
November 1, 1997 to December 31, 1997 Shares Amount
Shares sold 1,489,446 $ 18,112,269
Automatic conversion of shares 81,951 986,113
Shares issued to shareholders in
reinvestment of dividends and
distributions 783,234 9,375,306
------------ --------------
Total issued 2,354,631 28,473,688
Shares redeemed (933,276) (11,441,623)
------------ --------------
Net increase 1,421,355 $ 17,032,065
============ ==============
Class D Shares for the Period Dollar
November 1, 1996++ to October 31, 1997 Shares Amount
Shares sold 22,812,954 $ 235,349,723
Automatic conversion of shares 206,573 2,300,318
Shares issued to shareholders in
reinvestment of dividends 62,231 621,693
------------ --------------
Total issued 23,081,758 238,271,734
Shares redeemed (2,934,997) (31,861,885)
------------ --------------
Net increase 20,146,761 $ 206,409,849
============ ==============
[FN]
++Prior to November 1, 1996 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
5. Commitments:
At December 31, 1997, the Fund had entered into foreign exchange
contracts, in addition to the contracts listed on the Schedule of
Investments, under which it had agreed to purchase foreign currency
with an approximate value of $10,058,000.
60
<PAGE>
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Other Investment Policies and Practices.................................. 3
Investment Restrictions.................................................. 5
Management of the Fund.................................................... 8
Directors and Officers................................................... 8
Compensation of Directors................................................ 10
Management and Advisory Arrangements..................................... 10
Purchase of Shares........................................................ 12
Initial Sales Charge Alternatives--
Class A and Class D Shares.............................................. 12
Reduced Initial Sales Charges............................................ 14
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 17
Distribution Plans....................................................... 17
Limitations on the Payment of Deferred Sales Charges..................... 17
Redemption of Shares...................................................... 19
Deferred Sales Charges--
Class B and Class C Shares.............................................. 19
Portfolio Transactions and Brokerage...................................... 20
Determination of Net Asset Value.......................................... 22
Shareholder Services...................................................... 23
Investment Account....................................................... 23
Automatic Investment Plans............................................... 24
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 24
Systematic Withdrawal Plans.............................................. 25
Exchange Privilege....................................................... 26
Taxes..................................................................... 28
Tax Treatment of Futures, Options and Forward Foreign Exchange
Transactions............................................................ 31
Special Rules for Certain Foreign Currency Transactions.................. 31
Performance Data.......................................................... 32
General Information....................................................... 34
Description of Shares.................................................... 34
Computation of Offering Price per Share.................................. 35
Independent Auditors..................................................... 35
Custodian................................................................ 36
Transfer Agent........................................................... 36
Legal Counsel............................................................ 36
Reports to Shareholders.................................................. 36
Additional Information................................................... 36
Security Ownership of Certain Beneficial Owners.......................... 36
Independent Auditors' Report.............................................. 37
Financial Statements for the Fiscal Year Ended October 31, 1997........... 38
Independent Auditors' Report.............................................. 48
Financial Statements for the Fiscal Period Ended December 31, 1997........ 49
</TABLE>
Code #19002-0298
LOGO MERRILL LYNCH
Merrill Lynch
Global Value Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
February 27, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
