<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1999
SECURITIES ACT FILE NO. 333-36721
INVESTMENT COMPANY ACT FILE NO. 811-08389
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
<TABLE>
<C> <S>
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 2 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 3 /X/
(Check appropriate box or boxes)
</TABLE>
------------------------
MERRILL LYNCH
REAL ESTATE FUND, INC.
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
Registrant's telephone number, including Area Code: (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH REAL ESTATE FUND, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Counsel for the Fund:
BROWN & WOOD LLP Michael J. Hennewinkel, Esq.
One World Trade Center MERRILL LYNCH ASSET MANAGEMENT, L.P.
New York, New York 10048-0557 P.O. Box 9011
Attention: Frank P. Bruno, Esq. Princeton, New Jersey 08543-9011
</TABLE>
------------------------
It is proposed that this filing will become effective (check appropriate
box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
------------------------
TITLE OF SECURITIES BEING REGISTERED: Shares of Common Stock, par value $.10 per
share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT USE THIS PROSPECTUS TO SELL SECURITIES UNTIL THE REGISTRATION STATEMENT
CONTAINING THIS PROSPECTUS, WHICH HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION [LOGO]
PRELIMINARY PROSPECTUS DATED JANUARY 29, 1999
Merrill Lynch Real Estate Fund, Inc.
_March __, 1999
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD
KNOW BEFORE INVESTING, INCLUDING INFORMATION ABOUT
RISKS. PLEASE READ IT BEFORE YOU INVEST AND KEEP IT
FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED
UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
PAGE
[ICON] KEY FACTS
------------------------------------------------------
The Merrill Lynch Real Estate Fund at a Glance ..... 3
Risk/Return Bar Chart .............................. 4
Fees and Expenses .................................. 5
[ICON] DETAILS ABOUT THE FUND
------------------------------------------------------
How the Fund Invests ............................... 7
Investment Risks ................................... 9
[ICON] YOUR ACCOUNT
------------------------------------------------------
Merrill Lynch Select Pricing-SM- System ........... 19
How to Buy, Sell, Transfer and Exchange Shares .... 23
Participation in Merrill Lynch Fee-Based
Programs .......................................... 27
[ICON] MANAGEMENT OF THE FUND
------------------------------------------------------
Merrill Lynch Asset Management .................... 29
Financial Highlights .............................. 30
[ICON] FOR MORE INFORMATION
------------------------------------------------------
Shareholder Reports ....................... Back Cover
Statement of Additional Information ....... Back Cover
</TABLE>
MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
KEY FACTS [ICON]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this prospectus
in the sidebar.
COMMON STOCK -- shares of ownership of a corporation.
SHARES AND UNITS OF BENEFICIAL INTEREST IN REAL ESTATE INVESTMENT
TRUSTS -- shares of ownership in a type of pooled investment vehicles that
invests primarily in income producing real estate or real estate related loans
or interest.
PREFERRED STOCK -- class of stock that often pays dividends at a specified rate
and has preference over common stock in dividend payments and liquidation of
assets.
THE MERRILL LYNCH REAL ESTATE FUND AT A GLANCE
--------------------------------------------------
WHAT ARE THE FUND'S OBJECTIVES AND GOALS?
The Fund's investment objective is to seek total
return. Total return is a combination of capital
appreciation and investment income. There can be
no assurance that the Fund's investment objective
will be achieved.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests primarily in equity securities of
issuers that are principally engaged in the real
estate industry. The equity securities in which
the Fund will invest consist of COMMON STOCK,
SHARES AND UNITS OF BENEFICIAL INTEREST OF REAL
ESTATE INVESTMENT TRUSTS, PREFERRED STOCK and
securities which are convertible into common
stock. The Fund may invest up to 25% of its total
assets in foreign securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
As with any mutual fund, the value of the Fund's
investments, and therefore the value of Fund
shares, may go up or down. These changes may occur
because the stock market is rising or falling. At
other times, there are specific factors that may
affect the value of a particular investment. If
the value of the Fund's investment goes down, you
may lose money. The Fund is a non-diversified
fund, which means that it invests more of its
assets in fewer companies than if it were a
diversified fund. By concentrating in a smaller
number of investments, the Fund's risk is
increased because each investment has a greater
effect on the Fund's performance. This helps the
Fund's performance when its investments are
successful, but also hurts the Fund's performance
when its investments are unsuccessful.
As a sector fund that invests primarily in
companies engaged in the real estate industry, the
Fund is subject to the risks associated with real
estate. This makes the Fund more vulnerable to
price changes of real estate securities and
factors that affect the real estate industry than
a more broadly diversified mutual fund.
The prices of securities issued by companies
engaged in the real estate industry may change in
response to interest rate changes. Generally, when
interest rates go up, the value of securities
issued by companies in the real estate industry
goes down.
WHO SHOULD INVEST?
The Fund may be an appropriate investment for you
if you:
- Are investing with long-term goals such
as retirement or funding a child's
education.
- Are willing to accept the risk that the
value of your investment may decline in
exchange for potentially higher
long-term returns.
- Are looking to invest in a portfolio
composed primarily of real estate
related equity securities and are
willing to accept the risks associated
with investment in the real estate
industry.
MERRILL LYNCH REAL ESTATE FUND, INC. 3
<PAGE>
[ICON] KEY FACTS
RISK/RETURN BAR CHART
--------------------------------------------
The bar chart and table shown below
provide an indication of the risks
of investing in the Fund. The bar
chart shows changes in the Fund's
performance for Class B shares for
the complete calendar year since
the Fund's inception. Sales charges
are not reflected in the bar chart.
If these amounts were reflected,
returns would be less than those
shown. The table compares the
average annual total returns for
each class of the Fund's shares for
the periods shown with those of the
Morgan Stanley REIT Index. How the
Fund performed in the past is not
necessarily an indication of how
the Fund will perform in the
future.
EDGAR REPRESENTATION OF DATA POINTS USED IN
PRINTED GRAPHIC
<TABLE>
<S> <C>
1998 -12.55%
</TABLE>
During the period shown in the bar chart, the
highest return for a quarter was 3.59% (quarter
ended March 31, 1998) and the lowest return for a
quarter was -11.91% (quarter ended September 30,
1998).
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year ended) Past
December 31, 1998 One Year Since Inception
<S> <C> <C>
- --------------------------------------------------------------------
Merrill Lynch Real Estate Fund* A -16.36% -15.91%+
- --------------------------------------------------------------------
B -15.91% -14.71%+
- --------------------------------------------------------------------
C -13.45% -12.27%+
- --------------------------------------------------------------------
D -16.58% -16.12%+
- --------------------------------------------------------------------
Morgan Stanley REIT Index -16.90% -16.90%++
- --------------------------------------------------------------------
</TABLE>
* Includes sales charge.
+ Inception date is December 26, 1997.
++ Since December 31, 1997.
4 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
UNDERSTANDING
EXPENSES
Fund investors pay various fees and expenses either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:
SHAREHOLDER FEES -- These include sales charges which you may pay when you buy
or sell shares of the Fund.
EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:
ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.
MANAGEMENT FEE -- a fee paid to the Manager for managing the Fund.
DISTRIBUTION FEES -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities dealers
for account maintenance activities.
FEES AND EXPENSES
--------------------------------------------------
The Fund offers four different classes of shares.
Although your money will be invested the same way
no matter which class of shares you buy, there are
differences among the fees and expenses associated
with each class. Not everyone is eligible to buy
every class. After determining which classes you
are eligible to buy, decide which class best suits
your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
This table shows the different fees and expenses
that you may pay if you buy and hold the different
classes of shares of the Fund. Future expenses may
be greater or less than those indicated below.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID Class
DIRECTLY FROM YOUR INVESTMENT): Class A B(a) Class C Class D
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on purchases (as a
percentage of offering price) 5.25%(b) None None 5.25%(b)
- ----------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a percentage of
original purchase price or redemption proceeds, whichever
is lower) None(c) 4.0%(b) 1.0%(b) None(c)
- ----------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on Dividend
Reinvestments None None None None
- ----------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- ----------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- ----------------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
- ----------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS):
- ----------------------------------------------------------------------------------------------------
Management Fee 0.85% 0.85% 0.85% 0.85%
- ----------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(d) None 1.00% 1.00% 0.25%
- ----------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency fees)(e) 0.54% 0.56% 0.57% 0.54%
- ----------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(f) 1.39% 2.41% 2.42% 1.64%
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Class B shares automatically convert to Class D shares about 8 years after
you buy them and will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund calls the Service Fee an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares for a long
time, it may cost you more in distribution (12b-1) fees than the maximum
sales charge that you would have paid if you had bought one of the other
classes.
MERRILL LYNCH REAL ESTATE FUND, INC. 5
<PAGE>
[ICON] KEY FACTS
<TABLE>
<C> <S>
(e) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the period December
26, 1997 (commencement of operations) to November 30, 1998, the Fund paid
the Transfer Agent fees totaling $66,989. The Manager provides accounting
services to the Fund at its cost. For the period December 26, 1997
(commencement of operations) to November 30, 1998, the Fund reimbursed the
Manager $52,413 for these services.
(f) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
</TABLE>
EXAMPLES:
These examples are intended to help you compare
the cost of investing in the Fund with the cost of
investing in other mutual funds.
These examples assume that you invest $10,000 in
the Fund for the time periods indicated, that your
investment has a 5% return each year, that you pay
the sales charges, if any, that apply to the
particular class and that the Fund's operating
expenses remain the same. This assumption is not
meant to indicate you will receive a 5% annual
rate of return. Your annual return may be more or
less than the 5% used in this example. Although
your actual costs may be higher or lower, based on
these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Class A $659 $ 942 $1,246 $2,106
- ----------------------------------------------------------
Class B $644 $ 952 $1,286 $2,561*
- ----------------------------------------------------------
Class C $345 $ 755 $1,291 $2,756
- ----------------------------------------------------------
Class D $683 $1,015 $1,370 $2,367
- ----------------------------------------------------------
</TABLE>
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Class A $659 $ 942 $1,246 $2,106
- ----------------------------------------------------------
Class B $244 $ 752 $1,286 $2,561*
- ----------------------------------------------------------
Class C $245 $ 755 $1,291 $2,756
- ----------------------------------------------------------
Class D $683 $1,015 $1,370 $2,367
- ----------------------------------------------------------
</TABLE>
* Assumes conversion to Class D shares approximately eight years after
purchase. See note (a) to the Fees and Expenses table above.
MERRILL LYNCH REAL ESTATE FUND, INC.
6
<PAGE>
DETAILS ABOUT THE FUND [ICON]
ABOUT THE
PORTFOLIO MANAGER
Jay L. Willoughby is the Portfolio Manager of the Fund and is responsible for
the day-to-day management of the Fund's investment portfolio. Mr. Willoughby was
a partner and portfolio manager for the Crabbe Huson Group from 1988 to 1995.
From January 1995 to November 1997 he was a Managing Director of AEW Capital
Management, L.P. He has been a Senior Portfolio Manager of the Manager since
November 1997.
ABOUT THE
MANAGER
The Fund is managed by Merrill Lynch Asset Management.
HOW THE FUND INVESTS
--------------------------------------------------
The investment objective of the Fund is to seek
total return by investing primarily in equity
securities of issuers that are principally engaged
in the real estate industry. Total return is a
combination of capital appreciation and investment
income. There can be no assurance that the Fund's
investment objective will be achieved.
Under normal market conditions, the Fund will
invest at least 65% of its total assets in equity
securities of issuers that are principally engaged
in the real estate industry. If an issuer obtains
more than half of its gross revenues or net
profits from real estate operations it is
considered to be principally engaged in the
industry. Such issuers may receive their revenues
from real estate activities, such as:
- Ownership
- Leasing
- Development
- Construction
- Financing
- Management
- Sale
Examples of these issuers will include:
- Real estate investment trusts ("REITS")
- Real estate brokers
- Home builders or real estate developers
- Companies with substantial real estate
holdings
- Companies with significant involvement
in the real estate industry.
Examples of companies with significant involvement
in the real estate industry include:
- Building supply companies
- Financial institutions that originate
real estate mortgages
- Companies that provide mortgage
servicing.
MERRILL LYNCH REAL ESTATE FUND, INC. 7
<PAGE>
[ICON] DETAILS ABOUT THE FUND
The Fund will invest in common stock, shares or
units of beneficial interests of REITS, preferred
stock and other securities with equity
characteristics such as convertible securities and
warrants.
The Manager believes that property market
fundamentals are the primary reason for growth
underlying the success of real estate equity
securities. Issuers with strong management further
identify the most attractive real estate equity
investment opportunities. The Fund tries to
identify issuers with strong property fundamentals
and strong management teams. The Fund's research
process includes real estate market research,
inspection of specific properties and securities
analysis. The Fund believes that this process will
result in a portfolio of real estate equity
securities of issuers that own assets in desirable
markets across the country. The Fund further
believes that this process will result in a
portfolio which is diversified both by geography
and by property type.
Under normal market conditions, the Fund may
invest up to 35% of its total assets in:
- Non-convertible debt securities
- Mortgage-backed securities such as
mortgage pass-through certificates,
real estate mortgage investment conduit
("REMIC") certificates and
collateralized mortgage obligations
("CMO's")
- Cash or cash equivalents and investment
grade short-term securities including
money market securities.
The Fund may invest up to 25% of its total assets
in foreign securities.
The Fund has not established any rating criteria
for the debt securities in which it may invest.
Thus, it may invest in non-convertible debt
securities, REMIC's and CMO's that are unrated or
rated in the medium to low rating categories of
nationally recognized statistical rating
organizations.
Because of its emphasis on securities of issuers
principally engaged in the real estate industry,
the Fund should be considered as a vehicle for
diversification and not as a balanced investment
program.
8 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
INVESTMENT RISKS
- ----------------------------------------------------------------------------
This section contains a summary discussion of the
general risks of investing in the Fund. As with
any mutual fund, there can be no guarantee that
the Fund will meet its goals or that the Fund's
performance will be positive for any period of
time.
STOCK MARKET AND SELECTION RISK -- Stock market
risk is the risk that the stock market will go
down in value, including the possibility that the
market will go down sharply and unpredictably.
Selection risk is the risk that the investments
that Fund management selects will underperform the
stock market or other funds with similar
investment objectives and investment strategies.
SECTOR RISK -- Sector risk is the risk that the
Fund's concentration in the securities of real
estate related companies will expose the Fund to
the price movements of companies in one industry
more than a more broadly diversified mutual fund.
Because the Fund invests primarily in one
industry, there is the risk that the Fund will
perform poorly during a downturn in that industry.
An investment in the Fund is subject to the risks
associated with real estate related securities, as
noted. The Fund should be considered a vehicle for
diversification and should not be considered a
balanced investment program by itself.
REAL ESTATE RELATED SECURITIES -- Real estate
related securities are subject to the risks
associated with real estate. The main risk of real
estate-related securities is that the value of the
real estate may go down. Many factors may affect
real estate values. These factors include both the
general and local economies, the laws and
regulations affecting real estate (including
zoning and tax laws) and the costs of owning,
maintaining and improving real estate. Other
factors that may affect real estate values include
the availability of mortgages and changes in
interest rates.
If the Fund's real estate-related investments are
concentrated in one geographic area or in one
property type, the Fund will be particularly
subject to the risks associated with that
geographic area or property type.
SMALL CAP -- Small cap or emerging growth
companies may have limited product lines or
markets. They may be less financially secure than
larger,
MERRILL LYNCH REAL ESTATE FUND, INC. 9
<PAGE>
[ICON] DETAILS ABOUT THE FUND
more established companies. They may depend on a
small number of key personnel. If a product fails,
or if management changes, or there are other
adverse developments, the Fund's investment in a
small cap or emerging growth company may lose
substantial value.
Small cap or emerging growth securities generally
trade in lower volumes and are subject to greater
and more unpredictable price changes than larger
cap securities or the stock market as a whole.
Investing in small caps and emerging growth
securities requires a long term view.
FOREIGN MARKET RISK -- Because the Fund may invest
in foreign securities, the Fund offers you more
diversification than an investment only in the
United States since prices of securities traded on
foreign markets have often, though not always,
moved counter to prices in the United States.
Foreign security investment, however, involves
special risks not present in U.S. investments that
can increase the chances that the Fund will lose
money. In particular, the Fund is subject to the
risk that because there are generally fewer
investors on foreign exchanges and a smaller
number of shares traded each day, it may make it
difficult for the Fund to buy and sell securities
on those exchanges. In addition, prices of foreign
securities may go up and down more than prices of
securities traded in the United States.
FOREIGN ECONOMY RISK -- The economies of certain
foreign markets often do not compare favorably
with that of the United States with respect to
such issues as growth of gross national product,
reinvestment of capital, resources, and balance of
payments position. Certain such economies may rely
heavily on particular industries or foreign
capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions
against a particular country or countries, changes
in international trading patterns, trade barriers,
and other protectionist or retaliatory measures.
Investments in foreign markets may also be
adversely affected by governmental actions such as
the imposition of capital controls,
nationalization of companies or industries,
expropriation of assets, or the imposition of
punitive taxes. In addition, the governments of
certain countries may prohibit or impose
substantial restrictions on foreign investing in
their capital markets or in certain industries.
Any of these actions could severely affect
security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer
the Fund's assets or income back into the United
States, or otherwise adversely affect the Fund's
operations. Other foreign market risks include
foreign exchange controls, difficulties in pricing
securities, defaults on foreign government
securities, difficulties in enforcing favorable
legal judgments in
10 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
foreign courts, and political and social
instability. Legal remedies available to investors
in certain foreign countries may be less extensive
than those available to investors in the United
States or other foreign countries.
CURRENCY RISK AND EXCHANGE RISK -- Foreign
securities in which the Fund invests are usually
denominated or quoted in currencies other than the
U.S. dollar. Changes in foreign currency exchange
rates will affect the value of the securities of
the Fund. Generally, when the U.S. dollar rises in
value against a foreign currency, your investment
in a security denominated in that currency loses
value because the currency is worth fewer U.S.
dollars. Similarly when the U.S. dollar decreases
in value against a foreign currency, your
investment in a security denominated in that
currency gains value because the currency is worth
more U.S. dollars. This risk is generally known as
"currency risk" which is the possibility that a
stronger U.S. dollar will reduce returns for U.S.
investors investing overseas and a weak U.S.
dollar will increase returns for U.S. investors
investing overseas.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING
STANDARDS -- Many foreign governments supervise
and regulate stock exchanges, brokers and the sale
of securities less than the United States does.
Some countries may not have laws to protect
investors the way the United States' securities
laws do. Accounting standards in other countries
are not necessarily the same as in the United
States. If the accounting standards in another
country do not require as much detail as U.S.
accounting standards, it may be harder for the
Fund's portfolio manager to completely and
accurately determine a company's financial
condition.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE
UNITED STATES -- The Fund generally holds its
foreign securities in which it invests outside the
United States in foreign banks and securities
depositories. These such foreign banks and
securities depositories may be recently organized
or new to the foreign custody business. They may
also have operations subject to limited or no
regulatory oversight. Also, the laws of certain
countries may put limits on the Fund's ability to
recover its assets if a foreign bank or depository
or issuer of a security or any of their agents
goes bankrupt. In addition, it can be expected
that it will be more expensive for the Fund to
buy, sell, and hold securities in certain foreign
markets than in the U.S. market due to higher
brokerage, transaction, custody and/or other
costs. The increased expense to invest in foreign
markets reduces the amount the Fund can earn on
its investments and typically results in a higher
operating expense ratio for the Fund than
investment companies invested only in the United
States.
MERRILL LYNCH REAL ESTATE FUND, INC. 11
<PAGE>
[ICON] DETAILS ABOUT THE FUND
Settlement and clearance procedures in certain
foreign markets differ significantly from those in
the United States. Foreign settlement and
clearance procedures and trade regulations also
may involve certain risks (such as delays in
payment for or delivery of securities) not
typically involved with the settlement of U.S.
investments. Communications between the United
States and emerging market countries may be
unreliable, increasing the risk of delayed
settlements or losses of security certificates.
Settlements in certain foreign countries at times
have not kept pace with the number of securities
transactions; these problems may make it difficult
for the Fund to carry out transactions. If the
Fund cannot settle or is delayed in settling a
purchase of securities, it may miss attractive
investment opportunities and certain of its assets
may be uninvested with no return earned thereon
for some period. If the Fund cannot settle or is
delayed in settling a sale of securities, it may
lose money if the value of the security then
declines or, if it has contracted to sell the
security to another party, the Fund could be
liable to that party for any losses incurred.
Dividends or interest on, or proceeds from the
sale of, foreign securities may be subject to
foreign withholding taxes. Tax conventions between
certain countries and the United States may reduce
or eliminate such taxes.
EUROPEAN ECONOMIC AND MONETARY UNION (EMU)
Certain European countries have agreed to enter
into EMU in an effort to, among other things,
reduce barriers between countries, increase
competition among companies, reduce government
subsidies in certain industries, and reduce or
eliminate currency fluctuations among these
countries. Among other things, EMU establishes a
single common European currency (the "euro") that
was introduced on January 1, 1999 and is expected
to replace the existing national currencies of all
EMU participants by July 1, 2002. With the
introduction of the euro, certain securities
(beginning with government and corporate bonds)
are being redenominated in the euro, and,
thereafter, will be listed, trade and make
dividend and other payments only in euros.
Although EMU is generally expected to have a
beneficial effect, it could negatively affect the
Fund in a number of situations, including as
follows:
- If the euro, or EMU as a whole, does
not take effect as planned, the Fund's
investments could be adversely
affected. For example, sharp currency
fluctuations, exchange rate volatility,
and other disruptions of the markets
could occur.
12 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
- Withdrawal from EMU by a participating
country could also have a negative
effect on the Fund's investments, for
example if securities redenominated in
euros are transferred back into that
country's national currency.
- Computer, accounting, and trading
systems must be capable of recognizing
the euro as a distinct currency.
EMERGING MARKETS RISK -- The risks of foreign
investments are usually much greater for
investments in emerging markets. These investments
may be considered to be speculative. An emerging
market includes any country that is defined as
emerging or developing by the World Bank, the
International Finance Corporation, or the United
Nations. Emerging markets are riskier because they
develop unevenly and may never fully develop.
Emerging markets are more likely to experience
hyperinflation and currency devaluations (which
adversely affects returns to U.S. investors). In
addition, the securities markets in many of these
countries have far lower trading volumes and less
liquidity than developed markets. Because these
markets are so small, investments in them may be
more likely to suffer sharp and frequent price
changes or long-term price depression due to
adverse publicity, investor perceptions, or the
actions of a few large investors. In addition,
traditional measures of investment value used in
the United States, such as price to earnings
ratios, may not apply to certain small markets.
Emerging markets have histories of political
instability and abrupt changes in policies that
could increase the chances that their governments
would take actions that are hostile or detrimental
to private enterprise or foreign investment.
Certain emerging markets may also face other
significant internal or external risks, including
the risk of war, and ethnic, religious, and racial
conflicts. Governments in many emerging market
countries participate to a significant degree in
their economies and securities markets, which may
impair investment and economic growth.
Risks associated with certain types of obligations
in which the Fund may invest include:
CONVERTIBLES -- Convertibles are generally debt
securities or preferred stocks that may be
converted into common stock. Convertibles
typically pay current income, as either interest
(debt security convertibles) or dividends
(preferred stocks). A convertible's value usually
reflects both the stream of current income
payments and the value of the underlying common
stock. The market
MERRILL LYNCH REAL ESTATE FUND, INC. 13
<PAGE>
[ICON] DETAILS ABOUT THE FUND
value of a convertible debt security performs like
a regular debt security; that is, if market
interest rates rise, the value of a convertible
usually falls. Since it is convertible into common
stock, the convertible also has the same types of
market and issuer risk as the value of the
underlying common stock.
WARRANTS
A warrant gives the Fund the right to buy a
quantity of stock. The warrant specifies the
amount of underlying stock, the purchase (or
"exercise") price, and the date the warrant
expires. The Fund has no obligation to exercise
the warrant and buy the stock.
A warrant has value only if the Fund exercises it
before it expires. If the price of the underlying
stock does not rise above the exercise price
before the warrant expires, the warrant legally
expires without any value and the Fund loses any
amount it paid for the warrant. Thus, investments
in warrants may involve substantially more risk
than investments in common stock. Warrants may
trade in the same markets as their underlying
stock; however, the price of the warrant does not
necessarily move with the price of the underlying
stock.
DERIVATIVES
Derivatives allow the Fund to increase or decrease
its risk exposure more quickly and efficiently
than other types of instruments. The Fund may use
the following types of derivative instruments:
futures, forwards, options, indexed securities and
inverse securities.
Derivatives are volatile and involve significant
risks, including:
LEVERAGE RISK -- the risk associated with certain
types of investments or trading strategies (such
as borrowing money to increase the amount of
investments) that relatively small market
movements may result in large changes in the value
of an investment. Certain investments or trading
strategies that involve leverage can result in
losses that greatly exceed the amount originally
invested.
CREDIT RISK -- the risk that the counterparty (the
party on the other side of the transaction) on a
derivative transaction will be unable to honor its
financial obligation to the Fund.
CURRENCY RISK -- the risk that changes in the
exchange rate between currencies will adversely
affect the value (in U.S. dollar terms) of an
investment.
14 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
LIQUIDITY RISK -- the risk that certain securities
may be difficult or impossible to sell at the time
that the seller would like or at the price that
the seller believes the security is currently
worth.
The Fund may use derivatives for hedging purposes,
including anticipatory hedges, and to enhance
total return. Hedging is a strategy in which the
Fund uses a derivative to offset the risk that
other Fund holdings may decrease in value. While
hedging can reduce losses, it can also reduce or
eliminate gains if the market moves in a different
manner than anticipated by the Fund or if the cost
of the derivative outweighs the benefit of the
hedge. Hedging also involves the risk that changes
in the value of the derivative will not match
those of the holdings being hedged as expected by
the Fund, in which case any losses on the holdings
being hedged may not be reduced. There can be no
assurance that the Fund's hedging strategy will
reduce risk or that hedging transactions will be
either available or cost effective. The Fund is
not required to use hedging and may not choose to
do so.
BORROWING AND LEVERAGE
The Fund may borrow for temporary emergency
purposes including to meet redemptions. Borrowing
may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's
portfolio. Borrowing will cost the Fund interest
expense and other fees. The cost of borrowing may
reduce the Fund's return.
Certain securities that the Fund buys may create
leverage including, for example, when-issued
securities, forward commitments, options, warrants
and reverse repurchase agreements.
DEBT SECURITIES
Debt securities, such as bonds, involve credit
risk. This is the risk that the borrower will not
make timely payments of principal and interest.
The degree of credit risk depends on the issuer's
financial condition and on the terms of the bonds.
These securities are also subject to interest rate
risk. This is the risk that the value of the
security may fall when interest rates rise. In
general, the market price of debt securities with
longer maturities will go up or down more in
response to changes in interest rates than the
market price of shorter term securities.
MERRILL LYNCH REAL ESTATE FUND, INC. 15
<PAGE>
[ICON] DETAILS ABOUT THE FUND
ILLIQUID SECURITIES
The Fund may invest up to 15% of its assets in
illiquid securities that it cannot easily resell
within seven days at current value or that have
contractual or legal restrictions on resale. If
the Fund buys illiquid securities it may be unable
to quickly resell them or may be able to sell them
only at a price below current value.
RESTRICTED SECURITIES
Restricted securities have contractual or legal
restrictions on their resale. They include private
placement securities that the Fund buys directly
from the issuer. Private placement and other
restricted securities may not be listed on an
exchange and may have no active trading market.
Restricted securities may be illiquid. The Fund
may be unable to sell them on short notice or may
be able to sell them only at a price below current
value. The Fund may get only limited information
about the issuer, so may be less able to predict a
loss. In addition, if Fund management receives
material adverse non public information about the
issuer, the Fund will not be able to sell the
security.
144A: DESCRIPTION AND RISK MITIGATION
Rule 144A securities are restricted securities
that can be resold to qualified institutional
buyers but not to the general public. Rule 144A
securities may have an active trading market but
carry the risk that the active trading market may
not continue.
WHEN ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
When issued and delayed delivery securities and
forward commitments involve the risk that the
security the Fund buys will lose value prior to
its delivery to the Fund. There also is the risk
that the security will not be issued or that the
other party will not meet its obligation, in which
case the Fund loses the investment opportunity for
the assets it has set aside to pay for the
security and any gain in the security's price.
SECURITIES LENDING
The Fund may lend securities to financial
institutions that provide government securities as
collateral. Securities lending involves the risk
that the borrower may fail to return the
securities in a timely manner or at all. As a
result, the Fund may lose money and there may be a
delay in recovering the
16 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
loaned securities. The Fund could also lose money
if it does not recover the securities and the
value of the collateral falls. These events could
trigger adverse tax consequences to the Fund.
STATEMENT OF ADDITIONAL INFORMATION
- ----------------------------------------------------------------------------
If you would like further information about the
Fund, including how it invests, please see the
Statement of Additional Information.
MERRILL LYNCH REAL ESTATE FUND, INC. 17
<PAGE>
[ICON]
YOUR ACCOUNT [ICON]
MERRILL LYNCH SELECT PRICING-SM- SYSTEM
--------------------------------------------------
The Fund offers four share classes, each with its
own sales charge and expense structure, allowing
you to invest in the way that best suits your
needs. Each share class represents an ownership
interest in the same investment portfolio. When
you choose your class of shares you should
consider the size of your investment and how long
you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which
share class is best suited to your personal
financial goals.
For example, if you select Class A or D shares,
you generally pay a sales charge at the time of
purchase. If you buy Class D shares, you also pay
an ongoing account maintenance fee of 0.25%. You
may be eligible for a sales charge waiver.
If you select Class B or C shares, you will invest
the full amount of your purchase price, but you
will be subject to a distribution fee of 0.75% and
an account maintenance fee of 0.25%. Because these
fees are paid out of the Fund's assets on an
ongoing basis, over time these fees increase the
cost of your investment and may cost you more than
paying an initial sales charge. In addition, you
may be subject to a deferred sales charge when you
sell Class B or C shares.
The Fund's shares are distributed by Merrill Lynch
Funds Distributor, a division of Princeton Funds
Distributor, Inc., an affiliate of Merrill Lynch.
18 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
The table below summarizes key features of the Merrill Lynch Select Pricing-SM-
System.
<TABLE>
<CAPTION>
Class A Class B Class C
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
Availability Limited to certain Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch.
- Current Class A Limited availability Limited availability
shareholders through other securities through other securities
- Certain Retirement dealers. dealers.
Plans
- Participants in certain
Merrill Lynch sponsored
programs
- Certain affiliates of
Merrill Lynch.
----------------------------------------------------------------------------------------------------------
Initial Sales Charge? Yes. Payable at time of No. Entire purchase price No. Entire purchase price
purchase. Lower sales is invested in shares of is invested in shares of
charges available for the Fund. the Fund.
larger investments.
----------------------------------------------------------------------------------------------------------
Deferred Sales Charge? No. (May be charged for Yes. Payable if you Yes. Payable if you
purchases over $1 million redeem within four years redeem within one year of
that are redeemed within of purchase. purchase.
one year.)
----------------------------------------------------------------------------------------------------------
Account Maintenance and No. 0.25% Account Maintenance 0.25% Account Maintenance
Distribution Fees? Fee 0.75% Distribution Fee 0.75% Distribution
Fee. Fee.
----------------------------------------------------------------------------------------------------------
Conversion to Class D No. Yes, automatically after No.
shares? approximately eight
years.
----------------------------------------------------------------------------------------------------------
<CAPTION>
Class D
<S> <C>
-------------------------
Availability Generally available
through Merrill Lynch.
Limited availability
through other securities
dealers.
-------------------------
Initial Sales Charge? Yes. Payable at time of
purchase. Lower sales
charges available for
larger investments.
-------------------------
Deferred Sales Charge? No. (May be charged for
purchases over $1 million
that are redeemed within
one year.)
-------------------------
Account Maintenance and 0.25% Account Maintenance
Distribution Fees? Fee
No Distribution Fee.
-------------------------
Conversion to Class D No.
shares?
-------------------------
</TABLE>
MERRILL LYNCH REAL ESTATE FUND, INC. 19
<PAGE>
[ICON] YOUR ACCOUNT
RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing System funds that you
agree to buy within a 13 month period. Certain restrictions apply.
RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing System funds that you
agree to buy within a 13 month period. Certain restrictions apply.
CLASS A AND CLASS D SHARES -- INITIAL SALES CHARGE OPTIONS
If you select Class A or Class D shares, you will
pay a sales charge at the time of purchase.
<TABLE>
<CAPTION>
Dealer
Compensation
as a % of
As a % of As a % of Offering
Your Investment Offering Price Your Investment* Price
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
Less than $25,000 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.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This
charge is 1% of the lesser of the original cost of the shares being
redeemed or your redemption proceeds. A sales charge of 0.75% will be
charged on purchases of $1,000,000 or more of Class A or Class D shares by
certain employer sponsored retirement or savings plans.
No initial sales charge applies to Class A or
Class D shares that you buy through reinvestment
of dividends or distributions.
A reduced or waived sales charge on a purchase of
Class A or Class D shares may apply for:
- Purchases under a RIGHT OF ACCUMULATION
or LETTER OF INTENT.
- Merrill Lynch Blueprint-SM- Program
participants.
- TMA-SM- Managed Trusts.
- Certain Merrill Lynch investment or
central asset accounts.
- Certain employer-sponsored retirement
or savings plans.
- Purchases using proceeds from the sale
of certain Merrill Lynch closed-end
funds under certain circumstances.
20 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
- Certain investors, including directors
of Merrill Lynch mutual funds and
Merrill Lynch employees.
- Certain Merrill Lynch fee-based
programs.
Only certain investors are eligible to buy Class A
shares. Your Merrill Lynch Financial Consultant
can help you determine whether you are eligible to
buy Class A shares or to participate in any of
these programs.
If you decide to buy shares under the initial
sales charge alternative and you are eligible to
buy both Class A and Class D shares, you should
buy Class A since Class D shares are subject to a
0.25% account maintenance fee, while Class A
shares are not.
If you redeem Class A or Class D shares and within
30 days buy new shares of the same class, you will
not pay a sales charge on the new purchase amount.
The amount eligible for this "Reinstatement
Privilege" may not exceed the amount of your
redemption proceeds. To exercise the privilege,
contact your Merrill Lynch Financial Consultant or
the Fund's Transfer Agent at 1-800-MER-FUND.
CLASS B AND CLASS C SHARES -- DEFERRED SALES CHARGE OPTIONS
If you select Class B or Class C shares, you do
not pay an initial sales charge at the time of
purchase. However, if you redeem your Class B
shares within four years after purchase, or your
Class C shares within one year after purchase, you
may be required to pay a deferred sales charge.
You will also pay distribution fees of 0.75% and
account maintenance fees of 0.25% each year under
distribution plans that the Fund has adopted under
Rule 12b-1. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these
fees increase the cost of your investment and may
cost you more than paying an initial sales charge.
The Distributor uses the money that it receives
from the deferred sales charges and the
distribution fees to cover the costs of marketing,
advertising and compensating the Merrill Lynch
Financial Consultant or other securities dealer
who assists you in purchasing Fund shares.
MERRILL LYNCH REAL ESTATE FUND, INC. 21
<PAGE>
[ICON] YOUR ACCOUNT
CLASS B SHARES
If you redeem Class B shares within four years
after purchase, you may be charged a deferred
sales charge. The amount of the charge gradually
decreases as you hold your shares over time,
according to the following schedule:
<TABLE>
<CAPTION>
Years Since Purchase Sales Charge*
<S> <C>
- -----------------------------------------------------------------
0 - 1 4.00%
- -----------------------------------------------------------------
1 - 2 3.00%
- -----------------------------------------------------------------
2 - 3 2.00%
- -----------------------------------------------------------------
3 - 4 1.00%
- -----------------------------------------------------------------
4 and thereafter 0.00%
- -----------------------------------------------------------------
</TABLE>
* The percentage charge will apply to the lesser of
the original cost of the shares being redeemed or
the proceeds of your redemption. Shares acquired
through reinvestment of dividends or
distributions are not subject to a deferred sales
charge. Not all Merrill Lynch funds have
identical deferred sales charge schedules. If you
exchange your shares for shares of another fund,
the higher charge will apply.
The deferred sales charge relating to Class B
shares may be reduced or waived in certain
circumstances, such as:
- Certain post-retirement withdrawals
from an IRA or other retirement plan if
you are over 59 1/2 years old.
- Redemption by certain eligible 401(a)
and 401(k) plans, certain related
accounts, group plans participating in
the Merrill Lynch Blueprint Program and
certain retirement plan rollovers.
- Redemption in connection with
participation in certain Merrill Lynch
fee-based programs.
- Withdrawals resulting from shareholder
death or disability as long as the
waiver request is made within one year
of death or disability or, if later,
reasonably promptly following
completion of probate, or in connection
with involuntary termination of an
account in which Fund shares are held.
- Withdrawal through the Merrill Lynch
Systematic Withdrawal Plan of up to 10%
per year of your Class B account value
at the time the plan is established.
Your Class B shares convert automatically into
Class D shares approximately eight years after
purchase. Any Class B shares received through
reinvestment
22 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
of dividends or distributions paid on converting
shares will also convert at that time. Class D
shares are subject to lower annual expenses than
Class B shares. The conversion of Class B to Class
D shares is not a taxable event for Federal income
tax purposes.
Different conversion schedules apply to Class B
shares of different Merrill Lynch mutual funds.
For example, Class B shares of a fixed-income fund
convert approximately ten years after purchase
compared to approximately eight years for equity
funds. If you acquire your Class B shares in an
exchange from another fund with a shorter
conversion schedule, the Fund's eight year
conversion schedule will apply. If you exchange
your Class B shares in the Fund for Class B shares
of a fund with a longer conversion schedule, the
other fund's conversion schedule will apply. The
length of time that you hold both the original and
exchanged Class B shares in both funds will count
toward the conversion schedule. The conversion
schedule may be modified in certain other cases as
well.
CLASS C SHARES
If you redeem Class C shares within one year after
purchase, you may be charged a deferred sales
charge of 1.00%. The charge will apply to the
lesser of the original cost of the shares being
redeemed or the proceeds of your redemption. You
will not be charged a deferred sales charge when
you redeem shares that you acquire through
reinvestment of Fund dividends or distributions.
The deferred sales charge relating to Class C
shares may be reduced or waived in connection with
participation in certain Merrill Lynch fee-based
programs, involuntary termination of an account in
which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion
privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- ----------------------------------------------------------------------------
The chart below summarizes how to buy, sell,
transfer and exchange shares through Merrill Lynch
or other securities dealers. You may also buy
shares through the Transfer Agent. To learn more
about buying shares through the Transfer Agent,
call 1-800-MER-FUND. Because the selection of a
mutual fund involves many considerations, your
Merrill Lynch Financial Consultant may help you
with this decision.
MERRILL LYNCH REAL ESTATE FUND, INC. 23
<PAGE>
[ICON] YOUR ACCOUNT
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
<S> <C> <C>
- ----------------------------------------------------------------------------------------
Buy Shares First, select the Refer to the Merrill Lynch Select
share class Pricing table on page 19. Be sure to
appropriate for you read this prospectus carefully.
----------------------------------------------------------------
Next, determine the The minimum initial investment for the
amount of your Fund is $1,000 for all accounts except:
investment - $250 for certain Merrill Lynch
fee-based programs
- $100 for retirement plans
(The minimums for initial investments
may be waived under certain
circumstances.)
----------------------------------------------------------------
Have your Merrill The price of your shares is based on the
Lynch Financial next calculation of net asset value
Consultant or after your order is placed. Any purchase
securities dealer orders placed within fifteen minutes
submit your after the close of business on the New
purchase order York Stock Exchange will be priced at
the net asset value determined that day.
Purchase orders placed after that time
will be priced at the net asset value
determined on the next business day. The
Fund may reject any order to buy shares
and may suspend the sale of shares at
any time. Merrill Lynch may charge a
processing fee to confirm a purchase.
This fee is currently $5.35.
----------------------------------------------------------------
Or contact the To purchase shares directly, call the
Transfer Agent Transfer Agent at 1-800-MER-FUND and
request a purchase order. Mail the
completed purchase order to the Transfer
Agent at the address on the inside back
cover of this Prospectus.
- ----------------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for additional
Investment shares purchases is $50 for all accounts except
that retirement plans have a minimum
additional purchase of $1.
(The minimums for additional purchases
may be waived under certain
circumstances.)
----------------------------------------------------------------
Acquire additional All dividends and capital gains
shares through the distributions are automatically
automatic dividend reinvested without a sales charge.
reinvestment plan
----------------------------------------------------------------
Participate in the You may invest a specific amount on a
automatic periodic basis through certain Merrill
investment plan Lynch investment or central asset
accounts.
- ----------------------------------------------------------------------------------------
Transfer Shares to Transfer to a You may transfer your Fund shares only
Another Securities participating to another securities dealer that has
Dealer securities dealer entered into an agreement with Merrill
Lynch. All shareholder services will be
available for the transferred shares.
You may only purchase additional shares
of funds previously owned before the
transfer. All future trading of these
assets must be coordinated by the
receiving firm.
- ----------------------------------------------------------------------------------------
</TABLE>
24 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
<S> <C> <C>
- --------------------------------------------------------------------------------
Transfer Shares to Transfer to a You must either:
Another Securities non-participating - Transfer your shares to an account
Dealer (continued) securities dealer with the Transfer Agent; or
- Sell your shares.
- --------------------------------------------------------------------------------
Sell Your Shares Have your Merrill The price of your shares is based on the
Lynch Financial next calculation of net asset value
Consultant or after your order is placed. For your
securities dealer redemption request to be priced at the
submit your sales net asset value on the day of your
order request, you must submit your request to
your dealer within fifteen minutes after
that day's close of business on the New
York Stock Exchange (generally 4:00 p.m.
Eastern time). Any redemption request
placed after that time will be priced at
the net asset value at the close of
business on the next business day.
Dealers must submit redemption requests
to the Fund not more than thirty minutes
after the close of business on the New
York Stock Exchange on the day the
request was received.
Securities dealers, including Merrill
Lynch, may charge a fee to process a
redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No
processing fee is charged if you redeem
shares directly through the Transfer
Agent.
The Fund may reject an order to sell
shares under certain circumstances.
------------------------------------------------------------
Sell through the You may sell shares held at the Transfer
Transfer Agent Agent by writing to the Transfer Agent
at the address on the inside back cover
of this prospectus. All shareholders on
the account must sign the letter and
signatures must be guaranteed. If you
hold stock certificates, return the
certificates with the letter. The
Transfer Agent will normally mail
redemption proceeds within seven days
following receipt of a properly
completed request. If you make a
redemption request before the Fund has
collected payment for the purchase of
shares, the Fund or the Transfer Agent
may delay mailing your proceeds. This
delay will usually not exceed ten days.
If you hold share certificates, they
must be delivered to the Transfer Agent
before they can be converted. Check with
the Transfer Agent or your Merrill Lynch
Financial Consultant for details.
- --------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH REAL ESTATE FUND, INC. 25
<PAGE>
[ICON] YOUR ACCOUNT
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
<S> <C> <C>
- --------------------------------------------------------------------------------
Sells Shares Participate in the You can choose to receive systematic
Systematically Fund's Systematic payments from your Fund account either
Withdrawal Plan by check or through direct deposit to
your bank account on a monthly or
quarterly basis. If you have a Merrill
Lynch CMA-Registered Trademark-,
CBA-Registered Trademark- or Retirement
Account you can arrange for systematic
redemptions of a fixed dollar amount on
a monthly, bi-monthly, quarterly,
semi-annual or annual basis, subject to
certain conditions. Under either method
you must have dividends and other
distributions automatically reinvested.
For Class B and C shares your total
annual withdrawals cannot be more than
10% per year of the value of your shares
at the time your plan is established.
The deferred sales charge is waived for
systematic redemptions. Ask your Merrill
Lynch Financial Consultant for details.
- --------------------------------------------------------------------------------
Exchange Your Shares Select the fund You can exchange your shares of the Fund
into which you want for shares of many other Merrill Lynch
to exchange. Be mutual funds. You must have held the
sure to read that shares used in the exchange for at least
fund's prospectus 15 calendar days before you can exchange
to another fund.
Each class of Fund shares is generally
exchangeable for shares of the same
class of another fund. If you own Class
A shares and wish to exchange into a
fund in which you have no Class A
shares, you will exchange into Class D
shares.
Some of the Merrill Lynch mutual funds
impose a different initial or deferred
sales charge schedule. If you exchange
Class A or D shares for shares of a fund
with a higher initial sales charge than
you originally paid, you will be charged
the difference at the time of exchange.
If you exchange Class B shares for
shares of a fund with a different
deferred sales charge schedule, the
higher schedule will apply. The time you
hold Class B or C shares in both funds
will count when determining your holding
period for calculating a deferred sales
charge at redemption. If you exchange
Class A or D shares for money market
fund shares, you will receive Class A
shares of Summit Cash Reserves Fund.
Class B or C shares of the Fund will be
exchanged for Class B shares of Summit.
Although there is currently no limit on
the number of exchanges that you can
make, the exchange privilege may be
modified or terminated at any time in
the future.
- --------------------------------------------------------------------------------
</TABLE>
26 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
--------------------------------------------------
When you buy shares, you pay the NET ASSET VALUE,
plus any applicable sales charge. This is the
offering price. Shares are also redeemed at their
net asset value, minus any applicable deferred
sales charge. The Fund calculates its net asset
value (generally by using market quotations) each
day the New York Stock Exchange is open, fifteen
minutes after the close of business on the
Exchange (the Exchange generally closes at 4:00
p.m. Eastern time). The net asset value used in
determining your price is the next one calculated
after your purchase or redemption order is placed.
Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not
price its shares. As a result, the Fund's net
asset value may change on days when you will not
be able to purchase or redeem the Fund's shares.
Generally, Class A shares will have the highest
net asset value because that class has the lowest
expenses, and Class D shares will have a higher
net asset value than Class B or Class C shares.
Also dividends paid on Class A and Class D shares
will generally be higher than dividends paid on
Class B and Class C shares because Class A and
Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- ----------------------------------------------------------------------------
If you participate in certain fee-based programs
offered by Merrill Lynch, you may be able to buy
Class A shares at net asset value, including by
exchanges from other share classes. Sales charges
on the shares being exchanged may be reduced or
waived under certain circumstances.
You generally cannot transfer shares held through
a fee-based program into another account. Instead,
you will have to redeem your shares held through
the program and purchase shares of another class,
which may be subject to distribution and account
maintenance fees. This may be a taxable event and
you will pay any applicable sales charges.
If you leave one of these programs, your shares
may be redeemed or automatically exchanged into
another class of Fund shares or into a money
market fund. The class you receive may be the
class you originally owned when you entered the
program, or in certain cases, a different class.
If the exchange is into Class B shares, the period
before conversion to Class D shares may be
modified. Any redemption or exchange will be at
net asset value. However, if you participate in
the program for less than a specified period, you
may be charged a fee in accordance with the terms
of the program.
MERRILL LYNCH REAL ESTATE FUND, INC. 27
<PAGE>
[ICON] YOUR ACCOUNT
DIVIDENDS -- income paid to shareholders. Dividends may be reinvested in
additional Fund shares as they are paid.
DISTRIBUTIONS -- capital gains paid to shareholders. Distributions may be
reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend or distribution. The
reason? If you buy shares when a fund has realized but not yet distributed
income or capital gains, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable distribution.
Before investing you may want to consult your tax adviser.
Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.
DIVIDENDS, CAPITAL GAINS AND TAXES
- ----------------------------------------------------------------------------
The Fund will distribute any net investment income
annually and any net realized long or short term
capital gains at least annually. The Fund may also
pay a special distribution at the end of the
calendar year to comply with Federal tax
requirements. If your account is with Merrill
Lynch and you would like to receive DIVIDENDS and
DISTRIBUTIONS in cash, contact your Merrill Lynch
Financial Consultant. If your account is with the
Transfer Agent and you would like to receive
dividends and distributions in cash, contact the
Transfer Agent.
You will pay tax on dividends and distributions
from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or
exchange them for shares of another fund, any gain
on the transaction may be subject to tax. The Fund
intends to make distributions that will either be
taxed as ordinary income or capital gains. Capital
gains are generally taxed at different rates than
ordinary income.
If you are neither a lawful permanent resident nor
a citizen of the U.S. or if you are a foreign
entity, the Fund's ordinary income dividends
(which include distributions of net short-term
capital gains) will generally be subject to a 30%
U.S. withholding tax, unless a lower treaty rate
applies.
Dividends and interest received by the Fund may
give rise to withholding and other taxes imposed
by foreign countries. Tax conventions between
certain countries and the United States may reduce
or eliminate such taxes.
By law, the Fund must withhold 31% of your
distributions and proceeds if you have not
provided a taxpayer identification number or
social security number.
This section summarizes some of the consequences
under current Federal tax law of an investment in
the Fund. It is not a substitute for personal tax
advice. Consult your personal tax adviser about
the potential tax consequences of an investment in
the Fund under all applicable tax laws.
28 MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
MANAGEMENT OF THE FUND [ICON]
MERRILL LYNCH ASSET MANAGEMENT
--------------------------------------------------
Merrill Lynch Asset Management, the Fund's
Manager, manages the Fund's investments and its
business operations under the overall supervision
of the Fund's Board of Directors. The Manager has
the responsibility for making all investment
decisions for the Fund. The Manager has a
sub-advisory agreement with Merrill Lynch Asset
Management U.K. Limited, an affiliate, under which
the Manager may pay a fee for services it
receives. The Fund pays the Manager a fee at the
annual rate of 0.85% of the average daily net
assets of the Fund. For the period December 26,
1997 (commencement of operations) to November 30,
1998 the Manager received a management fee of
$544,585 (based on average daily net assets of
approximately $68.8 million).
Merrill Lynch Asset Management is part of the
Asset Management Group, which had approximately
$501 billion in investment company and other
portfolio assets under management as of December
1998. This amount includes assets managed for
Merrill Lynch affiliates.
A NOTE ABOUT YEAR 2000
Many computer systems were designed using only two
digits to designate years. These systems may not
be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem").
The Fund could be adversely affected if the
computer systems used by the Fund's management or
other Fund service providers do not properly
address this problem before January 1, 2000. The
Fund's management expects to have addressed this
problem before then, and does not anticipate that
the services it provides will be adversely
affected. The Fund's other service providers have
told the Fund's management that they also expect
to resolve the Year 2000 Problem, and the Fund's
management will continue to monitor the situation
as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund
could be negatively affected. The Year 2000
Problem could also have a negative impact on the
issuers of securities in which the Fund invests,
and this could hurt the Fund's investment returns.
MERRILL LYNCH REAL ESTATE FUND, INC. 29
<PAGE>
[ICON]
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the period since the Fund's inception. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements, are included in the
Fund's annual report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
Class A Class B
------------------- -------------------
For the Period For the Period
December 26, 1997+ December 26, 1997+
Increase (Decrease) in to November 30, to November 30,
Net Asset Value: 1998 1998
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.00 $ 10.00
- -------------------------------------------------------------------------------------------------------
Investment income -- net .33 .24
- -------------------------------------------------------------------------------------------------------
Realized and unrealized loss on investments and foreign
currency transactions -- net (1.37) (1.36)
- -------------------------------------------------------------------------------------------------------
Total from investment operations (1.04) (1.12)
- -------------------------------------------------------------------------------------------------------
Less dividends from investment income -- net (.26) (.19)
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.70 $ 8.69
- -------------------------------------------------------------------------------------------------------
Total Investment Return:**
- -------------------------------------------------------------------------------------------------------
Based on net asset value per share (10.57)%# (11.36)%#
- -------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------
Expenses 1.39%* 2.41%*
- -------------------------------------------------------------------------------------------------------
Investment income -- net 3.67%* 2.58%*
- -------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 2,255 $44,482
- -------------------------------------------------------------------------------------------------------
Portfolio turnover 108.25% 108.25%
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
MERRILL LYNCH REAL ESTATE FUND, INC.
30
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class D
------------------- -------------------
For the Period For the Period
December 26, 1997+ December 26, 1997+
Increase (Decrease) in to November 30, to November 30,
Net Asset Value: 1998 1998
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.00 $ 10.00
- -------------------------------------------------------------------------------------------------------
Investment income -- net .24 .30
- -------------------------------------------------------------------------------------------------------
Realized and unrealized loss on investments and foreign
currency transactions -- net (1.37) (1.36)
- -------------------------------------------------------------------------------------------------------
Total from investment operations (1.13) (1.06)
- -------------------------------------------------------------------------------------------------------
Less dividends from investment income -- net (.19) (.24)
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.68 $ 8.70
- -------------------------------------------------------------------------------------------------------
Total Investment Return:**
- -------------------------------------------------------------------------------------------------------
Based on net asset value per share (11.41)%# (10.74)%#
- -------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------
Expenses 2.42%* 1.64%*
- -------------------------------------------------------------------------------------------------------
Investment income -- net 2.63%* 3.34%*
- -------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $ 9,737 $ 6,269
- -------------------------------------------------------------------------------------------------------
Portfolio turnover 108.25% 108.25%
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
# Aggregate total investment return.
MERRILL LYNCH REAL ESTATE FUND, INC. 31
<PAGE>
<TABLE>
<S> <C> <C>
POTENTIAL
------------------------- INVESTORS ----------------------------
| OPEN AN ACCOUNT (TWO OPTIONS). |
| |
| |
-1- -2-
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
OR SECURITIES DEALER FINANCIAL DATA SERVICES, INC.
P.O. Box 45289
ADVISES SHAREHOLDERS ON THEIR FUND Jacksonville, Florida 32232-5289
INVESTMENTS.
PERFORMS SHAREHOLDER
| RECORDKEEPING AND REPORTING SERVICES.
|
| DISTRIBUTOR |
| |
| MERRILL LYNCH FUNDS DISTRIBUTOR, |
| A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC. |
----------------- P.O. Box 9081 --------------------
Princeton, New Jersey 08543-9081
ARRANGES FOR THE SALE OF FUND SHARES.
|
|
|
|
THE FUND
----------------------- THE BOARD OF DIRECTORS ------------------------
| OVERSEES THE FUND. |
| |
| |
COUNSEL | | CUSTODIAN
| |
BROWN & WOOD LLP | | The Bank of New York
One World Trade Center | | 90 Washington Street
New York, New York 10048-0557 | | 12th Floor
| | New York, New York 10286
PROVIDES LEGAL ADVICE TO THE FUND. | |
| | HOLDS THE FUND'S ASSETS FOR SAFEKEEPING.
| |
| |
| |
| |
INDEPENDENT AUDITORS ------------------ ----------------- INVESTMENT MANAGER
DELOITTE & TOUCHE, LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
AUDITS THE FINANCIAL Plainsboro, New Jersey 08536
STATEMENTS OF THE FUND ON BEHALF OF
THE SHAREHOLDERS. MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
MANAGES THE FUND'S DAY-TO-DAY ACTIVITIES.
</TABLE>
MERRILL LYNCH REAL ESTATE FUND, INC.
<PAGE>
Shareholder Reports
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated above, if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-08389
Code #19017-3-99
- -C- Merrill Lynch Asset Management, L.P.
[LOGO]
Merrill Lynch
Real Estate Fund, Inc.
_March __, 1999_
<PAGE>
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 29, 1999
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH REAL ESTATE FUND, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
-------------------
Merrill Lynch Real Estate Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks to provide shareholders with
total return by investing primarily in equity securities of issuers that are
principally engaged in the real estate industry. Total return is the combination
of capital appreciation and investment income. The Fund may employ a variety of
techniques to hedge against market or currency risk or to enhance total return.
There can be no assurance that the investment objective of the Fund will be
realized. See "Investment Objective and Policies."
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
"Purchase of Shares."
-------------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated March ,
1999 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
1-800-637-3863 or by writing the Fund at the above address. The Prospectus is
incorporated by reference into this Statement of Additional Information, and
this Statement of Additional Information is incorporated by reference into the
Prospectus. The Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587, ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
-------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
--------------
The date of this Statement of Additional Information is March , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Investment Objective and Policies......................................................................... 2
Real Estate Related Securities.......................................................................... 2
Mortgage-Backed Securities.............................................................................. 4
Temporary Investments................................................................................... 5
Convertibles............................................................................................ 5
Warrants................................................................................................ 7
Investment in Foreign Issuers........................................................................... 7
Depositary Receipts..................................................................................... 8
European Economic and Monetary Union ("EMU")............................................................ 8
Derivatives............................................................................................. 9
Indexed and Inverse Securities.......................................................................... 10
Investment in Other Investment Companies................................................................ 10
Other Investment Policies and Practices................................................................. 11
Investment Restrictions................................................................................. 16
Portfolio Turnover...................................................................................... 18
Management of the Fund.................................................................................... 19
Directors and Officers.................................................................................. 19
Compensation of Directors............................................................................... 20
Management and Advisory Arrangements.................................................................... 21
Code of Ethics.......................................................................................... 22
Purchase of Shares........................................................................................ 22
Initial Sales Charge Alternatives -- Class A and Class D Shares......................................... 23
Deferred Sales Charge Alternatives -- Class B and Class C Shares........................................ 28
Distribution Plans...................................................................................... 32
Limitations on the Payment of Deferred Sales Charges.................................................... 33
Redemption of Shares...................................................................................... 34
Redemption.............................................................................................. 35
Repurchase.............................................................................................. 35
Reinstatement Privilege--Class A and Class D Shares..................................................... 35
Pricing of Shares......................................................................................... 36
Determination of Net Asset Value........................................................................ 36
Computation of Offering Price Per Share................................................................. 37
Portfolio Transactions and Brokerage...................................................................... 37
Transactions in Portfolio Securities.................................................................... 37
Shareholder Services...................................................................................... 39
Investment Account...................................................................................... 39
Exchange Privilege...................................................................................... 40
Fee-Based Programs...................................................................................... 42
Retirement Plans........................................................................................ 42
Automatic Investment Plans.............................................................................. 42
Automatic Dividend Program.............................................................................. 43
Systematic Withdrawal Plan.............................................................................. 43
Distributions and Taxes................................................................................... 44
Dividends and Distributions............................................................................. 44
Taxes................................................................................................... 45
Tax Treatment of Options and Futures Transactions....................................................... 47
Special Rules for Certain Foreign Currency Transactions................................................. 47
Performance Data.......................................................................................... 48
General Information....................................................................................... 50
Description of Shares................................................................................... 50
Independent Auditors.................................................................................... 50
Custodian............................................................................................... 51
Transfer Agent.......................................................................................... 51
Legal Counsel........................................................................................... 51
Reports to Shareholders................................................................................. 51
Shareholder Inquiries................................................................................... 51
Additional Information.................................................................................. 51
Financial Statements...................................................................................... 52
Appendix I................................................................................................ I-1
Appendix II............................................................................................... II-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek total return by investing
primarily in equity securities of issuers that are principally engaged in the
real estate industry. Total return is a combination of capital appreciation and
investment income. 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
of 1940, as amended (the "Investment Company Act"). There can be no assurance
that the Fund's investment objective will be achieved.
The Fund should be considered as a means of diversifying an investment
portfolio and not in itself a balanced investment program. Accordingly, the Fund
may be appropriate only for long-term investors who can assume the risk of loss
of principal and who do not seek current income but can accommodate taxable
distributions of income and capital gains.
Under normal market conditions, at least 65% of the Fund's total assets will
be invested in equity securities of issuers that are principally engaged in the
real estate industry. An issuer "principally engaged" in that industry is an
issuer that derives at least 50% of its gross revenues or net profits from the
ownership, leasing, development, construction, financing, management or sale of
commercial, industrial or residential real estate or interests therein. Such
issuers may include, for example, real estate investment trusts ("REITs"), real
estate brokers, home builders or real estate developers, companies with
substantial real estate holdings (such as paper and lumber producers,
agricultural businesses and lodging and entertainment companies) and companies
with significant involvement in the real estate industry, such as building
supply companies, financial institutions that originate real estate mortgages
and companies that provide mortgage servicing. The equity securities in which
the Fund will invest consist of common stocks, shares or units of beneficial
interest of REITs, preferred stock and securities with equity characteristics,
such as convertible securities and warrants.
The investment strategy of Merrill Lynch Asset Management, L.P. ("MLAM" or
the "Manager") with respect to equity securities of real estate issuers is based
on the premise that property market fundamentals are the primary determinant of
growth underlying the success of real estate equity securities. Value added
management will further distinguish the most attractive real estate equity
securities. The Manager's research and investment process is designed to
identify issuers with strong property fundamentals and strong management teams.
This process is comprised of real estate market research, specific property
inspection and securities analysis. The Manager believes that this process will
result in a portfolio of real estate equity securities of issuers that own
assets in desirable markets across the country, diversified both geographically
and by property type.
Under normal market conditions, up to 35% of the Fund's total assets may be
invested in (i) non-convertible debt securities, (ii) mortgage-backed securities
such as mortgage pass-through certificates, real estate mortgage investment
conduit ("REMIC") certificates and collateralized mortgage obligations ("CMOs"),
and (iii) cash or cash equivalents and investment grade, short-term securities
including money market securities ("Temporary Investments"). The Fund may invest
up to 25% of its total assets in foreign securities.
Because the Fund has not established any rating criteria for the debt
securities in which it may invest, its assets may be invested in non-convertible
debt securities, REMIC certificates and CMOs that are unrated or rated in the
medium to low rating categories of nationally recognized statistical rating
organizations.
REAL ESTATE-RELATED SECURITIES
Although the Fund does not invest directly in real estate, it does invest
primarily in equity securities of issuers that are principally engaged in the
real estate industry and does have a policy of concentration of its investments
in the real estate industry. Therefore, an investment in the Fund is subject to
certain risks associated with the ownership of real estate and with the real
estate industry in general. These risks
2
<PAGE>
include, among others: possible declines in the value of real estate; risks
related to general and local economic conditions; possible lack of availability
of mortgage funds or other limitations on access to capital; overbuilding; risks
associated with leverage; market illiquidity; extended vacancies of properties;
increase in competition, property taxes, capital expenditures and operating
expenses; changes in zoning laws or other governmental regulation; costs
resulting from the clean-up of, and liability to third parties for damages
resulting from, environmental problems; tenant bankruptcies or other credit
problems; casualty or condemnation losses; uninsured damages from floods,
earthquakes or other natural disasters; limitations on and variations in rents,
including decreases in market rates for rents; investments in developments that
are not completed or that are subject to delays in completion; and changes in
interest rates. To the extent that assets underlying the Fund's investments are
concentrated geographically, by property type or in certain other respects, the
Fund may be subject to certain of the foregoing risks to a greater extent.
Investments by the Fund in securities of companies providing mortgage servicing
will be subject to the risks associated with refinancings and their impact on
servicing rights.
In addition, if the Fund receives rental income or income from the
disposition of real property acquired as a result of a default on securities the
Fund owns, the receipt of such income may adversely affect the Fund's ability to
retain its tax status as a regulated investment company because of certain
income source requirements applicable to mutual funds under the Internal Revenue
Code of 1986, as amended (the "Code").
REAL ESTATE INVESTMENT TRUSTS ("REITS"). REITs are a type of pooled
investment vehicle that invests primarily in income producing real estate or
real estate related loans or interests. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity
REITs invest the majority of their assets directly or indirectly in real
property and derive income primarily from the collection of rents. Equity REITs
can also realize capital gains by selling properties that have appreciated in
value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. Like
investment companies such, as the Fund, REITs are not taxed on income
distributed to shareholders provided they comply with certain requirements of
the Code. The Fund will indirectly bear its proportionate share of expenses
incurred by REITs in which the Fund invests in addition to the expenses incurred
directly by the Fund.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Equity REITs
may be affected by changes in the value of the underlying property owned by the
REITs, while mortgage REITs may be affected by the quality of any credit
extended. REITs are dependent upon management skills, may not be diversified
geographically or by property type, and are subject to heavy cash flow
dependency, default by borrowers and self-liquidation. REITs must also meet
various requirements under the Code in order to avoid entity level tax and to
pass-through certain tax attributes of their income to shareholders. REITs are
consequently subject to the risk of failing to meet these requirements for
favorable tax treatment and failing to maintain their exemptions from
registration under the Investment Company Act. REITs are also subject to changes
in the Code, including changes involving their tax status.
REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
Investing in REITs involves risks similar to those associated with investing
in small capitalization companies. REITs may have limited financial resources,
may trade less frequently and in limited volume and may be subject to more
abrupt or erratic price movements than larger company securities. Historically,
small capitalization stocks, such as REITs, have been more volatile in price
than the larger capitalization
3
<PAGE>
stocks included in the S&P Index of 500 Common Stocks. The management of a REIT
may be subject to conflicts of interest with respect to the operation of the
business of the REIT and may be involved in real estate activities competitive
with the REIT. REITs may own properties through joint ventures or in other
circumstances in which the REIT may not have control over its investments. REITs
may incur significant amounts of leverage.
MORTGAGE-BACKED SECURITIES
The Fund may invest up to 35% of its total assets in mortgage-backed
securities. Mortgage-backed securities in which the Fund invests include
mortgage pass-through certificates and multiple-class pass-through securities,
such as REMIC pass-through certificates, CMOs and stripped mortgage-backed
securities, and other types of mortgage-backed securities that may be available
in the future.
The Fund may invest in guaranteed mortgage pass-through securities which
represent participation interests in pools of residential mortgage loans and
which are issued by United States governmental lenders or by private lenders and
guaranteed by the United States Government or one of its agencies or
instrumentalities, including but not limited to the Government National Mortgage
Association ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie
Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). In
general, Ginnie Mae certificates are guaranteed by the full faith and credit of
the United States Government for timely payment of principal and interest on the
certificates. Fannie Mae certificates are generally guaranteed by Fannie Mae, a
federally chartered and privately-owned corporation for full and timely payment
of scheduled principal and interest on the certificates. In general, Freddie Mac
certificates are guaranteed by Freddie Mac, a corporate instrumentality of the
United States Government, for timely payment of interest and the ultimate
collection of all principal of the related mortgage loans.
Mortgage-backed securities also include CMOs and REMIC pass-through or
participation certificates, which may be issued by, among others, United States
Government agencies and instrumentalities as well as private lenders. CMOs and
REMIC certificates are issued in multiple classes and the principal of and
interest on the mortgage assets may be allocated among the several classes of
CMOs or REMIC certificates in various ways. Each class of CMOs or REMIC
certificates, often referred to as a "tranche," is issued at a specified
adjustable or fixed interest rate and must be fully retired no later than its
final distribution date. Generally, interest is paid or accrues on all classes
of CMOs or REMIC certificates on a monthly basis. The Fund will not invest in
the lowest tranche of CMOs and REMIC certificates.
Typically, CMOs are collateralized by Ginnie Mae or Freddie Mac certificates
but also may be collateralized by other mortgage assets such as whole loans or
private mortgage pass-through securities. Debt service on CMOs is provided from
payments of principal and interest on collateral of mortgage assets and any
reinvestment income thereon.
A REMIC is a pool of assets that qualifies for special tax treatment under
the Code and consists of certain mortgages or deeds of trust primarily secured
by interests in real property and other permitted investments. Investors may
purchase "regular" and "residual" interests in REMIC trusts although the Fund
does not intend to invest in "residual interests."
Mortgage-backed securities are "pass-through" securities, meaning that
principal and interest payments made by the borrower on the underlying mortgages
are passed through to the Fund as investor in such securities. The value of
mortgage-backed securities, like that of traditional fixed-income securities,
typically increases when interest rates fall and decreases when interest rates
rise. However, mortgage-backed securities differ from traditional fixed-income
securities because of their potential for prepayment without penalty. The price
paid by the Fund for its mortgage-backed securities, the yield the Fund expects
to receive from such securities and the average life of the securities are based
on a number of factors, including the anticipated rate of prepayment of the
underlying mortgages. In a period of declining interest rates, borrowers may
prepay the underlying mortgages more quickly than anticipated, thereby reducing
the yield to maturity and the average life of the mortgage-backed securities.
Moreover, when the Fund
4
<PAGE>
reinvests the proceeds of a prepayment in these circumstances, it will likely
receive a rate of interest that is lower than the rate on the security that was
prepaid. To the extent that the Fund purchases mortgage-backed securities at a
premium, mortgage foreclosures and principal prepayments may result in a loss to
the extent of the premium paid. If the Fund buys such securities at a discount,
both scheduled payments of principal and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of income which,
when distributed to shareholders, will be taxable as ordinary income. In a
period of rising interest rates, prepayments of the underlying mortgages may
occur at a slower than expected rate, creating maturity extension risk. This
particular risk may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Since long-
term securities generally fluctuate more widely in response to changes in
interest rates than shorter-term securities, maturity extension risk could
increase the inherent volatility of the Fund. See also "Debt Securities" and
"Illiquid Securities".
TEMPORARY INVESTMENTS
The Fund reserves the right, as a temporary defensive measure, to hold up to
100% of its total assets in 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 primarily 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.
CONVERTIBLES
Convertible securities entitle the holder to receive interest payments paid
on corporate debt securities or the dividend preference on a preferred stock
until such time as the convertible security matures or is redeemed or until the
holder elects to exercise the conversion privilege. Synthetic convertible
securities may be either (i) a debt security or preferred stock that may be
convertible only under certain contingent circumstances or that may pay the
holder a cash amount based on the value of shares of underlying common stock
partly or wholly in lieu of a conversion right (a "Cash-Settled Convertible") or
(ii) a combination of separate securities chosen by the Manager in order to
create the economic characteristics of a convertible security, I.E., a fixed
income security paired with a security with equity conversion features, such as
an option or warrant (a "Manufactured Convertible").
The characteristics of convertible securities make them appropriate
investments for an investment company seeking a high total return from capital
appreciation and investment income. These characteristics include the potential
for capital appreciation as the value of the underlying common stock increases,
the relatively high yield received from dividend or interest payments as
compared to common stock dividends and decreased risks of decline in value
relative to the underlying common stock due to their fixed-income nature. As a
result of the conversion feature, however, the interest rate or dividend
preference on a convertible security is generally less than would be the case if
the securities were issued in nonconvertible form.
In analyzing convertible securities, the Manager will consider both the
yield on the convertible security and the potential capital appreciation that is
offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Even in cases where a substantial portion of the
convertible securities held by the Fund are denominated in U.S. dollars, the
underlying equity securities may be quoted in the currency of the country where
the issuer is domiciled. With respect to convertible securities denominated in a
currency different from that of the underlying equity securities, the conversion
price may be based on a
5
<PAGE>
fixed exchange rate established at the time the security is issued. As a result,
fluctuations in the exchange rate between the currency in which the debt
security is denominated and the currency in which the share price is quoted will
affect the value of the convertible security. As described below, the Fund is
authorized to enter into foreign currency hedging transactions in which it may
seek to reduce the effect of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (I.E., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
As indicated above, synthetic convertible securities may include either
Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled
Convertibles are instruments that are created by the issuer and have the
economic characteristics of traditional convertible securities but may not
actually permit conversion into the underlying equity securities in all
circumstances. As an example, a private company may issue a Cash-Settled
Convertible that is convertible into common stock only if the company
successfully completes a public offering of its common stock prior to maturity
and otherwise pays a cash amount to reflect any equity appreciation.
Manufactured Convertibles are created by the Manager by combining separate
securities that possess one of the two principal characteristics of a
convertible security, I.E., fixed income ("fixed income component") or a right
to acquire equity securities ("convertible component"). The fixed income
component is achieved by investing in nonconvertible fixed income securities,
such as nonconvertible bonds, preferred stocks and money market instruments. The
convertibility component is achieved by investing in call options, warrants,
LEAPS, or other securities with equity conversion features ("equity features")
granting the holder the right to purchase a specified quantity of the underlying
stocks within a specified period of time at a specified price or, in the case of
a stock index option, the right to receive a cash payment based on the value of
the underlying stock index.
A Manufactured Convertible differs from traditional convertible securities
in several respects. Unlike a traditional convertible security, which is a
single security having a unitary market value, a Manufactured Convertible is
comprised of two or more separate securities, each with its own market value.
Therefore,
6
<PAGE>
the total "market value" of such a Manufactured Convertible is the sum of the
values of its fixed-income component and its convertibility component.
More flexibility is possible in the creation of a Manufactured Convertible
than in the purchase of a traditional convertible security. Because many
corporations have not issued convertible securities, the Manager may combine a
fixed income instrument and an equity feature with respect to the stock of the
issuer of the fixed income instrument to create a synthetic convertible security
otherwise unavailable in the market. The Manager may also combine a fixed income
instrument of an issuer with an equity feature with respect to the stock of a
different issuer when the Manager believes such a Manufactured Convertible would
better promote the Fund's objective than alternative investments. For example,
the Manager may combine an equity feature with respect to an issuer's stock with
a fixed income security of a different issuer in the same industry to diversify
the Fund's credit exposure, or with a U.S. Treasury instrument to create a
Manufactured Convertible with a higher credit profile than a traditional
convertible security issued by that issuer. A Manufactured Convertible also is a
more flexible investment in that its two components may be purchased separately
and, upon purchasing the separate securities, "combined" to create a
Manufactured Convertible. For example, the Fund may purchase a warrant for
eventual inclusion in a Manufactured Convertible while postponing the purchase
of a suitable bond to pair with the warrant pending development of more
favorable market conditions.
The value of a Manufactured Convertible may respond differently to certain
market fluctuations than would a traditional convertible security with similar
characteristics. For example, in the event the Fund created a Manufactured
Convertible by combining a short-term U.S. Treasury instrument and a call option
on a stock, the Manufactured Convertible would likely outperform a traditional
convertible of similar maturity and which is convertible into that stock during
periods when Treasury instruments outperform corporate fixed income securities
and underperform during periods when corporate fixed-income securities
outperform Treasury instruments.
WARRANTS
Buying a warrant does not make the Fund a shareholder of the underlying
stock. The warrant holder has no right to dividends or votes on the underlying
stock. A warrant does not carry any right to assets of the issuer, and for this
reason investment in warrants may be more speculative than other equity-based
investments.
INVESTMENT IN FOREIGN ISSUERS
GENERAL. The Fund may invest up to 25% of its total net assets in the
securities of foreign issuers. Investment in securities of foreign issuers
involves certain risks not typically 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. Changes in foreign currency exchange rates will affect the
value of securities in the Fund and the unrealized appreciation or depreciation
of investments. 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. Certain foreign investments also may be subject to foreign
withholding taxes. These risks often are heightened for investments in smaller,
emerging capital markets.
PUBLIC INFORMATION. Securities of foreign issuers may not be registered
with the Commission, nor may 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.
7
<PAGE>
TRADING VOLUME, CLEARANCE AND SETTLEMENT. Foreign financial markets, while
generally growing in trading volume, typically have substantially less volume
than U.S. markets, and securities of many foreign companies are less liquid and
their prices more volatile than securities of comparable domestic companies. The
foreign markets also have different clearance and settlement procedures. Delays
in settlement could result in periods when assets of the Fund are uninvested and
no return is earned thereon. 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, could result 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 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 which evidence
ownership of underlying securities issued by a foreign corporation. EDRs are
receipts issued in Europe which evidence a similar ownership arrangement. GDRs
are receipts issued throughout the world which 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.
EUROPEAN ECONOMIC AND MONETARY UNION ("EMU")
For a number of years, certain European countries have been seeking economic
unification that would, among other things, reduce barriers between countries,
increase competition among companies, reduce government subsidies in certain
industries, and reduce or eliminate currency fluctuations among these European
countries. The Treaty on European Union (the "Maastricht Treaty") seeks to set
out a framework for the European Economic and Monetary Union ("EMU") among the
countries that comprise the European Union ("EU"). Among other things, EMU
establishes a single common European currency (the "euro") that was introduced
on January 1, 1999 and is expected to replace the existing national currencies
of all EMU participants by July 1, 2002. EMU took effect for the initial EMU
participants as of January 1, 1999, and was implemented over the weekend January
1, 1999 through January 3, 1999 ("conversion weekend"). Upon implementation of
EMU, certain securities issued in participating EU countries (beginning with
government and corporate bonds) will be redenominated in the euro, and
thereafter, will be listed, traded, and make dividend and other payments only in
euros.
No assurance can be given that EMU will take effect, that the changes
planned for the EU can be successfully implemented, or that these changes will
result in the economic and monetary unity and stability intended. There is a
possibility that EMU will not be implemented, will be implemented but not
completed, or will be completed but then partially or completely unwound.
Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which could diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries,
8
<PAGE>
including sharp appreciation or depreciation of participants' national
currencies and a significant increase in exchange rate volatility, a resurgence
in economic protectionism, an undermining of confidence in the European markets,
an undermining of European economic stability, the collapse or slowdown of the
drive toward European economic unity, and/or reversion of the attempts to lower
government debt and inflation rates that were introduced in anticipation of EMU.
Also, withdrawal from EMU at any time after the conversion weekend by an initial
participant could cause disruption of the financial markets as securities
redenominated in euros are transferred back into that country's national
currency, particularly if the withdrawing country is a major economic power.
Such developments could have an adverse impact on the Fund's investments in
Europe generally or in specific countries participating in EMU. Gains or losses
from euro conversion may be taxable to Fund shareholders under foreign or, in
certain limited circumstances, U.S. tax laws.
DERIVATIVES
The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of value or rates, such
as the S&P 500 or the prime lending rate). Derivatives allow the Fund to
increase or decrease the level of risk to which the Fund is exposed more quickly
and efficiently than transactions in other types of instruments. Derivatives,
however, are volatile and involve significant risks, including:
CREDIT RISK -- the risk that the counterparty on a Derivative
transaction will be unable to honor its financial obligation to the Fund.
CURRENCY RISK -- the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
LEVERAGE RISK -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount of the
investments) that relatively small market movements may result in large
changes in the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that greatly exceed
the amount originally invested.
LIQUIDITY RISK -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price
that the seller believes the security is currently worth.
The Fund may use the following types of derivative instruments:
FUTURES -- exchange-traded contracts involving the obligation of the
seller to deliver, and the buyer to receive, certain assets (or a money
payment based on the change in value of certain assets or an index) at a
specified time. Futures involve leverage risk and may involve currency risk.
Futures are discussed in more detail below.
FORWARDS -- private contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment based
on the change in value of certain assets or an index) at a specified time.
Forwards involve credit risk and leverage risk, and may involve currency
risk.
OPTIONS -- exchange-traded or private contracts involving the right of a
holder to deliver (a "put") or receive (a "call") certain assets (or a money
payment based on the change of certain assets or an index) from another
party at a specified price within a specified time period. Options involve
leverage risk. Private options also involve credit risk and liquidity risk.
Options may involve currency risk.
Additional information on these Derivatives is set forth in Appendix I to
the Statement of Additional Information.
The Fund may use Derivatives for hedging purposes. Hedging is a strategy in
which a Derivative is used to offset the risk that other Fund holdings may
decrease in value. Losses on the other investment may be substantially reduced
by gains on a Derivative that reacts in an opposite manner to market movements.
9
<PAGE>
While hedging can reduce losses, it can also reduce or eliminate gains if the
market moves in a different manner than anticipated by the Fund or if the cost
of the Derivative outweighs the benefit of the hedge. Hedging also involves the
risk that changes in the value of the Derivative will not match those of the
holdings being hedged as expected by the Fund, in which case any losses on the
holdings being hedged may not be reduced. This risk is known as "Correlation
Risk."
RISK FACTORS IN DERIVATIVES. Use of Derivatives for hedging purposes
involves correlation risk. If the value of the Derivative 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 into transactions involving Derivatives 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 "Risk Factors in Options, Futures and
Currency Transactions." However, there can be no assurance that, at any specific
time, either a liquid secondary market will exist for a Derivative 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 Derivative without incurring
substantial losses, if at all.
Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund. 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 Securities and Exchange 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.
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. 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
10
<PAGE>
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).
OTHER INVESTMENT POLICIES AND PRACTICES
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. 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 and commissions or dealer spread),
size of order, difficulty of execution, 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 contemplates that, consistent with its policy of obtaining the best net
results, it will place orders for transactions with a number of brokers and
dealers, including Merrill Lynch, an affiliate of the Manager. 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 and the expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information. See "Management of the
Fund -- Management and Advisory Arrangements."
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 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 the 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.
BORROWING AND LEVERAGE. 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
11
<PAGE>
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.
The use of leverage by the Fund creates an opportunity for greater total
return, but, at the same time, creates special risks. For example, leveraging
may exaggerate changes in the net asset value of Fund shares and in the yield on
the Fund's portfolio. Although the principal of such borrowings will be fixed,
the Fund's assets may change in value during the time the borrowings are
outstanding. Borrowings will create interest expenses for the Fund which can
exceed the income from the assets purchased with the borrowings. To the extent
the income or capital appreciation derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay on the borrowings,
the Fund's return will be greater than if leverage had not been used.
Conversely, if the income or capital appreciation from the securities purchased
with such borrowed funds is not sufficient to cover the cost of borrowing, the
return to the Fund will be less than if leverage had not been used, and
therefore the amount available for distribution to shareholders as dividends and
other distributions will be reduced. In the latter case, the Manager in its best
judgment nevertheless may determine to maintain the Fund's leveraged position if
it expects that the benefits to the Fund's shareholders of maintaining the
leveraged position will outweigh the current reduced return.
Certain types of borrowings by the Fund may result in the Fund being subject
to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Manager from managing the Fund's
portfolio in accordance with the Fund's investment objectives and policies.
However, a breach of any such covenants not cured within the specified cure
period may result in acceleration of outstanding indebtedness and require the
Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so.
The Fund at times may borrow from affiliates of the Manager, provided that
the terms of such borrowings are no less favorable than those available from
comparable sources of funds in the marketplace.
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 disposition of the collateral. A purchase and
12
<PAGE>
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.
WHEN ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD
COMMITMENTS. The Fund may purchase or sell securities that it is entitled to
receive on a when-issued basis. The Fund may also purchase or sell securities on
a delayed delivery basis. The Fund may also purchase or sell securities through
a forward commitment. These transactions involve the purchase or sale of
securities by the Fund at an established price with payment and delivery taking
place in the future. The Fund enters into these transactions to obtain what is
considered an advantageous price to the Fund at the time of entering into the
transaction. The Fund has not established any limit on the percentage of its
assets that may be committed in connection with these transactions. When the
Fund purchases securities in these transactions, the Fund segregates liquid
securities in an amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when-issued basis
will be issued or that a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the delivery
date may be more or less than the Fund's purchase price. The Fund may bear the
risk of a decline in the value of the security in these transactions and may not
benefit from an appreciation in the value of the security during the commitment
period.
STANDBY COMMITMENT AGREEMENTS. The Fund may enter into standby commitment
agreements. These agreements commit the Fund, for a stated period of time, to
purchase a stated amount of securities which 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.
The Fund will enter into such agreements 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 will limit its investment in such commitments so
that the aggregate purchase price of 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 the commitment. The Fund segregates liquid assets in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security 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.
13
<PAGE>
ILLIQUID/RESTRICTED/144A 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. Illiquid securities may trade at a discount
from comparable, more liquid investments. 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 where 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.
The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid 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 restricted securities that 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 either (i) freely tradable in their primary markets offshore or (ii) non-
investment grade debt securities which the Manager determines are as liquid as
publicly-registered non-investment grade debt securities. The Board of Directors
has adopted guidelines and delegated 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 continue to develop, the Board of Directors will carefully
monitor the Fund's investments in these securities. 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.
NO RATING CRITERIA FOR DEBT SECURITIES. The Fund has not established any
rating criteria for the debt securities in which it may invest and such
securities may not be rated at all for creditworthiness. Securities rated in the
medium to low rating categories of nationally recognized statistical rating
organizations, such as Standard & Poor's ("S&P") and Moody's Investors Service,
Inc. ("Moody's") and unrated securities of comparable quality (such lower rated
and unrated securities are referred to herein as "high yield/high risk
securities" or "junk bonds") are speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the security and
generally involve a greater volatility of price than securities in higher rating
categories. In purchasing such securities, the Fund will rely on the Manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. The Manager will take into consideration, among other
things, the issuer's financial resources, its sensitivity to
14
<PAGE>
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters. The Fund does not intend to purchase
debt securities that are in default.
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During such periods, service of debt obligations also may be adversely affected
by specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield/ high risk securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and,
consequently, dividends to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it generally is not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an adverse impact
on market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations
generally are available on many high yield/high risk securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. The Fund's Directors, or the Manager will
consider carefully the factors affecting the market for high yield/high risk,
lower rated securities in determining whether any particular security is liquid
or illiquid and whether current market quotations are readily available.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to affect adversely the Fund's net asset value. In addition, the Fund may
incur additional expenses to the extent it is required to seek recovery upon a
default on a portfolio holding or participate in the restructuring of the
obligations.
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 "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 of 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
that that of a diversified investment company as a
15
<PAGE>
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.
SUITABILITY. The economic benefit from an investment in the Fund depends
upon many factors beyond the control of the Fund, the Manager and its
affiliates. Because of its emphasis on securities of issuers principally engaged
in the real estate industry, the Fund should be considered as a vehicle for
diversification and not as a balanced investment program. The suitability for
any particular investor of a purchase of shares of the Fund will depend upon,
among other things, such investor's investment objectives and ability to accept
the risks of investing in such industry including the risk of a loss of
principal.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted a number of fundamental and non-fundamental investment policies
and restrictions. The fundamental policies and restrictions 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 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). Unless otherwise provided, all references to the assets of the Fund
below are in terms of current market value. The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding issuers principally engaged in the real estate industry
and the U.S. Government and its agencies and instrumentalities). For
purposes of this restriction, states, municipalities and their political
subdivisions are not considered part of any industry.
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.
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 which
invest in real estate or interests therein and may hold and sell real estate
acquired by the Fund as a result of the ownership of securities.
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, repurchase agreements and purchase and sale
contracts or any similar instruments shall not be deemed to be the making of
a loan, and except further that the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made only in
accordance with applicable law and the guidelines set forth in the Fund's
Prospectus and this Statement of Additional Information, as they may be
amended from time to time.
5. Issuer senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its total
assets (including the amount borrowed), (ii) the Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) the Fund may
obtain such short-term credit as may be necessary for the clearence of
purchases and sales of portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law. The Fund may
not pledge its assets other than to secure such borrowings or, to the extent
permitted by the Fund's investment policies as set forth in its Prospectus
and Statement of Additional Information, as they may be amended from time to
time in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
16
<PAGE>
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 that the Fund may do so in accordance with applicable law and the
Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities or other investment companies except to the
extent permitted by applicable law. As a matter of policy, however, the Fund
will not purchase shares of any registered open-end investment company or
registered unit investment trust in reliance on Section 12(d)(l)(F) or (G)
(the "fund of funds" provisions) of the Investment Company Act, at any time
its 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 currently does not
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
or put to the issuer or 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. The Board of Directors may adopt
guidelines and delegate to the Manager the daily function of determining and
monitoring liquidatity or restricted securities. The Board has determined
that securities which are freely tradable in their primary market outside
the United States should be deemed liquid. 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 over-the
counter ("OTC") options and the assets used as cover from 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
17
<PAGE>
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 form the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is equal
to the repurchase price less the amount by which the option is "in-the-money"
(I.E. current market value of the underlying securities minus the option's
strike price). The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the premium received for
the option, plus the amount by which the option is "in-the-money." This policy
as to OTC options is not a fundamental policy of the Fund and may be amended by
the 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 cash securities.
SECURITIES LENDING. The Fund may lend securities with a value not exceeding
33 1/3% of its total assets. In return, the Fund receives collateral in an
amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
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. The Fund receives
securities as collateral for the loaned securities and the Fund and the borrower
negotiate a rate for the loan premium to be received by the Fund for the loaned
securities, which increases the Fund's yield. The Fund may receive a flat fee
for its loans. The loans are terminable at any time and the borrower, after
notice, is required to return borrowed securities within five business days. The
Fund may pay reasonable finder's, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, 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.
Because of the affiliation of Merrill Lynch with the Manager, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." Without such an exemptive order the Fund would be
prohibited from engaging in portfolio transactions with Merrill Lynch or any of
its affiliates acting as principal.
PORTFOLIO TURNOVER
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 the general market, economic or financial conditions. 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 all 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. While the Fund anticipates that its annual portfolio
18
<PAGE>
turnover rate should not exceed 100% under normal conditions, it is impossible
to predict portfolio turnover rates. Higher portfolio turnover may contribute to
higher transactional costs and negative tax consequences, such as an increase in
capital gain dividends or in ordinary income dividends of accrued market
discount. See "Distributions and Taxes." 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 securities in the portfolio during the year.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Board of Directors of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act (the "non-interested Directors"). The Directors are responsible for the
overall supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the Investment Company Act.
Information about the Directors, executive officers and the 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 each Director, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- PRESIDENT AND DIRECTOR(1)(2) -- Chairman of the
Manager and Fund Asset Management, L.P. ("FAM") (which terms as used herein
include their 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.
JOE GRILLS (63) -- DIRECTOR(2) -- P.O. Box 98, Rapidan, Virginia 22733.
Member of the Committee of Investment of Employee Benefit Assets of the
Financial Executives Institute ("CIEBA") since 1986; Member of CIEBA's Executive
Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Incorporated ("IBM") and Chief Investment
Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment
Advisory Committees of the State of New York Common Retirement Fund and the
Howard Hughes Medical Institute since 1997; Director, Duke Management Company
since 1992 and elected Vice Chairman in May 1998; Director, LaSalle Street Fund
since 1995; Director, Hotchkis and Wiley Mutual Funds since 1996; Director,
Kimco Realty Corporation since 1997; Member of the Investment Advisory Committee
of the Virginia Retirement System since 1998 Director, Montpelier Foundation
since December 1998.
WALTER MINTZ (69) -- DIRECTOR(2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.
ROBERT S. SALOMON, JR. (62) -- DIRECTOR(2) -- 106 Dolphin Cove Quay,
Stamford, Connecticut 06902. Principal of STI Management (investment adviser)
since 1994; Trustee, The Common Fund since 1980; Chairman and CEO of Salomon
Brothers Asset Management from 1992 until 1995; Chairman of Salomon Brothers
equity mutual funds from 1992 until 1995; Monthly columnist with FORBES magazine
since 1992; Director of Stock Research and U.S. Equity Strategist at Salomon
Brothers from 1975 until 1991.
MELVIN R. SEIDEN (68) -- DIRECTOR(2) -- 780 Third Avenue, Suite 2502, New
York, New York 10017. Director of Silbanc Properties, Ltd. (real estate,
investment and consulting) since 1987; Chairman and President of Seiden & de
Cuevas, Inc. (private investment firm) from 1964 to 1987.
STEPHEN B. SWENSRUD (65) -- DIRECTOR(2) -- 24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman of Fernwood Advisors (investment adviser)
since 1996; Principal, Fernwood Associates (financial consultant) since 1975.
19
<PAGE>
TERRY K. GLENN (58) -- 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 Princeton Funds
Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991; President
of Princeton Administrators, L.P. since 1988.
NORMAN R. HARVEY (65) -- SENIOR VICE PRESIDENT(1) (2) -- Senior Vice
President of the Manager and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
JAY L. WILLOUGHBY (40) -- SENIOR PORTFOLIO MANAGER(1) -- Senior Portfolio
Manager of the Manager since 1997; Managing Director of AEW Capital Management,
L.P. from 1995 to 1997; Partner and Portfolio Manager of the Crabbe Huson Group
from 1988 to 1995.
DONALD C. BURKE (38) -- VICE PRESIDENT AND TREASURER(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 since 1990.
PHILIP M. MANDEL (51) -- SECRETARY(1) (2) -- First Vice President of the
Manager since 1997; Vice President and Assistant General Counsel of Merrill
Lynch from 1989 until 1997.
- ------------
(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
investment companies for which the Manager, or its affiliate FAM, acts as
investment adviser or manager.
As of March , 1999, the Directors and officers of the Fund as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director 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.
COMPENSATION OF DIRECTORS
The Fund pays each non-interested Director a fee of $1,500 per year plus
$250 per meeting attended. The Fund also compensates members of its Audit and
Nominating Committee (the "Committee"), which consists of all the non-interested
Directors, a fee of $1,500 per year plus $ 250 for each Committee meeting
attended. The Fund reimburses each non-interested Director for his out-of-pocket
expenses relating to attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Directors for the period December 26, 1997 (commencement of operations) to
November 30, 1998 and the aggregate compensation paid to them from all
registered investment companies advised by the Manager and its affiliate, FAM
("MLAM/FAM-advised funds"), for the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
PENSION OR AGGREGATE
RETIREMENT ESTIMATED COMPENSATION FROM
BENEFITS ACCRUED ANNUAL FUND AND OTHER
POSITION COMPENSATION AS PART OF FUND BENEFITS UPON MLAM/FAM-
NAME WITH FUND FROM FUND EXPENSE RETIREMENT ADVISED FUNDS(1)
- ----------------------------- ------------ --------------- ------------------ ------------- ------------------
<S> <C> <C> <C> <C> <C>
Joe Grills................... Director $ 8,000 None None $ 186,333
Walter Mintz................. Director $ 8,250 None None $ 178,583
Robert S. Salomon, Jr. ...... Director $ 8,250 None None $ 178,583
Melvin R. Seiden............. Director $ 8,250 None None $ 178,583
Stephen B. Swensrud.......... Director $ 8,250 None None $ 195,583
</TABLE>
- -------------
(1) The Directors serve on the boards of MLAM/FAM-advised funds as follows: Joe
Grills (22 registered investment companies consisting of 55 portfolios),
Walter Mintz (20 registered investment companies consisting of 41
portfolios), Robert S. Salomon (20 registered investment companies
consisting of 41 portfolios), Melvin R. Seiden (20 registered investment
companies consisting of 41 portfolios), Stephen B. Swensrud (23 registered
investment companies consisting of 56 portfolios).
Directors of the Fund, members of the Boards of other MLAM-advised
investment companies, ML & Co. and its subsidiaries (the term "subsidiaries,"
when used herein with respect to ML & Co., includes
20
<PAGE>
FAM, the Manager 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.
MANAGEMENT AND ADVISORY ARRANGEMENTS
MANAGEMENT SERVICES. The Manager provides the Fund with investment advisory
and management services. Subject to the supervision of the Board of Directors,
the Manager is responsible for the actual management of the Fund's portfolio and
constantly reviews 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. The Manager
performs certain of the other administrative services and provides all the
office space, facilities, equipment and necessary personnel for management of
the Fund.
MANAGEMENT FEE. The Fund has entered into an investment management
agreement with the Manager (the "Management Agreement"), pursuant to which the
Manager receives for its services to the Fund monthly compensation at the annual
rate of 0.85% of the average daily net assets of the Fund . The table below sets
forth information about the total investment advisory fees paid by the Fund to
the Manager for the period December 26, 1997 (commencement of operations) to
November 30, 1998.
<TABLE>
<CAPTION>
INVESTMENT ADVISORY
PERIOD ENDED NOVEMBER 30, FEE
- ------------------------------------------------------ ----------------------
<S> <C>
1998.................................................. $544,585
</TABLE>
PAYMENT OF FUND EXPENSES. 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 ML & Co. or
any of its affiliates. The Fund pays all other expenses incurred in the
operation of the Fund, including among other things: taxes, expenses for legal
and auditing services, costs of printing proxies, stock certificates,
shareholder reports, prospectuses and statements of additional information,
except to the extent paid by Merrill Lynch Funds Distributor, a division of PFD
(the "Distributor"); charges of the custodian and the transfer agent; expenses
of redemption of shares; Commission fees; expenses of registering the shares
under Federal and state securities laws; fees and expenses of unaffiliated
Directors; accounting and pricing costs (including the daily calculations 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 for the Fund by the Manager and the
Fund reimburses the Manager for its costs in connection with such services. See
"Purchase of Shares -- Distribution Plans."
ORGANIZATION OF THE MANAGER. The Manager is a limited partnership, the
partners of which are ML & Co., a financial services holding company and the
parent of Merrill Lynch, 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.
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.
The following entities may be considered "controlling persons" of MLAM U.K.:
Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch
International Holdings, Inc., a subsidiary of Merrill Lynch International, Inc.,
a subsidiary of ML & Co.
DURATION AND TERMINATION. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year 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 contract or interested persons (as defined in the Investment
Company Act) of any such
21
<PAGE>
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party or by vote of the
shareholders of the Fund.
TRANSFER AGENCY SERVICES. Financial Data Services, Inc. (the "Transfer
Agent"), 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 a fee of
$11.00 per Class A or Class D account and $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 the beneficial
interest of a person in the relevant share class on a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co.
DISTRIBUTION EXPENSES. The Fund has entered into four 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 above.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which 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.
The Codes require that all employees of the Manager pre-clear any personal
securities investment (with limited exceptions, such as government securities).
The pre-clearance 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).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing-SM- System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C or Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund and
22
<PAGE>
has the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees (also known as service fees)
and Class B and Class C shares bear the expenses of the ongoing distribution
fees and the additional incremental transfer agency costs resulting from the
deferred sales charge arrangements. The contingent deferred sales charges
("CDSCs"), distribution fees 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 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 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 Merrill Lynch Select Pricing-SM- System is used by more than 50
registered investment companies advised by MLAM or FAM. Funds advised by MLAM or
FAM that utilize the Merrill Lynch Select Pricing-SM- System are referred to
herein as "Select Pricing Funds."
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. 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.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase Class
A shares should purchase Class A shares rather than Class D shares because there
is an account maintenance fee imposed on Class D shares. Investors qualifying
for significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges imposed
in connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A or
Class D shares, because over time the accumulated ongoing account maintenance
and distribution fees on Class B or Class C shares may exceed the initial sales
charge and, in the case of Class D shares, the account maintenance fee. Although
some investors who previously purchased Class A shares may no longer be eligible
to purchase Class A shares of other Select Pricing Funds, those previously
purchased Class A shares, together with Class B, Class C and Class D share
holdings, will count toward a right of accumulation which may qualify the
investor for reduced initial sales charge on new initial sales charge purchases.
In addition, the ongoing Class B and Class C account maintenance and
distribution fees will cause Class B and Class C shares to have higher expense
ratios, pay lower dividends and have lower total returns than the initial sales
charge shares. The ongoing Class D account maintenance fees will cause Class D
shares to have a higher expense ratio, pay lower dividends and have a lower
total return than Class A shares.
23
<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 which
has no purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-
dealer or clients of an investment adviser.
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
who currently own Class A shares, 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 MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in Select Pricing Funds. Also eligible to purchase Class A shares at
net asset value are participants in certain investment programs including TMASM
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 certain 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. 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 are met. In addition, Class A shares of
the Fund and certain other Select Pricing Funds are offered at net asset value
to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions are met, to shareholders of Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
pursuant to a tender offer conducted by such funds in shares of the Fund and
certain other Select Pricing Funds.
The following table sets forth information regarding Class A and Class D
sales charge information.
CLASS A AND CLASS D SALES CHARGE INFORMATION
<TABLE>
<CAPTION>
CLASS A SHARES
- -----------------------------------------------------------------------------------------------------------------------------
For the Period
December 26, 1997
(commencement of Gross Sales Sales Charges Sales Charges CDSCs Received on
operations) to Charges Retained by Paid to Redemption of
November 30, Collected Distributor Merrill Lynch Load-Waived Shares
- --------------------- --------------------- ----------------------- ----------------------- -----------------------------
<S> <C> <C> <C> <C>
1998 $ 0 $ 0 $ 0 $ 0
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
CLASS D SHARES
- -----------------------------------------------------------------------------------------------------------
For the Period
December 26, 1997
(commencement of Gross Sales Sales Charges Sales Charges CDSCs Received on
operations) to Charges Retained by Paid to Redemption of
November 30, Collected Distributor Merrill Lynch Load-Waived Shares
- --------------------- --------------- ----------------- ----------------- -----------------------------
<S> <C> <C> <C> <C>
1998 $ 225,333 $ 3,800 $ 221,533 $ 0
</TABLE>
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.
REDUCED INITIAL SALES CHARGES
REINVESTED DIVIDENDS AND CAPITAL GAINS. 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.
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 any other Select Pricing 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 INTENT. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent 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 Intent may be included under a
subsequent Letter of Intent executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. The
value of Class A and Class D shares of the Fund and of other Select Pricing
Funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intent, may be included as
a credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intent (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 5.0% 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
Intent must be at least 5.0% of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the 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
25
<PAGE>
purchased under such Letter, but there will be no retroactive reduction of the
sales charge 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 Intent will be deducted from
the total purchases made under such Letter. An exchange from the Summit Cash
Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
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. The Blueprint
program 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 $300 at 4.25%, from $300.01 to $5,000 at 3.25% plus $3.00,
and $5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A or Class D shares of the Fund are being
offered at net asset value plus a sales charge of 0.50% 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 (the "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 the IRA
Rollover Program.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, 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 at net asset value to
TMA-SM- Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
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 investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
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.
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 1-800-237-7777.
PURCHASE PRIVILEGE OF CERTAIN PERSONS. Directors of the Fund, members of
the Boards of other MLAM-advised funds, ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with
26
<PAGE>
respect to ML & Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly owned and controlled by ML & Co.) and their directors and
employees, and any trust, pension, profit-sharing or other benefit plan for such
persons, may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the Financial Consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and, second, the investor 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 are also offered at net asset value, without a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that 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 other fund were 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 that has a business relationship with a Merrill Lynch
Financial Consultant and that 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 the 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.
CLOSED-END FUND INVESTMENT OPTION. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by FAM or MLAM who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill 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 Select Pricing Funds
("Eligible Class D Shares"), if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible Class D Shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing dividends
from shares of common stock acquired in such offering. Third, the closed-end
fund shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
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
27
<PAGE>
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.
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 personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund 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 shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment 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.
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 Select Pricing 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. See "Pricing of Shares -- Determination of Net Asset Value" below.
Because no initial sales charges are deducted at the time of the 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
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees 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.
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. In determining whether a CDSC is
28
<PAGE>
applicable to a redemption, the calculation will be determined in the manner
that results in the lowest applicable rate being charged. 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. 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. 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.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
- ------------------------------------------------------------------------ ---------------------
<S> <C>
0-1..................................................................... 4.0%
1-2..................................................................... 3.0%
2-3..................................................................... 2.0%
3-4..................................................................... 1.0%
4 and thereafter........................................................ None
</TABLE>
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares 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 a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC may be 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 Internal Revenue Code of 1986, as amended) of a 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 or, if later, reasonably promptly following
completion of probate. The Class B CDSC may be waived on redemptions of shares
by certain eligible 401(a) and eligible 401(k) plans. The CDSC may also be
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 may be waived for any Class B shares that were acquired and held at
the time of the redemption in an Employee Access Account available through
employers providing eligible 401(k) plans. The Class B CDSC may also be 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. The
Class B CDSC may be waived or its terms may be modified in connection with
certain fee-based programs. The Class B CDSC may also be waived in connection
with involuntary termination of an account in which Fund shares are held or for
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee-Based Programs" and -- "Systematic Withdrawal
Plan". See "Shareholder Services -- Fee-Based Programs."
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER
ARRANGEMENTS. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the CDSC
upon redemption, 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. Such Class B shares will convert into Class D shares
29
<PAGE>
approximately ten years after the plan purchases the first share of any Select
Pricing 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 1-800-237-7777.
MERRILL LYNCH BLUEPRINT-SM- PROGRAM. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations, credit
unions and benefit plans. 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 Class B investors. Orders for
purchases and redemptions of Class B 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 is no minimum initial or subsequent purchase
requirement for investors who are part of a Blueprint automatic investment plan.
Additional information concerning these Blueprint programs, including any annual
fees or transaction charges, is available from Merrill Lynch, Pierce, Fenner &
Smith Incorporated, The Blueprint-SM- Program, P.O. Box 30441, New Brunswick,
New Jersey 08989-0441.
CONVERSION OF CLASS B SHARES TO CLASS D SHARES. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset value of the shares of
the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at the 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.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing 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 on to the holding period
for the shares acquired. The conversion period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
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.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
30
<PAGE>
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. 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. 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.
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.
The Class C CDSC may be reduced or waived in connection with certain fee-based
programs, involuntary termination of an account in which Fund shares are held
and withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee-Based Programs" and -- "Systematic Withdrawal Plan"
CLASS B AND CLASS C SALES CHARGE INFORMATION
<TABLE>
<CAPTION>
CLASS B SHARES*
- ----------------------------------------------------------------------------
For the Period
December 26, 1997
(commencement of
operations) CDSCs Received CDSCs Paid to
to November 30, by Distributor Merrill Lynch
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
1998 $ 137,504 $ 137,504
</TABLE>
* Additional Class B CDSCs payable to the Distributor
with respect to the period December 26, 1997
(commencement of operations) to November 30, 1998 may
have been waived or converted to a contingent
obligation in connection with a shareholder's
participation in certain fee-based programs.
<TABLE>
<CAPTION>
CLASS C SHARES
- ----------------------------------------------------------------------------
For the Period
December 26, 1997
(commencement of
operations) to November CDSCs Received CDSCs Paid to
30, by Distributor Merrill Lynch
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
1998 $ 15,828 $ 15,828
</TABLE>
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and are used in whole
or in part by the Distributor to defray the expenses of dealers (including
Merrill Lynch) related to providing distribution-related services to the Fund in
connection with the sale of the Class B and Class C shares, such as the payment
of compensation to financial consultants for selling Class B and Class C shares
from the dealer's 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.
See "Distribution Plans" below. 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.
31
<PAGE>
DISTRIBUTION PLANS
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each
a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
The Distribution Plans for Class B, Class C and Class D shares each provides
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
with respect to Class B, Class C and Class D shares. Each of those classes has
exclusive voting rights with respect to the 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 upon any material
changes to expenses charged under the Class D Distribution Plan).
The Distribution Plans for Class B and Class C shares each provides 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.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination of
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 reasonable
likelihood that each Distribution Plan will benefit the Fund and its related
class of shareholders. Each Distribution Plan can be terminated at any time,
without penalty, by the vote of a majority of the Independent Directors or by
the vote of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of the Distribution Plan or such report, the first two years in an easily
accessible place.
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 and/or distribution fees paid to the
Distributor. 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 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
32
<PAGE>
allocated accrual basis, revenues consist of the account maintenance fees,
distribution fees, the 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
promotion 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, 1997, the last date for which fully allocated accrual
data is available, the fully allocated accrual revenues of the Distributor and
Merrill Lynch for the period since the commencement of operations of Class B
shares exceeded fully allocated accrual expenses by approximately $1,174 (3.64%
of Class B net assets at that date). As of November 30, 1998, direct cash
expenses for the period since the commencement of operations of Class B shares
exceeded direct cash revenues by $262,449 (.59% of Class B net assets at that
date). As of December 31, 1997, the fully allocated accrual expenses of the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class C shares exceeded the fully allocated accrual revenues by
approximately $53,000 (1.0% of Class C net assets at that date). As of November
30, 1998, direct cash revenues for the period since the commencement of
operations of Class C shares exceeded direct cash expenses by $65,734 (.68% of
Class C net assets at that date).
For the period December 26, 1997 (commencement of operations) to November
30, 1998, the Fund paid the Distributor $460,841 pursuant to the Class B
Distribution Plan (based on average daily net assets subject to such Class B
Distribution Plan of approximately $49.5 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 period
December 26, 1997 (commencement of operations) to November 30, 1998, the Fund
paid the Distributor $91,240 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $9.8 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 period December 26, 1997
(commencement of operations) to November 30, 1998, the Fund paid the Distributor
$17,619 pursuant to the Class D Distribution Plan (based on average daily net
assets subject to such Class D Distribution Plan of approximately $7.6 million),
all of which was paid to Merrill Lynch for providing account maintenance
activities in connection with 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 fee
and the CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with the
Class B shares is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares and any CDSCs will be paid
to the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance fee. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
33
<PAGE>
The following table sets forth comparative information as of November 30,
1998 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 the Class B shares, the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF NOVEMBER 30, 1998
----------------------------------------------------------------------------------------
(IN THOUSANDS)
ALLOWABLE
ELIGIBLE ALLOWABLE INTEREST ON MAXIMUM AMOUNTS AGGREGATE
GROSS AGGREGATE SALES UNPAID AMOUNT PREVIOUSLY PAID UNPAID
SALES(1) CHARGE BALANCE(2) PAYABLE TO DISTRIBUTOR(3) BALANCE
----------- --------------- ------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES FOR THE PERIOD DECEMBER
26, 1997 (COMMENCEMENT OF OPERATIONS)
TO NOVEMBER 30, 1998
Under NASD Rule as Adopted............. $ 57,926 $ 3,620 $ 273 $ 3,893 $ 484 $ 3,409
Under Distributor's Voluntary Waiver... $ 57,926 $ 3,620 $ 290 $ 3,910 $ 484 $ 3,426
CLASS C SHARES FOR THE PERIOD DECEMBER
26, 1997 (COMMENCEMENT OF OPERATIONS)
TO NOVEMBER 30, 1998
Under NASD Rule as Adopted............. $ 12,552 $ 784 $ 55 $ 839 $ 84 $ 755
<CAPTION>
ANNUAL
DISTRIBUTION
FEE AT CURRENT
NET ASSET
LEVEL(4)
---------------
<S> <C>
CLASS B SHARES FOR THE PERIOD DECEMBER
26, 1997 (COMMENCEMENT OF OPERATIONS)
TO NOVEMBER 30, 1998
Under NASD Rule as Adopted............. $ 334
Under Distributor's Voluntary Waiver... $ 334
CLASS C SHARES FOR THE PERIOD DECEMBER
26, 1997 (COMMENCEMENT OF OPERATIONS)
TO NOVEMBER 30, 1998
Under NASD Rule as Adopted............. $ 73
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
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 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to July
6, 1993 under the distribution plan in effect at that time, at a 1.0% rate,
0.75% of average daily net assets has been treated as a distribution fee and
0.25% of average daily net assets has been deemed to have been a service fee
and not subject to the NASD maximum sales charge rule. See "What are the
Fund's fees and expenses?" 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 voluntary maximum (with respect to Class B shares) or
the NASD maximum (with respect to Class B and Class C shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
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 right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the 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 may by order 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.
34
<PAGE>
REDEMPTION
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
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(s) on the Transfer Agent's register. The
signature(s) on the redemption requests must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), 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, payments 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 (E.G., cash, Federal funds or certified check
drawn on a United States bank). 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, Federal funds or certified check drawn on a United States
bank) has been collected for the purchase of such Fund shares, which will not
exceed 10 days.
REPURCHASE
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer within fifteen minutes after
the regular close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on the day received, and 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 on
accounts held at 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
repurchase procedure. However, a shareholder whose order for repurchase is
rejected by the Fund may redeem Fund shares as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares of the Fund
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
35
<PAGE>
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.
PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday as of fifteen minutes after the close of
business on the NYSE on each day the NYSE is open for trading. The NYSE
generally closes at 4:00 p.m., Eastern time. 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 NYSE is not open for trading 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.
Net asset value is computed by dividing the value of the securities held by
the Portfolio 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, rounded to the nearest
cent. Expenses, including the fees payable to the Manager and Distributor, 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 the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of 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 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 Directors as the primary market.
Long positions in securities traded in the over-the-counter ("OTC") market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC market are valued at
the last available ask price in the OTC market prior to the time of valuation.
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
When the Fund writes an option, the amount of the premium received is recorded
on the books of the Fund as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including 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
36
<PAGE>
by or under the direction of the Directors of the Fund. Such valuations and
procedures will be reviewed periodically by the Directors.
Generally, trading in non-U.S. 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.
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 and number of shares outstanding on November 30, 1998 is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets................................................. $ 2,255,323 $ 44,481,562 $ 9,737,420 $ 6,268,501
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Number of Shares Outstanding............................... 259,172 5,120,477 1,121,528 720,597
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Net Asset Value Per Share (net assets divided by number of
shares outstanding)...................................... $ 8.70 $ 8.69 $ 8.68 $ 8.70
Sales Charge (for Class A and Class D shares: 5.25% of
offering price; 5.54% of net asset value per share)* .48 ** ** .48
------------ ------------- ------------ ------------
Offering Price............................................. $ 9.18 $ 8.69 $ 8.68 $ 9.18
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</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 of shares. 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" herein.
PORTFOLIO TRANSACTIONS AND BROKERAGE
TRANSACTIONS IN PORTFOLIO SECURITIES
Subject to policies established by the Board of Directors, the Manager is
primarily responsible for the execution of the Fund's portfolio transactions and
the allocation of brokerage. The Fund has no obligation to deal with any dealer
or group of dealers in the execution of transactions in portfolio securities of
the Fund. Where possible, the Fund deals directly with the dealers who make a
market in the securities involved except in those circumstances where better
prices and execution are available elsewhere. It is the policy of the Fund to
obtain the best results in conducting portfolio transactions for the Fund,
taking into account such factors as price (including the applicable dealer
spread or commission), the size, type and difficulty of the transaction
involved, the firm's general execution and operations facilities and the firm's
risk in positioning the securities involved. The portfolio securities of the
Fund generally are traded on a principal basis and normally do not involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Fund primarily consists of dealer or underwriter spreads.
While reasonable competitive spreads or commissions are sought, the Fund will
not necessarily be paying the lowest spread or commission available.
Transactions with respect to the securities of small and emerging
37
<PAGE>
growth companies in which the Fund may invest may involve specialized services
on the part of the broker or dealer and thereby entail higher commissions or
spreads than would be the case with transactions involving more widely traded
securities.
Subject to obtaining the best net results, dealers who provide supplemental
investment research (such as information concerning tax-exempt securities,
economic data and market forecasts) 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 its
Management Agreement and the expense of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information.
Supplemental investment research obtained from such dealers might be used by the
Manager in servicing all of its accounts and all such research might not be used
by the Manager in connection with the Fund. Consistent with the Conduct Rules of
the NASD and policies established by the Directors of the Fund, the Manager may
consider sales of shares of the Fund as a factor in the selection of brokers or
dealers to execute portfolio transactions for the Fund.
For the period December 26, 1997 (commencement of operations) to November
30, 1998, brokerage commissions paid to Merrill Lynch aggregated $31,651, which
comprised 7.44% of the Fund's aggregate brokerage commissions paid and involved
7.83% of the Fund's aggregate dollar amount of transactions involving payment of
commissions during the year. Aggregate brokerage commissions paid by the Fund
are set forth in the following table:
<TABLE>
<CAPTION>
FOR THE PERIOD DECEMBER 26, 1997
(COMMENCEMENT OF OPERATIONS) TO NOVEMBER 30, BROKERAGE COMMISSIONS PAID
- ------------------------------------------------------------------ --------------------------
<S> <C>
1998.............................................................. $425,338
</TABLE>
Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such persons are prohibited from dealing with
the Fund as principal in the purchase and sale of securities unless a permissive
order allowing such transactions is obtained from the Commission. Since
transactions in the over-the-counter market usually involve transactions with
dealers acting as principal for their own accounts, affiliated persons of the
Fund, including Merrill Lynch and any of its affiliates, will not serve as the
Fund's dealer in such transactions. However, affiliated persons of the Fund may
serve as its broker in listed or over-the-counter transactions conducted on an
agency basis provided that, among other things, the fee or commission received
by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions. 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 adopted by the Board of Directors
of the Fund that either comply with rules adopted by the Commission or with
interpretations of the Commission staff.
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, will be subject to
negotiated commission rates. The Fund's ability and decisions to purchase or
sell portfolio securities of foreign issuers 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 United States dollars,
the Fund intends to manage its portfolio so as to give reasonable assurance that
it will be able to obtain United States dollars to the extent necessary to meet
anticipated redemptions. Under present conditions, it is not believed that these
considerations will have any significant effect on its portfolio strategy.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the Investment Company Act in
order to seek to recapture underwriting and dealer spreads from affiliated
entities. The Directors have considered all factors deemed relevant and have
made
38
<PAGE>
a determination not to seek such recapture at this time. The Directors will
reconsider this matter from time to time.
Section 11(a) of the 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 a statement
setting forth 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. Securities may be held by, or be appropriate investments for, the Fund
as well as other funds or investment advisory clients of the Manager or MLAM.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Manager or an affiliate when one or
more clients of the Manager or an affiliate are selling the same security. If
purchases or sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for which the Manager
or an affiliate act as manager, 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 an affiliate 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.
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. Full details as to each of such services, copies of the various plans 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, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gain distributions. The statements will also show any other activity
in the account since the preceding statement. Shareholders will also receive
separate confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of ordinary income dividends
and capital gains distributions. A shareholder with an account held at the
Transfer Agent may make additions to his or her Investment Account at any time
by mailing a check directly to the Transfer Agent. A shareholder may also
maintain an account through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. 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 (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or continue to
maintain an Investment Account at the Transfer Agent for
39
<PAGE>
those Class A or Class D shares. Shareholders interested in transferring their
Class B or Class C shares from Merrill Lynch 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 his or her shares and then must turn the certificates over to the new firm
for re-registration in the new brokerage firm's name.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated as available for
exchange by holders of Class A, Class B, Class C and Class D shares of Select
Pricing Funds. 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. Before effecting an
exchange, shareholders should obtain a currently effective prospectus of the
fund into which the exchange is to be made. Exercise of the exchange privilege
is treated as a sale of the exchanged shares and a purchase of the acquired
shares for Federal income tax purposes.
EXCHANGES OF CLASS A AND CLASS D SHARES. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing Fund at any time as long
as, at the time of the exchange, the shareholder holds Class A shares of the
second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
for Class A shares of Summit ("new Class A or Class D shares") are transacted on
the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A or Class D shares and the
sales charge payable at the time of the exchange on the new Class A or Class D
shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
EXCHANGES OF CLASS B AND CLASS C SHARES. Each Select Pricing Fund with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to the Fund's
40
<PAGE>
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 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 fund from which the exchange has
been made. For purposes of computing the CDSC 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 or
Class C 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.
EXCHANGES FOR SHARES OF A MONEY MARKET FUND. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any Conversion Period with respect to Class B shares. Class B
shares of Summit will be subject to a distribution fee at an annual rate of
0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who exchanged Select Pricing
Fund shares for such other money market funds and subsequently wish to exchange
those money market fund shares for shares of the Fund will be subject to the
CDSC schedule applicable to such Fund shares, if any. The holding period for
those money market fund shares will not count toward satisfaction of the holding
period requirement for reduction of the CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period. However, the holding period for Class B or Class C shares received in
exchange for such money market fund shares will be aggregated with the holding
period for the original Select Pricing Fund shares for purposes of reducing the
CDSC or satisfying the Conversion Period.
EXCHANGES BY PARTICIPANTS IN THE MFA PROGRAM. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA program, I.E., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA program, Class A shares will be
re-exchanged for the class of shares originally held. For purposes of computing
any CDSC that may be payable upon redemption of Class B or Class C shares so
reacquired, or the Conversion Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the holding period for
the Class B or Class C shares originally held. The Fund's exchange privilege is
also modified with respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA program. First, the initial
allocation of assets is made under the MFA program. Then, any subsequent
exchange under the MFA program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge
41
<PAGE>
previously paid on the shares of the other Select Pricing Fund and the sales
charge payable on the shares of the Fund being acquired in the exchange under
the MFA program.
EXERCISE OF THE EXCHANGE PRIVILEGE. 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 Select Pricing 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 may thereafter resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where
the exchange legally may be made. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
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
1-800-MER-FUND or 1-800-637-3863.
RETIREMENT PLANS
Individual retirement accounts and other retirement plans are available from
Merrill Lynch. Under these plans, investments may be made in the Fund and
certain of the other mutual funds sponsored by Merrill Lynch as well as in other
securities. Merrill Lynch charges an initial establishment fee and an annual
custodial fee for each account. Information with respect to these plans is
available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100, and the minimum subsequent purchase is $1.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made 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. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
For investors who buy shares of the Fund through
42
<PAGE>
Blueprint, no minimum charge to the investor's bank account is required.
Alternatively, an investor whose shares of the Fund are held within a
CMA-Registered Trademark- or CBA-Registered Trademark- account may arrange to
have periodic investments made in the Fund in amounts of $100 ($1 or more for
retirement accounts) or more through the CMA-Registered Trademark- or
CBA-Registered Trademark- Automated Investment Program.
AUTOMATIC DIVIDEND PROGRAM
Unless specific instructions are given as to the method of payment,
dividends and capital gains distributions will be automatically reinvested,
without sales charge, in additional full and fractional shares of the Fund. Such
reinvestment will be at the net asset value of shares of the Fund as of the
close of business on the NYSE on the monthly payment date for such dividends and
distributions. No CDSC will be imposed upon redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained
with the Transfer Agent elect to have subsequent dividends or both dividends and
capital gains distributions, paid in cash, rather than reinvested in shares of
the Fund or vice versa (provided that, in the event that a payment on an account
maintained at the Transfer Agent would amount to $10.00 or less, a shareholder
will not receive such payment in cash and such payment will automatically be
reinvested in additional shares). Commencing ten days after the receipt by the
Transfer Agent of such notice, those instructions will be effected. The Fund is
not responsible for any failure of delivery to the shareholder's address of
record and no interest will accrue on amounts represented by uncashed
distribution checks. Cash payments can also be directly deposited to the
shareholder's bank account.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals are available for shareholders with
shares having 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
the class of shares to be redeemed. Redemptions will be made at net asset value
as determined fifteen minutes after the close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern 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 net asset value determined fifteen minutes after the close of
business on the NYSE on the following business day. The check for the withdrawal
payment will be mailed, or the direct deposit of the withdrawal payment will be
made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all shares in the
Investment Account are reinvested automatically in Fund shares. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.
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 -- Contingent Deferred Sales Charges -- Class
B and Class C Shares." Where the systematic withdrawal plan is applied to Class
B shares, upon conversion of the
43
<PAGE>
last Class B shares in an account to Class D shares, the systematic withdrawal
plan will be applied thereafter to Class D shares if the shareholder so elects.
See "Purchase of Shares -- Deferred Sales Charge Alternatives -- Conversion of
Class B Shares to Class D Shares." If an investor wishes to change the amount
being withdrawn in a systematic withdrawal plan the investor should contact his
or her Merrill Lynch Financial Consultant.
Withdrawal payments should not be considered as dividends. 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 that maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Automatic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a
CMA-Registered Trademark-, CBA-Registered Trademark- Account or Retirement
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the CMA-Registered Trademark- or
CBA-Registered Trademark- 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 CMA-Registered Trademark- or CBA-Registered Trademark-
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automated Investment Program. For
more information on the CMA-Registered Trademark- or CBA-Registered Trademark-
Systematic Redemption Program, eligible shareholders should contact their
Merrill Lynch Financial Consultant.
Capital gains and ordinary income received in each of the retirement plans
referred to above are exempt from Federal taxation until distributed from the
plan. Investors considering participation in any such plan should review
specific tax laws relating thereto and should consult their attorneys or tax
advisers with respect to the establishment and maintenance of any such plan.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such investment income are paid annually. All net
realized capital gains, if any, are distributed to the Fund's shareholders at
least annually. Premiums from expired call options written by the Fund and net
gains from closing purchase transactions are treated as short-term capital gains
for Federal income tax purposes. Shareholders may elect in writing to receive
any such dividends or distributions, or both, in cash. See "Shareholder Services
- -- Automatic Reinvestment of Dividends and Capital Gains Distributions" for
information concerning the manner in which dividends may be reinvested
automatically in shares of the Fund. Dividends and distributions are taxable to
shareholders, as described below, whether they are invested in shares of the
Fund or received in cash. The per share dividends and distributions on Class B
and Class C shares will be lower than the per share dividends and distributions
on Class A and Class D shares as a result of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares; similarly, the per share dividends and distributions
on Class D shares will be lower than the per share dividends and distributions
on Class A shares as a result of the account maintenance fees applicable with
respect to the Class D shares. See "Pricing of Shares -- Determination of Net
Asset Value."
44
<PAGE>
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as the Fund 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 that 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.
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 a 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.
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, whether or not reinvested. 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 options, futures and warrants) ("capital
gain dividends") are taxable to shareholders as long-term 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). Certain categories of
capital gains are 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 gains dividends, as well as any amount of capital gains 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. 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 Securities and Exchange 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.
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 of the acquired Class D shares will
include the holding period of 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
reduces any sales charge the shareholder would have owed upon the
45
<PAGE>
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.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning applicability of the United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described above. Some of
these high yield/high risk securities may be purchased at a discount and may
therefore cause the Fund to accrue and distribute income before amounts due
under the obligations are paid. In addition, a portion of the interest payments
on such high yield/high risk securities may be treated as dividends for Federal
income tax purposes; in such case, if the issuer of such high yield/high risk
securities is a domestic corporation, dividend payments by the Fund will be
eligible for the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.
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.
The Fund may make investments that produce taxable income which is not
matched by a corresponding receipt of cash or an offsetting loss deduction. Such
investments would include obligations that have original issue discount, accrue
negative amortization or are subordinated in the mortgage-backed securities
structure. Such taxable income would be treated as income earned by the Fund and
would be subject to the distribution requirements of the Code. Because such
income may not be matched by a corresponding receipt of cash by the Fund or an
offsetting loss deduction, the Fund may be required to borrow money or dispose
of other securities to be able to make distributions to shareholders. The Fund
intends to make sufficient and timely distributions to shareholders to qualify
for the special tax treatment afforded RICs at all times and to avoid imposition
of the excise tax.
46
<PAGE>
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.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures 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 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
forward foreign exchange contract, or 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 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 options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and closing transactions in options, futures and forward
foreign exchange contracts.
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 future 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 realized but in the same taxable year would be recharacterized
as a return of
47
<PAGE>
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 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 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 may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of 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 formulas 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 and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A 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.
Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period. Tax equivalent yield quotations will be computed
by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus
a stated tax rate and (c) adding the result to that part, if any, of the Fund's
yield that is not tax-exempt.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data 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. The Fund's total return may be
expressed either as a
48
<PAGE>
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.
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
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
- ---------------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (December 26, 1997) to
November 30, 1998..................... (16.33)% $847.40 (15.87)% $851.70
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (December 26, 1997) to
November 30, 1998..................... (10.57)% $894.30 (11.36)% $886.40
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (December 26, 1997) to
November 30, 1998..................... (15.26)% $847.40 (14.83)% $851.70
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------- -------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
- ---------------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (December 26, 1997) to
November 30, 1998..................... (13.16)% $877.20 (16.51)% $847.50
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (December 26, 1997) to
November 30, 1998..................... (11.41)% $885.90 (10.74)% $892.60
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (December 26, 1997) to
November 30, 1998..................... (12.28)% $877.20 (15.43)% $845.70
</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 advertisements directed to such investors 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 the waiver of sales charges, a lower amount of expenses is deducted.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Index, the Value Line Composite Index, the Dow Jones Industrial
Average, other market indices or performance data published by Lipper Analytical
Services, Inc., Morningstar Publications, Inc., MONEY MAGAZINE, U.S. NEWS &
WORLD REPORT, BUSINESS WEEK, FORBES MAGAZINE and FORTUNE MAGAZINE or other
industry publications. When comparing its performance to a market index, the
Fund may refer to various statistical measures derived
49
<PAGE>
from the historic performance of the Fund and the index, such as standard
deviation and beta. In addition, from time to time the Fund may include the
Fund's risk-adjusted performance ratings assigned by Morningstar Publications,
Inc. in advertising or supplemental sales literature. As with other performance
data, performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
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.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on September 24, 1997. It has
an authorized capital of 400,000,000 shares of Common Stock, par value $.10 per
share, divided into four classes designated Class A, Class B, Class C and Class
D Common Stock, each consisting of 100,000,000 shares. Shares of Class A, Class
B, Class C and Class D Common Stock represent an interest in the same assets of
the Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such expenditures. The Fund may issue additional classes or
shares if the Board of Directors deems such issuance to be in the best interests
of the Fund. Upon liquidation of the Fund, shareholders of each class are
entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders, except for any expenses which may be attributable
only to one class. Shares have no preemptive or conversion rights. The rights of
redemption and exchange are described elsewhere herein and in the Prospectus.
Shares are fully paid and nonassessable by the Fund.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors and any
other matter submitted to a shareholder vote. 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 act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment management agreement;
(iii) approval of a distribution agreement; and (iv) ratification of selection
of independent accountants. Also, the by-laws of the Fund require that a special
meeting of shareholders be held upon the written request of at least 25% 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 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 will be issued by the Transfer
Agent only on specific request. Certificates for fractional shares are not
issued in any case.
The Manager provided the initial capital for the Fund by purchasing 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 (estimated at approximately $141,000) 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 which the number of such initial shares being redeemed
bears to the number of shares initially purchased.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the
50
<PAGE>
non-interested Directors of the Fund. The independent auditors are responsible
for auditing the annual financial statements of the Fund.
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286, (the "Custodian") acts as the Custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund
to be held in its offices outside the United States and with certain foreign
banks and securities depositories. The Custodian is responsible for safeguarding
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on the Fund's
investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's transfer agent (the "Transfer Agent").
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 November 30 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.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act 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.
51
<PAGE>
To the knowledge of the Fund, the following persons or entities owned
beneficially 5% or more of any class of the Fund's shares as of January 4, 1999.
<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
- --------------------------------- ------------------------------- -----------------
<S> <C> <C>
Jay L. Willoughby and 103 Saint Clair Ct
Kathryn B. Willoughby Princeton, NJ 08540 12.4% Class A
Merrill Lynch Trust Company ATTN: Robert Arimenta Jr.
Trustee FBO MLSIP PO Box 30532
Investment Account New Brunswick, NJ 08989 11.6% Class A
Edward J. Vranizan IRA 2946 SW Canterbury Ln
FBO Edward J. Vranizan Portland, OR 97201 6.1% Class A
Merrill Lynch Trust Company ATTN: Robert Arimenta Jr.
Trustee FBO MLRAP Plan P.O. Box 30532
Investment Account New Brunswick, NJ 08989 5.6% Class A
Bryan N. Ison 48 Maddock Rd
Titusville, NJ 08560 5.0% Class A
Richard S. Huson, Trustee 15 SW Colorado Ave #280
Yvonne M. Huson, Trustee Bend, OR 97702 5.8% Class C
Mr. Frank Y. Nishida and 3767 Crestway Dr.
Mrs. Michiko Nishida Los Angeles, CA 90043 13.7% Class D
</TABLE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling 1-800-456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
52
<PAGE>
Code #19017-03-99
<PAGE>
APPENDIX I
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.
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 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.
I-1
<PAGE>
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 an amount on 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. By
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 will write a
put option on a security or a securities index only if the Fund is using the put
as an anticipatory hedge or is writing the put 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 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 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
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 and, including stock index
futures and financial futures contracts, 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.
I-2
<PAGE>
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 futures contract's expiration date. 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 spot and forward foreign exchange transactions and
currency swaps, 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 U.S.
dollar.
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. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
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 foreign exchange transaction for purposes of hedging a specific
transaction by, for example, purchasing a currency needed to settle a security
transaction or selling a currency in which the Fund has received or 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
purchasing a currency in which the Fund anticipates acquiring a portfolio
position in the near future. The Fund may also hedge portfolio positions through
currency swaps, which are transactions in which one currency is simultaneously
bought for a second currency on a spot basis and sold for the second currency on
a forward basis.
The Fund may also hedge against the decline in the value of a currency
against the U.S. 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 U.S. 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 "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 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. The Fund
may, however, hedge a currency by entering into a transaction in a Currency
Instrument denominated in a currency other than the currency being hedged (a
"cross-hedge"). The Fund will only
I-3
<PAGE>
enter into a cross-hedge if the Manager believes that (i) there is a
demonstrably high correlation between the currency in which the cross-hedge is
denominated and the currency being hedged and (ii) executing a cross-hedge
through the currency in which the cross-hedge is denominated will be
significantly more cost effective or provide substantially greater liquidity
than executing a similar hedging transaction by means of the currency being
hedged.
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 the 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.
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 Securities and
Exchange 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
I-4
<PAGE>
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 Securities and Exchange 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 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.
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.
I-5
<PAGE>
APPENDIX II
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
<TABLE>
<S> <C>
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in "Aaa" securities.
A Bonds which are rated "A" possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated "Baa" are considered as medium-grade obligations (I.E., they
are neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable investment.
Assurance of interest and principle payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated "Caa" are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca Bonds which are rated "Ca" represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
</TABLE>
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's makes no
representation that rated bank or insurance company obligations are exempt from
registration under the Securities Act of 1933 or issued in conformity with any
other applicable law or
II-1
<PAGE>
regulation. Nor does Moody's represent that any specific bank or insurance
company obligation is legally enforceable or a valid senior obligation of a
rated issuer. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2. Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME. Issuers rated Not Prime do not fall within any of the Prime
rating categories.
If any issuer represents to Moody's that its short-term debt obligations are
supported by the credit of another entity or entities, then the name or names of
such supporting entity or entities are listed within the parentheses beneath the
name of the issuer, or there is a footnote referring the reader to another page
for the name or names of the supporting entity or entities. In assigning ratings
to such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
Moody's ratings are opinions, not recommendations to buy or sell, and their
accuracy is not guaranteed. A rating should be weighed solely as one factor in
an investment decision and you should make your own study and evaluation of any
issuer whose securities or debt obligations you consider buying or selling.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of our familiar bond rating symbols is used in the quality ranking of
preferred stock. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
II-2
<PAGE>
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<S> <C>
aaa An issue which is rated "aaa" is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend impairment
within the universe of preferred stocks.
aa An issue which is rated "aa" is considered to be a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade preferred
stock. While risks are judged to be somewhat greater than in the "aaa" and "aa"
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade preferred stock,
neither highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements and its
future cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b An issue which is rated "b" generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividends payments. This
rating designation does not purport to indicate the future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is likely to be in
arrears on dividends with little likelihood of eventual payments.
c This is the lowest rated class of preferred or preference stock. Issues so rated can
thus be regarded as having extremely poor prospects of ever attaining any real
investment standing.
</TABLE>
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issuer ranks in the lower end of its
generic rating category.
DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current opinion
of the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation.
The debt rating is not recommendation to purchase, sell or hold a financial
obligation, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform any audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
II-3
<PAGE>
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on the obligation in accordance with
the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's
capacity to meet its financial commitment on the obligation is extremely strong.
AA Debt rated "AA" differs from the highest rated obligations only in small degree. The
obligor's capacity to meet its financial commitment on the obligation is very strong.
A Debt rated "A" is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories. However,
the obligor's capacity to meet its financial commitment on the obligation is still
strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity
of the obligor to meet is financial commitment on the obligation.
Debt rated "BB", "B", "CCC", "CC" and "C" are regarded as having significant
speculative characteristics. "BB" indicates the least degree of speculation and "C"
the highest. While such debt will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major exposures to
adverse conditions.
BB Debt rated "BB" is less vulnerable to non-payment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B Debt rated "B" is more vulnerable to non-payment than obligations rated "BB", but the
obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely impair
the obligor's capacity or willingness to meet its financial commitments on the
obligation.
CCC Debt rated "CCC" is currently vulnerable to non-payment, and is dependent upon
favorable business, financial, or economic conditions for the obligor to meet its
financial commitment on the obligation. In the event of adverse business, financial,
or economic conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation.
CC The rating "CC" is currently highly vulnerable to non-payment.
C The "C" rating may be used to cover a situation where a bankruptcy petition has been
filed or similar action has been taken, but payments on this obligation are being
continued.
D The "D" rating, unlike other ratings, is not prospective; rather, it is used only
where a default has actually occurred--and not where a default is only expected.
Standard & Poor's changes ratings to "D" either:
</TABLE>
- On the day an interest and/or principal payment is due and is not paid.
An exception is made if there is a grace period and Standard & Poor's
believes that a payment will be made, in which case the rating can be
maintained; or
II-4
<PAGE>
- Upon voluntary bankruptcy filing or similar action. An exception is made
if Standard & Poor's expects that debt service payments will continue to
be made on a specific issue. In the absence of a payment default or
bankruptcy filing, a technical default (I.E., covenant violation) is not
sufficient for assigning a "D" rating.
An issuer credit rating (also known as a corporate credit rating,
counterparty credit rating, natural rating, senior implied rating, or
default risk rating) is changed to "N.M." (for "not meaningful") upon:
- The first occurrence of a payment default on any financial obligation,
rated or unrated, other than a financial obligation subject to a bona
fide commercial dispute. (In this context, preferred stock is not
considered to be a financial obligation. Thus, a missed preferred stock
dividend does not necessarily mean that the issuer credit rating is
changed to "N.M.")
- A voluntary bankruptcy filing by the issuer, or similar action--even if
the issuer continues debt service payments on some financial obligations;
or
- Seizure of a rated bank by a regulator or placement of an insurer under
regulatory supervision owing to its financial condition. Such regulatory
actions imply substantial uncertainty about the issuer's ability to
continue meeting financial obligations. (An insurer's claims-paying
ability rating would go to "R" if the insurer were placed under
regulatory supervision because of its financial condition.)
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R. indicates not rated.
Debt obligations of issuers outside the United States and its territories
are rated on he same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. Also, the laws
of various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries in general.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A" for the
highest-quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 A short-term obligation rated A-1 is rated in the highest category by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the obligation.
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
B A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet is financial
commitment on the obligation; however, it faces major ongoing uncertainties which
could lead to the obligor's inadequate capacity to meet its financial commitment on
the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the obligor
to meet its financial commitment on the obligation.
D Debt rated "D" is in payment default. The "D" rating category is used when interest
payments or principal payments are not made on the date due, even if the applicable
grace period has not expired, unless Standard & Poor's believes that such payments
will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained by Standard & Poor's from other
sources it considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information or based on other
circumstances.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which is intrinsically different
from, and subordinated to, a debt issue. Therefore, to reflect this difference,
the preferred stock rating symbol will normally not be higher than the debt
rating symbol assigned to, or that would be assigned to, the senior debt of the
same issuer.
A preferred stock rating is not a recommendation to purchase, sell, or hold
a security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation;
II. Nature of, and provisions of, the issue;
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' right.
II-6
<PAGE>
<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA A preferred stock issue, rated AA also qualifies as a high-quality, fixed-income
security. The capacity to pay preferred stock obligations is very strong, although
not as overwhelming as for issues rated AAA.
A An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated BBB is regarded as backed by an adequate capacity to pay the preferred
stock obligations. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity to make payments for a preferred stock in this category than for
issues in the A category.
BB Preferred stock rated BB, B and CCC are regarded, on balance, as predominantly
B speculative with respect to the issuer's capacity to pay preferred stock obligations.
CCC BB indicates the lowest degree of speculation and CCC the highest. While such issues
will likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating CC is reserved for a preferred stock issue that is in arrears on dividends
or sinking fund payments, but that is currently paying.
C A preferred stock rated C is a non paying issue.
D A preferred stock rated D is a nonpaying issuer with the issuer in default on debt
instruments.
N.R. This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
</TABLE>
PLUS (+) OR MINUS (-): To provide more detailed indications of preferred
stock quality, ratings from AA to CCC may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
II-7
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S>
1(a) -- Articles of Incorporation of the Registrant, dated September 23,
1997.(a)
2 -- By-Laws of the Registrant.(a)
3(a) -- Portions of the Articles of Incorporation, as amended and supplemented,
and By-Laws of the Registrant defining the rights of holders of shares of
common stock of the Registrant.(b)
4(a) -- Management Agreement, as amended, between the Registrant and MLAM.
(b) -- Form of Sub-Advisory Agreement between MLAM and Merrill Lynch Asset
Management U.K. Limited.(e)
5(a) -- Form of Revised Class A Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc. (now known as Princeton Funds
Distributor, Inc.)(the "Distributor")(including Form of Selected
Dealers Agreement).(c)
(b) -- Class B Distribution Agreement between the Registrant and the
Distributor.(c)
(c) -- Form of Class C Distribution Agreement between the Registrant and the
Distributor (including Form of Selected Dealers Agreement).(c)
(d) -- Form of Class D Distribution Agreement between the Registrant and the
Distributor (including Form of Selected Dealers Agreement).(c)
6 -- None.
7 -- Custody Agreement between the Registrant and The Chase Manhattan
Bank.(a)
8(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between the Registrant and Merrill Lynch Financial Data
Services, Inc. (now known as Financial Data Services, Inc.)(a)
(b) -- Agreement between Merrill Lynch & Co., Inc. and Registrant relating to
Registrant's use of Merrill Lynch name.(a)
9 -- None.
10 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 -- None.
12 -- Certificate of Merrill Lynch Asset Management, L.P.(b)
13(a) -- Form of Class B Distribution Plan of the Registrant and Class B
Distribution Plan Sub-Agreement.(c)
(b) -- Form of Class C Distribution Plan of the Registrant and Class C
Distribution Plan Sub-Agreement.(c)
(c) -- Form of Class D Distribution Plan of the Registrant and Class D
Distribution Plan Sub-Agreement.(c)
14(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
15 -- Merrill Lynch Select Pricing-SM- System Plan pursuant to Rule 18f-3.(d)
</TABLE>
- ------------------------
(a) Filed on September 30, 1997 as an Exhibit to the Registrant's Registration
Statement on Form N-1A (File No. 333-36721) under the Securities Act of
1933, as amended (the "Registration Statement").
(b) Filed on November 12, 1997, as an Exhibit to Pre-Effective Amendment No. 1
to the Registration Statement.
(c) Reference is made to Articles IV, V (Sections 3, 5, 6 and 7), VI, VII and IX
of the Registrant's Articles of Incorporation filed as Exhibit 1 to the
Registration Statement; and to Articles II, III (Sections 1, 3,
C-1
<PAGE>
5 and 6), VI, VII, XIII and XIV of the Registrant's By-Laws, filed as
Exhibit 2 to the Registration Statement.
(d) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996 relating to shares of Merrill Lynch
New York Municipal Bond Fund series of Merrill Lynch Multi-State Municipal
Series Trust (File No. 2-99473).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 25. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C
and Class D Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may be
concerned, Article VI of the Registrant's By-Laws provides that such payments
will be made only on the following conditions: (i) advances may be made only on
receipt of a written affirmation of such person's good faith belief that the
standard of conduct necessary for indemnification has been met and a written
undertaking to repay any such advance if it is ultimately determined that the
standard of conduct has not been met; and (ii) (a) such promise must be secured
by a security for the undertaking in form and amount acceptable to the
Registrant, (b) the Registrant is insured against losses arising by receipt by
the advance, or (c) a majority of a quorum of the Registrant's disinterested
non-party Directors, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that at the time the
advance is proposed to be made, there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (the "1933 Act"), against certain types of civil liabilities arising in
connection with the Registration Statement or Prospectus and Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE MANAGER.
Merrill Lynch Asset Management, L.P. ("MLAM" or "Manager"), acts as the
investment adviser for the following open-end registered investment companies:
Merrill Lynch Adjustable Rate Securities
C-2
<PAGE>
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch
Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/ Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc. and Hotchkis and Wiley funds (advised by Hotchkis and Wiley,
a division of MLAM); and for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch
Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch
World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio, two
investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts as
the investment manager for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High
Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc., and The Municipal Fund Accumulation
Program, Inc.; and for the following closed-end registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund III, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund
III, MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund,
Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
C-3
<PAGE>
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665. The
address of FAM, MLAM, Princeton Services, Inc. ("Princeton Services") and
Princeton Administrators, L.P. ("Princeton Administrators") is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Princeton Funds
Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD") is
P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co.,
Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281-1201. The address of the Fund's transfer agent, Financial
Data Services, Inc. ("FDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since November 1, 1996 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Richard is Treasurer and Mr. Glenn is Executive Vice President of substantially
all of the investment companies described in the first two paragraphs of this
Item 26, and Messrs. Giordano, Harvey, Kirstein and Monagle are officers of one
or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------------ ---------------------------- ---------------------------------------------
<S> <C> <C>
ML & Co............................. Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services.................. General Partner General Partner of FAM
Arthur Zeikel....................... Chairman Chairman of FAM; President of FAM and MLAM
from 1977 to 1997; Chairman and Director of
Princeton Services; President of Princeton
Services from 1993 to 1997; Executive Vice
President of ML & Co.
Jeffrey M. Peek..................... President President of FAM; President and Director of
Princeton Services; Executive Vice President
of ML & Co.; Managing Director and Co-Head of
the Investment Banking Division of Merrill
Lynch (in 1997); Senior Vice President and
Director of the Global Securities and
Economics Division of Merrill Lynch (from
1995 to 1997).
Terry K. Glenn...................... Executive Vice President Executive Vice President of FAM; Executive
Vice President and Director of Princeton
Services; President and Director of PFD;
Director of FDS; President of Princeton
Administrators; Senior Vice President of
Princeton Services
Mark A. Desario..................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Linda L. Federici................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------------ ---------------------------- ---------------------------------------------
Vincent R. Giordano................. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
<S> <C> <C>
Elizabeth A. Griffin................ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Norman R. Harvey.................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel.............. Senior Vice President, Senior Vice President, Secretary and General
Secretary and General Counsel of FAM; Senior Vice President of
Counsel Princeton Services
Philip L. Kirstein.................. Senior Vice President Senior Vice President of FAM; Senior Vice
President, Director and Secretary of
Princeton Services
Ronald M. Kloss..................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Debra W. Landsman-Yaros............. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Vice
President of PFD
Stephen M. M. Miller................ Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr............... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Brian A. Murdock.................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services;
Gregory D. Upah..................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Ronald L. Welburn................... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill
Lynch Consults International Portfolio, Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch
Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series Fund,
Inc., Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Short-Term
Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
Utility Income Fund, Inc., Merrill
C-5
<PAGE>
Lynch Variable Series Funds, Inc., Merrill Lynch World Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton Gate, 1
Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since July 1,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard are officers
of one or more of the registered investment companies listed in the first two
paragraphs of this Item 26:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITIONS WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------------ -------------------------------- -----------------------------------------
<S> <C> <C>
Arthur Zeikel....................... Director and Chairman Chairman of FAM and MLAM; President of
FAM and MLAM from 1977 to 1997; Chairman
and Director of Princeton Services;
President of Princeton Services from 1993
to 1997; Executive Vice President of ML &
Co.
Alan J. Albert...................... Senior Managing Director Vice President of MLAM
Nicholas C.D. Hall.................. Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group
Carol Ann Langham................... Company Secretary None
Debra Anne Searle................... Assistant Company Secretary None
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies referred
to in the first two paragraphs of Item 26 except CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc. and The Municipal Fund Accumulation Program, Inc.; MLFD also acts as the
principal underwriter for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of
C-6
<PAGE>
Messrs. Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH PFD WITH REGISTRANT
- -------------------------------------------------- -------------------------------- ----------------------------
<S> <C> <C>
Terry K. Glenn.................................... President and Director Executive Vice President
Michael G. Clark.................................. Director None
Thomas J. Verage.................................. Director None
Robert W. Crook................................... Senior Vice President None
Michael J. Brady.................................. Vice President None
William M. Breen.................................. Vice President None
James T. Fatseas.................................. Vice President None
Debra W. Landsman-Yaros........................... Vice President None
Michelle T. Lau................................... Vice President None
Salvatore Venezia................................. Vice President None
William Wasel..................................... Vice President None
Robert Harris..................................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the rules thereunder are maintained at the offices of
the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey 08536), and its
transfer agent, Financial Data Services, Inc. (4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484).
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund -- Merrill
Lynch Asset Management" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund -- Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and the State of New Jersey, on the 29th day of January,
1999.
<TABLE>
<S> <C> <C>
MERRILL LYNCH REAL ESTATE FUND, INC.
(Registrant)
By: /s/ ARTHUR ZEIKEL
-----------------------------------------
(Arthur Zeikel, President)
</TABLE>
Pursuant to the requirements of the Securities Act, this registration
statement has been signed below by the following persons in the capacities and
on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
ARTHUR ZEIKEL President and Director
- ------------------------------ (Principal Executive
(Arthur Zeikel) Officer)
DONALD C. BURKE* Treasurer (Principal
- ------------------------------ Financial
(Donald C. Burke) and Accounting Officer)
JOE GRILLS*
- ------------------------------ Director
(Joe Grills)
WALTER MINTZ*
- ------------------------------ Director
(Walter Mintz)
ROBERT S. SALOMON, JR.*
- ------------------------------ Director
(Robert S. Salomon, Jr.)
MELVIN R. SEIDEN*
- ------------------------------ Director
(Melvin R. Seiden)
STEPHEN B. SWENSRUD*
- ------------------------------ Director
(Stephen B. Swensrud)
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ARTHUR ZEIKEL
-------------------------
(Arthur Zeikel, January 29, 1999
Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
POWER OF ATTORNEY
MERRILL LYNCH REAL ESTATE FUND, INC. (THE "FUND")
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn and Donald C. Burke, or any of them, as attorney-in-fact, to sign
on his or her behalf, individually and in each capacity stated below, any
amendments to the Registration Statement (including post-effective amendments)
of the Fund and to file the same with all exhibits thereto, with the Securities
and Exchange Commission.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ARTHUR ZEIKEL President (Principal
- ------------------------------ Executive Officer) and
(Arthur Zeikel) Director
/s/ DONALD C. BURKE Treasurer (Principal
- ------------------------------ Financial and Accounting
(Donald C. Burke) Officer)
/s/ JOE GRILLS
- ------------------------------ Director
(Joe Grills)
/s/ WALTER MINTZ
- ------------------------------ Director
(Walter Mintz)
/s/ ROBERT S. SALOMON, JR.
- ------------------------------ Director
(Robert S. Salomon, Jr.)
/s/ MELVIN R. SEIDEN
- ------------------------------ Director
(Melvin R. Seiden)
/s/ STEPHEN B. SWENSRUD
- ------------------------------ Director January 13, 1999
(Stephen B. Swensrud)
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10 Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
14(a) Financial Data Schedule for Class A shares.
14(b) Financial Data Schedule for Class B shares.
14(c) Financial Data Schedule for Class C shares.
14(d) Financial Data Schedule for Class D shares.
</TABLE>
C-10
<PAGE>
EXHIBIT 99.10
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Real Estate Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 2 to Registration Statement No. 333-36721 of our report dated January 19,
1999 appearing in the annual report to shareholders of Merrill Lynch Real Estate
Fund, Inc. for the year ended November 30, 1998, and to the reference to us
under the caption "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
January 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001043433
<NAME> MERRILL LYNCH REAL ESTATE FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-26-1997
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 69997321
<INVESTMENTS-AT-VALUE> 62842325
<RECEIVABLES> 292056
<ASSETS-OTHER> 116545
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 63250926
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 508120
<TOTAL-LIABILITIES> 508120
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73665878
<SHARES-COMMON-STOCK> 259172
<SHARES-COMMON-PRIOR> 2500
<ACCUMULATED-NII-CURRENT> 228866
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3997626)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7154312)
<NET-ASSETS> 2255323
<DIVIDEND-INCOME> 2986204
<INTEREST-INCOME> 217505
<OTHER-INCOME> 0
<EXPENSES-NET> (1471818)
<NET-INVESTMENT-INCOME> 1731891
<REALIZED-GAINS-CURRENT> (4010701)
<APPREC-INCREASE-CURRENT> (7154312)
<NET-CHANGE-FROM-OPS> (9433122)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (56990)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 377111
<NUMBER-OF-SHARES-REDEEMED> (125372)
<SHARES-REINVESTED> 4933
<NET-CHANGE-IN-ASSETS> 62642806
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 544585
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1471818
<AVERAGE-NET-ASSETS> 1929460
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .33
<PER-SHARE-GAIN-APPREC> (1.37)
<PER-SHARE-DIVIDEND> (.26)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.70
<EXPENSE-RATIO> 1.39
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001043433
<NAME> MERRILL LYNCH REAL ESTATE FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> CLASS B
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-26-1997
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 69997321
<INVESTMENTS-AT-VALUE> 62842325
<RECEIVABLES> 292056
<ASSETS-OTHER> 116545
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 63250926
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 508120
<TOTAL-LIABILITIES> 508120
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73665878
<SHARES-COMMON-STOCK> 5120477
<SHARES-COMMON-PRIOR> 2500
<ACCUMULATED-NII-CURRENT> 228866
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3997626)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7154312)
<NET-ASSETS> 44481562
<DIVIDEND-INCOME> 2986204
<INTEREST-INCOME> 217505
<OTHER-INCOME> 0
<EXPENSES-NET> (1471818)
<NET-INVESTMENT-INCOME> 1731891
<REALIZED-GAINS-CURRENT> (4010701)
<APPREC-INCREASE-CURRENT> (7154312)
<NET-CHANGE-FROM-OPS> (9433122)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1018928
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6447479
<NUMBER-OF-SHARES-REDEEMED> (1409194)
<SHARES-REINVESTED> 79692
<NET-CHANGE-IN-ASSETS> 62642806
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 544585
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1471818
<AVERAGE-NET-ASSETS> 49472632
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .24
<PER-SHARE-GAIN-APPREC> (1.36)
<PER-SHARE-DIVIDEND> (.19)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.69
<EXPENSE-RATIO> 2.41
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001043433
<NAME> MERRILL LYNCH REAL ESTATE FUND, INC.
<SERIES>
<NUMBER> 003
<NAME> CLASS C
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-26-1997
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 69997321
<INVESTMENTS-AT-VALUE> 62842325
<RECEIVABLES> 292056
<ASSETS-OTHER> 116545
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 63250926
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 508120
<TOTAL-LIABILITIES> 508120
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73665878
<SHARES-COMMON-STOCK> 1121528
<SHARES-COMMON-PRIOR> 2500
<ACCUMULATED-NII-CURRENT> 228866
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3997626)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7154312)
<NET-ASSETS> 9737420
<DIVIDEND-INCOME> 2986204
<INTEREST-INCOME> 217505
<OTHER-INCOME> 0
<EXPENSES-NET> (1471818)
<NET-INVESTMENT-INCOME> 1731891
<REALIZED-GAINS-CURRENT> (4010701)
<APPREC-INCREASE-CURRENT> (7154312)
<NET-CHANGE-FROM-OPS> (9433122)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (216101)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1420370
<NUMBER-OF-SHARES-REDEEMED> (320547)
<SHARES-REINVESTED> 19205
<NET-CHANGE-IN-ASSETS> 62642806
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 544585
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1471818
<AVERAGE-NET-ASSETS> 9789158
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .24
<PER-SHARE-GAIN-APPREC> (1.37)
<PER-SHARE-DIVIDEND> (.19)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.68
<EXPENSE-RATIO> 2.42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0001043433
<NAME> MERRILL LYNCH REAL ESTATE FUND, INC.
<SERIES>
<NUMBER> 004
<NAME> CLASS D
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-26-1997
<PERIOD-END> NOV-30-1998
<INVESTMENTS-AT-COST> 69997321
<INVESTMENTS-AT-VALUE> 62842325
<RECEIVABLES> 292056
<ASSETS-OTHER> 116545
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 63250926
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 508120
<TOTAL-LIABILITIES> 508120
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 73665878
<SHARES-COMMON-STOCK> 720597
<SHARES-COMMON-PRIOR> 2500
<ACCUMULATED-NII-CURRENT> 228866
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3997626)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7154312)
<NET-ASSETS> 6268501
<DIVIDEND-INCOME> 2986204
<INTEREST-INCOME> 217505
<OTHER-INCOME> 0
<EXPENSES-NET> (1471818)
<NET-INVESTMENT-INCOME> 1731891
<REALIZED-GAINS-CURRENT> (4010701)
<APPREC-INCREASE-CURRENT> (7154312)
<NET-CHANGE-FROM-OPS> (9433122)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (197931)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 986078
<NUMBER-OF-SHARES-REDEEMED> (280835)
<SHARES-REINVESTED> 12854
<NET-CHANGE-IN-ASSETS> 62642806
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 544585
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1471818
<AVERAGE-NET-ASSETS> 7588528
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .30
<PER-SHARE-GAIN-APPREC> (1.36)
<PER-SHARE-DIVIDEND> (.24)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.70
<EXPENSE-RATIO> 1.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
