<PAGE> 1
PROSPECTUS
JULY 26, 1996
MERRILL LYNCH CAPITAL FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800
Merrill Lynch Capital Fund, Inc. (the "Fund") seeks to achieve the highest
total investment return consistent with prudent risk through a fully managed
investment policy utilizing equity, debt (including money market) and
convertible securities. This permits management of the Fund to vary investment
policy based on its evaluation of changes in economic and market trends. Total
investment return is the aggregate of income and capital value changes.
Consistent with this policy, the Fund's portfolio may, at any given time, be
invested substantially in equity securities, corporate bonds or money market
securities. It is the expectation of management that, over longer periods, a
major portion of the Fund's portfolio will consist of equity securities of
larger market capitalization, quality companies. Since January 1, 1974, the
portion of the Fund's portfolio invested in equity securities has ranged from
approximately 43% to 98% with the balance being invested in corporate bonds,
money market securities, government bonds and mortgage-backed securities. On
March 31, 1996, approximately 46.7% of the Fund's portfolio was invested in
equity securities. There can be no assurance that the Fund's investment
objective will be achieved. For more information on the Fund's investment
objective and policies, please see "Investment Objective and Policies" on page
10.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from other securities dealers which have entered into dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated July 26, 1996 (the "Statement of Additional Information"),
has been filed with the Securities and Exchange Commission (the "Commission")
and can be obtained, without charge, by calling or by writing the Fund at the
above telephone number or address. The Statement of Additional Information is
hereby incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 2
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows.
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ----------------------- ------------ ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments............................ None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............ None(d) 4.0% during the first 1.0% for one None(d)
year, decreasing 1.0% year
annually thereafter to
0.0% after the fourth
year
Exchange Fee............................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Investment Advisory Fees(e)................ 0.40% 0.40% 0.40% 0.40%
12b-1 Fees(f):
Account Maintenance Fees................. None 0.25% 0.25% 0.25%
Distribution Fees........................ None 0.75% 0.75% None
(Class B shares
convert to Class D
shares automatically
after approximately
eight years and cease
being subject to
distribution fees)
Other Expenses:
Custodial Fees........................ 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(g)........ 0.13% 0.15% 0.16% 0.13%
Other................................. 0.02% 0.02% 0.02% 0.02%
----- ----- ----- -----
Total Other Expenses.............. 0.16% 0.18% 0.19% 0.16%
----- ----- ----- -----
Total Fund Operating Expenses.............. 0.56% 1.58% 1.59% 0.81%
===== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain investment
programs. See "Purchase of Shares--Initial Sales Charge Alternatives--Class
A and Class D Shares"--page 17.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares"--page 19.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A or Class D purchases of $1,000,000 or more are not subject
to an initial sales charge. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"-- page 17.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge will instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase.
(e) See "Management of the Fund--Management and Advisory Arrangements"--page 13.
(f) See "Purchase of Shares--Distribution Plans"--page 23.
(g) See "Management of the Fund--Transfer Agency Services"--page 15.
2
<PAGE> 3
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth on page 2,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period:
Class A..................................................... $ 58 $70 $82 $119
Class B..................................................... $ 56 $70 $86 $168*
Class C..................................................... $ 26 $50 $87 $189
Class D..................................................... $ 60 $77 $95 $147
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A..................................................... $ 58 $70 $82 $119
Class B..................................................... $ 16 $50 $86 $168*
Class C..................................................... $ 16 $50 $87 $189
Class D..................................................... $ 60 $77 $95 $147
</TABLE>
- ---------------
* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
directly through the Fund's transfer agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares".
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Investment Adviser") or Fund Asset Management, L.P. ("FAM"), an affiliate of
MLAM. Funds advised by MLAM or FAM which use the Merrill Lynch Select
Pricing(SM) System are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares
3
<PAGE> 4
bear the expenses of the ongoing account maintenance fees and Class B and Class
C shares bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. The deferred sales charges, distribution and account maintenance
fees that are imposed on Class B and Class C shares, as well as the account
maintenance fees that are imposed on Class D shares, are imposed directly
against those classes and not against all assets of the Fund and accordingly,
such charges do not affect the net asset value of any other class or have any
impact on investors choosing another sales charge option. Dividends paid by the
Fund for each class of shares are calculated in the same manner at the same time
and will differ only to the extent that account maintenance and distribution
fees and any incremental transfer agency costs relating to a particular class
are borne exclusively by that class. 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 deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares".
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
-----------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales
charge(2)(3) No No No
-----------------------------------------------------------------------------------------------
B CDSC for a period of 4 years,
at a rate of 4.0% during
the first year, decreasing B shares convert to
1.0% annually to 0.0% 0.25% 0.75% D shares automatically
after approximately
eight years(4)
-----------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
-----------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% No No
-----------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares-- Eligible Class A
Investors".
4
<PAGE> 5
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but, if the initial sales charge is
waived, will be subject to a 1.0% CDSC for one year. See "Class A" and
"Class D" below.
(4) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans were modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A
shares of the Fund. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class
A shares of the Fund in that account. Other eligible investors include
certain retirement plans and participants in certain investment
programs. In addition, Class A shares will be offered at net asset
value to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries
(the term "subsidiaries", when used herein with respect to ML & Co.,
includes the Investment Adviser, FAM and certain other entities
directly or indirectly wholly-owned and controlled by ML & Co.) and
their directors and officers, and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge is 5.25%
which is reduced for purchases of $25,000 and over, and waived for
purchases by certain retirement plans in connection with certain
investment programs. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases will be subject to a 1.0% CDSC if the shares are
redeemed within one year after purchase. Sales charges also are reduced
under a right of accumulation which takes into account the investor's
holdings of all classes of all MLAM-advised mutual funds. See "Purchase
of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares".
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee
of 0.25%, and an ongoing distribution fee of 0.75%, of the
Fund's average net assets attributable to the Class B shares, and a
CDSC if they are redeemed within four years of purchase. Approximately
eight years after issuance, Class B shares will convert automatically
into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain
other MLAM-advised mutual funds into which exchanges may be made
convert into Class D shares automatically after approximately ten
years. If Class B shares of the Fund are exchanged for Class B shares
of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired. Automatic conversion of Class
B shares into Class D shares will occur at least once each month on
the basis of the relative net asset values of the shares of the two
classes on the conversion date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal
income tax purposes. Shares purchased through reinvestment of
dividends on Class B shares also will convert automatically to Class D
shares. The conversion period for dividend reinvestment shares and the
conversion and holding periods for certain retirement plans are
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares".
5
<PAGE> 6
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25%, and an
ongoing distribution fee of 0.75%, of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC if they are redeemed within one year of purchase. Although Class C
shares are subject to a 1.0% CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares, except that there is no waiver for purchases by
retirement plans in connection with certain investment programs. Class
D shares also will be issued upon conversion of Class B shares as
described above under "Class B". See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors 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 that previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are
6
<PAGE> 7
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.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all of their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all of their assets invested initially and they are
uncertain as to the length of time they intend to hold their assets in
MLAM-advised mutual funds. Although Class C shareholders are subject to a
shorter CDSC period at a lower rate, they forgo the Class B conversion feature,
making their investment subject to account maintenance and distribution fees for
an indefinite period of time. In addition, while both Class B and Class C
distribution fees are subject to the limitations on asset-based sales charges
imposed by the NASD, the Class B distribution fees are further limited under a
voluntary waiver of asset-based sales charges. See "Purchase of
Shares--Limitations on the Payment of Deferred Sales Charges".
7
<PAGE> 8
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in connection
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the year ended March
31, 1996 and the independent auditors' report thereon are included in the
Statement of Additional Information. The following per share data and ratios
have been derived from information provided in the Fund's audited financial
statements. Further information about the performance of the Fund is contained
in the Fund's most recent annual report to shareholders which may be obtained,
without charge, by calling or by writing the Fund at the telephone number or
address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.... $ 27.74 $ 27.46 $ 27.89 $ 26.90 $ 25.38 $ 23.65 $ 22.33
---------- ---------- ---------- ---------- ---------- ---------- --------
Investment income--net................ 1.21 1.01 .97 .87 1.02 1.17 1.11
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net.................... 5.41 1.77 .50 1.99 2.12 2.24 2.03
---------- ---------- ---------- ---------- ---------- ---------- --------
Total from investment operations...... 6.62 2.78 1.47 2.86 3.14 3.41 3.14
---------- ---------- ---------- ---------- ---------- ---------- --------
Less dividends and distributions:
Investment income--net............... (1.16) (.94) (.95) (.87) (1.02) (1.14) (1.10)
Realized gain on investments--net.... (2.30) (1.56) (.95) (1.00) (.60) (.54) (.72)
---------- ---------- ---------- ---------- ---------- ---------- --------
Total dividends and distributions..... (3.46) (2.50) (1.90) (1.87) (1.62) (1.68) (1.82)
---------- ---------- ---------- ---------- ---------- ---------- --------
Net asset value, end of year.......... $ 30.90 $ 27.74 $ 27.46 $ 27.89 $ 26.90 $ 25.38 $ 23.65
========== ========== ========== ========== ========== ========== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.... 24.50% 10.95% 5.39% 11.33% 12.96% 15.17% 14.04%
========== ========== ========== ========== ========== ========== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................. .56% .57% .53% .55% .56% .58% .60%
========== ========== ========== ========== ========== ========== ========
Investment income--net................ 4.09% 3.81% 3.52% 3.56% 4.21% 5.13% 4.80%
========== ========== ========== ========== ========== ========== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)........................... $3,225,758 $2,507,767 $2,237,492 $2,056,023 $1,533,530 $1,083,741 $866,924
========== ========== ========== ========== ========== ========== ========
Portfolio turnover.................... 84% 89% 86% 55% 59% 86% 85%
========== ========== ========== ========== ========== ========== ========
Average commission rate paid.......... $ .0382 --+ --+ --+ --+ --+ --+
========== ========== ========== ========== ========== ========== ========
<CAPTION>
1989 1988 1987
-------- -------- --------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.... $ 21.32 $ 27.97 $ 26.19
-------- -------- --------
Investment income--net................ 1.07 .91 .88
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net.................... 1.69 (1.58) 3.44
-------- -------- --------
Total from investment operations...... 2.76 (.67) 4.32
-------- -------- --------
Less dividends and distributions:
Investment income--net............... (.73) (.22) (.44)
Realized gain on investments--net.... (1.02) (5.76) (2.10)
-------- -------- --------
Total dividends and distributions..... (1.75) (5.98) (2.54)
-------- -------- --------
Net asset value, end of year.......... $ 22.33 $ 21.32 $ 27.97
======== ======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share.... 13.42% (1.69%) 18.44%
======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................. .64% .60% .62%
======== ======== ========
Investment income--net................ 4.79% 3.57% 3.52%
======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)........................... $678,958 $657,682 $700,643
======== ======== ========
Portfolio turnover.................... 63% 85% 109%
======== ======== ========
Average commission rate paid.......... --+ --+ --+
======== ======== ========
</TABLE>
- ---------------
* Total investment returns exclude the effects of sales loads.
+ Data not required for the period.
8
<PAGE> 9
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989+++
---------- ---------- ---------- ---------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 27.28 $ 27.04 $ 27.49 $ 26.58 $ 25.14 $ 23.46 $ 22.27 $ 22.64
---------- ---------- ---------- ---------- ---------- -------- -------- -------
Investment income--net....... .90 .74 .70 .65 .80 .96 .91 .22
Realized and unrealized gain
on investments and foreign
currency
transactions--net........... 5.29 1.72 .48 1.89 2.05 2.19 1.96 .72
---------- ---------- ---------- ---------- ---------- -------- -------- -------
Total from investment
operations.................. 6.19 2.46 1.18 2.54 2.85 3.15 2.87 .94
---------- ---------- ---------- ---------- ---------- -------- -------- -------
Less dividends and
distributions:
Investment income--net...... (.87) (.66) (.68) (.63) (.81) (.93) (.96) (.54)
Realized gain on
investments--net.......... (2.30) (1.56) (.95) (1.00) (.60) (.54) (.72) (.77)
---------- ---------- ---------- ---------- ---------- -------- -------- -------
Total dividends and
distributions............... (3.17) (2.22) (1.63) (1.63) (1.41) (1.47) (1.68) (1.31)
---------- ---------- ---------- ---------- ---------- -------- -------- -------
Net asset value, end of
period...................... $ 30.30 $ 27.28 $ 27.04 $ 27.49 $ 26.58 $ 25.14 $ 23.46 $ 22.27
=========== =========== =========== =========== =========== ========= ========= ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share....................... 23.22% 9.81% 4.36% 10.16% 11.81% 14.03% 12.84% 4.42%#
=========== =========== =========== =========== =========== ========= ========= ========
RATIOS TO AVERAGE NET ASSETS:
Expenses..................... 1.58% 1.59% 1.55% 1.56% 1.58% 1.60% 1.62% 1.70%*
=========== =========== =========== =========== =========== ========= ========= ========
Investment income--net....... 3.07% 2.79% 2.50% 2.53% 3.14% 4.11% 3.72% 4.43%*
=========== =========== =========== =========== =========== ========= ========= ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................. $5,025,504 $3,664,250 $3,079,332 $2,694,774 $1,582,065 $620,842 $365,773 $32,254
=========== =========== =========== =========== =========== ========= ========= ========
Portfolio turnover........... 84% 89% 86% 55% 59% 86% 85% 63%
=========== =========== =========== =========== =========== ========= ========= ========
Average commission rate
paid........................ $ .0382 --+ --+ --+ --+ --+ --+ --+
=========== =========== =========== =========== =========== ========= ========= ========
<CAPTION>
CLASS C CLASS D
--------------------- --------------------
FOR THE FOR THE
PERIOD PERIOD
OCTOBER OCTOBER
FOR THE 21, FOR THE 21,
YEAR 1994++ YEAR 1994++
ENDED TO ENDED TO
MARCH MARCH MARCH MARCH
31, 31, 31, 31,
-------- -------- -------- --------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 27.17 $ 26.81 $ 27.72 $ 27.27
-------- -------- -------- --------
Investment income--net....... .92 .49 1.16 .48
Realized and unrealized gain
on investments and foreign
currency
transactions--net........... 5.24 1.03 5.38 1.15
-------- -------- -------- --------
Total from investment
operations.................. 6.16 1.52 6.54 1.63
-------- -------- -------- --------
Less dividends and
distributions:
Investment income--net...... (.95) (.43) (1.10) (.45)
Realized gain on
investments--net.......... (2.30) (.73) (2.30) (.73)
-------- -------- -------- --------
Total dividends and
distributions............... (3.25) (1.16) (3.40) (1.18)
-------- -------- -------- --------
Net asset value, end of
period...................... $ 30.08 $ 27.17 $ 30.86 $ 27.72
========= ========= ========= =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share....................... 23.25% 6.07%# 24.21% 6.42%#
========= ========= ========= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses..................... 1.59% 1.64%* .81% .87%*
========= ========= ========= =========
Investment income--net....... 3.08% 3.22%* 3.84% 3.94%*
========= ========= ========= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................. $259,131 $ 46,902 $521,599 $171,201
========= ========= ========= =========
Portfolio turnover........... 84% 89% 84% 89%
========= ========= ========= =========
Average commission rate
paid........................ $ .0382 --+ $ .0382 --+
========= ========= ========= =========
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Data not required for the period.
++ Commencement of Operations.
+++ Class B shares commenced operations on October 21, 1988.
# Aggregate total investment return.
9
<PAGE> 10
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve the highest total investment
return consistent with prudent risk. To do this, management of the Fund shifts
the emphasis among equity, debt (including money market) and convertible
securities. This flexible, total investment return approach is called a "fully
managed" investment policy. It distinguishes the Fund from other investment
companies which often seek either capital growth or current income. Of course,
there is no assurance that the Fund will attain this objective.
The Fund's investment philosophy is based on the belief that, as in the
past, the structure of the United States' economy and other economies and their
securities markets will undergo continuous change. Thus, the fully managed
approach puts maximum emphasis on flexibility.
The two principal features of the Fund's management approach are
flexibility and concentration in "quality" companies.
Flexibility. The Fund's fully managed investment approach makes use of
equity, debt (including money market) and convertible securities. Freedom to
move among these different types of securities as prevailing trends change is
the keystone of the Fund's investment policy.
Concentration in "Quality" Companies. The earnings of quality companies
generally tend to grow consistently. Their internal strengths--good financial
resources, a strong balance sheet, satisfactory rate of return on capital, a
good industry position and superior management skills--give the Fund confidence
that these companies consistently will achieve at high levels. The Fund
considers quality companies to be those which conform most closely to these
characteristics. Most of the Fund's equity portfolio is in the common stocks of
these quality companies.
Sometimes, to reduce risk and to achieve the highest total investment
return, the Fund may invest in other securities:
-- Non-convertible, long-term debt securities, including "deep discount"
corporate debt securities, mortgage-backed securities issued or guaranteed by
governmental entities or private issuers, and debt securities issued or
guaranteed by governments, their agencies and instrumentalities. Such debt
securities generally will be "investment grade". However, the Fund has
established no rating criteria for the debt securities in which it may invest,
and the Fund may invest in securities which are rated below "investment grade".
See "Investment Objective and Policies" and Appendix A in the Statement of
Additional Information for a discussion of the risks involved in investing in
securities which are rated below "investment grade."
-- Convertible securities, i.e., fixed income issues which give the owner
the option of a later exchange for common stock. 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. 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 for the common stock, the conversion
value is substantially below the investment value of the convertible security,
the price of the convertible security will be governed principally by its
investment value.
10
<PAGE> 11
-- Cash or money-market securities to produce interest income during
periods of defensive investment.
The Investment Adviser expects that over longer periods a larger portion of
the Fund's portfolio will consist of equity securities. However, the flexible
fully managed investment approach enables the Fund to switch its emphasis to
debt and convertible securities if, in the opinion of the Investment Adviser,
prevailing market or economic conditions warrant. The Investment Adviser will
determine the emphasis among equity and debt securities, including convertible
securities, based on its evaluation as to the types of securities presently
providing the opportunity for the highest total investment return consistent
with prudent risk. On March 31, 1996, approximately 46.7% of the Fund's
portfolio was invested in equity securities.
The Fund may invest in the securities of smaller or emerging growth
companies. The securities of smaller or emerging growth companies may be subject
to more abrupt or erratic market movements than larger, more established
companies or the market average in general. These companies may have limited
product lines, markets or financial resources, or they may be dependent on a
limited management group.
The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act. However, the Fund will not invest more than
15% of its total assets in illiquid investments, which includes securities for
which there is no readily available market, securities subject to contractual
restrictions on resale, certain investments in asset-backed and
receivable-backed securities and restricted securities, unless the Fund's Board
of Directors continuously determines, based on the trading markets for the
specific restricted security, that it is liquid. The Board of Directors may
adopt guidelines and delegate to the Investment Adviser 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.
The Board of Directors carefully monitors the Fund's investments in these
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. These
investments in securities purchased pursuant to Rule 144A 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
restricted securities.
The Fund may invest up to 25% of its total assets in securities of foreign
issuers. Investments in securities of foreign issuers involve certain risks,
including fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. In addition, foreign companies are not
subject to accounting, auditing and financial reporting standards and
requirements comparable to those of U.S. companies. The foreign markets also
have different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the Fund
due to subsequent declines in 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. To the extent such investments are subject to
withholding or other taxes or to regulations relating to repatriation of assets,
the Fund's distributable income will be reduced. The prices of securities in
different countries may be subject to different economic, financial, political
and social factors.
11
<PAGE> 12
Among the risks to which an investment in the Fund is subject are interest
rate risk and credit risk. Interest rate risk is the risk that the portion of
the Fund's net asset value attributable to the Fund's fixed-income securities
may fall when interest rates rise and rise when interest rates fall. In general,
fixed-income securities with longer maturities will be subject to greater
volatility resulting from interest rate fluctuations than will fixed-income
securities with shorter maturities. Credit risk is the risk that an issuer of
fixed-income securities that the Fund owns will not make timely payments of
interest or repayments of principal from the issuer. Credit risk is greater in
lower-rated securities.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies which are fundamental policies
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act of 1940, as amended (the "Investment Company Act") means
the lesser of (a) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its total assets, taken at market value at the time of each
investment, in the securities of issuers in any particular industry (excluding
the U.S. Government and its agencies and instrumentalities). Investment
restrictions and policies that are non-fundamental policies may be changed by
the Board of Directors without shareholder approval. As a non-fundamental
policy, the Fund may not borrow amounts in excess of 5% of its total assets,
taken at acquisition or market value, whichever is lower and then only from
banks as a temporary measure for extraordinary or emergency purposes. 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.
As a non-fundamental policy, the Fund will not invest in securities which
cannot readily be 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 total assets (or 10% of its total assets
as presently required by certain state laws) taken at market value would be
invested in such securities. Notwithstanding the foregoing, the Fund may
purchase without regard to this limitation securities that are not registered
under the Securities Act, but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors continuously determines, based on the trading
markets for the specific Rule 144A security, that it is liquid. The Board of
Directors may adopt guidelines and delegate to the Investment Adviser the daily
function of determining and monitoring liquidity of restricted securities. The
Board has determined that securities which are freely tradeable in their primary
market offshore should be deemed liquid. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations.
Lending of Portfolio Securities. The Fund from time to time lends
securities (but no more than 20% of its total assets) from its portfolio to
approved borrowers and receives therefor collateral in cash or securities issued
or guaranteed by the U.S. Government which are maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. During the period of the loan, the Fund receives the income on both
the loaned securities and the collateral, and thereby increases its yield.
Writing of Covered Call Options. The Fund may from time to time write
(i.e., sell) covered call options on its portfolio securities and enter into
closing purchase transactions with respect to certain of such options. A call
option is considered covered where the writer of the option owns the underlying
securities. By writing a
12
<PAGE> 13
covered call option, the Fund, in return for the premium income realized from
the sale of the option, may give up the opportunity to profit from a price
increase in the underlying security above the option exercise price. In
addition, the Fund will not be able to sell the underlying security until the
option expires, is exercised or the Fund effects a closing purchase transaction.
A closing purchase transaction cancels out the Fund's position as the writer of
an option by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. If an option expires unexercised, the
writer realizes a gain in the amount of the premium. Such a gain, of course, may
be offset by a decline in the market price of the underlying security during the
option period. The Fund may not write covered call options on underlying
securities exceeding 15% of the value of its total assets.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund, as defined in the Investment
Company Act. The Directors of the Fund 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.
The Directors of the Fund are:
ARTHUR ZEIKEL*--President of the Investment Adviser and FAM; President and
Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of ML & Co.; Director of the Distributor.
DONALD CECIL--Special Limited Partner of Cumberland Partners (an investment
partnership).
M. COLYER CRUM--James R. Williston Professor of Investment Management,
Harvard Business School.
EDWARD H. MEYER--Chairman of the Board of Directors, President and Chief
Executive Officer of Grey Advertising Inc.
JACK B. SUNDERLAND--President and Director of American Independent Oil
Company, Inc. (an energy company).
J. THOMAS TOUCHTON--Managing Partner of The Witt-Touchton Company (a
private investment partnership).
- ------------
*Interested person, as defined by the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, acts as the
investment adviser for the Fund and provides the Fund with management and
investment advisory services. The Investment Adviser or its affiliate, FAM, acts
as the investment adviser for more than 130 registered investment companies. The
Investment Adviser also provides investment advisory services to individual and
institutional accounts. As of June 30, 1996, the Investment Adviser and FAM had
a total of approximately $206.5 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
the Investment Adviser.
Achieving the Fund's investment objective depends on informed decisions to
buy, sell or hold particular securities. Subject to the direction of the Board
of Directors, the Fund's Investment Adviser has created a comprehensive
management system that sets objectives and establishes a framework for the
selection of particular securities and the distribution of assets. The system
appraises economic and other forces affecting
13
<PAGE> 14
securities markets and industries, and assesses short- and long-term prospects.
The Investment Adviser regularly reviews the research and analysis of other
brokerage firms with which the Fund does business.
The Fund pays the Investment Adviser a monthly fee based on the average
daily value of the Fund's net assets at the annual rates of: 0.50% of that
portion of average daily net assets not exceeding $250 million; 0.45% of that
portion of average daily net assets exceeding $250 million but not exceeding
$300 million; 0.425% of that portion of average daily net assets exceeding $300
million but not exceeding $400 million; and 0.40% of that portion of average
daily net assets exceeding $400 million. For the fiscal year ended March 31,
1996, the Investment Adviser earned a fee of $31,428,894 (based upon average net
assets of approximately $7.8 billion) and the effective fee rate was 0.40%.
The Investment Adviser is responsible for placing the Fund's brokerage
business and for negotiating prices, commissions and the charges for other
services. The Investment Adviser is not restricted in its choice of brokers or
dealers. It seeks the most favorable rates and services from any number of
brokers and dealers, including Merrill Lynch. See "Portfolio Transactions and
Brokerage".
The Fund pays certain expenses incurred in the operation of the Fund
including, among others, taxes, expenses for legal and auditing services, costs
of printing proxies and stock certificates, charges of the custodian and
transfer agent, expenses of redemption, brokerage costs, Commission fees, all
expenses of shareholders' and Directors' meetings and certain of the expenses of
printing prospectuses, statements of additional information and reports to
shareholders. For the fiscal year ended March 31, 1996, the ratio of total
expenses to average net assets was 0.56% for Class A shares, 1.58% for Class B
shares, 1.59% for Class C shares and 0.81% for Class D shares.
Kurt Schansinger has been the Senior Portfolio Manager of the Fund since
April 1996 and Vice President of the Investment Adviser since January 1996. From
January 1996 until April 1996, Mr. Schansinger served as Associate Portfolio
Manager of the Fund. Walter Cuje is the Associate Portfolio Manager of the Fund.
Mr. Cuje has been an Associate Portfolio Manager of the Investment Adviser since
October 1993 and a Vice President thereof since July 1991.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act which incorporates the Code of
Ethics of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of the
Investment Adviser and, as described below, impose additional, more onerous,
restrictions on Fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser 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 which 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 Investment Adviser. 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).
14
<PAGE> 15
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (formerly called Financial Data
Services, Inc.) (the "Transfer Agent"), which is a wholly-owned subsidiary of ML
& Co., acts as the Fund's transfer agent pursuant to a transfer agency, dividend
disbursing agency and shareholder servicing agency agreement (the "Transfer
Agency Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption of shares and the
opening and maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Fund pays the Transfer Agent a fee of $11.00 per Class A or Class
D shareholder account and $14.00 per Class B or Class C shareholder account and
the Transfer Agent is entitled to reimbursement from the Fund for out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement. For
the fiscal year ended March 31, 1996, the Fund paid the Transfer Agent
$10,911,584 pursuant to the Transfer Agency Agreement. At June 30, 1996 the Fund
had 198,108 Class A shareholder accounts, 347,193 Class B shareholder accounts,
30,751 Class C shareholder accounts and 38,005 Class D shareholder accounts. At
this level of accounts, the annual fee payable to the Transfer Agent would
aggregate $7,888,459 plus out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, an affiliate of the Investment Adviser, FAM and Merrill
Lynch, acts as the distributor of shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000, and the minimum subsequent
purchase is $50, except that for retirement plans, the minimum initial purchase
is $100, and the minimum subsequent purchase is $1.
The Fund offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis depending upon the class
of shares selected by the investor under the Merrill Lynch Select Pricing(SM)
System, as described below. The applicable offering price for purchase orders is
based on the net asset value of the Fund next determined after receipt of the
purchase order by the Distributor. As to purchase orders received by securities
dealers prior to the close of business on the New York Stock Exchange (the
"NYSE") (generally, 4:00 P.M., New York time) which includes orders received
after the close of business on the previous day, the applicable offering price
will be based on the net asset value determined as of 15 minutes after the close
of business on the NYSE on that day, provided the orders are received by the
Distributor prior to 30 minutes after the close of business on the NYSE on that
day. If the purchase orders are not received by the Distributor prior to 30
minutes after the close of business on the NYSE, such orders shall be deemed
received on the next business day. The Fund or the Distributor may suspend the
continuous offering of the Fund's shares of any class at any time in response to
conditions in the securities markets or otherwise and may thereafter resume such
offering from time to time. Any order may be rejected by the Distributor or the
Fund. Neither the Distributor nor the dealers are permitted to withhold placing
orders to benefit themselves by a price change. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a sale of shares to such
customers. Purchases directly through the Transfer Agent are not subject to the
processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that 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
15
<PAGE> 16
circumstances. Shares of Class A and Class D are sold to investors choosing the
initial sales charge alternatives and shares of Class B and Class C are sold to
investors choosing the deferred sales charge alternatives. Investors should
determine whether under their particular circumstances it is more advantageous
to incur an initial sales charge or to have the entire initial purchase price
invested in the Fund with the investment thereafter being subject to a CDSC and
ongoing distribution fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill Lynch
Select Pricing(SM) System is set forth under "Merrill Lynch Select Pricing(SM)
System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges do not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares are calculated in the same manner at the same time and differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. 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 Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
16
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales
charge(2)(3) No No No
------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years,
at a rate of 4.0% during
the first year, decreasing B shares convert to
1.0% annually to 0.0% 0.25% 0.75% D shares automatically
after approximately
eight years(4)
------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% No No
------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but, if the initial sales charge is
waived, will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans were modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
17
<PAGE> 18
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS DISCOUNT TO
PERCENTAGE OF PERCENTAGE* OF SELECTED DEALERS
OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ------------------------------------------------- ------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000................................ 5.25% 5.54% 5.00%
$25,000 but less than $50,000.................... 4.75 4.99 4.50
$50,000 but less than $100,000................... 4.00 4.17 3.75
$100,000 but less than $250,000.................. 3.00 3.09 2.75
$250,000 but less than $1,000,000................ 2.00 2.04 1.80
$1,000,000 and over**............................ 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more, and on Class A share purchases by certain retirement plan
investors in connection with certain investment programs, made on or after
October 21, 1994. If the sales charge is waived in connection with a purchase
of $1,000,000 or more, such purchases will be subject to a CDSC of 1.0% if
the shares are redeemed within one year after purchase. Class A purchases
made prior to October 21, 1994 might have been subject to a CDSC if the
shares were redeemed within one year of purchase at the following rates:
1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on purchases of
$2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to $5,000,000; and
0.25% on purchases of more than $5,000,000, in lieu of paying an initial
sales charge. The charge is assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A
or Class D shares by certain employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. During
the fiscal year ended March 31, 1996, the Fund sold 19,027,848 of its Class A
shares for aggregate net proceeds to the Fund of $584,244,547. The gross sales
charges for the sale of Class A shares of the Fund for that year were
$1,248,807, of which $81,332 and $1,167,475 were received by the Distributor and
Merrill Lynch, respectively. For the fiscal year ended March 31, 1996, the
Distributor received no CDSCs with respect to redemption within one year after
purchase of Class A shares purchased subject to front-end sales charge waivers.
During the fiscal year ended March 31, 1996, the Fund sold 10,198,663 of its
Class D shares for aggregate net proceeds to the Fund of $303,203,877. The gross
sales charges for the sale of Class D shares of the Fund for that period were
$3,786,103, of which $247,249 and $3,538,854 were received by the Distributor
and Merrill Lynch, respectively. During such period CDSCs received by the
Distributor with respect to redemption within one year after purchase of Class D
shares purchased subject to front-end sales charge waivers were de minimis.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer-sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares of the Fund 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
18
<PAGE> 19
in MLAM-advised mutual funds. Also eligible to purchase Class A shares at net
asset value are participants in certain investment programs including TMA(SM)
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services, collective investment trusts for which Merrill Lynch Trust
Company serves as trustee and certain purchases made in connection with the
Merrill Lynch Mutual Fund Adviser ("MFA") program. In addition, Class A shares
are offered at net asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the Boards of MLAM-advised investment
companies, including the Fund. Certain persons who acquired shares of certain
MLAM-advised closed-end funds in their initial offerings who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met. In
addition, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. and, if certain conditions set forth in the Statement of
Additional Information are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such funds in shares of the
Fund and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain
employer-sponsored retirement or savings plans and to Employee Access
Accounts(SM) available through qualified employers which provide such plans.
Class A and Class D shares are offered at net asset value to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest in shares of the Fund the net
proceeds from a sale of certain of their shares of common stock, pursuant to
tender offers conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
while Class C shares
19
<PAGE> 20
are subject only to a one-year 1.0% CDSC. On the other hand, approximately eight
years after Class B shares are issued, such Class B shares, together with shares
issued upon dividend reinvestment with respect to those shares, are
automatically converted into Class D shares of the Fund and thereafter will be
subject to lower continuing fees. See "Conversion of Class B Shares to Class D
Shares" below. Both Class B and Class C shares are subject to an account
maintenance fee of 0.25% of net assets and a distribution fee of 0.75% of net
assets as discussed below under "Distribution Plans". The proceeds from the
account maintenance fees are used to compensate Merrill Lynch for providing
account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of Class B and Class C shares,
such as the payment of compensation to financial consultants for selling Class B
and Class C shares from the 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. Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which are
redeemed within four years of purchase may be subject to a CDSC at the rates set
forth below charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
20
<PAGE> 21
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
------------------- ----------------
<S> <C>
0-1.................................................... 4.00%
1-2.................................................... 3.00
2-3.................................................... 2.00
3-4.................................................... 1.00
4 and thereafter....................................... 0.00
</TABLE>
For the fiscal year ended March 31, 1996, the Distributor received CDSCs of
$4,025,586 with respect to redemptions of Class B shares, all of which was paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in the 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 for shares purchased
on or after October 21, 1994).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the MFA program, the time
period that such Class A shares are held in the MFA program will be included in
determining the holding period of Class B shares reacquired upon termination of
participation in the MFA program (see "Shareholder Services -- Exchange
Privilege").
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch Blueprint(SM) Program. The CDSC also is waived
for any Class B shares which are purchased by eligible 401(k) or eligible 401(a)
plans which are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption. The Class B
CDSC also is waived for any Class B shares which 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.
21
<PAGE> 22
Additional information concerning the waiver of the Class B CDSC is set forth in
the Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged as
a percentage of the dollar amount subject thereto. The charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions. For the fiscal year ended March 31, 1996, the
Distributor received CDSCs of $75,917 with respect to redemptions of Class C
shares, all of which was paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund, Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase 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 a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event 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.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
22
<PAGE> 23
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate fund at net asset value per
share.
The Conversion Period also is modified for retirement plan investors which
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services -- Exchange
Privilege"), then the holding period for such Class A shares will be "tacked" to
the holding period of the Class B shares originally held for purposes of
calculating the Conversion Period on Class B shares acquired upon termination of
participation in the MFA program.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and CDSC are the same as
those of the initial sales charge with respect to the Class A and Class D shares
of the Fund in that the deferred sales charges provide for the financing of the
distribution of the Fund's Class B and Class C shares.
For the fiscal year ended March 31, 1996, the Fund paid the Distributor
$43,935,168 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Distribution Plan of approximately $4.4 billion), all of
which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended March 31, 1996, the
23
<PAGE> 24
Fund paid the Distributor $1,382,636 pursuant to the Class C Distribution Plan
(based on average net assets subject to such Distribution Plan of approximately
$139.0 million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended March 31, 1996, the Fund paid the
Distributor $875,288 pursuant to the Class D Distribution Plan (based on average
net assets subject to such Distribution Plan of approximately $352.0 million),
all of which was paid to Merrill Lynch for providing account maintenance
services in connection with Class D shares. At June 30, 1996, the net assets of
the Fund subject to the Class B Distribution Plan aggregated approximately $5.0
billion. At this asset level, the annual fee payable pursuant to the Class B
Distribution Plan would aggregate approximately $50.5 million. At June 30, 1996,
the net assets of the Fund subject to the Class C Distribution Plan aggregated
approximately $293.7 million. At this asset level, the annual fee payable
pursuant to the Class C Distribution Plan would aggregate approximately $2.9
million. At June 30, 1996, the net assets of the Fund subject to the Class D
Distribution Plan aggregated approximately $584.1 million. At this asset level,
the annual fee payable pursuant to the Class D Distribution Plan would aggregate
approximately $1.5 million.
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, 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, 1995, with respect to Class B shares, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch
exceeded fully allocated accrual revenues for such period by approximately
$26,356,000 (0.55% of Class B net assets at that date). As of March 31, 1996,
with respect to Class B shares direct cash revenues for the period since the
commencement of the offering of Class B shares exceeded direct cash expenses by
$87,676,632 (1.74% of Class B net assets at that date). Similar fully allocated
accrual data for Class C shares is not presented because such revenues and
expenses for the period from October 21, 1994 (commencement of operations) to
December 31, 1995 are de minimis. As of March 31, 1996, direct cash revenues for
the period since the commencement of the offering of Class C shares exceeded
direct cash expenses by $378,528 (0.15% of Class C net assets at that date).
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the Fund's
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
24
<PAGE> 25
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fees and the CDSCs). In connection with the Class B shares, the
Distributor 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 in connection with the 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.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares".
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund on 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 which may be applicable, there will be no charge
for redemptions if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with the
Transfer Agent may be accomplished by a written letter requesting redemption.
Proper notice of redemption in the case of shares for which certificates have
been issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. The notice in either event
requires the signatures of all persons in whose names the shares are registered,
signed exactly as their names appear on the Transfer Agent's register or on the
certificate, as the case may be.
25
<PAGE> 26
The signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" (including, for example, Merrill Lynch branch offices and
certain other financial institutions) as such is defined in Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain instances, the
Transfer Agent may require additional documents, such as, but not limited to,
trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the NYSE
(generally, 4:00 P.M., New York 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 to
submit 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 which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Repurchases directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund, however, may redeem shares as set forth
above.
For a shareholder redeeming through his or her listed securities dealer
other than Merrill Lynch, payment will be made to the securities dealer. A
shareholder redeeming through Merrill Lynch will receive payment through Merrill
Lynch. Redemption payments will be made within seven days of the proper tender
of the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time 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
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<PAGE> 27
without a sales charge up to the dollar amount redeemed. The reinstatement
privilege may be exercised by sending a notice of exercise along with a check
for the amount to be reinstated to the Transfer Agent within 30 days after the
date the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot exceed
the amount of the redemption proceeds. The reinstatement privilege is a one-time
privilege and may be exercised by the Class A or Class D shareholder only the
first time such shareholder makes a redemption. 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to each
of such services, copies of the various plans described below and instructions
as to how to participate in the various services or plans, or 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. Certain of these services are only available to U.S. investors. Included
in the Fund's shareholder services are the following:
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 long-term capital gain distributions. The
statements also will show any other activity in the account since the previous
statement. Shareholders will receive separate confirmations for each purchase or
sale transaction other than automatic investment purchases and the reinvestment
of ordinary income dividends, and long-term capital gains distributions.
Shareholders may make additions to their Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders also may maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically, without charge, at the Transfer
Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for his or
her shares and then must turn the certificates over to the new firm for re-
registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the shares (paying any applicable
27
<PAGE> 28
CDSC) so that the cash proceeds can be transferred to the account at the new
firm, or such shareholder must continue to maintain a retirement account at
Merrill Lynch for those shares.
Exchange Privilege. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his or her account in which the exchange is made at the time of the exchange or
is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period for the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised fund from which the
exchange has been made.
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<PAGE> 29
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services-- Exchange Privilege" in the
Statement of Additional Information.
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 also is 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 program of Class A or Class D shares of a
MLAM-advised mutual 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 previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without sales charge, at the net asset value
per share next determined 15 minutes after the close of business on the NYSE on
the ex-dividend date of such dividend or distribution. A shareholder may at any
time, by written notification or by telephone (1-800-MER-FUND) to the Transfer
Agent, elect to have subsequent dividends or both dividends and capital gains
distributions paid in cash rather than reinvested, in which event payment will
be mailed on or about the payment date. Cash payments can also be made directly
to the shareholder's bank account. A shareholder whose account is maintained
through Merrill Lynch may at any time, by written notification to Merrill Lynch,
elect to have both dividends and capital gains distributions paid in cash rather
than reinvested. No CDSC will be imposed on redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his or her Investment Account in the
form of payments by check or through automatic payment by direct deposit to the
investor's bank account on either a monthly or quarterly basis. A Class A or
Class D shareholder whose shares are held within a CMA(R), CBA(R) or Retirement
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the Systematic Redemption Program, subject to
certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
and Class D shares may be made to an investor's Investment Account by
prearranged charges of $50 or more to his or her regular bank account. Investors
who maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments
made in the Fund in their CMA(R) or CBA(R) accounts or in certain related
accounts in amounts of $100 or more ($1 for retirement plans) through the CMA(R)
or CBA(R) Automated Investment Program.
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<PAGE> 30
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Adviser is responsible for making the Fund's portfolio
decisions, placing the Fund's brokerage business, evaluating the reasonableness
of brokerage commissions and negotiating the amount of any commissions paid,
subject to policies established by the Fund's Board of Directors and officers.
The Fund has no obligation to deal with any broker or group of brokers in the
execution of transactions in portfolio securities. Orders for transactions in
portfolio securities are placed for the Fund with a number of brokers and
dealers, including Merrill Lynch. In placing orders, it is the policy of the
Fund to obtain the most favorable net results, taking into account various
factors, including price, commission, if any, size of the transaction and
difficulty of execution. Where practicable, the Investment Adviser surveys a
number of brokers and dealers in connection with proposed portfolio transactions
and selects the broker or dealer which offers the Fund best price and execution
or other services which are of benefit to the Fund. Merrill Lynch has advised
the Fund that, in transactions with Merrill Lynch, the Fund receives a
commission rate at least as favorable as the rate Merrill Lynch charges its
other customers in similar transactions.
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Investment Adviser may receive
orders for transactions by the Fund. Such supplemental research services
ordinarily consist of assessments and analyses of the business or prospects of a
company, industry or economic sector. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement. If in the judgment
of the Investment Adviser the Fund will be benefited by supplemental research
services, the Investment Adviser is authorized to pay brokerage commissions to a
broker furnishing such services which are in excess of commissions which another
broker may have charged for effecting the same transaction. The expenses of the
Investment Adviser will not necessarily be reduced as a result of the receipt of
such supplemental information. The Investment Adviser may use such information
in servicing its other accounts.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with a
formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B and
Class C shares, and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees, distribution charges and any incremental transfer agency costs relating to
each class of shares will be borne exclusively by that class. The Fund will
include performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
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<PAGE> 31
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements directed to investors whose purchases are subject to reduced
sales charges in the case of Class A and Class D shares or waiver of the CDSC in
the case of Class B and Class C shares (such as investors in certain retirement
plans), performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses may be deducted. See "Purchase of Shares". The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine and Fortune Magazine or other
industry publications. As with other performance data, performance comparisons
should not be considered indicative of the Fund's relative performance for any
future period. In addition, from time to time the Fund may include its risk-
adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid semi-annually. All
net realized long- or short-term capital gains, if any, will be distributed to
the Fund's shareholders at least annually. The per share dividends and
distributions on each class of shares will be reduced as a result of any account
maintenance, distribution and transfer agency fees applicable with respect to
that class. See "Determination of Net Asset Value" below. Dividends and
distributions may be reinvested automatically in shares of the Fund at the net
asset value without a sales charge. Shareholders may elect in writing to receive
any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders as discussed below whether they are
reinvested in shares of the Fund or received in cash. From time to time, the
Fund may declare a special distribution at or about the end of the calendar year
in order to comply with a Federal tax requirement that certain percentages of
its ordinary income and capital gains be distributed during the calendar year.
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<PAGE> 32
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily, 15 minutes after the close of business on the NYSE (generally, 4:00
p.m., New York time), on each day during which the NYSE is open for trading. Any
assets or liabilities initially expressed in terms of non-U.S. dollar currencies
are translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation. The net asset value per share
is computed by adding the total value of all securities held by the Fund plus
cash, interest and dividends accrued minus liabilities, including accrued
expenses, and this amount is divided by the total number of shares outstanding
at such time, rounded to the nearest cent. Expenses, including the investment
advisory fees payable to the Investment Adviser and any account maintenance
and/or distribution fees payable to the Distributor, are accrued daily. The Fund
employs Merrill Lynch Securities Pricing Service ("MLSPS"), an affiliate of the
Investment Adviser, to provide certain securities prices for the Fund. During
the fiscal year ended March 31, 1996, the Fund paid $7,714 to MLSPS for such
service. The per share net asset value of Class A shares generally will be
higher than the per share net asset value of the shares of the other classes,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares and the daily expense accruals of the account maintenance fees applicable
with respect to Class D shares; moreover, the per share net asset value of Class
D shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge (although not necessarily meet) immediately after
the payment of dividends or distributions which will differ by approximately the
amount of the expense accrual differentials between the classes.
Portfolio securities which 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. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities 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. Securities which are traded both in the OTC market and on a stock
exchange will be 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. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith under the direction of the Board of Directors of the Fund.
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"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary
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<PAGE> 33
income and net realized capital gains which it distributes to Class A, Class B,
Class C and Class D shareholders (together, the "shareholders"). The Fund
intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, 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).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% 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 the applicability of the United States withholding
tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
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.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options generally will be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
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<PAGE> 34
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends 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 U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
ORGANIZATION OF THE FUND
The Fund, a diversified, open-end investment company, was organized in
Maryland on July 29, 1987 and is a successor to a Delaware corporation that was
organized under the name Lionel D. Edie Capital Fund, Inc. in September 1973 and
changed its name to Merrill Lynch Capital Fund, Inc. in June 1976. It has an
authorized capital of 1,000,000,000 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. Class A and Class B each consists of 300,000,000 shares and
Class C and Class D each consists of 200,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common Stock represent interests in the same assets
of the Fund and are identical in all respects except that Class B, Class C and
Class D shares bear certain expenses related to the account maintenance
associated with such shares and Class B and Class C shares bear certain expenses
related to the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to account maintenance and distribution
expenditures, as applicable. See "Purchase of Shares". The Directors of the Fund
may classify and reclassify the shares of the Fund into additional classes of
Common Stock at a future date.
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<PAGE> 35
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive rights. Shares
have the conversion rights described in the Prospectus. Each share of Common
Stock is entitled to participate equally in dividends and distributions declared
by the Fund and in the net assets of the Fund on liquidation or dissolution
after satisfaction of outstanding liabilities except, as noted above, the Class
B, Class C and Class D shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
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<PAGE> 37
MERRILL LYNCH CAPITAL FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) Program. You may request a Merrill Lynch Blueprint(SM)
Program application by calling (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C
shares / / Class D shares
of Merrill Lynch Capital Fund, Inc. and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
<TABLE>
<S> <C>
1. .......................................................... 4. ..........................................................
2. .......................................................... 5. ..........................................................
3. .......................................................... 6. ..........................................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
......................................................................................... Date...
(Zip Code)
</TABLE>
<TABLE>
<CAPTION>
Occupation ......................................... Name and Address of Employer.................................................
<S> <C>
.............................................................................
.............................................................................
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Capital Fund, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (check one): / / checking / / savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number ................................................... Account
Number..........................................................................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor ......................................................
Date............................................................................
(if joint account, both must sign)
NOTE: If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany this
application.
A-1
<PAGE> 38
MERRILL LYNCH CAPITAL FUND, INC. -- AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND CLASS D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Capital Fund, Inc. or any other investment company with an initial sales
charge or deferred sales charge for which Merrill Lynch Funds Distributor, Inc.
acts as distributor over the next 13 month period which will equal or exceed:
/ / $25,000 / / $50,000 / / $100,000
/ / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Capital Fund, Inc.
Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Capital Fund, Inc. held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form when completed should be mailed to:
Merrill Lynch Capital Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
Shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer A/C No.
</TABLE>
A-2
<PAGE> 39
MERRILL LYNCH CAPITAL FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL PLAN OR THE
AUTOMATIC INVESTMENT PLAN ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name................................................................................
First Name Initial Last Name ------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND CLASS D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Capital Fund,
Inc. at cost or current offering price. Withdrawals to be made either (check
one) / / Monthly on the 24th day of each month, or / / Quarterly on the 24th day
of March, June, September and December. If the 24th falls on a weekend or
holiday, the next succeeding business day will be utilized. Begin systematic
withdrawals on ________________ or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / /
$________ or / / ____% of the current value of / / Class A or / / Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of..........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)......................................................
Address.........................................................................
...........................................................................
Signature of Owner..............................................................
Date............................................................................
Signature of Co-Owner (if any)..................................................
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
......................................................................
Signature of Depositor..........................................................
Date............................................................................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
A-3
<PAGE> 40
MERRILL LYNCH CAPITAL FUND, INC. -- AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C
shares / / Class D shares
of Merrill Lynch Capital Fund, Inc. subject to the terms set forth below. In the
event that I am not eligible to purchase Class A shares, I understand that Class
D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Capital Fund, Inc., as indicated below:
Amount of each ACH debit $...................................................
Account No...................................................................
Please date and invest ACH debits on the 20th of each month
beginning ________________ or as soon as possible thereafter.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN
BY MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip............................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc., I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
A-4
<PAGE> 41
[This page is intentionally left blank.]
<PAGE> 42
[This page is intentionally left blank.]
<PAGE> 43
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10286
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 44
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table............................ 2
Merrill Lynch Select Pricing(SM)
System............................. 3
Financial Highlights................. 8
Investment Objective and Policies.... 10
Management of the Fund............... 13
Board of Directors................. 13
Management and Advisory
Arrangements.................... 13
Code of Ethics..................... 14
Transfer Agency Services........... 15
Purchase of Shares................... 15
Initial Sales Charge Alternatives--
Class A and Class D Shares...... 17
Deferred Sales Charge
Alternatives--
Class B and Class C Shares...... 19
Distribution Plans................. 23
Limitations on the Payment of
Deferred Sales Charges.......... 24
Redemption of Shares................. 25
Redemption......................... 25
Repurchase......................... 26
Reinstatement Privilege--Class A
and Class D Shares.............. 26
Shareholder Services................. 27
Portfolio Transactions and
Brokerage.......................... 30
Performance Data..................... 30
Additional Information............... 31
Dividends and Distributions........ 31
Determination of Net Asset Value... 32
Taxes.............................. 32
Organization of the Fund........... 34
Shareholder Reports................ 35
Shareholder Inquiries.............. 35
Authorization Form................... A-1
Code #10044-0796
</TABLE>
Merrill Lynch
Capital Fund, Inc.
PROSPECTUS
July 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE> 45
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH CAPITAL FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------------
Merrill Lynch Capital Fund, Inc. (the "Fund") seeks to achieve the highest
total investment return consistent with prudent risk through a fully managed
investment policy utilizing equity, debt (including money market) and
convertible securities. This permits management of the Fund to vary investment
policy based on its evaluation of changes in economic and market trends. Total
investment return is the aggregate of income and capital value changes.
Consistent with this policy, the Fund's portfolio may, at any given time, be
invested substantially in equity securities, corporate bonds or money market
securities. It is the expectation of management that, over longer periods, a
major portion of the Fund's portfolio will consist of equity securities of
larger market capitalization, quality companies. Since January 1, 1974, the
portion of the Fund's portfolio invested in equity securities has ranged from
approximately 43% to 98%, with the balance being invested in corporate bonds,
money market securities, government bonds and mortgage-backed securities. On
March 31, 1996, approximately 46.7% of the Fund's portfolio was invested in
equity securities.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated July
26, 1996 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is July 26, 1996.
<PAGE> 46
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to achieve the highest total
investment return consistent with prudent risk through a fully managed
investment policy utilizing equity, debt (including money market) and
convertible securities. Reference is made to "Investment Objective and Policies"
in the Prospectus for a discussion of the investment objective and policies of
the Fund.
Portfolio Turnover. The rate of portfolio turnover is not a limiting
factor and, given the Fund's investment policies, it is anticipated that there
may be periods when high portfolio turnover will exist. The use of covered call
options at times when the underlying securities are appreciating in value may
result in higher portfolio turnover. The Fund pays brokerage commissions in
connection with writing call options and effecting closing purchase
transactions, as well as in connection with purchases and sales of portfolio
securities. Although the Fund anticipates that its annual portfolio turnover
rate should not exceed 100%, the turnover rate may vary greatly from year to
year or during periods within a year. A high rate of portfolio turnover results
in correspondingly greater brokerage commission expenses. 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 with maturities at the time of acquisition of one year or less) by
the monthly average value of the securities in the portfolio during the year.
The portfolio turnover rate for each of the fiscal years ended March 31, 1995
and 1996 was 89% and 84%, respectively.
Investment Restrictions. In addition to the investment policies and
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
shares, which for this purpose means the lesser of (a) 67% of the shares
represented at a meeting where more than 50% of the outstanding shares are
represented or (b) 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. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act of 1940, as amended
(the "Investment Company Act").
2. Invest more than 25% of its total assets, taken at market value, in
the securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. 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.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
2
<PAGE> 47
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes (currently Ohio regulations prohibit
any borrowing in excess of 33 1/3 of the Fund's total assets), (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. 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.
9. 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.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors without approval of the Fund's shareholders.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
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 total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). 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 (c).
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange
3
<PAGE> 48
(the "NYSE") or the American Stock Exchange or a major foreign exchange.
For purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of Merrill Lynch Asset Management, L.P., the investment adviser for
the Fund (the "Investment Adviser"), the directors of such general partner
or the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 5% of its total assets, taken at acquisition or
market value, whichever is lower and then only from banks as a temporary
measure for extraordinary or emergency purposes.
------------------------
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to a permissive
order or otherwise in compliance with the provisions of the Investment Company
Act and the rules and regulations thereunder. Included among such restricted
transactions are purchases from or sales to Merrill Lynch of securities in
transactions in which it acts as principal and purchases of securities from
underwriting syndicates of which Merrill Lynch is a member. See "Portfolio
Transactions and Brokerage".
Lending of Portfolio Securities. Subject to investment restriction (5)
above, the Fund from time to time lends securities from its portfolio to
approved borrowers and receives therefor collateral in cash or securities issued
or guaranteed by the U.S. Government which are maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If cash
collateral is received by the Fund, it is invested in short-term money market
securities, and a portion of the yield received in respect of such investment is
retained by the Fund; and if securities are delivered to the Fund as collateral,
the Fund and the borrower negotiate a rate for the loan premium to be received
by the Fund for lending its portfolio securities. In either event, the total
yield on the Fund's portfolio is increased by loans of its portfolio securities.
The Fund will have the right to regain record ownership of loaned securities to
exercise beneficial rights such as voting rights, subscription rights and rights
to dividends, interest or other distributions. Such loans are terminable at any
time. The Fund may pay reasonable finder's administrative and custodian fees in
connection with such loans.
4
<PAGE> 49
Writing of Covered Call Options. The Fund may from time to time write,
i.e., sell, covered call options on its portfolio securities and enter into
closing purchase transactions with respect to certain of such options. A call
option is considered covered where the writer of the option owns the underlying
securities. By writing a covered call option, the Fund, in return for the
premium income realized from the sale of the option, may give up the opportunity
to profit from a price increase in the underlying security above the option
exercise price. In addition, the Fund will not be able to sell the underlying
security until the option expires, is exercised or the Fund effects a closing
purchase transaction as described below. A closing purchase transaction cancels
out the Fund's position as the writer of an option by means of an offsetting
purchase of an identical option prior to the expiration of the option it has
written. If the option expires unexercised, the Fund realizes a gain in the
amount of the premium received for the option which may be offset by a decline
in the market price of the underlying security during the option period. The
Fund may not write covered options on underlying securities exceeding 15% of the
value of its total assets.
All options referred to herein and in the Fund's Prospectus are options
issued by The Options Clearing Corporation (the "Clearing Corporation") which
are currently traded on the Chicago Board Options Exchange, the American Stock
Exchange, the Philadelphia Stock Exchange, the Pacific Stock Exchange or the
NYSE. A call option gives the purchaser of an option the right to buy, and
obligates the writer (seller) to sell, the underlying security at the exercise
price during the option period. The option period normally ranges from three to
nine months from the date the option is written. For writing an option, the Fund
receives a premium, which is the price of such an option on the exchange on
which it is traded. The exercise price of the option may be below, equal to or
above the current market value of the underlying security at the time the option
is written.
The writer may terminate its obligation prior to the expiration date of the
option by executing a closing purchase transaction which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in ownership of an option. A closing purchase
transaction ordinarily will be effected to realize a profit on an outstanding
call option, to prevent an underlying security from being called, to permit the
sale of the underlying security or to permit the writing of a new call option
containing different terms on such underlying security. The cost of such a
liquidation purchase plus transaction costs may be greater than the premium
received on the original option, in which case the Fund will have incurred a
loss in the transaction. An option may be closed out only on an exchange which
provides a secondary market for an option of the same series and there is no
assurance that a secondary market will exist for any particular option. A
covered option writer unable to effect a closing purchase transaction will not
be able to sell the underlying security until the option expires or the
underlying security is delivered upon exercise, with the result that the writer
will be subject to the risk of market decline in the underlying security during
such period. The Fund will write an option on a particular security only if
management believes that a secondary market will exist on an exchange for
options of the same series which will permit the Fund to make a closing purchase
transaction in order to close out its position.
Due to the relatively short time that exchanges have been dealing with
options, options involve risks of possible unforeseen events which can be
disruptive to the option markets or could result in the institution of certain
procedures including restriction of certain types of orders.
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. The Fund is authorized
to invest a portion of its debt portfolio in fixed-income securities which are
rated below "investment
5
<PAGE> 50
grade" by a nationally recognized statistical rating organization. Securities
rated below "investment grade" by nationally recognized statistical rating
organizations, e.g., below BBB by Standard & Poor's Ratings Group and below Baa
by Moody's Investors Service, Inc., and unrated securities of comparable quality
in the judgment of the Investment Adviser (such lower rated and unrated
securities are sometimes referred to 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 substantial risk such as a greater volatility of price than securities
in higher rating categories. See Appendix A to this Statement of Additional
Information -- "Ratings of Debt Securities and Preferred Stock" on page 33.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund,
including their ages and their principal occupations for at least the past five
years, is set forth below. Unless otherwise noted, the address of each executive
officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64)--President and Director(1)(2)--President of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1977; President of Fund Asset Management L.P. ("FAM") (which
term, as used herein, includes its corporate predecessors) since 1977; President
and Director of Princeton Services, Inc. ("Princeton Services") since 1993;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990;
Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor") since
1977.
DONALD CECIL (69)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman, Westchester County (N.Y.) Board of Transportation.
M. COLYER CRUM (63)--Director(2)--Soldiers Field Road, Boston,
Massachusetts 02163. James R. Williston Professor of Investment Management,
Harvard Business School, since 1971; Director of Cambridge Bancorp, Copley
Properties, Inc. and Sun Life Assurance Company of Canada.
EDWARD H. MEYER (69)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Harman
International Industries, Inc. and Ethan Allen Interiors, Inc.
JACK B. SUNDERLAND (67)--Director(2)--P.O. Box 7, West Cornwall,
Connecticut 06796. President and Director of American Independent Oil Company,
Inc. (an energy company) since 1987; Member of Council on Foreign Relations
since 1971.
J. THOMAS TOUCHTON (57)--Director(2)--Suite 3405, One Tampa City Center,
Tampa, Florida 33602. Managing Partner of The Witt-Touchton Company and its
predecessor The Witt Co. (a private investment partnership) since 1972; Trustee
Emeritus of Washington and Lee University; Director of TECO Energy, Inc. (an
electric utility holding company).
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<PAGE> 51
TERRY K. GLENN (55)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and FAM since 1983; Executive Vice President
and Director of Princeton Services since 1993; President of the Distributor
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
NORMAN R. HARVEY (62)--Senior Vice President(1)(2)--Senior Vice President
of the Investment Adviser and FAM since 1982; Senior Vice President of Princeton
Services since 1993.
DONALD C. BURKE (36)--Vice President(1)(2)--Vice President and Director of
Taxation of the Investment Adviser since 1990; employee of Deloitte & Touche LLP
from 1982 to 1990.
WALTER CUJE (37)-- Vice President(1)--Vice President of the Investment
Adviser since 1991; Associate Portfolio Manager of the Fund since 1993.
KURT SCHANSINGER (36)--Vice President(1)--Vice President of the Investment
Adviser since 1996; Senior Portfolio Manager of the Fund since April, 1996 and
Associate Portfolio Manager from January, 1996 through April, 1996; Senior Vice
President of Oppenheimer Capital L.P. from 1983 to 1996.
GERALD M. RICHARD (47)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and FAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer thereof since 1984.
MARK B. GOLDFUS (49)--Secretary(1)(2)--Vice President of the Investment
Adviser and FAM since 1985.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director or officer of certain other
investment companies for which the Investment Adviser or FAM acts as
investment adviser.
At June 30, 1996, 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 that date, Mr. Zeikel, an officer and Director of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding Common Stock
of ML & Co.
COMPENSATION OF DIRECTORS
The Investment Adviser pays all compensation of officers and employees of
the Fund and all Directors of the Fund who are affiliated persons of ML & Co. or
any of its subsidiaries. Each unaffiliated Director is paid an annual fee of
$3,500 by the Fund for serving as a Director plus a fee of $500 for each meeting
of the Board which he or she attends. The Fund also pays each member of the
Audit Committee of the Board of Directors, which consists of all the
unaffiliated Directors, an annual fee of $2,500. The Chairman of the Audit
Committee receives an additional $1,000 annually. The Fund reimburses each
unaffiliated Director for his or her out-of-pocket expenses relating to
attendance at Board and Committee meetings. Fees and expenses paid to the
Directors aggregated $41,285 for the fiscal year ended March 31, 1996.
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<PAGE> 52
The following table sets forth, for the fiscal year ended March 31, 1996,
compensation paid by the Fund to the unaffiliated Directors and for the calendar
year ended December 31, 1995, the aggregate compensation paid by all registered
investment companies (including the Fund) advised by the Investment Adviser and
its affiliate, FAM ("MLAM/FAM-Advised Funds") to the unaffiliated Directors:
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
BENEFIT ACCRUED MLAM/FAM-ADVISED
COMPENSATION AS PART OF FUND FUNDS PAID TO
DIRECTOR FROM THE FUND EXPENSE DIRECTOR(1)
- ------------------------------------------------ ------------- --------------- ----------------
<S> <C> <C> <C>
Donald Cecil.................................... $ 9,000 None $271,850
M. Colyer Crum.................................. $ 8,000 None $120,600
Edward H. Meyer................................. $ 8,000 None $239,225
Jack B. Sunderland.............................. $ 8,000 None $134,600
J. Thomas Touchton.............................. $ 8,000 None $134,600
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (36 registered investment companies consisting of 36 portfolios); Mr.
Crum (18 registered investment companies consisting of 18 portfolios); Mr.
Meyer (36 registered investment companies consisting of 36 portfolios); Mr.
Sunderland (19 registered investment companies consisting of 28 portfolios);
and Mr. Touchton (19 registered investment companies consisting of 28
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Pursuant to the investment advisory agreement with the Investment Adviser
(the "Investment Advisory Agreement"), the Fund pays the Investment Adviser a
monthly fee based on the average daily value of the Fund's net assets at the
annual rates of: 0.50% of that portion of the average daily net assets not
exceeding $250 million; 0.45% of that portion of the average daily net assets
exceeding $250 million but not exceeding $300 million; 0.425% of that portion of
the average daily net assets exceeding $300 million but not exceeding $400
million; and 0.40% of that portion of the average daily net assets exceeding
$400 million. For the fiscal years ended March 31, 1994, 1995 and 1996, the
advisory fees paid by the Fund to the Investment Adviser totaled $20,844,212,
$23,221,209 and $31,428,894, respectively.
California imposes limitations on the expenses of the Fund. These expense
limitations require that the Investment Adviser reimburse the Fund in an amount
necessary to prevent the aggregate ordinary operating expenses (excluding taxes,
brokerage fees and commissions, distribution fees and extraordinary charges such
as litigation costs) from exceeding in any fiscal year 2.5% of the Fund's first
$30 million of average daily net assets, 2.0% of the next $70 million of average
daily net assets and 1.5% of the remaining average daily net assets. The
Investment Adviser's obligation to reimburse the Fund is limited to the amount
of the investment advisory fee. No fee payment will be made to the Investment
Adviser during any fiscal year which will cause such expenses to exceed the most
restrictive expense limitation at the time of such payment. The Fund was not
required to be reimbursed by the Investment Adviser pursuant to such operating
expense limitations during the last three fiscal years ended March 31, 1996.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Investment Adviser, subject to review by the Board of
Directors. The Investment Adviser supplies the portfolio managers for the Fund
who consider analyses from various sources, make the necessary investment
decisions and place
8
<PAGE> 53
transactions accordingly. The Investment Adviser also is obligated to perform
certain administrative and management services for the Fund and is required to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties under the Investment Advisory Agreement.
Securities held by the Fund also may be held by or be appropriate
investments for other funds for which the Investment Adviser or FAM acts as an
adviser or by investment advisory clients of the Investment Adviser. Because of
different investment objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for the Fund or other funds for
which the Investment Adviser or FAM acts as investment adviser or for their
advisory clients arise for consideration at or about the same time, transactions
in such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that transactions
on behalf of more than one client of the Investment Adviser or FAM during the
same period may increase the demand for securities being purchased or the supply
of securities being sold there may be an adverse effect on price.
The Investment Adviser provides the investment advisory services and pays
all of the officers and employees of the Fund, as well as all fees for Directors
of the Fund who are connected with the Investment Adviser, the Distributor,
Merrill Lynch or ML & Co. The Investment Adviser also provides all office space,
facilities, equipment and necessary personnel for portfolio management of the
Fund. The Investment Adviser bears the expense of calculating the Fund's net
asset value.
The Fund pays all other expenses incurred, except for some expenses
incurred by the Distributor, in the operation of the Fund including, among
others, taxes, expenses for legal and auditing services, costs of printing
proxies and stock certificates, charges of the custodian and transfer agent,
expenses of redemption, brokerage costs, Commission fees and all expenses of
shareholders' and Directors' meetings and certain of the expenses of printing
prospectuses, statements of additional information and reports to shareholders.
Accounting services are provided for the Fund by the Investment Adviser. The
Distributor will pay the promotional expenses incurred in connection with the
offering of shares of the Fund. See "Purchase of Shares--Distribution Plans".
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities or its power to
exercise a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors or a majority of the voting
securities and (b) by a majority of Directors who are neither parties to such
contract nor interested persons (as defined in the Investment Company Act) of
any such party. Such contract is not assignable and may be terminated without
penalty on 60 days' written notice at the option of either party thereto or by
the vote of the shareholders of the Fund.
9
<PAGE> 54
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund and has the same rights except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the account maintenance and/or distribution
fees are paid. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege".
The Merrill Lynch Select Pricing(SM) System is used by more than 50 mutual
funds advised by the Investment Adviser or its affiliate, FAM. Funds advised by
the Investment Adviser or FAM which utilize the Merrill Lynch Select Pricing(SM)
System are referred to herein as "MLAM-advised mutual funds".
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, the 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 Investment Advisory Agreement
described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
During the fiscal year ended March 31, 1996, the Fund sold 19,027,848 of
its Class A shares for aggregate net proceeds to the Fund of $584,244,547. The
gross sales charges for the sale of Class A shares of the Fund for that year
were $1,248,807, of which $81,332 and $1,167,475 were received by the
Distributor and Merrill Lynch, respectively. For the fiscal year ended March 31,
1996, the Distributor received no CDSCs with respect to redemption within one
year after purchase of Class A shares purchased subject to front-end sales
charge waivers. During the fiscal year ended March 31, 1996, the Fund sold
10,198,663 of its Class D shares for aggregate net proceeds to the Fund of
$303,203,877. The gross sales charges for the sale of Class D shares of the Fund
for that period were $3,786,103, of which $247,249 and $3,538,854 were received
by the Distributor and Merrill Lynch, respectively. During such period CDSCs
received by the Distributor with respect to redemption within one year after
purchase of Class D shares purchased subject to front-end sales charge waivers
were de minimis. For information as to brokerage commissions received by Merrill
Lynch, see "Portfolio Transactions and Brokerage".
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 spouse and their children under the
age of 21 years purchasing shares for his or their own
10
<PAGE> 55
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 which has not been in existence for at
least six months or which has no purchase other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being purchased
plus (b) an amount equal to the then current net asset value or cost, whichever
is higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of other MLAM-advised mutual funds. For any such right of accumulation
to be made available, the Distributor must be provided at the time of purchase,
by the purchaser or the purchaser's securities dealer, with sufficient
information to permit confirmation of qualification. Acceptance of the purchase
order is subject to such confirmation. The right of accumulation may be amended
or terminated at any time. Shares held in the name of a nominee or custodian
under pension, profit-sharing, or other employee benefit plans may not be
combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund, or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant, recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A or Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intention
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to five percent of the intended amount will be held in escrow
during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter 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, but there will be no retroactive reduction of the sales charges on
any
11
<PAGE> 56
previous purchase. The value of any shares redeemed or otherwise disposed of by
the purchaser prior to termination or completion of the Letter of Intention will
be deducted from the total purchases made under such Letter. An exchange from a
MLAM-advised money market fund into the Fund that creates a sales charge will
count toward completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group IRAs and participants in certain affinity
groups such as credit unions and trade associations. 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
and Class D shares of the Fund are being offered at net asset value plus a sales
charge of 1/2 of 1% for corporate or group IRA programs placing orders to
purchase their Class A 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
whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA
Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or FAM 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 or Class D shares, if the conditions
set forth below are satisfied. Alternatively, closed-end fund shareholders who
purchased such shares on or after October 21, 1994 and wish to reinvest the net
proceeds from a sale of their closed-end fund shares are offered Class A shares
(if eligible to buy Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D shares"), if the following
conditions are met: first, the sale of the closed-end fund shares must be made
through Merrill Lynch and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D shares; second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering; third, the closed-end fund shares must have been
12
<PAGE> 57
continuously maintained in a Merrill Lynch securities account; and fourth, there
must be a minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the 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.
Purchase Privileges of Certain Persons. 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 the Investment Adviser, 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 also are offered at net asset value, without a
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment 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 he
or she will purchase Class D shares of the Fund with proceeds from a redemption
of a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund, and
the proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of the other mutual fund and such 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 of termination.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the
13
<PAGE> 58
investor must advise Merrill Lynch that it will purchase Class D shares of the
Fund with proceeds from the redemption of such shares of the other mutual fund
and 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.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Employee Access Accounts(SM). Class A or Class D shares are offered at net
asset value to Employee Access Accounts(SM) available through qualified
employers that provide employer-sponsored retirement or savings plans that are
eligible to purchase such shares at net asset value. The initial minimum for
such accounts is $500 except that the initial minimum for shares purchased for
such accounts pursuant to the Automatic Investment Program is $50.
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 which
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. 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 which (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.
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 of the Fund at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in specified
investments and/or the services provided by Merrill Lynch to the plan. Certain
other plans may purchase Class B shares with a waiver of the CDSC upon
redemption, based on similar criteria. Such Class B shares will convert into
Class D shares approximately eight years after the plan purchases the first
share of any MLAM-advised mutual fund. Minimum purchase requirements may be
waived or varied for such plans. Additional information regarding purchases by
employer-sponsored retirement or savings plans and certain other arrangements is
available toll-free from Merrill Lynch Business Financial Services at (800)
237-7777.
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<PAGE> 59
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, each Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the account
maintenance and/or distribution fees paid to the Distributor. 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 its related class of shareholders. Each Distribution Plan
further provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the "Independent Directors"),
shall be committed to the discretion of the Independent Directors then in
office. In approving each Distribution Plan in accordance with Rule 12b-1, the
Independent Directors concluded that there is reasonable likelihood that such
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 such Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the Fund preserve copies of
each Distribution Plan and any report made pursuant to such plan for a period of
not less than six years from the date of such Distribution Plan or such report,
the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fees and the CDSCs).
In connection with the Class B shares, the Distributor 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
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<PAGE> 60
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances payment in
excess of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of March 31, 1996
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares, the Distributor's voluntary maximum.
DATA CALCULATED AS OF MARCH 31, 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
CLASS B, FOR THE PERIOD ALLOWABLE AMOUNTS FEE AT
OCTOBER 21, 1988 ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
(COMMENCEMENT OF OPERATIONS) GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
TO MARCH 31, 1996: SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
- ------------------------------- ---------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted..... $4,545,462 $284,091 $ 54,277 $338,368 $126,581 $211,787 $ 37,691
Under Distributor's Voluntary
Waiver....................... $4,545,462 $284,091 $ 22,727 $306,818 $126,581 $180,237 $ 37,691
CLASS C, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO MARCH 31, 1996:
- -------------------------------
Under NASD Rule as Adopted..... $ 224,863 $ 14,054 $ 794 $14,848 $ 1,184 $ 13,664 $ 1,943
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or eligible Class C shares sold
during periods indicated other than shares acquired through dividend
reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% 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 "Purchase of
Shares -- Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to the Class B shares,
the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to receive payment with respect to any redemption of shares may
be suspended by the Fund for a period of up to seven days. Suspensions of more
than seven days may not be made except (1) for any period (a) during which the
NYSE is closed other than customary weekend and holiday closings or (b) during
which trading on the NYSE is restricted; (2) for any period during which an
emergency exists as a result of which (a) disposal by the Fund of securities
owned by it is not reasonably practicable or (b) it is not reasonably
practicable for the Fund fairly to determine the value of its net assets; or (3)
for such other periods as the Commission may by order permit for the protection
of security holders of the Fund. The Commission shall by
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<PAGE> 61
rules and regulations determine the conditions under which (i) trading shall be
deemed to be restricted and (ii) an emergency shall be deemed to exist within
the meaning of clause (2) above.
DEFERRED SALES CHARGE--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives-- Class B and Class C Shares", while Class B shares redeemed
within four years are subject to a CDSC under most circumstances, the charge is
waived on redemptions of Class B shares in connection with certain post-
retirement withdrawals from an Individual Retirement Account ("IRA") or other
retirement plan or on redemptions of Class B shares following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan or attaining age
59 1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) or any redemption resulting from the tax-free return of an
excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability. For the fiscal years ended March
31, 1994, 1995 and 1996, the Distributor received CDSCs of $3,578,730,
$3,965,708 and $4,025,586, respectively, with respect to redemptions of Class B
shares, all of which was paid to Merrill Lynch. For the period October 21, 1994
(commencement of operations) to March 31, 1995 and for the fiscal year ended
March 31, 1996, the Distributor received CDSCs of $4,929 and $75,917,
respectively, with respect to redemptions of Class C shares, all of which was
paid to Merrill Lynch.
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 and
credit unions. Class B shares of the Fund are offered through Blueprint only to
members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint by members of such affinity groups.
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
will be grouped for execution purposes which, in some circumstances, may involve
the execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There is no minimum initial or
subsequent purchase requirement for investors who are part of a Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the policies established by the Board of Directors of the Fund,
the Investment Adviser is responsible for making the Fund's portfolio decisions
and placing the Fund's brokerage business, evaluating the reasonableness of
brokerage commissions and negotiating the amount of any commissions paid. The
Fund has no obligation to deal with any broker or group of brokers in the
execution of transactions in portfolio securities. Orders for transactions in
portfolio securities are placed for the Fund with a number of brokers and
dealers, including Merrill Lynch. In placing orders, it is the policy of the
Fund to obtain the most favorable net results, taking into account various
factors, including price, commissions, if any, size of the transaction, and
17
<PAGE> 62
difficulty of execution. Where practicable, the Investment Adviser surveys a
number of brokers and dealers in connection with proposed portfolio transactions
and selects the broker or dealer which offers the Fund the best price and
execution or other services which are of benefit to the Fund. Merrill Lynch has
advised the Fund that, in transactions with Merrill Lynch, the Fund receives a
commission rate at least as favorable as the rate Merrill Lynch charges its
other customers in similar transactions. In addition, consistent with the Rules
of Fair Practice of the NASD and policies established by the Directors of the
Fund, the Investment Adviser may consider sales of shares of the Fund as a
factor in the selection of brokers or dealers to execute portfolio transactions
for the Fund.
For the fiscal year ended March 31, 1994, the Fund paid brokerage
commissions of $8,838,842 of which $255,039, or 2.9% was paid to Merrill Lynch
for effecting 2.9% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. For the fiscal year ended March 31, 1995, the
Fund paid brokerage commissions of $9,238,987 of which $315,095, or 3.4%, was
paid to Merrill Lynch for effecting 2.9% of the aggregate dollar amount of
transactions in which the Fund paid brokerage commissions. For the fiscal year
ended March 31, 1996, the Fund paid brokerage commissions of $9,059,719 of which
$525,422, or 5.8% was paid to Merrill Lynch for effecting 4.9% of the aggregate
dollar amount of transactions in which the Fund paid brokerage commissions.
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Investment Adviser (including
Merrill Lynch) may receive orders for transactions by the Fund. Such
supplemental research services ordinarily consist of assessments and analyses of
the business or prospects of a company, industry or economic sector. Information
so received will be in addition to and not in lieu of the services required to
be performed by the Investment Adviser under the Investment Advisory Agreement.
If in the judgment of the Investment Adviser the Fund will be benefitted by
supplemental research services, the Investment Adviser is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions which another broker may have charged for effecting the same
transaction. The expenses of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental information, and the
Investment Adviser may use such information in servicing its other accounts.
The Fund invests in securities traded in the over-the-counter ("OTC")
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as principal
in the purchase and sale of securities. Since transactions in the OTC market
usually involve transactions with dealers acting as principal for their own
accounts, affiliated persons of the Fund, including Merrill Lynch, will not
serve as the Fund's dealer in such transactions. See "Investment Objective and
Policies--Investment Restrictions". However, affiliated persons of the Fund may
serve as its broker in OTC transactions conducted on an agency basis.
The Board of Directors of the Fund has considered the possibilities of
seeking to recapture for the benefit of the Fund brokerage commissions, dealer
spreads and other expenses of possible portfolio transactions, such as
underwriting commissions and tender offer solicitation fees, by conducting such
portfolio transactions through affiliated entities, including Merrill Lynch. For
example, brokerage commissions received by Merrill Lynch could be offset against
the advisory fee payable by the Fund to the Investment Adviser. After
considering all factors deemed relevant, the Board made a determination not to
seek such recapture. The Board will reconsider this matter from time to time.
The Investment Adviser has arranged for the Fund's
18
<PAGE> 63
custodian to receive any tender offer solicitation fees on behalf of the Fund
payable with respect to portfolio securities of the Fund.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the United States national securities exchanges from
executing exchange transactions for their affiliates and institutional accounts
which 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 of 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
the floor of any such securities exchange of which it is a member, appropriate
consents have been obtained from the Fund and annual statements as to aggregate
compensation will be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is computed
once daily, Monday through Friday, as of 15 minutes after the close of business
on the NYSE (generally, 4:00 P.M., New York time), on each day during which the
NYSE is open for trading. The NYSE is not open on New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The Fund also will determine its net asset value on any day in which there is
sufficient trading in its portfolio securities that the net asset value might be
materially affected, but only if on any such day the Fund is required to sell or
redeem shares. The net asset value per share is computed by dividing the sum of
the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
investment advisory fees and any account maintenance and/or distribution fees,
are accrued daily. The per share net asset value of Class B, Class C and Class D
shares generally will be lower than the per share net asset value of Class A
shares reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to Class B
and Class C shares and the daily expense accruals of the account maintenance
fees applicable with respect to Class D shares; moreover the per share net asset
value of Class B and Class C shares generally will be lower than the per share
net asset value of Class D shares reflecting the daily expense accruals of the
distribution fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differentials between the classes.
Portfolio securities which 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. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. When the
Fund writes a call option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The
19
<PAGE> 64
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. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith under the direction of the Board of Directors of the Fund.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Certain of such services are
not available to investors who place orders for the Fund's shares through
Blueprint. Certain of these services are available only to U.S. investors. Full
details as to each of such services, copies of the various plans described below
and instructions as to how to participate in the various services or plans, or
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 Merrill Lynch Financial
Data Services, Inc. (the "Transfer Agent") has an Investment Account and will
receive statements, at least quarterly, from the Transfer Agent. The statements
will serve as transaction confirmations for automatic investment purchases and
the reinvestment of ordinary income dividends and capital gains distributions.
The statements also will show any other activity in the account since the
previous statement. Shareholders also will receive separate confirmations for
each purchase or sale transaction other than automatic investment purchases, the
reinvestment of ordinary income dividends and long-term capital gains
distributions. A shareholder may make additions to his or her Investment Account
at any time by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only on the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A shares from Merrill
Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the Class A or Class D shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A or Class D shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm or such shareholder must
continue to maintain an Investment Account at the Transfer Agent for those Class
A or Class D shares. Shareholders interested in transferring their Class B or
Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for his or
her shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the
20
<PAGE> 65
cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer or by mail
directly to the Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks or
automated clearing house debits of $50 or more to charge the regular bank
account of the shareholder on a regular basis to provide systematic additions to
the Investment Account of such shareholder. For investors who buy shares of the
Fund through Blueprint, no minimum charge to the investor's bank account is
required. Investors who maintain CMA(R) or CBA(R) accounts may arrange to have
periodic investments made in the Fund in their CMA(R) or CBA(R) accounts or in
certain related accounts in amounts of $100 or more ($1 for retirement accounts)
through the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the ex-dividend date of the dividend or distribution. Shareholders may elect
in writing to receive either their ordinary income dividends or capital gains
distributions, or both, in cash, in which event payment will be mailed or direct
deposited on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D 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 Class A or Class D shares with a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his or her Class
A or Class D shares. Redemptions will be made at net asset value as determined
as of 15 minutes after the close of business on the NYSE (generally, 4:00 P.M.,
New York time) on the 24th day of each month or the 24th day of the last month
of each quarter, whichever is applicable. If the NYSE is not open for business
on such date, the Class A or Class D shares will be redeemed at 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 for the withdrawal payment
21
<PAGE> 66
will be made, on the next business day following redemption. When a shareholder
is making systematic withdrawals, dividends and distributions on all Class A or
Class D shares in the Investment Account are reinvested automatically in Class A
or Class D shares, respectively. A shareholder's Systematic Withdrawal Plan may
be terminated at any time, without charge or penalty, by the shareholder, the
Fund, the Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares concurrent
with withdrawals are ordinarily disadvantageous to the shareholder because of
sales charges and tax liabilities. The Fund will not knowingly accept purchase
orders for Class A or Class D shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one year's
scheduled withdrawals or $1,200, whichever is greater. Periodic investments may
not be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed
on a monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R) or CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to a
shareholder's account five business days after the date the shares are redeemed.
Monthly systematic redemptions will be made at net asset value on the first
Monday of each month, bimonthly systematic redemptions will be made at net asset
value on the first Monday of every other month, and quarterly, semiannual or
annual redemptions are made at net asset value on the first Monday of months
selected at the shareholder's option. If the first Monday of the month is a
holiday, the redemption will be processed at net asset value on the next
business day. The CMA(R) or CBA(R) Systematic Redemption Program is not
available if Fund shares are being purchased within the account pursuant to the
Automatic Investment Program. For more information on the CMA(R) or CBA(R)
Systematic Redemption Program, eligible shareholders should contact their
Merrill Lynch financial consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. 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.
Capital gains and ordinary income received in each of the plans referred to
above are exempt from Federal taxation until distributed from the plans.
Investors considering participation in any such plan should review specific tax
laws relating thereto and should consult their attorneys or tax advisers with
respect to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select
Pricing(SM) System, Class A shareholders may exchange
22
<PAGE> 67
Class A shares of the Fund for Class A shares of a second MLAM-advised mutual
fund if the shareholder holds any Class A shares of the second fund in his
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, but the shareholder does not hold Class A shares of the second fund
in his or her account at the time of the exchange and is not otherwise eligible
to acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class B, Class C and
Class D shares are exchangeable with shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the holding
period for the previously owned shares of the Fund is "tacked" to the holding
period for the newly acquired shares of the other fund as more fully described
below. Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds as follows: Class A shares may
be exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund (available only for exchanges within certain
retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch
U.S. Treasury Money Fund; Class B, Class C and Class D shares may be exchanged
for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are 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 charge 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 and Class D shares on which the dividend was paid. Based on this
formula, Class A or Class D shares generally may be exchanged into the Class A
or Class D shares of the other funds or into shares of the Class A and Class D
money market funds with a reduced or without a sales charge.
In addition, each of the funds with Class B or Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares
23
<PAGE> 68
of the Fund acquired through use of the exchange privilege will be subject to
that 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 sales charge that may be payable on a
disposition of the new Class B or Class C shares, the holding period for the
outstanding Class B or Class C shares is "tacked" to the holding period for the
new Class B or Class C shares. For example, an investor may exchange Class B
shares of the Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special
Value Fund") after having held the Fund 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 new Special Value Fund
Class B shares for more than five years.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("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.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC, or with respect to the Class B shares, towards satisfaction
of the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively, of
any fund offering such shares, in which event the holding period for Class B or
Class C shares of that fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange Class
B shares of the Fund for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If, instead of such
redemption, the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continues to hold for an additional two and a half years,
any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed exchange
24
<PAGE> 69
application. This exchange privilege may be modified or terminated at any time
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 at any time
and thereafter may resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income, if any.
Dividends from such net investment income will be paid semi-annually. All net
realized long- or short-term capital gains, if any, will be distributed to the
Fund's shareholders at least annually. See "Shareholder Services--Automatic
Reinvestment of Dividends and Capital Gains Distributions" for information
concerning the manner in which dividends and distributions may be reinvested
automatically in shares of the Fund. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders, as discussed below, whether they are
reinvested in shares of the Fund or received in cash. 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
"Determination of Net Asset Value".
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"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term gains over net long-term capital losses (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from certain
transactions in options) ("capital gain dividends") are taxable to shareholders
as long-term capital gains, regardless of the length of time the shareholder has
owned Fund shares. Any loss upon the sale or exchange of Fund shares held for
six months or less, however, 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).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the
25
<PAGE> 70
Fund's ordinary income dividends may be eligible for the dividends received
deduction allowed to corporations under the Code, if certain requirements are
met. For this purpose, the Fund will allocate dividends eligible for the
dividends received deduction among the Class A, Class B, Class C and Class D
shareholders according to a method (which it believes is consistent with the
Commission rule permitting the issuance and sale of multiple classes of stock)
that is based on the gross income allocable to Class A, Class B, Class C and
Class D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% 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 the applicability of the United States withholding
tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
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.
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 on the exchanged shares reduces any sales charge such
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to
26
<PAGE> 71
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.
TAX TREATMENT OF OPTIONS TRANSACTIONS
The Fund may write covered call options on its portfolio securities and
enter into closing purchase transactions with respect to certain of such
options. In general, unless an election is available to the Fund or an exception
applies, such options contracts that are "Section 1256 contracts" will be
"marked to market" for Federal income tax purposes at the end of each taxable
year, i.e., each such option contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to shareholders.
The mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest or currency exchange rates with respect to its investments.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in option contracts.
Under Section 1092, the Fund may be required to postpone recognition for tax
purposes of losses incurred in certain sales of securities and certain closing
transactions in options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, 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 United States dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. 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
27
<PAGE> 72
year generally would be recharacterized as a return of capital to shareholders,
thereby reducing the basis of each shareholder's Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than such
shareholder's 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 an investment in the
Fund.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with the formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends 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.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charge, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
28
<PAGE> 73
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
Set forth below is total return information for the Class A, Class B, Class
C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
-------------------------- ------------------------- ------------------------- -------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE $1,000 OF THE $1,000 OF THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
- ---------------------------------- ----------- ------------ ----------- ------------ ----------- ------------ -----------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
March 31, 1996...... 17.97% $1,179.70 19.22% $1,192.20 22.25% $1,222.50 17.69% $1,176.90
Five Years Ended
March 31, 1996...... 11.65% $1,734.80 11.71% $1,739.30
Ten Years Ended
March 31, 1996...... 11.64% $3,008.70
Inception
(October 21, 1988)
to March 31, 1996*... 12.07% $2,337.00
Inception
(October 21, 1994)
to March 31, 1996**... 20.39% $1,307.30 16.88% $1,252.50
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended March 31,
1996................ 24.50% $1,245.00 23.22% $1,232.20 23.25% $1,232.50 24.21% $1,242.10
1995................ 10.95% $1,109.50 9.81% $1,098.10
1994................ 5.39% $1,053.90 4.36% $1,043.60
1993................ 11.33% $1,113.30 10.16% $1,101.60
1992................ 12.96% $1,129.60 11.81% $1,118.10
1991................ 15.17% $1,151.70 14.03% $1,140.30
1990................ 14.04% $1,140.40 12.84% $1,128.40
1989................ 13.42% $1,134.20
1988................ (1.69)% $ 983.10
1987................ 18.44% $1,184.40
1986................ 36.77% $ 1,367.70
1985................ 23.16% $ 1,231.60
1984................ 11.81% $1,118.10
1983................ 31.97% $1,319.70
1982................ (2.59)% $ 974.10
1981................ 45.55% $1,455.50
1980................ 9.69% $1,096.90
1979................ 24.89% $1,248.90
1978................ 0.72% $1,007.20
1977................ (9.47)% $ 905.30
1976................ 19.93% $1,199.30
1975................ (2.42)% $ 975.80
Inception
(November 8, 1973)
to March 31, 1974... (4.60)% $ 954.00
(Table continued on the following page)
</TABLE>
29
<PAGE> 74
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
-------------------------- ------------------------- ------------------------- -------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE $1,000 OF THE $1,000 OF THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
- ---------------------------------- ----------- ------------ ----------- ------------ ----------- ------------ -----------
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(October 21, 1988)
to March 31,
1989*............... 4.42 % $ 1,044.20
Inception
(October 21, 1994)
to March 31, 1995**... 6.07% $1,060.70 6.42% $1,064.20
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(November 8, 1973)
to March 31, 1996... 1,378.83% $14,788.30
Inception
(October 21, 1988)
to March 31,
1996*............... 133.70% $2,337.00
Inception
(October 21, 1994)
to March 31, 1996**... 30.73% $1,307.30 25.25% $1,252.50
</TABLE>
- ---------------
*Information as to Class B shares is presented only for the period October 21,
1988 to March 31, 1996. Prior to October 21, 1988, no Class B shares were
publicly issued.
**Information as to Class C and Class D shares is presented only for the period
October 21, 1994 to March 31, 1996. Prior to October 21, 1994, no Class C or
Class D shares were publicly issued.
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
charge or the waiver of CDSCs, a lower amount of expenses may be deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was organized as a Maryland corporation on July 29, 1987 and is
the successor to a fund that was organized in Delaware under the name Lionel D.
Edie Capital Fund, Inc. in September 1973, and changed its name to Merrill Lynch
Capital Fund, Inc. in June 1976. The authorized capital stock of the Fund
consists of 1,000,000,000 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. Class A and Class B each consists of 300,000,000 shares and Class
C and Class D each consists of 200,000,000 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
30
<PAGE> 75
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
account maintenance and/or distribution expenditures. The Board of Directors of
the Fund may classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Pursuant to an undertaking to certain state securities
commissions, the Fund will call a meeting of shareholders for any purpose on the
written request of the holders of at least 10% of the outstanding shares of the
Fund. 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 is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund on 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.
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 as of March 31, 1996, is set forth
below:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets........................... $3,225,757,636 $5,025,504,320 $259,131,009 $521,599,329
============= ============= =========== ===========
Number of Shares Outstanding......... 104,401,286 165,840,417 8,614,852 16,903,714
============= ============= =========== ===========
Net Asset Value per Share (net assets
divided by number of shares
outstanding)....................... $30.90 $30.30 $30.08 $30.86
Sales Charge for Class A and Class D
Shares: 5.25% of offering price
(5.54% of net amount invested*).... 1.71 ** ** 1.71
------ ------ ------ ------
Offering Price....................... $32.61 $30.30 $30.08 $32.57
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ---------------
*Rounded to the nearest one-hundredth percent; assumes the 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 upon redemption. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares" in the Prospectus and
"Redemption of Shares--Deferred Sales Charges--Class B and Class C Shares"
herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the
31
<PAGE> 76
independent 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, acts as custodian of the Fund's assets (the "Custodian"). The Custodian
is responsible for safeguarding and controlling the Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest and
dividends on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts.
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 March 31 of each year. The Fund sends
to its shareholders, at least semi-annually, reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to which
reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on June 30, 1996.
32
<PAGE> 77
APPENDIX A
RATINGS OF DEBT SECURITIES AND PREFERRED STOCK
DESCRIPTION OF CORPORATE DEBT RATINGS OF MOODY'S INVESTORS SERVICE, INC.
("MOODY'S")
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 risk appear
somewhat larger than the 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 some time 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 repayments 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
investments. Assurance of interest and principal repayments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
33
<PAGE> 78
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers.
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory 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.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory 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.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, 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.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols presented below are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
34
<PAGE> 79
Preferred stock rating symbols and their definitions are as follows:
"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 a high-grade preferred stock.
This rating indicates that there is 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" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be 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 dividend
payments. This rating designation does not purport to indicate the future
status of payments.
"ca" An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
"c" This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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 issue ranks in the lower end of
its generic rating category.
DESCRIPTION OF CORPORATE DEBT RATINGS OF STANDARD & POOR'S RATINGS GROUP
("STANDARD & POOR'S")
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
35
<PAGE> 80
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than for debt in higher rated
categories.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and
repay principal. BB indicates the least degree of speculation and C the
highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest payments and
principal repayments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
B Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category
is also used for debt subordinated to senior debt that is assigned an
actual or implied BB or BB- rating.
CCC Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
36
<PAGE> 81
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal repayments 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.
The D rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
PLUS (+) OR MINUS (-):
The ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
c The letter c indicates that the holder's option to tender the security
for purchase may be canceled under certain prestated conditions
enumerated in the tender option documents.
L The letter L indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
federally insured and interest is adequately collateralized. In the case
of certificates of deposit, the letter L indicates that the deposit,
combined with other deposits being held in the same right and capacity,
will be honored for principal and accrued pre-default interest up to the
federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor
insured institution, upon maturity.
p The letter p indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by
the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment
on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with respect to
such likelihood and risk.
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
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 considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
37
<PAGE> 82
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal repayments 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.
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 issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the debt rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking
fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA".
38
<PAGE> 83
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
B
CCC Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such
issues will likely have some quality and 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 in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-):
To provide more detailed indications of preferred stock quality, the
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
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.
39
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Capital Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Capital Fund, Inc. as of March 31,
1996, the related statements of operations for the year then ended and changes
in net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1996 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Capital Fund, Inc. as of March 31, 1996, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 1, 1996
40
<PAGE> 85
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Aerospace 178,000 Goodrich (B.F.) Co. $ 9,078,923 $ 14,151,000 0.2%
514,000 Lockheed Martin Corp. (a) 31,379,559 38,999,750 0.4
1,010,000 Rockwell International Corporation 35,951,594 59,463,750 0.7
-------------- -------------- ------
76,410,076 112,614,500 1.3
Airlines 455,000 KLM Royal Dutch Airlines N.V. 15,454,833 15,847,417 0.2
408,000 KLM Royal Dutch Airlines N.V. (NY Shares) (ADR)* 12,936,844 14,178,000 0.1
-------------- -------------- ------
28,391,677 30,025,417 0.3
Automobile 944,000 Echlin Inc. 28,954,480 34,220,000 0.4
Equipment
Automotive 1,000,000 General Motors Corp. 47,198,920 53,250,000 0.6
Banking 237,000 Banco Bilboa Vizcaya (ADR)* 5,835,430 8,798,625 0.1
1,593,000 Bancorp Hawaii, Inc. 46,046,216 55,954,125 0.6
600,000 Bangkok Bank Company Ltd. 5,935,084 8,085,612 0.1
360,000 BankAmerica Corp. 20,136,956 27,900,000 0.3
360,000 Chemical Banking Corp. 12,987,657 25,380,000 0.3
950,000 NationsBank Corp. 45,495,094 76,118,750 0.8
2,740,000 SouthTrust Corp. 47,579,304 75,692,500 0.8
1,220,000 Union Planters Corp. 17,085,667 36,905,000 0.4
-------------- -------------- ------
201,101,408 314,834,612 3.4
Beverages 1,600,000 Cadbury Schweppes PLC 11,499,142 12,210,400 0.1
Building Materials 241,000 Medusa Corp. 6,023,782 7,380,625 0.1
Capital Goods 442,000 GATX Corp. 17,933,469 20,332,000 0.2
458,000 Giddings & Lewis, Inc. 7,717,565 8,702,000 0.1
284,000 Kennametal, Inc. 8,803,338 10,259,500 0.1
235,000 United Dominion Industries, Ltd. 5,650,699 5,698,750 0.1
-------------- -------------- ------
40,105,071 44,992,250 0.5
Chemicals 197,000 Dexter Corporation 4,882,022 5,220,500 0.1
400,000 du Pont (E.I.) de Nemours & Co. 24,194,771 33,200,000 0.3
792,000 Engelhard Corp. 13,001,621 18,513,000 0.2
1,240,000 Imperial Chemical Industries PLC (ADR)* 60,045,532 70,680,000 0.8
-------------- -------------- ------
102,123,946 127,613,500 1.4
Computer Software 1,025,000 ++Creative Technology, Ltd. 12,833,743 6,150,000 0.1
Diversified 3,500,000 Hanson PLC (Sponsored) (ADR)* 56,409,536 52,500,000 0.6
Companies 10,599,000 Hillsdown Holdings PLC 25,028,158 29,927,919 0.3
743,000 Tenneco, Inc. 30,564,622 41,515,125 0.5
3,900,000 Tomkins PLC 16,271,315 15,060,002 0.1
1,000,000 United Technologies Corp. 59,058,703 112,250,000 1.2
1,240,000 ++Worldtex Inc. (c) 5,964,546 6,045,000 0.1
-------------- -------------- ------
193,296,880 257,298,046 2.8
Drug Stores 770,000 Rite Aid Corp. 22,045,542 23,773,750 0.3
</TABLE>
41
<PAGE> 86
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Electrical 266,000 Cooper Industries, Inc. $ 9,655,449 $ 10,374,000 0.1%
Equipment 820,000 General Electric Co. 41,535,004 63,857,500 0.7
868,000 Philips Electronics N.V. (ADR)* 21,479,447 31,573,500 0.4
-------------- -------------- ------
72,669,900 105,805,000 1.2
Financial Services 1,460,000 Federal National Mortgage Association 35,463,490 46,537,500 0.5
4,770,000 Ruam Pattana II Fund (Foreign) 2,849,866 3,072,235 0.0
9,730,000 ++Ruam Pattana II Fund (Local) 6,628,068 6,266,845 0.1
-------------- -------------- ------
44,941,424 55,876,580 0.6
Food Distribution 13,870,000 Dairy Farm International Holdings Ltd.
(Ordinary) 15,534,045 13,107,150 0.1
Foods/Food 1,361,600 Archer-Daniels-Midland Co. 23,758,364 25,019,400 0.3
Processing 14,600 Cultor OY 573,921 662,518 0.0
321,000 Dean Foods Co. 8,659,673 8,025,000 0.1
99,000 Nestle S.A. 103,564,527 111,767,477 1.2
200,000 Thai Theparos Food Product Public Company
Limited (Foreign) 880,000 871,978 0.0
359,400 Thai Theparos Food Product Public Company
Limited (Local) 1,589,259 1,566,944 0.0
-------------- -------------- ------
139,025,744 147,913,317 1.6
Footware 28,618,000 Yue Yuen Industrial (Holdings Limited) 7,454,895 6,956,535 0.1
Forest Products 612,000 Weyerhaeuser Co. 27,846,461 28,228,500 0.3
Home Builders 260,000 ++Oriole Homes Corp. (c) 2,394,771 1,950,000 0.0
Hospital 1,900,000 Columbia/HCA Healthcare Corp. 90,574,852 109,725,000 1.2
Management 2,810,000 ++Tenet Healthcare Corp. (b) 36,022,061 59,010,000 0.7
-------------- -------------- ------
126,596,913 168,735,000 1.9
Household Products 170,000 Armor All Products Corp. 3,045,566 2,677,500 0.0
Insurance 1,800,000 Allstate Corporation 49,201,588 75,825,000 0.8
416,000 American General Corporation 14,956,200 14,352,000 0.2
773,000 American International Group, Inc. 50,408,890 72,372,125 0.8
176,000 American National Insurance Co. 10,182,521 11,880,000 0.1
36,700 Ayudhya Insurance Company, Ltd. (Foreign) 241,496 232,739 0.0
61,200 Ayudhya Insurance Company, Ltd. (Local) 403,981 388,109 0.0
1,080,000 EXEL Ltd. (ADR)* 45,501,718 74,520,000 0.8
600,000 First Colony Holding Corp. 14,962,987 14,325,000 0.2
2,158,000 Fremont General Corp. (c) 29,940,486 50,982,750 0.6
457,000 Horace Mann Educators Corp. 11,386,151 13,938,500 0.1
123,000 Integon Corp. 2,126,783 2,506,125 0.0
2,154,000 Lowndes Lambert Group Holdings PLC 5,366,108 4,799,969 0.1
200,000 Penncorp Financial Group, Inc. 6,372,501 6,300,000 0.1
290,000 Provident Life & Accident Insurance Co. 7,317,251 8,808,750 0.1
1,605,000 Safeco Corp. 42,977,252 53,767,500 0.6
1,170,000 Sphere Drake Holdings Ltd. 15,809,901 11,846,250 0.1
361,000 St. Paul Companies, Inc. 18,451,602 20,035,500 0.2
465,000 TIG Holdings, Inc. 10,689,988 15,112,500 0.2
1,450,000 Travelers Inc. 32,039,038 95,700,000 1.1
275,000 USLIFE Corporation 7,161,900 8,078,125 0.1
-------------- -------------- ------
375,498,342 555,770,942 6.2
</TABLE>
42
<PAGE> 87
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Iron & Steel 492,000 Birmingham Steel Corp. $ 10,326,934 $ 7,257,000 0.1%
854,000 Cleveland-Cliffs, Inc. (c) 28,920,123 37,789,500 0.4
-------------- -------------- ------
39,247,057 45,046,500 0.5
Leisure/Hotels 1,092,000 Carnival Corp. (Class A) 25,400,446 30,030,000 0.3
3,400,000 Mandarin Oriental International Ltd. 3,324,644 4,284,000 0.1
-------------- -------------- ------
28,725,090 34,314,000 0.4
Manufactured 277,000 Fleetwood Enterprises, Inc. 6,068,949 6,855,750 0.1
Housing
Medical Services 442,000 Bumrungrad Hospital Public Company, Ltd.
(Foreign) 556,290 499,287 0.0
232,300 Bumrungrad Hospital Public Company, Ltd.
(Local) 289,002 262,408 0.0
-------------- -------------- ------
845,292 761,695 0.0
Metals & Basic 215,000 Cameco Corp. 4,880,067 11,361,468 0.1
Materials 571,000 Minsura Sociedad Limitada S.A. (T Shares) 4,121,560 4,566,057 0.1
-------------- -------------- ------
9,001,627 15,927,525 0.2
Natural Gas 1,400,000 Coastal Corp. 39,876,060 55,300,000 0.6
Suppliers 320,000 El Paso Natural Gas Co. 8,804,854 11,840,000 0.1
659,000 MetroGas S.A. (ADR)* 7,847,336 6,260,500 0.1
3,684,000 TransCanada Pipelines, Ltd. (ADR)* 54,273,082 51,115,500 0.6
3,760,000 Williams Companies, Inc. 101,147,048 189,410,000 2.1
-------------- -------------- ------
211,948,380 313,926,000 3.5
Oil & Gas 40,000 ++BELCO Oil & Gas Corporation 882,400 910,000 0.0
Exploration
Oil--Integrated 167,000 Mobil Corporation 18,409,272 19,351,125 0.2
2,558,000 Phillips Petroleum Company 88,340,747 101,041,000 1.1
37,000 Repsol, S.A. (ADR)* 1,287,719 1,382,875 0.0
1,240,000 Repsol, S.A. (Ordinary) 37,646,000 46,784,908 0.5
448,000 Texaco Inc. 29,612,871 38,528,000 0.4
3,000,000 TOTAL S.A. (ADR)* 86,214,090 102,000,000 1.2
11,313,000 YPF S.A. (Sponsored) (ADR)* 234,428,432 227,674,125 2.5
-------------- -------------- ------
495,939,131 536,762,033 5.9
Oil--Refining & 290,000 Ultramar Corp. 7,506,452 8,373,750 0.1
Marketing
Oil Service 1,265,000 Dresser Industries, Inc. 28,464,979 38,582,500 0.4
Paper 200,000 ++Jefferson Smurfit Group PLC (ADR)* 6,207,462 5,325,000 0.1
790,000 Temple-Inland, Inc. 36,163,014 37,031,250 0.4
-------------- -------------- ------
42,370,476 42,356,250 0.5
Pharmaceuticals 503,000 Block Drug, Inc. (Class A) 15,230,004 20,371,500 0.2
3,480,000 Glaxo Holdings PLC (ADR)* 90,665,465 87,435,000 1.0
650,000 Mallinckrodt Group Inc. 20,266,093 24,456,250 0.3
393,000 Merck & Co., Inc. 18,821,304 24,464,250 0.3
2,110,000 Pfizer, Inc. 98,215,361 141,370,000 1.5
200,000 Warner-Lambert Co. 16,152,383 20,650,000 0.2
-------------- -------------- ------
259,350,610 318,747,000 3.5
</TABLE>
43
<PAGE> 88
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Photography 290,000 Eastman Kodak Co. $ 16,924,155 $ 20,590,000 0.2%
Plastic Recycling 946,000 Wellman Inc. 20,386,872 22,231,000 0.3
Railroads 420,000 Canadian National Railway Co. 6,732,746 7,245,000 0.1
Real Estate 195,000 National Health Investors, Inc. 6,202,950 6,337,500 0.1
Investment Trusts 1,754,000 RFS Hotel Investors, Inc. (c) 26,471,049 29,598,750 0.3
406,000 South West Properties Trust 5,524,272 5,430,250 0.1
1,270,000 Walden Residential Properties, Inc. (c) 23,297,776 27,781,250 0.3
-------------- -------------- ------
61,496,047 69,147,750 0.8
Retail Trade 1,904,000 Wal-Mart Stores, Inc. 45,929,299 44,030,000 0.5
Savings & Loan 475,000 Ahmanson (H.F.) & Co. 11,043,343 11,518,750 0.1
Associations
Services 1,670,000 PHH Corp. (c) 62,537,753 92,893,750 1.0
265,000 Rollins, Inc. 6,535,562 6,194,375 0.1
-------------- -------------- ------
69,073,315 99,088,125 1.1
Telecommuni- 130,000 Frontier Corporation 3,759,365 4,095,000 0.0
cations 1,818,000 GTE Corp. 58,038,914 79,764,750 0.9
410,000 ++Nokia Corp. (ADR)* (c) 14,103,994 14,042,500 0.2
970,000 ++Telecomunicacoes Brasileiras S.A.--
Telebras (ADR)* 53,263,047 48,257,500 0.5
-------------- -------------- ------
129,165,320 146,159,750 1.6
Tires & Rubber 2,900,000 The Goodyear Tire & Rubber Co. 114,315,790 147,900,000 1.6
Utilities--Electric, 101,000 Aquarion Co. 2,306,022 2,575,500 0.0
Gas & Water 115,000 Central Hudson Gas & Electric Corp. 3,045,568 3,478,750 0.1
136,000 Energen Corp. 3,115,698 2,975,000 0.0
640,000 Entergy Corp. 15,520,093 17,920,000 0.2
1,050,000 Illinova Corp. 22,555,391 29,531,250 0.3
156,000 Montana Power Co. 3,575,431 3,373,500 0.1
118,000 Northwest Natural Gas Co. 3,862,348 3,746,500 0.1
23,000 NUI Corporation 419,780 428,375 0.0
1,900,000 Pinnacle West Capital Corp. 37,516,110 54,862,500 0.6
160,000 Public Service Company of North Carolina 2,555,808 2,560,000 0.0
288,000 Texas Utilities Co. 11,556,428 11,916,000 0.1
1,400,000 Unicom Corp. 32,447,717 37,800,000 0.4
170,000 United Water Resources, Inc. 2,203,889 2,231,250 0.0
240,000 Washington Water Power Co. 4,030,780 4,590,000 0.1
-------------- -------------- ------
144,711,063 177,988,625 2.0
Total Common Stocks 3,335,121,121 4,219,845,627 46.7
Face
Amount Corporate Bonds
Automobile Parts $ 20,000,000 Eaton Corp., 6.50% due 6/01/2025 19,929,200 19,545,000 0.2
Automotive Hertz Corp.:
15,000,000 6.70% due 6/15/2002 14,982,500 14,916,900 0.2
13,000,000 6% due 1/15/2003 12,891,670 12,371,840 0.1
-------------- -------------- ------
27,874,170 27,288,740 0.3
</TABLE>
44
<PAGE> 89
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Banking $ 20,000,000 Banco Rio de la Plata, 8.75% due 12/15/2003 $ 20,060,800 $ 17,200,000 0.2%
25,000,000 Bank of Boston Corp., 6.625% due 12/01/2005 23,519,000 24,203,250 0.3
BankAmerica Corp.:
15,000,000 6.875% due 6/01/2003 14,149,050 14,988,300 0.2
30,000,000 6.75% due 9/15/2005 29,591,750 29,579,100 0.3
10,000,000 Bankers Trust Company, 7.50% due 1/15/2002 9,688,700 10,181,500 0.1
30,000,000 The Chase Manhattan Corp., 6.50% due 8/01/2005 29,105,700 28,953,000 0.3
11,400,000 Chemical Bank, 7% due 6/01/2005 11,191,266 11,370,702 0.1
15,000,000 First Chicago Corp., 6.875% due 6/15/2003 13,963,300 14,939,250 0.2
6,000,000 First Hawaiian, Inc., 6.25% due 8/15/2000 5,841,600 5,895,240 0.1
First Security Corp.:
5,000,000 5.71% due 2/09/1999 5,000,000 4,908,000 0.1
10,000,000 7% due 7/15/2005 9,978,700 9,910,710 0.1
30,000,000 First Union Corp., 6.55% due 10/15/2035 29,953,350 29,326,800 0.3
Great Western Financial Corp.:
13,000,000 6.125% due 6/15/1998 12,244,010 12,985,960 0.1
10,000,000 6.375% due 7/01/2000 9,998,800 9,896,400 0.1
NationsBank Corp.:
10,500,000 5.70% due 9/11/2000 9,545,865 10,163,160 0.1
40,000,000 5.60% due 2/07/2001 40,000,000 38,395,600 0.4
10,000,000 6.20% due 8/15/2003 9,670,360 9,623,100 0.1
25,000,000 6.50% due 8/15/2003 22,104,200 24,336,250 0.3
25,000,000 PNC Funding Corp., 6.125% due 9/01/2003 24,451,000 23,757,000 0.3
Provident Bank:
10,000,000 6.125% due 12/15/2000 10,071,000 9,755,200 0.1
15,000,000 6.375% due 1/15/2004 14,709,250 14,326,650 0.2
20,000,000 Union Planters Corp., 6.25% due 11/01/2003 18,756,100 19,055,600 0.2
20,000,000 Wachovia Corp., 6.605% due 10/01/2025 20,012,500 19,601,600 0.2
-------------- -------------- ------
393,606,301 393,352,372 4.4
Broadcasting & 30,000,000 News America Holdings, Inc., 7.50% due
Publishing 3/01/2000 29,179,330 30,810,600 0.3
Capital Goods 5,000,000 Giddings & Lewis, Inc., 7.50% due 10/01/2005 5,000,000 4,971,800 0.1
Chemicals 16,000,000 Lyondell Petrochemical Company,
6.50% due 2/15/2006 15,228,970 15,234,240 0.2
25,000,000 Union Carbide Corp., 6.79% due 6/01/2025 25,000,000 24,566,000 0.3
-------------- -------------- ------
40,228,970 39,800,240 0.5
Diversified Grace (W.R.) & Co.:
Companies 10,000,000 6.85% due 6/23/1997 9,903,700 10,107,800 0.1
20,000,000 7.40% due 2/01/2000 19,663,100 20,363,400 0.2
Tenneco, Inc.:
15,000,000 7.875% due 10/01/2002 14,619,180 15,683,700 0.2
20,000,000 6.50% due 12/15/2005 19,991,900 19,053,400 0.2
-------------- -------------- ------
64,177,880 65,208,300 0.7
Electronics 16,000,000 Litton Industries, Inc., 6.98% due 3/15/2006 16,000,000 15,987,808 0.2
Philips Electronics N.V.:
10,000,000 6.75% due 8/15/2003 9,866,300 9,866,300 0.1
10,000,000 7.125% due 5/15/2025 9,972,650 10,107,900 0.1
-------------- -------------- ------
35,838,950 35,962,008 0.4
</TABLE>
45
<PAGE> 90
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Finance $ 5,000,000 Caterpillar Financial Services Corp.,
5.35% due 11/10/1998 $ 4,924,800 $ 4,896,050 0.1%
Chrysler Finance Corp.:
13,000,000 6.50% due 6/15/1998 12,752,820 13,054,990 0.2
12,000,000 5.375% due 10/15/1998 11,439,770 11,752,200 0.1
10,000,000 5.70% due 1/19/1999 10,011,600 9,840,300 0.1
30,000,000 6.20% due 12/06/2000 30,000,000 29,489,400 0.3
Ford Motor Credit Co.:
10,000,000 5.625% due 12/15/1998 9,703,400 9,835,800 0.1
30,000,000 5.75% due 1/25/2001 29,937,200 28,939,800 0.3
40,000,000 ++++GTE Finance Corp., 5.81% due 12/15/1997 40,000,000 39,592,000 0.5
8,000,000 General Electric Capital Corp., 5.13%
due 4/01/2004 8,000,000 8,550,936 0.1
General Motors Acceptance Corp.:
25,000,000 5.875% due 1/12/1999 25,044,500 24,728,250 0.3
48,500,000 5.625% due 2/01/1999 47,273,190 47,629,910 0.5
50,000,000 5.625% due 2/15/2001 49,623,200 47,935,000 0.5
30,000,000 6.75% due 6/10/2002 29,520,300 29,826,600 0.3
10,000,000 Greyhound Financial Corp., 6.75% due 3/25/1999 9,694,200 10,014,600 0.1
Household Finance Corp.:
15,000,000 7.125% due 4/30/1999 14,356,800 15,259,350 0.2
10,000,000 7.45% due 4/01/2000 9,958,700 10,296,400 0.1
10,300,000 6.50% due 7/15/2003 10,202,253 10,011,497 0.1
International Lease Finance Corp.:
10,000,000 5.98% due 11/16/1998 9,990,200 9,919,900 0.1
22,500,000 6.05% due 4/30/1999 22,368,375 22,269,375 0.3
20,000,000 5.62% due 2/01/2000 19,876,200 19,368,200 0.2
10,000,000 Margaretten Financial Corp., 6.75% due 6/15/2000 9,621,060 10,037,700 0.1
Sears, Roebuck Acceptance Corp.:
20,000,000 6.50% due 6/15/2000 20,025,000 19,910,200 0.2
25,000,000 5.71% due 2/06/2001 25,000,000 24,017,500 0.3
50,000,000 5.63% due 2/07/2001 49,996,500 48,038,000 0.5
15,000,000 USL Capital Corp., 5.79% due 1/23/2001 14,995,800 14,520,000 0.2
-------------- -------------- ------
524,315,868 519,733,958 5.8
Financial Leasing GATX Corp.:
12,000,000 6.27% due 12/05/2001 11,823,270 11,700,840 0.1
25,000,000 6.69% due 11/30/2005 24,984,750 24,304,250 0.3
XTRA Corp.:
20,000,000 6.79% due 8/01/2001 19,945,800 20,072,400 0.2
20,000,000 6.68% due 11/30/2001 20,000,000 19,918,000 0.2
-------------- -------------- ------
76,753,820 75,995,490 0.8
Financial Services 10,000,000 American Express Credit Corp., 6.125%
due 11/15/2001 9,963,300 9,807,700 0.1
Finova Capital Corp.:
25,000,000 6.45% due 6/01/2000 24,766,550 24,888,750 0.3
15,000,000 5.98% due 2/27/2001 14,968,950 14,590,800 0.2
10,000,000 6.56% due 11/15/2002 10,000,000 9,756,300 0.1
McDonnell Douglas Finance Corp.:
5,000,000 5.48% due 2/08/1999 4,997,600 4,854,250 0.1
10,000,000 6.375% due 7/15/1999 9,864,100 9,935,400 0.1
10,000,000 6.77% due 9/11/2002 9,983,500 10,035,400 0.1
20,000,000 6.965% due 9/12/2005 20,049,200 19,773,400 0.2
Morgan Stanley Group, Inc.:
15,000,000 5.625% due 3/01/1999 14,969,100 14,702,025 0.2
35,000,000 5.75% due 2/15/2001 34,968,150 33,716,550 0.4
</TABLE>
46
<PAGE> 91
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Financial Services Smith Barney Shearson Holdings, Inc.:
(concluded) $ 10,000,000 6% due 3/15/1997 $ 9,902,000 $ 10,010,100 0.1%
20,000,000 5.875% due 2/01/2001 19,936,800 19,359,000 0.2
-------------- -------------- ------
184,369,250 181,429,675 2.1
Food & Tobacco Nabisco Inc.:
21,000,000 6.70% due 6/15/2002 20,830,000 20,686,260 0.2
20,000,000 6.85% due 6/15/2005 20,000,000 19,419,200 0.2
40,830,000 40,105,460 0.4
Foreign 20,000,000 ++++Province of Buenos Aires, 11.50% due 10/19/1998 20,000,000 20,340,000 0.2
Government Republic of Argentina:
Obligations 45,000,000 9.25% due 2/23/2001 44,801,400 41,287,500 0.5
55,000,000 8.375% due 12/20/2003 40,435,000 46,200,000 0.5
74,250,000 6.812% due 3/31/2005 49,722,750 53,367,188 0.6
4,500,000 Republic of Colombia, 7.25% due 2/23/2004 4,145,000 4,140,000 0.1
-------------- -------------- ------
159,104,150 165,334,688 1.9
Forest Products 20,000,000 Champion International Corp., 6.40%
due 2/15/2026 19,863,440 18,894,860 0.2
Hospital Columbia/HCA Healthcare Corp.:
20,000,000 6.125% due 12/15/2000 18,456,800 19,558,800 0.2
20,000,000 6.91% due 6/15/2005 19,919,400 19,934,800 0.2
17,500,000 6.63% due 7/15/2045 17,149,625 17,064,425 0.2
5,000,000 Tenet Healthcare Corp., 9.625% due 9/01/2002 5,000,000 5,362,500 0.1
-------------- -------------- ------
60,525,825 61,920,525 0.7
Industrial 9,775,000 Crane Co., 7.25% due 6/15/1999 9,619,840 9,888,879 0.1
50,000,000 Williams Holdings of Delaware, Inc., 6.25%
due 2/01/2006 49,739,500 47,143,500 0.5
-------------- -------------- ------
59,359,340 57,032,379 0.6
Insurance 15,125,000 Integon Corp., 8% due 8/15/1999 15,225,519 15,230,724 0.2
10,000,000 NAC Re Corp., 8% due 6/15/1999 10,189,300 10,309,500 0.1
Travelers Inc.:
20,000,000 6.125% due 6/15/2000 18,772,550 19,499,600 0.2
20,000,000 6.875% due 6/01/2025 20,037,200 20,143,800 0.2
-------------- -------------- ------
64,224,569 65,183,624 0.7
Machinery 15,000,000 Black & Decker Corp., 6.625% due 11/15/2000 14,248,100 14,950,650 0.2
20,000,000 FMC Corp., 6.375% due 9/01/2003 18,940,800 19,080,800 0.2
Harris Corp.:
22,500,000 6.375% due 8/15/2002 22,461,850 21,891,600 0.2
10,000,000 10.375% due 12/01/2018 10,541,400 11,030,900 0.1
10,000,000 TRINOVA Corp., 7.95% due 5/01/1997 9,975,000 10,166,600 0.1
-------------- -------------- ------
76,167,150 77,120,550 0.8
Manufactured 3,000,000 Oakwood Homes Corp., 9.125% due 6/01/2007 3,000,000 3,015,000 0.0
Housing
Natural Gas Coastal Corp.:
Suppliers 13,000,000 8.75% due 5/15/1999 13,055,960 13,702,000 0.2
30,000,000 8.125% due 9/15/2002 29,984,410 31,678,800 0.3
15,000,000 ENSERCH Corporation, 7.125% due 6/15/2005 15,095,150 15,006,300 0.2
-------------- -------------- ------
58,135,520 60,387,100 0.7
</TABLE>
47
<PAGE> 92
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Oil--Integrated Occidental Petroleum Corp.:
$ 12,000,000 5.85% due 11/09/1998 $ 11,150,172 $ 11,848,080 0.1%
14,475,000 5.90% due 11/09/1998 14,325,907 14,308,827 0.2
18,375,000 6.24% due 11/24/2000 18,135,306 18,103,234 0.2
Union Texas Petroleum Holdings, Inc.:
10,000,000 6.70% due 11/18/2002 10,000,000 9,764,500 0.1
20,000,000 6.81% due 12/05/2007 20,000,000 19,417,200 0.2
Unocal Corporation:
10,000,000 6.11% due 2/17/2004 10,000,000 9,427,100 0.1
40,000,000 6.23% due 2/15/2005 40,000,000 37,810,800 0.4
25,000,000 YPF S.A., 8% due 2/15/2004 21,533,750 22,187,500 0.3
-------------- -------------- ------
145,145,135 142,867,241 1.6
Oil--Related 20,000,000 Tosco Corporation, 7% due 7/15/2000 19,894,250 19,600,000 0.2
Railroads 3,000,000 Burlington Northern, Inc., 7.40% due 5/15/1999 2,993,580 3,065,220 0.0
Services 19,375,000 ADT Operations, 8.25% due 8/01/2000 19,511,125 19,907,813 0.2
Steel 20,000,000 USX Corp., 6.375% due 7/15/1998 19,894,000 19,877,000 0.2
Telecommuni- 25,000,000 AT&T Capital Corp., 6.07% due 10/24/1997 25,000,000 25,030,000 0.3
cations 10,000,000 Bell Atlantic Financial Services, Inc.,
5.47% due 4/27/1998 10,031,400 9,882,900 0.1
10,000,000 Pacific Telecom, Inc., 6.625% due 10/20/2005 10,000,000 9,647,400 0.1
-------------- -------------- ------
45,031,400 44,560,300 0.5
Transportation 10,000,000 General American Transportation Corp., 6.44%
due 11/13/2001 10,000,000 9,801,700 0.1
Utilities--Electric, 10,000,000 Commonwealth Edison Co., 6% due 3/15/1998 10,157,200 9,929,400 0.1
Gas & Water 25,000,000 Enron Corp., 6.75% due 7/01/2005 24,050,050 24,321,250 0.3
5,000,000 Long Island Lighting Co., 7.625% due 4/15/1998 4,986,210 5,029,100 0.0
PECO Energy Co.:
5,000,000 7.50% due 1/15/1999 5,043,600 5,131,700 0.1
20,000,000 5.625% due 11/01/2001 18,908,800 18,830,600 0.2
Texas Utilities Co.:
5,000,000 7.125% due 6/01/1997 4,987,500 5,060,700 0.1
9,500,000 5.75% due 7/01/1998 9,297,135 9,394,075 0.1
United Illuminating Co.:
5,000,000 7.375% due 1/15/1998 5,003,125 5,044,450 0.1
5,000,000 6.20% due 1/15/1999 4,693,050 4,894,950 0.0
87,126,670 87,636,225 1.0
-------------- -------------- ------
Total Corporate Bonds 2,292,079,893 2,290,407,868 25.4
Collateralized Mortgage Obligations
Federal Home Loan Mortgage Corp.:
20,000,000 5.80% due 4/15/2006 18,615,625 19,518,600 0.2
14,902,246 6% due 4/15/2006 14,558,214 14,836,974 0.2
13,000,000 6% due 2/15/2011 12,020,937 11,765,000 0.1
Federal National Mortgage Association:
20,000,000 5.10% due 3/25/2002 19,256,250 19,756,200 0.2
12,000,000 6.50% due 1/25/2008 11,608,125 11,553,720 0.1
10,000,000 5% due 4/25/2014 9,756,250 9,853,100 0.1
13,093,229 Prudential Home Mortgage Security Co.,
5.25% due 12/25/2000 12,532,675 12,790,383 0.2
Total Collateralized Mortgage Obligations 98,348,076 100,073,977 1.1
</TABLE>
48
<PAGE> 93
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount US Government Obligations Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
US Treasury Notes:
$110,000,000 5.75% due 10/31/2000 $ 111,273,437 $ 108,401,700 1.2%
130,000,000 6.375% due 8/15/2002 123,911,719 130,751,400 1.4
525,000,000 5.75% due 8/15/2003 512,372,188 507,034,500 5.6
605,000,000 5.875% due 2/15/2004 600,813,281 586,850,000 6.5
345,000,000 5.875% due 11/15/2005 348,964,844 332,493,750 3.7
376,000,000 5.625% due 2/15/2006 375,408,750 356,613,440 4.0
Total US Government Obligations 2,072,744,219 2,022,144,790 22.4
Short-Term Investments
Commercial 49,000,000 American Telephone & Telegraph Co., 5.32%
Paper** due 4/23/1996 48,826,213 48,826,213 0.5
34,862,000 Associates Corp. of North America, 5.48%
due 4/01/1996 34,851,386 34,851,386 0.4
42,000,000 Daimler-Benz AG, 5.14% due 4/03/1996 41,976,013 41,976,013 0.5
50,000,000 Goldman Sachs Group L.P., 5.35% due 4/25/1996 49,806,806 49,806,806 0.6
40,000,000 National Fleet Funding Corp., 5.25% due 5/01/1996 39,813,333 39,813,333 0.4
8,000,000 Schering-Plough Corp., 5.12% due 4/04/1996 7,994,311 7,994,311 0.1
-------------- -------------- ------
223,268,062 223,268,062 2.5
US Government Federal National Mortgage Association:
& Agency 40,000,000 5.17% due 4/16/1996 39,902,344 39,902,344 0.5
Obligations** 40,000,000 5.17% due 4/19/1996 39,885,111 39,885,111 0.4
40,000,000 5.17% due 4/26/1996 39,844,900 39,844,900 0.4
-------------- -------------- ------
119,632,355 119,632,355 1.3
Total Short-Term Investments 342,900,417 342,900,417 3.8
Total Investments $8,141,193,726 8,975,372,679 99.4
==============
Other Assets Less Liabilities 56,619,615 0.6
-------------- ------
Net Assets $9,031,992,294 100.0%
============== ======
<FN>
*American Depositary Receipts (ADR).
**Commercial Paper and US Government & Agency Obligations are
traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
++Non-income producing security.
++++Restricted security as to resale. The value of the Fund's
investments in restricted securities was $59,932,000,
representing 0.7% of net assets.
Acquisition Value
Issue Dates Cost (Note 1a)
GTE Finance Corp.,
5.81% due 12/15/1997 5/25/1993 $40,000,000 $39,592,000
Province of Buenos Aires,
11.50% due 10/19/1998 10/04/1995 20,000,000 20,340,000
Total $60,000,000 $59,932,000
=========== ===========
(a)Formerly Lockheed Corp.
(b)Formerly National Medical Enterprises, Inc.
(c)Investments in companies 5% or more of whose outstanding
securities are held by the Fund (such companies are defined as
"Affiliated Companies" in section 2(a)(3) of the Investment
Company Act of 1940) are as follows:
Net Share Net Dividend
Industry Affiliate Activity Cost Income
Diversified Worldtex Inc. 250,000 $ 1,155,793 +++
Companies
Home Builders Oriole Homes Corp. (10,000) (104,975) +++
Insurance Fremont General
Corp. 708,000 (787,434) $1,234,300
Iron & Steel Cleveland--Cliffs,
Inc. (205,000) (7,544,226) 1,120,393
Real Estate RFS Hotel
Investment Investors, Inc. 654,000 9,351,838 1,869,130
Trusts
Real Estate Walden Residential
Investment Properties, Inc. 475,000 7,954,221 2,081,130
Trusts
Services PHH Corp. -- -- 2,237,800
Telecommuni-
cations Nokia Corp. (ADR) 410,000 14,103,994 +++
+++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
49
<PAGE> 94
<TABLE>
FINANCIAL INFORMATION
<CAPTION>
Statement of Assets and Liabilities as of March 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$8,141,193,726) (Note 1a) $8,975,372,679
Cash 3,012,797
Foreign cash (Note 1c) 3,462,743
Receivables:
Interest $ 57,826,401
Capital shares sold 28,875,344
Dividends 10,741,685
Securities sold 9,152,874 106,596,304
--------------
Prepaid registration fees and other assets (Note 1f) 135,000
--------------
Total assets 9,088,579,523
--------------
Liabilities: Payables:
Capital shares redeemed 24,214,226
Securities purchased 21,961,605
Distributor (Note 2) 4,246,383
Investment adviser (Note 2) 2,864,387 53,286,601
--------------
Accrued expenses and other liabilities 3,300,628
--------------
Total liabilities 56,587,229
--------------
Net Assets: Net assets $9,031,992,294
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 300,000,000 shares
Consist of: authorized $ 10,440,129
Class B Shares of Common Stock, $0.10 par value, 300,000,000 shares
authorized 16,584,042
Class C Shares of Common Stock, $0.10 par value, 200,000,000 shares
authorized 861,485
Class D Shares of Common Stock, $0.10 par value, 200,000,000 shares
authorized 1,690,371
Paid-in capital in excess of par 7,765,965,408
Undistributed investment income--net 71,862,639
Undistributed realized capital gains on investments and foreign
currency transactions--net 330,415,520
Unrealized appreciation on investments and foreign currency
transactions--net 834,172,700
--------------
Net assets $9,031,992,294
==============
Net Asset Value: Class A--Based on net assets of $3,225,757,636 and 104,401,286 shares
outstanding $ 30.90
==============
Class B--Based on net assets of $5,025,504,320 and 165,840,417 shares
outstanding $ 30.30
==============
Class C--Based on net assets of $259,131,009 and 8,614,852 shares
outstanding $ 30.08
==============
Class D--Based on net assets of $521,599,329 and 16,903,714 shares
outstanding $ 30.86
==============
See Notes to Financial Statements.
</TABLE>
50
<PAGE> 95
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended March 31, 1996
<S> <S> <C> <C>
Investment Interest and discount earned $ 245,286,391
Income Dividends (net of $2,678,657 foreign withholding tax) 117,437,311
(Notes 1d & 1e): Other 118,038
--------------
Total income 362,841,740
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 43,935,168
Investment advisory fees (Note 2) 31,428,894
Transfer agent fees--Class B (Note 2) 6,544,983
Transfer agent fees--Class A (Note 2) 3,690,869
Account maintenance and distribution fees--Class C (Note 2) 1,382,636
Account maintenance fees--Class D (Note 2) 875,288
Printing and shareholder reports 782,018
Registration fees (Note 1f) 707,903
Custodian fees 578,365
Transfer agent fees--Class D (Note 2) 452,520
Transfer agent fees--Class C (Note 2) 223,212
Professional fees 108,486
Directors' fees and expenses 41,285
Pricing fees 10,005
Other 117,237
--------------
Total expenses 90,878,869
--------------
Investment income--net 271,962,871
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 843,469,459
(Loss) on Foreign currency transactions--net (418,926) 843,050,533
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 481,220,303
(Notes 1b, 1c, Foreign currency transactions--net (4,321) 481,215,982
1e & 3): -------------- --------------
Net realized and unrealized gain on investments and foreign
currency transactions 1,324,266,515
--------------
Net Increase in Net Assets Resulting from Operations $1,596,229,386
==============
See Notes to Financial Statements.
</TABLE>
51
<PAGE> 96
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended
March 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 271,962,871 $ 184,513,108
Realized gain on investments and foreign currency transactions--net 843,050,533 229,679,961
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 481,215,982 156,181,613
-------------- --------------
Net increase in net assets resulting from operations 1,596,229,386 570,374,682
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (107,615,888) (79,657,527)
Shareholders Class B (124,808,348) (80,336,105)
(Note 1g): Class C (4,109,418) (186,349)
Class D (12,210,426) (1,531,830)
Realized gain on investments--net:
Class A (215,994,688) (132,046,243)
Class B (336,099,182) (188,065,461)
Class C (11,431,655) (321,434)
Class D (27,764,995) (2,472,719)
-------------- --------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (840,034,600) (484,617,668)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 1,885,677,575 987,538,601
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 2,641,872,361 1,073,295,615
Beginning of year 6,390,119,933 5,316,824,318
-------------- --------------
End of year* $9,031,992,294 $6,390,119,933
============== ==============
<FN>
*Undistributed investment income--net (Note 1h) $ 71,862,639 $ 61,422,496
============== ==============
See Notes to Financial Statements.
</TABLE>
52
<PAGE> 97
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratiois have been derived Class A
from informatioon provided in the financial statements. For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 27.74 $ 27.46 $ 27.89 $ 26.90 $ 25.38
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net 1.21 1.01 .97 .87 1.02
Realized and unrealized gain on investments
and foreign currency transactions--net 5.41 1.77 .50 1.99 2.12
---------- ---------- ---------- ---------- ----------
Total from investment operations 6.62 2.78 1.47 2.86 3.14
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (1.16) (.94) (.95) (.87) (1.02)
Realized gain on investments--net (2.30) (1.56) (.95) (1.00) (.60)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (3.46) (2.50) (1.90) (1.87) (1.62)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 30.90 $ 27.74 $ 27.46 $ 27.89 $ 26.90
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 24.50% 10.95% 5.39% 11.33% 12.96%
Return:* ========== ========== ========== ========== ==========
Ratios to Expenses .56% .57% .53% .55% .56%
Average ========== ========== ========== ========== ==========
Net Assets: Investment income--net 4.09% 3.81% 3.52% 3.56% 4.21%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $3,225,758 $2,507,767 $2,237,492 $2,056,023 $1,533,530
Data: ========== ========== ========== ========== ==========
Portfolio turnover 84% 89% 86% 55% 59%
========== ========== ========== ========== ==========
Average commission rate paid $ .0382 -- ++ -- ++ -- ++ -- ++
========== ========== ========== ========== ==========
<CAPTION>
The following per share data and ratiois have been derived Class B
from informatioon provided in the financial statements. For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 27.28 $ 27.04 $ 27.49 $ 26.58 $ 25.14
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .90 .74 .70 .65 .80
Realized and unrealized gain on investments
and foreign currency transactions--net 5.29 1.72 .48 1.89 2.05
---------- ---------- ---------- ---------- ----------
Total from investment operations 6.19 2.46 1.18 2.54 2.85
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.87) (.66) (.68) (.63) (.81)
Realized gain on investments--net (2.30) (1.56) (.95) (1.00) (.60)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (3.17) (2.22) (1.63) (1.63) (1.41)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 30.30 $ 27.28 $ 27.04 $ 27.49 $ 26.58
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 23.22% 9.81% 4.36% 10.16% 11.81%
Return:* ========== ========== ========== ========== ==========
Ratios to Expenses 1.58% 1.59% 1.55% 1.56% 1.58%
Average ========== ========== ========== ========== ==========
Net Assets: Investment income--net 3.07% 2.79% 2.50% 2.53% 3.14%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $5,025,504 $3,664,250 $3,079,332 $2,694,774 $1,582,065
Data: ========== ========== ========== ========== ==========
Portfolio turnover 84% 89% 86% 55% 59%
========== ========== ========== ========== ==========
Average commission rate paid $ .0382 -- ++ -- ++ -- ++ -- ++
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
++Data not required for the period.
See Notes to Financial Statements.
</TABLE>
53
<PAGE> 98
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
March 31, March 31, March 31, March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 27.17 $ 26.81 $ 27.72 $ 27.27
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .92 .49 1.16 .48
Realized and unrealized gain on investments
and foreign currency transactions--net 5.24 1.03 5.38 1.15
---------- ---------- ---------- ----------
Total from investment operations 6.16 1.52 6.54 1.63
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.95) (.43) (1.10) (.45)
Realized gain on investments--net (2.30) (.73) (2.30) (.73)
---------- ---------- ---------- ----------
Total dividends and distributions (3.25) (1.16) (3.40) (1.18)
---------- ---------- ---------- ----------
Net asset value, end of period $ 30.08 $ 27.17 $ 30.86 $ 27.72
========== ========== ========== ==========
Total Investment Based on net asset value per share 23.25% 6.07%+++ 24.21% 6.42%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 1.59% 1.64%* .81% .87%*
Net Assets: ========== ========== ========== ==========
Investment income--net 3.08% 3.22%* 3.84% 3.94%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 259,131 $ 46,902 $ 521,599 $ 171,201
Data: ========== ========== ========== ==========
Portfolio turnover 84% 89% 84% 89%
========== ========== ========== ==========
Average commission rate paid $ .0382 -- ++++$ .0382 -- ++++
========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Data not required for the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
54
<PAGE> 99
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Capital Fund, Inc. (the "Fund") is regis-
tered under the Investment Company Act of 1940 as a
diversified, open-end management investment company.
The Fund offers four classes of shares under the
Merrill Lynch Select Pricing SM System. Shares of Class A
and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a con-
tingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights
and the same terms and conditions, except that Class B,
Class C and Class D Shares bear certain expenses related
to the account maintenance of such shares, and Class B
and Class C Shares also bear certain expenses related
to the distribution of such shares. Each class has ex-
clusive voting rights with respect to matters relating to
its account maintenance and distribution expenditures.
The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which
are traded on stock exchanges are valued at the last
sale price on the exchange on which such securities are
traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid
price prior to the time of valuation. In cases where
securities are traded on more than one exchange, the
securities are valued on the exchange designated by or
under the authority of the Board of Directors as the
primary market. Securities which are traded both in the
over-the-counter market and on a stock exchange are
valued according to the broadest and most representa-
tive market. Options written are valued at the last sale
price in the case of exchange-traded options or, in the
case of options traded in the over-the-counter market,
the last asked price. Options purchased are valued at
the last sale price in the case of exchange-traded options
or, in the case of options traded in the over-the-counter
market, the last bid price. Short-term securities are
valued at amortized cost, which approximates market
value. Securities and assets for which market quotations
are not available are valued at fair value as determined
in good faith by or under the direction of the Fund's
Board of Directors.
(b) Derivative financial instruments--The Fund may
engage in various portfolio strategies to seek to increase
its return by hedging its portfolio against adverse
movements in the equity, debt and currency markets.
Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under
the contract.
* Options--The Fund is authorized to write covered call
options and purchase put options. When the Fund writes
an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently
marked to market to reflect the current market value of
the option written. When a security is purchased or sold
through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the
basis of the security acquired or deducted from (or
added to) the proceeds of the security sold. When an
option expires (or the Fund enters into a closing trans-
action), the Fund realizes a gain or loss on the option to
the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction
exceeds the premium paid or received).
Written and purchased options are non-income pro-
ducing investments.
(c) Foreign currency transactions--Transactions denomi-
nated in foreign currencies are recorded at the exchange
rate prevailing when recognized. Assets and liabilities
denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency
transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unreal-
ized gains or losses from investments include the effects
of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply
with the requirements of the Internal Revenue Code
applicable to regulated investment companies and
to distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax pro-
vision is required. Under the applicable foreign tax law,
a withholding tax may be imposed on interest, dividends,
and capital gains at various rates.
(e) Security transactions and investment income--
Security transactions are recorded on the dates the
transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend date,
except that if the ex-dividend date has passed, certain
dividends from foreign securities are recorded as soon
as the Fund is informed of the ex-dividend date. Interest
55
<PAGE> 100
income (including amortization of discount) is recog-
nized on the accrual basis. Realized gains and losses on
security transactions are determined on the identified
cost basis.
(f) Prepaid registration fees--Prepaid registration
fees are charged to expense as the related shares are
issued.
(g) Dividends and distributions--Dividends and
distributions paid by the Fund are recorded on the
ex-dividend dates.
(h) Reclassification--Generally accepted accounting
principles require that certain components of net assets be
reclassified to reflect permanent differences between
financial reporting and tax purposes. Accordingly,
current year's permanent book/tax differences of
$12,778,648 have been reclassified from undistributed
net investment income to accumulated net realized
capital losses. These reclassifications have no effect
on net assets or net asset value per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory
Agreement with Merrill Lynch Asset Management, L.P.
("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned sub-
sidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which
is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of Merrill
Lynch Group, Inc.
MLAM is responsible for the management of the Fund's
portfolio and provides the necessary personnel, facili-
ties, equipment and certain other services necessary to
the operations of the Fund. For such services, the Fund
pays a monthly fee based upon the average daily value of
the Fund's net assets at the following annual rates: 0.50%
of the Fund's average daily net assets not exceeding
$250 million; 0.45% of average daily net assets in excess
of $250 million but not exceeding $300 million; 0.425%
of average daily net assets in excess of $300 million but
not exceeding $400 million; and 0.40% of average daily
net assets in excess of $400 million. The Investment
Advisory Agreement obligates MLAM to reimburse the
Fund to the extent the Fund's expenses (excluding
interest, taxes, distribution fees, brokerage fees and
commissions, and extraordinary items) exceed 2.5% of
the Fund's first $30 million of average daily net assets,
2.0% of the Fund's next $70 million of average daily net
assets, and 1.5% of the average daily net assets in excess
thereof. No fee payment will be made to MLAM during
any fiscal year which will cause such expenses to exceed
the most restrictive expense limitation at the time of
such payment.
Pursuant to the distribution plans (the "Distribution
Plans") adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the
Fund pays the Distributor ongoing account maintenance
and distribution fees. The fees are accrued daily and
paid monthly at annual rates based upon the average
daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor,
Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"),
a subsidiary of ML & Co., also provides account main-
tenance and distribution services to the Fund. The
ongoing account maintenance fee compensates the Dis-
tributor and MLPF&S for providing account maintenance
services to Class B, Class C and Class D shareholders.
The ongoing distribution fee compensates the Dis-
tributor and MLPF&S for providing shareholder and
distribution-related services to Class B and Class C
shareholders.
For the year ended March 31, 1996, MLFD earned under-
writing discounts and commissions and MLPF&S earned
dealer concessions on sales of the Fund's Class A and
Class D Shares as follows:
MLFD MLPF&S
Class A $ 81,332 $1,167,475
Class D $247,249 $3,538,854
For the year ended March 31, 1996, MLPF&S received
contingent deferred sales charges of $4,025,586 and
$75,917 relating to transactions in Class B and Class C
Shares, respectively.
In addition, MLPF&S received $525,422 in commissions
on the execution of portfolio security transactions for
the year ended March 31, 1996.
56
<PAGE> 101
NOTES TO FINANCIAL STATEMENTS (concluded)
Merrill Lynch Financial Data Services, Inc. ("MLFDS"),
a wholly-owned subsidiary of ML & Co., is the Fund's
transfer agent.
During the year ended March 31, 1996, Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, received
$7,714 for security price quotations to compute the net
asset value of the Fund.
Certain officers and/or directors of the Fund are officers
and/or directors of MLAM, PSI, MLPF&S, MLFDS, MLFD,
and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-
term securities, for the year ended March 31, 1996 were
$7,446,853,963 and $6,285,139,919, respectively.
Net realized and unrealized gains (losses) as of
March 31, 1996 were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $843,151,299 $834,178,953
Short-term investments (22,268) --
Paydowns 340,428 --
Foreign currency
transactions (418,926) (6,253)
------------ ------------
Total $843,050,533 $834,172,700
============ ============
As of March 31, 1996, net unrealized appreciation
for Federal income tax purposes aggregated $830,016,332,
of which $982,470,622 related to appreciated securities
and $152,454,290 related to depreciated securities. At
March 31, 1996, the aggregate cost of investments for
Federal income tax purposes was $8,145,356,347.
4. Capital Share Transactions:
Net increase in net assets derived from capital share
transactions was $1,885,677,575 and $987,538,601 for
the years ended March 31, 1996 and March 31, 1995,
respectively.
Transactions in capital shares for each class were as
follows:
Class A Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
Shares sold 19,027,848 $ 584,244,547
Shares issued to shareholders
in reinvestment of dividends
& distributions 9,847,092 289,450,802
-------------- --------------
Total issued 28,874,940 873,695,349
Shares redeemed (14,880,078) (451,792,754)
-------------- --------------
Net increase 13,994,862 $ 421,902,595
============== ==============
Class A Shares for the Year Dollar
Ended March 31, 1995 Shares Amount
Shares sold 17,286,503 $ 471,481,609
Shares issued to shareholders
in reinvestment of dividends
& distributions 7,424,496 192,734,824
-------------- --------------
Total issued 24,710,999 664,216,433
Shares redeemed (15,776,697) (427,291,645)
-------------- --------------
Net increase 8,934,302 $ 236,924,788
============== ==============
Class B Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
Shares sold 45,146,025 $1,369,296,478
Shares issued to shareholders
in reinvestment of dividends
& distributions 13,896,514 386,369,306
-------------- --------------
Total issued 59,042,539 1,755,665,784
Shares redeemed (25,082,439) (748,567,202)
Automatic conversion
of shares (2,447,861) (71,651,206)
-------------- --------------
Net increase 31,512,239 $ 935,447,376
============== ==============
Class B Shares for the Year Dollar
Ended March 31, 1995 Shares Amount
Shares sold 35,795,347 $ 958,699,323
Shares issued to shareholders
in reinvestment of dividends
& distributions 9,333,565 239,011,925
-------------- --------------
Total issued 45,128,912 1,197,711,248
Shares redeemed (20,872,708) (557,090,978)
Automatic conversion
of shares (3,804,492) (100,075,150)
-------------- --------------
Net increase 20,451,712 $ 540,545,120
============== ==============
Class C Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
Shares sold 7,451,321 $ 221,649,300
Shares issued to shareholders
in reinvestment of dividends
& distributions 474,830 13,924,668
-------------- --------------
Total issued 7,926,151 235,573,968
Shares redeemed (1,037,499) (31,045,232)
-------------- --------------
Net increase 6,888,652 $ 204,528,736
============== ==============
Class C Shares for the Period Dollar
Oct. 21, 1994++ to Mar. 31, 1995 Shares Amount
Shares sold 1,868,357 $ 49,114,822
Shares issued to shareholders
in reinvestment of dividends
& distributions 18,191 452,606
-------------- --------------
Total issued 1,886,548 49,567,428
Shares redeemed (160,348) (4,186,298)
-------------- --------------
Net increase 1,726,200 $ 45,381,130
============== ==============
[FN]
++Commencement of Operations.
57
<PAGE> 102
Class D Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
Shares sold 10,198,663 $ 303,203,877
Automatic conversion
of shares 2,406,94 71,651,206
Shares issued to shareholders
in reinvestment of dividends
& distributions 1,173,178 35,170,384
-------------- --------------
Total issued 13,778,786 410,025,467
Shares redeemed (3,050,741) (86,226,599)
-------------- --------------
Net increase 10,728,045 $ 323,798,868
============== ==============
Class D Shares for the Period Dollar
Oct. 21, 1994++ to Mar. 31, 1995 Shares Amount
Shares sold 2,621,771 $ 69,784,869
Automatic conversion
of shares 3,740,107 100,075,150
Shares issued to shareholders
in reinvestment of dividends
& distributions 140,100 3,548,731
-------------- --------------
Total issued 6,501,978 173,408,750
Shares redeemed (326,309) (8,721,187)
-------------- --------------
Net increase 6,175,669 $ 164,687,563
============== ==============
[FN]
++Commencement of Operations.
5. Commitments:
At March 31, 1996, the Fund had entered into forward
exchange contracts under which it had agreed to buy
and sell various foreign currencies with a value of
$317,838 and 696,025, respectively.
58
<PAGE> 103
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and
Policies......................... 2
Management of the Fund............. 6
Directors and Officers........... 6
Compensation of Directors........ 7
Management and Advisory
Arrangements.................. 8
Purchase of Shares................. 10
Initial Sales Charge Alternatives
--
Class A and Class D Shares.... 10
Reduced Initial Sales Charges.... 11
Employer-Sponsored Retirement or
Savings Plans and Certain
Other Arrangements............ 14
Distribution Plans............... 15
Limitations on the Payment of
Deferred Sales Charges........ 15
Redemption of Shares............... 16
Deferred Sales Charge --
Class B and Class C Shares.... 17
Portfolio Transactions and
Brokerage........................ 17
Determination of Net Asset Value... 19
Shareholder Services............... 20
Investment Account............... 20
Automatic Investment Plans....... 21
Automatic Reinvestment of
Dividends and Capital Gains
Distributions................. 21
Systematic Withdrawal Plans --
Class A and Class D Shares.... 21
Retirement Plans................. 22
Exchange Privilege............... 22
Dividends, Distributions and
Taxes............................ 25
Dividends and Distributions...... 25
Taxes............................ 25
Tax Treatment of Options
Transactions.................. 27
Special Rules for Certain Foreign
Currency Transactions......... 27
Performance Data................... 28
General Information................ 30
Description of Shares............ 30
Computation of Offering Price
per Share..................... 31
Independent Auditors............. 31
Custodian........................ 32
Transfer Agent................... 32
Legal Counsel.................... 32
Reports to Shareholders.......... 32
Additional Information........... 32
Appendix A......................... 33
Independent Auditors' Report....... 40
Financial Statements............... 41
Code #10257-0796
</TABLE>
Merrill Lynch
Capital Fund, Inc.
STATEMENT OF
ADDITIONAL
INFORMATION
July 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 104
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>
