<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1997
SECURITIES ACT FILE NO. 2-49007
INVESTMENT COMPANY ACT FILE NO. 811-2405
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 34 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 23 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH CAPITAL FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH CAPITAL FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PHILIP L. KIRSTEIN, ESQ. COUNSEL FOR THE FUND:
MERRILL LYNCH ASSET BROWN & WOOD LLP
MANAGEMENT ONE WORLD TRADE CENTER
P.O. BOX 9011 NEW YORK, N.Y. 10048-0557
PRINCETON, NEW JERSEY 08543-9011 ATTENTION: THOMAS R. SMITH, JR., ESQ.
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (b)
[ ] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(1)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (a)(1)
[ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(2)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (a)(2) OF RULE 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
------------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON MAY 22, 1997.
================================================================================
<PAGE> 2
MERRILL LYNCH CAPITAL FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- -------------- ---------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................... Cover Page
Item 2. Synopsis................................. Fee Table; Merrill Lynch Select
Pricing(SM) System
Item 3. Condensed Financial Information.......... Financial Highlights; Performance Data
Item 4. General Description of Registrant........ Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund................... Fee Table; Management of the Fund;
Portfolio Transactions and Brokerage;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance............................. Not Applicable
Item 6. Capital Stock and Other Securities....... Cover Page; Purchase of Shares;
Redemption of Shares; Shareholder
Services; Additional Information
Item 7. Purchase of Securities Being Offered..... Cover Page; Fee Table; Merrill Lynch
Select Pricing(SM) System; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase................. Fee Table; Merrill Lynch Select
Pricing(SM) System; Purchase of Shares;
Redemption of Shares; Shareholder
Services
Item 9. Pending Legal Proceedings................ Not Applicable
PART B
Item 10. Cover Page............................... Cover Page
Item 11. Table of Contents........................ Back Cover Page
Item 12. General Information and History.......... Not Applicable
Item 13. Investment Objective and Policies........ Investment Objective and Policies
Item 14. Management of the Fund................... Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities............................... Management of the Fund; General
Information-Additional Information
Item 16. Investment Advisory and Other Services... Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices............................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities....... General Information
Item 19. Securities Being Offered................. Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information -- Description of Shares
Item 20. Tax Status............................... Dividends, Distributions and Taxes
Item 21. Underwriters............................. Purchase of Shares
Item 22. Calculation of Performance Data.......... Performance Data
Item 23. Financial Statements..................... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
JULY 21, 1997
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 approach 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, 1997, approximately 55% 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 11.
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 that 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 and for
participants in certain fee-based programs the minimum initial purchase is $500
and the minimum subsequent purchase is $50. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through 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 NOR HAS THE SECURITIES AND EXCHANGE 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 21, 1997 (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> 4
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(f)
annually thereafter to
0.0% after the fourth
year(e)
Exchange Fee............................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)................ 0.40% 0.40% 0.40% 0.40%
12b-1 Fees(h):
Account Maintenance Fees................. None 0.25% 0.25% None
Distribution Fees........................ None 0.75% 0.75% 0.25%
(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(i)........ 0.13% 0.15% 0.16% 0.13%
Other................................. 0.01% 0.01% 0.01% 0.01%
----- ----- ----- -----
Total Other Expenses.............. 0.15% 0.17% 0.18% 0.15%
----- ----- ----- -----
Total Fund Operating Expenses.............. 0.55% 1.57% 1.58% 0.80%
===== ===== ===== ======
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives-- Class A and Class D Shares"--page 19 and "Shareholder
Services--Fee-Based Programs"--page 30.
(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 21.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans and participants in certain fee-based
programs. Class A or Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares"--page 19.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 30.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 30.
2
<PAGE> 5
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 30.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page 15.
(h) See "Purchase of Shares--Distribution Plans"--page 24.
(i) See "Management of the Fund--Transfer Agency Services"--page 16.
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth on page 2,
(2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any applicable
CDSC for Class B and Class C shares):
Class A..................................................... $ 58 $69 $82 $118
Class B..................................................... $ 56 $70 $86 $167*
Class C..................................................... $ 26 $50 $86 $188
Class D..................................................... $ 60 $77 $95 $146
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 $69 $82 $118
Class B..................................................... $ 16 $50 $86 $167*
Class C..................................................... $ 16 $50 $86 $188
Class D..................................................... $ 60 $77 $95 $146
</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 Conduct
Rules of the National Association of Securities Dealers, Inc. (the "NASD").
Merrill Lynch may charge its customers a processing fee (presently $5.35) for
confirming purchases and repurchases. Purchases and redemptions made directly
through the 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 registered investment companies 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
3
<PAGE> 6
advised by MLAM or FAM that 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 bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The 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 four
years, at a rate of 4.0%
during the first year,
decreasing 1.0% annually to B shares convert to
0.0%(4) 0.25% 0.75% D shares automatically
after approximately
eight years(5)
-----------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
-----------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% No No
-----------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 7
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares-- Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection with
certain fee-based programs. A 0.75% sales charge for 401(k) purchases over
$1 million will apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares 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 who currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class
A shares of the Fund in that account. Other eligible investors include
certain retirement plans and participants in certain fee-based
programs. In addition, Class A shares 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 employees and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over, and waived for purchases by
certain retirement plans and participants in certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. Sales charges also are reduced under a
right of accumulation that takes into account the investor's holdings
of all classes of all MLAM-advised mutual funds. See "Purchase of
Shares-- Initial Sales Charge Alternatives--Class A and Class D
Shares."
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class B shares, and a CDSC if they are redeemed within
four years of purchase. Such CDSC may be modified in connection with
certain fee-based programs. Approximately eight years after issuance,
Class B shares will convert automatically into Class D shares of the
Fund, which are subject to 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
5
<PAGE> 8
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."
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 of 1.0% if they are redeemed within one year of purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is reduced
for purchases of $25,000 and over. Purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales
charge is waived, such purchases may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. The schedule of
initial sales charges and reductions for Class D shares is the same as
the schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D shares
also will be issued upon conversion of Class B shares as described
above under "Class B." See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors 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
6
<PAGE> 9
fees on Class B or Class C shares may exceed the initial sales charge and, in
the case of Class D shares, the account maintenance fee. Although some investors
that previously purchased Class A shares may no longer be eligible to purchase
Class A shares of other MLAM-advised mutual funds, those previously purchased
Class A shares, together with Class B, Class C and Class D share holdings, will
count toward a right of accumulation that may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will cause
Class B and Class C shares to have higher expense ratios, pay lower dividends
and have lower total returns than the initial sales charge shares. The ongoing
Class D account maintenance fees will cause Class D shares to have a higher
expense ratio, pay lower dividends and have a lower 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 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 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> 10
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 fiscal year ended
March 31, 1997 and the independent auditors' report thereon are included in the
Statement of Additional Information. Further information about the performance
of the Fund is contained in the Fund's most recent annual report to
shareholders, which may be obtained, without charge, by calling or by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------------
1997++ 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 30.90 $ 27.74 $ 27.46 $ 27.89 $ 26.90
---------- ---------- ---------- ---------- ----------
Investment income--net 1.25 1.21 1.01 .97 .87
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 2.43 5.41 1.77 .50 1.99
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.68 6.62 2.78 1.47 2.86
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (1.25) (1.16) (.94) (.95) (.87)
Realized gain on investments--net (1.94) (2.30) (1.56) (.95) (1.00)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (3.19) (3.46) (2.50) (1.90) (1.87)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 31.39 $ 30.90 $ 27.74 $ 27.46 $ 27.89
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 12.62% 24.50% 10.95% 5.39% 11.33%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses .55% .56% .57% .53% .55%
========== ========== ========== ========== ==========
Investment income--net 3.99% 4.09% 3.81% 3.52% 3.56%
========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands) $3,291,219 $3,225,758 $2,507,767 $2,237,492 $2,056,023
========== ========== ========== ========== ==========
Portfolio turnover 47% 84% 89% 86% 55%
========== ========== ========== ========== ==========
Average commission rate paid+ $ .0432 $ .0382 -- -- --
========== ========== ========== ========== ==========
<CAPTION>
1992 1991 1990 1989 1988
----------- ---------- -------- -------- --------
<S> <C<C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET
VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 25.38 $ 23.65 $ 22.33 $ 21.32 $ 27.97
----------- ---------- -------- -------- --------
Investment income--net 1.02 1.17 1.11 1.07 .91
Realized and unrealized gain (loss)
on investments and foreign currency
transactions--net 2.12 2.24 2.03 1.69 (1.58)
----------- ---------- -------- -------- --------
Total from investment operations 3.14 3.41 3.14 2.76 (.67)
----------- ---------- -------- -------- --------
Less dividends and distributions:
Investment income--net (1.02) (1.14) (1.10) (.73) (.22)
Realized gain on investments--net (.60) (.54) (.72) (1.02) (5.76)
----------- ---------- -------- -------- --------
Total dividends and distributions (1.62) (1.68) (1.82) (1.75) (5.98)
----------- ---------- -------- -------- --------
Net asset value, end of year $ 26.90 $ 25.38 $ 23.65 $ 22.33 $ 21.32
========== ========== ======== ======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 12.96% 15.17% 14.04% 13.42% (1.69%)
========== ========== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses .56% .58% .60% .64% .60%
========== ========== ======== ======== ========
Investment income--net 4.21% 5.13% 4.80% 4.79% 3.57%
========== ========== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands) $ 1,533,530 $1,083,741 $866,924 $678,958 $657,682
========== ========== ======== ======== ========
Portfolio turnover 59% 86% 85% 63% 85%
========== ========== ======== ======== ========
Average commission rate paid+ -- -- -- -- --
========== ========== ======== ======== ========
</TABLE>
- ---------------
* Total investment returns exclude the effect of sales loads.
+ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
++ Based on average shares outstanding during the year.
8
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------
1997++ 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 30.30 $ 27.28 $ 27.04 $ 27.49 $ 26.58 $ 25.14
---------- ---------- ---------- ---------- ---------- ----------
Investment income--net........................ .91 .90 .74 .70 .65 .80
Realized and unrealized gain on investments
and foreign currency transactions--net....... 2.39 5.29 1.72 .48 1.89 2.05
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations.............. 3.30 6.19 2.46 1.18 2.54 2.85
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net....................... (.94) (.87) (.66) (.68) (.63) (.81)
Realized gain on investments--net............ (1.94) (2.30) (1.56) (.95) (1.00) (.60)
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and distributions............. (2.88) (3.17) (2.22) (1.63) (1.63) (1.41)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period................ $ 30.72 $ 30.30 $ 27.28 $ 27.04 $ 27.49 $ 26.58
========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............ 11.48% 23.22% 9.81% 4.36% 10.16% 11.81%
========== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses...................................... 1.57% 1.58% 1.59% 1.55% 1.56% 1.58%
========== ========== ========== ========== ========== ==========
Investment income--net........................ 2.97% 3.07% 2.79% 2.50% 2.53% 3.14%
========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...... $4,977,431 $5,025,504 $3,664,250 $3,079,332 $2,694,774 $1,582,065
========== ========== ========== ========== ========== ==========
Portfolio turnover............................ 47% 84% 89% 86% 55% 59%
========== ========== ========== ========== ========== ==========
Average commission rate paid+++............... $ .0432 $ .0382 -- -- -- --
========== ========== ========== ========== ========== ==========
<CAPTION>
1991 1990 1989+
-------- -------- --------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 23.46 $ 22.27 $ 22.64
-------- -------- --------
Investment income--net........................ .96 .91 .22
Realized and unrealized gain on investments
and foreign currency transactions--net....... 2.19 1.96 .72
-------- -------- --------
Total from investment operations.............. 3.15 2.87 .94
-------- -------- --------
Less dividends and distributions:
Investment income--net....................... (.93) (.96) (.54)
Realized gain on investments--net............ (.54) (.72) (.77)
-------- -------- --------
Total dividends and distributions............. (1.47) (1.68) (1.31)
-------- -------- --------
Net asset value, end of period................ $ 25.14 $ 23.46 $ 22.27
======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............ 14.03% 12.84% 4.42%#
======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses...................................... 1.60% 1.62% 1.70%*
======== ======== ========
Investment income--net........................ 4.11% 3.72% 4.43%*
======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)...... $620,842 $365,773 $ 32,254
======== ======== ========
Portfolio turnover............................ 86% 85% 63%
======== ======== ========
Average commission rate paid+++............... -- -- --
======== ======== ========
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Class B shares commenced operations on October 21, 1988.
++ Based on average shares outstanding during the year.
+++ For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
# Aggregate total investment return.
9
<PAGE> 12
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS C CLASS D
--------------------------------------- ---------------------------------------
FOR THE FOR THE
PERIOD PERIOD
OCTOBER 21, OCTOBER 21,
FOR THE YEAR 1994+ TO FOR THE YEAR 1994+ TO
ENDED MARCH 31, MARCH 31, ENDED MARCH 31, MARCH 31,
---------------------- ----------- ---------------------- -----------
1997+++ 1996 1995 1997+++ 1996 1995
-------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 30.08 $ 27.17 $ 26.81 $ 30.86 $ 27.72 $ 27.27
-------- -------- ----------- -------- -------- -----------
Investment income--net.................. .90 .92 .49 1.17 1.16 .48
Realized and unrealized gain on
investments and foreign currency
transactions--net...................... 2.36 5.24 1.03 2.43 5.38 1.15
-------- -------- ----------- -------- -------- -----------
Total from investment operations........ 3.26 6.16 1.52 3.60 6.54 1.63
-------- -------- ----------- -------- -------- -----------
Less dividends and distributions:
Investment income--net................. (.96) (.95) (.43) (1.18) (1.10) (.45)
Realized gain on investments--net...... (1.94) (2.30) (.73) (1.94) (2.30) (.73)
-------- -------- ----------- -------- -------- -----------
Total dividends and distributions....... (2.90) (3.25) (1.16) (3.12) (3.40) (1.18)
-------- -------- ----------- -------- -------- -----------
Net asset value, end of period.......... $ 30.44 $ 30.08 $ 27.17 $ 31.34 $ 30.86 $ 27.72
======== ======== ============= ======== ======== =============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...... 11.45% 23.25% 6.07%++ 12.34% 24.21% 6.42%++
======== ======== ============= ======== ======== =============
RATIOS TO AVERAGE NET ASSETS:
Expenses................................ 1.58% 1.59% 1.64%* .80% .81% .87%*
======== ======== ============= ======== ======== =============
Investment income--net.................. 2.96% 3.08% 3.22%* 3.75% 3.84% 3.94%*
======== ======== ============= ======== ======== =============
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $322,438 $259,131 $ 46,902 $690,116 $521,599 $ 171,201
======== ======== ============= ======== ======== =============
Portfolio turnover...................... 47% 84% 89% 47% 84% 89%
======== ======== ============= ======== ======== =============
Average commission rate paid#........... $ .0432 $ .0382 -- $ .0432 $ .0382 --
======== ======== ============= ======== ======== =============
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
+++ Based on average shares outstanding during the year.
# For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchase and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
10
<PAGE> 13
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 the economies and
securities markets of other countries will undergo continuous change. Thus, the
fully managed approach puts maximum emphasis on investment 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 perform at high levels. The Fund
considers quality companies to be those that 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 that are rated below Baa by Moody's
Investors Service, Inc. ("Moody's") or below BBB by Standard & Poor's Ratings
Services ("S&P") or which, in the Investment Adviser's judgment, possess similar
credit characteristics. Such securities, sometimes referred to as "high
yield/high risk securities" or "junk bonds", are predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
the terms of the security and generally involve a greater volatility of price
than securities in higher rating categories. The market prices of high-yielding,
lower-rated securities may fluctuate more than those of higher-rated securities
and may decline significantly in periods of general economic difficulty, which
may follow periods of rising interest rates. In purchasing such securities, the
Fund will rely on the Investment Adviser's judgment, analysis and experience in
evaluating the creditworthiness of the issuer of such securities. The Investment
Adviser will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of its management and regulatory matters. See "Investment
Objective and Policies" in the Statement of Additional Information for a more
detailed discussion of the pertinent risk factors involved in investing in "high
yield/high risk securities" or "junk bonds" and Appendix A--"Ratings
11
<PAGE> 14
of Debt Securities and Preferred Stock" in the Statement of Additional
Information for additional information regarding ratings of debt securities. The
Fund does not intend to purchase debt securities that are in default or which
the Investment Adviser believes will be in default. The Fund does not intend to
invest in excess of 35% of its total assets in securities that are rated below
Baa by Moody's or below BBB by S&P or that the Investment Adviser believes have
characteristics similar to those securities.
-- Convertible securities, i.e., fixed income issues that 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.
-- 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, 1997, approximately 55% 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 the liquidity of any restricted securities in the
Fund's portfolio. The Board has determined that securities which are freely
tradeable in their primary market offshore should be deemed liquid. The Board of
Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
12
<PAGE> 15
The Board of Directors carefully monitors the Fund's investments in
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. To the extent
that qualified institutional buyers become for a time uninterested in purchasing
these restricted securities, the Fund's investments in securities purchased
pursuant to Rule 144A could have the effect of increasing the level of
illiquidity in the Fund.
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 may not be
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 the value of such portfolio security or, if the
Fund has entered into a contract to sell the security, could result in possible
liability to the purchaser. 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.
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 generally
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 that are fundamental policies
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act 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 that will
reduce net income.
13
<PAGE> 16
Lending of Portfolio Securities. The Fund may from time to time lend
securities (but no more than 20% of its total assets) from its portfolio to
approved borrowers and receive therefor collateral in cash or securities issued
or guaranteed by the U.S. Government that 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 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 its affiliate, FAM;
President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and 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
Emeritus, 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.
14
<PAGE> 17
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 140 registered investment companies. The
Investment Adviser or FAM also provides investment advisory services to
individual and institutional accounts. As of June 30, 1997, the Investment
Adviser and FAM had a total of approximately $256.6 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 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,
1997, the Investment Adviser earned a fee of $37,585,806 (based upon average net
assets of approximately $9.3 billion) and the effective fee rate was 0.40%.
Also, the Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly-owned subsidiary of ML & Co. and an affiliate
of the Investment Adviser, pursuant to which the Investment Adviser pays MLAM
U.K. a fee for providing services to the Investment Adviser with respect to the
Fund in an amount to be determined from time to time by the Investment Adviser
and MLAM U.K. but in no event in excess of the amount the Investment Adviser
actually receives for providing services to the Fund pursuant to the investment
advisory agreement between the Fund and the Investment Adviser (the "Investment
Advisory Agreement"). MLAM U.K. has offices at Milton Gate, 1 Moor Lane, London
EC2Y 9HA, England.
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, 1997, the ratio of total
expenses to average net assets was 0.55% for Class A shares, 1.57% for Class B
shares, 1.58% for Class C shares and 0.80% for Class D shares.
15
<PAGE> 18
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 that 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 that at
the time, is being purchased or sold (as the case may be), or to the knowledge
of the employee is being considered for purchase or sale, by any fund advised by
the 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).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a subsidiary of ML & Co., acts as the Fund's transfer agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
up to $11.00 per Class A or Class D account and up to $14.00 per Class B or
Class C account and is entitled to reimbursement for certain transaction charges
and out-of-pocket expenses incurred by it under the Transfer Agency Agreement.
For purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class or a record-keeping system, provided the record-keeping system is
maintained by a wholly-owned subsidiary of ML & Co. For the fiscal year ended
March 31, 1997, the total fee paid by the Fund to the Transfer Agent was
$13,044,649.
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,
16
<PAGE> 19
and the minimum subsequent purchase is $1 and for participants in certain
fee-based programs, the minimum initial purchase is $500 and the minimum
subsequent purchase is $50.
The Fund offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis depending upon the class
of shares selected by the investor under the Merrill Lynch Select Pricing(SM)
System, as described 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 from the securities dealer prior to 30 minutes after the close of
business on the NYSE on that day. If the purchase orders are not received by the
Distributor prior to 30 minutes after the close of business on the NYSE on that
day, such orders shall be deemed received on the next business day. The Fund or
the Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$5.35) to confirm a sale of shares to such customers. Purchases made directly
through the Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that 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. 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
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and 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
17
<PAGE> 20
respect to such class pursuant to which account maintenance and/or distribution
fees are paid (except that Class B shareholders may vote upon any material
changes to expenses charged under the Class D Distribution Plan). 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 CDSCs and distribution fees with respect to Class B and Class C shares in
that the sales charges and distribution fees applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, 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.
<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 four
years, at a rate of 4.0%
during the first year,
decreasing 1.0% annually to B shares convert to
0.0%(4) 0.25% 0.75% D shares automatically
after approximately
eight years(5)
------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 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 may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC if redeemed within one year. Such CDSC may be waived in connection with
certain fee-based programs. A 0.75% sales charge for 401(k) purchases over
$1 million will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
18
<PAGE> 21
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.
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 DISCOUNT TO
SALES LOAD AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE* OF THE NET AMOUNT AS PERCENTAGE* OF
AMOUNT OF PURCHASE OFFERING 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 purchases by certain retirement plan
investors and in connection with certain fee-based programs. If the sales
charge is waived in connection with a purchase of $1,000,000 or more, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed within one
year after purchase. Such CDSC may be waived in connection with certain
fee-based programs. The 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. The
proceeds from the account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
During the fiscal year ended March 31, 1997, the Fund sold 17,867,783 of
its Class A shares for aggregate net proceeds to the Fund of $553,401,282. The
gross sales charges for the sale of Class A shares of the Fund for the year were
$621,183, of which $41,749 and $579,434 were received by the Distributor and
Merrill Lynch, respectively. During such period, the Distributor received no
CDSCs with respect to redemption within one year after purchase of Class A
shares purchased subject to a front-end sales charge waiver.
During the fiscal year ended March 31, 1997, the Fund sold 7,903,395 of its
Class D shares for aggregate net proceeds to the Fund of $244,928,191. The gross
sales charges for the sale of Class D shares of the Fund for the year were
$2,108,587, of which $144,815 and $1,963,772 were received by the Distributor
and Merrill Lynch, respectively. During such period, the Distributor received
CDSCs of $986 with respect to redemptions within one year after purchase of
Class D shares purchased subject to a front-end sales charge waiver.
19
<PAGE> 22
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 and U.S. branches of foreign banking institutions provided
that the program or branch has $3 million or more initially invested in
MLAM-advised mutual funds. Also eligible to purchase Class A shares at net asset
value are participants in certain investment programs including TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services, collective investment trusts for which Merrill Lynch Trust Company
serves as trustee and purchases made in connection with certain fee-based
programs. In addition, Class A shares are offered at net asset value to ML & Co.
and its subsidiaries and their directors and employees and to members of the
Boards of MLAM-advised investment companies, including the Fund. Certain persons
who acquired shares of certain MLAM-advised closed-end funds in their initial
offerings who wish to reinvest the net proceeds from a sale of their closed-end
fund shares of common stock in shares of the Fund also may purchase Class A
shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met. In addition, Class A shares of the Fund and
certain other MLAM-advised mutual funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions set forth in the Statement of Additional Information are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from
a sale of certain of their shares of common stock pursuant to a tender offer
conducted by such funds in shares of the Fund and certain other MLAM-advised
mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder
Services -- Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Subject to certain conditions Class A
and Class D shares are offered at net asset value to shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. and Class A shares are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. who wish to reinvest in shares of
the Fund the net proceeds from a sale of certain of their shares of common
stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value, without a 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.
20
<PAGE> 23
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately eight years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, 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 continuing account maintenance
activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of Class B and Class C shares,
such as the payment of compensation to financial consultants for selling Class B
and Class C shares, from the 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 that are
redeemed within four years of purchase may be subject to a CDSC at the rates set
forth below charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in
21
<PAGE> 24
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.
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, 1997, the Distributor received CDSCs of
$6,950,823 with respect to redemptions of Class B shares, all of which were 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).
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 that are purchased by eligible 401(k) or eligible 401(a)
plans that are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption. The Class B
CDSC also is waived for any Class B shares that are purchased by a Merrill Lynch
rollover IRA that was funded by a rollover from a terminated 401(k) plan managed
by the MLAM Private Portfolio Group and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares that are
purchased within qualifying Employee Access(SM) Accounts. Additional information
concerning the waiver of the Class B CDSC is set forth in the Statement of
Additional
22
<PAGE> 25
Information. The terms of the CDSC may be modified in connection with certain
fee-based programs. See "Shareholder Services -- Fee-Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year 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. No Class C CDSC will be assessed in connection
with certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs." For the fiscal year ended March 31, 1997, the Distributor received
CDSCs of $202,197 with respect to redemptions of Class C shares, all of which
were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares 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
23
<PAGE> 26
Conversion Period, or vice versa, the Conversion Period applicable to the Class
B shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that 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 funds at net asset value per
share.
The Conversion Period also is modified for retirement plan investors which
participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the 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, 1997, the Fund paid the Distributor
$51,006,246 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $5.1 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
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March 31, 1997, the Fund paid the Distributor $3,085,780 pursuant to the Class C
Distribution Plan (based on average net assets subject to such Class C
Distribution Plan of approximately $306.9 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, 1997, the Fund paid the Distributor $1,545,620 pursuant to the
Class D Distribution Plan (based on average net assets subject to such Class D
Distribution Plan of approximately $614.9 million), all of which was paid to
Merrill Lynch for providing account maintenance activities in connection with
Class D shares.
The payments under the Distribution Plans are based 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, 1996, for Class B shares, fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch exceeded fully allocated
accrual revenues for such period by approximately $12,674,000 (.24% of Class B
net assets at that date). As of March 31, 1997, for Class B shares, direct cash
expenses for the period since commencement of operations exceeded direct cash
revenues for such period by $2,905,587 (2.67% of Class B net assets at that
date). As of March 31, 1997, for Class C shares, fully allocated accrual
expenses for the period since October 21, 1994 (commencement of operations)
exceeded fully allocated accrual revenues by $1,232,000 (.38% of Class C net
assets at that date). As of March 31, 1997, for Class C shares, direct cash
revenues for the period since October 21, 1994 (commencement of operations)
exceeded direct cash expenses by $3,045,727 (.94% of Class C net assets at that
date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares."
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LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares but not the account maintenance
fee. The maximum sales charge rule 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 CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee 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.
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 that 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. Redemption requests should not be
sent to the Fund. A redemption request in either event requires the signatures
of all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the redemption request must be guaranteed by an
"eligible guarantor institution" (including, for example, Merrill Lynch branch
offices and certain other financial institutions) as such term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent
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<PAGE> 29
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,
Federal funds 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 that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares.
Repurchases made directly through the Transfer Agent are not subject to the
processing fee. The Fund reserves the right to reject any order for repurchase,
which right of rejection might adversely affect shareholders seeking redemption
through the 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
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days
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after the date the request for redemption was accepted by the Transfer Agent or
the Distributor. Alternatively, the reinstatement privilege may be exercised
through the investor's Merrill Lynch Financial Consultant within 30 days after
the date the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot exceed
the amount of the redemption proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
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. A shareholder may make additions to
his or her Investment Account at any time by mailing a check directly to the
Transfer Agent. Shareholders also may maintain their accounts through Merrill
Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account, an
Investment Account in the transferring shareholder's name 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 such
shares and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred account such as an IRA from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the retirement account is to be transferred will not take delivery of
shares of the Fund, a shareholder either must redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm, or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.
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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
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his or her account at the time of the exchange and is not otherwise eligible
to acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period 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> 32
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.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share next determined 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 to Merrill Lynch if the shareholder's account is
maintained with Merrill Lynch or by written notification or telephone call
(1-800-MER-FUND) to the Transfer Agent if the shareholder's account is
maintained with the Transfer Agent, elect to have subsequent dividends or
capital gains distributions, or both, paid in cash, rather than reinvested, in
which event payment will be mailed on or about the payment date. Cash payments
can also be directly deposited to the shareholder's bank account. 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 his or her 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 CMA(R) or CBA(R) 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.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods which such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to
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<PAGE> 33
another broker-dealer or to the Transfer Agent. Except in limited circumstances
(which may also involve an exchange as described above), such shares must be
redeemed and another class of shares purchased (which may involve the imposition
of initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND or (800) 637-3863.
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
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<PAGE> 34
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.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over longer periods of time.
In advertisements directed to investors whose purchases are subject to reduced
sales charges in the case of Class A and Class D shares or waiver of the CDSC in
the case of Class B and Class C shares (such as investors in certain retirement
plans), performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses may be deducted. See "Purchase of Shares." The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 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, 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.
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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 to that class. See
"Determination of Net Asset Value" below. Dividends and distributions will be
reinvested automatically in shares of the Fund, at net asset value without a
sales charge. However, a shareholder whose account is maintained at the Transfer
Agent or whose account is maintained through Merrill Lynch may elect in writing
to receive any such dividends or distributions, or both, in cash. See
"Shareholder Services -- Automatic Reinvestment of Dividends and Distributions"
for information as to how to elect either dividend reinvestment or cash
payments. Dividends and distributions are taxable to shareholders as discussed
below whether they are reinvested in shares of the Fund or received in cash.
From time to time, the Fund may declare a special distribution at or about the
end of the calendar year in order to comply with Federal tax requirements that
certain percentages of its ordinary income and capital gains be distributed
during the calendar year.
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 or
on any other day on which there is sufficient trading in portfolio securities
that the net asset value of the Fund's shares may be materially affected. Any
assets or liabilities initially expressed in terms of non-U.S. dollar currencies
are translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation. The net asset value per share
is computed by dividing the sum of the 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 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,
1997, the Fund paid $7,139 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; in addition, the per share net asset value of
Class D shares generally will be higher than the per share net asset value of
Class B and Class C shares, reflecting the daily expense accruals of the
distribution and the 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.
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<PAGE> 36
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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 that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
When the Fund writes an option, the amount of the premium received is recorded
on the books of the Fund as an asset and an equivalent liability. The amount of
the liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars at the prevailing market
rates as obtained from one or more dealers. 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"). As long as it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to Class
A, Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in 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.
34
<PAGE> 37
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
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
35
<PAGE> 38
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 1,200,000,000 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 400,000,000 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.
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
36
<PAGE> 39
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.
37
<PAGE> 40
[This page is intentionally left blank.]
<PAGE> 41
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.)
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>
<S> <C>
Occupation .........................................
...................................................
Signature of Owner
<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> 42
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> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer A/C No.
</TABLE>
A-2
<PAGE> 43
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> <C> <C> <C> <C> <C> <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> 44
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> 45
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> 46
- ------
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 System.......... 3
Financial Highlights......................... 8
Investment Objective and Policies............ 11
Management of the Fund....................... 14
Board of Directors......................... 14
Management and Advisory Arrangements....... 15
Code of Ethics............................. 16
Transfer Agency Services................... 16
Purchase of Shares........................... 16
Initial Sales Charge Alternatives--
Class A and Class D Shares............... 19
Deferred Sales Charge Alternatives--
Class B and Class C Shares............... 21
Distribution Plans......................... 24
Limitations on the Payment of Deferred
Sales Charges............................ 26
Redemption of Shares......................... 26
Redemption................................. 26
Repurchase................................. 27
Reinstatement Privilege--Class A and Class
D Shares................................. 27
Shareholder Services......................... 28
Investment Account......................... 28
Exchange Privilege......................... 29
Automatic Reinvestment of Dividends and
Capital Gains Distributions.............. 30
Systematic Withdrawal Plans................ 30
Automatic Investment Plans................. 30
Fee-Based Programs......................... 30
Portfolio Transactions and Brokerage......... 31
Performance Data............................. 31
Additional Information....................... 33
Dividends and Distributions................ 33
Determination of Net Asset Value........... 33
Taxes...................................... 34
Organization of the Fund................... 36
Shareholder Reports........................ 36
Shareholder Inquiries...................... 37
Authorization Form........................... A-1
Code #10044-0797
</TABLE>
#MERRILL LYNCH LOGO#
MERRILL LYNCH
CAPITAL FUND, INC.
PROSPECTUS #MLYNCH COMPASS#
July 21, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE> 47
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 approach 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, 1997, approximately 55% 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
21, 1997 (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 21, 1997.
<PAGE> 48
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 Fund will, however,
comply with the Federal tax requirement that less than 30% of its gross income
be derived from gains from the sale or other disposition of securities held for
less than three months. 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, 1996 and 1997 was 84% and 47%,
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
2
<PAGE> 49
the guidelines set forth in the Fund's Prospectus and Statement of
Additional Information, as they may be amended from time to time.
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, (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 permitted by applicable law. As a matter of policy, however, the
Fund will not purchase shares of any registered open-end investment company
or registered unit investment trust, in reliance on Section 12(d)(1)(F) or
(G) (the "fund of funds" provision) of the Investment Company Act, at any
time its shares are owned by another investment company that is part of the
same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its 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.
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.
3
<PAGE> 50
d. 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 may, from time to time, lend securities from its portfolio to
approved borrowers and receive 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.
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
4
<PAGE> 51
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 that are
rated below "investment 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
Services ("S&P") and below Baa by Moody's Investors Service, Inc. ("Moody's"),
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. Consequently,
although high yield/high risk securities can be expected to provide higher
yields, such securities may be subject to greater market price fluctuations and
risk of loss of principal than lower yielding, higher rated debt securities.
Investments in high yield/high risk securities will be made only when, in the
judgment of the Investment Adviser, such securities provide attractive total
return potential relative to the risk of such securities, as compared to higher
quality debt securities. The Fund will not invest in debt securities in the
lowest rating categories (those rated CC or lower by S&P or Ca or lower by
Moody's) unless the Investment Adviser believes that the financial condition of
the issuer or the protection afforded the particular securities is stronger than
would otherwise be indicated by such low ratings.
5
<PAGE> 52
Issuers of high yield/high risk securities may be highly leveraged and may
not have available to them more traditional methods of financing. Therefore, the
risks associated with acquiring the securities of such issuers generally are
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, issuers of
high yield/high risk securities may be more likely to experience financial
stress, especially if such issuers are highly leveraged. During such periods,
such issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific issuer developments, or the issuer's inability to
meet specific projected business forecasts, or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of high yield/high risk securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield/high risk securities frequently have call or redemption features
that would permit an issuer to repurchase the security from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities.
Because not all dealers maintain markets in all high yield/high risk securities,
there is no established secondary market for many of these securities, and the
Fund anticipates that such securities could be sold only to a limited number of
dealers or institutional investors. To the extent that a secondary trading
market for high yield/high risk securities does exist, it generally is not as
liquid as the secondary market for higher rated securities. Reduced secondary
market liquidity may have an adverse impact on market price and the Fund's
ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of an issuer. Reduced secondary market
liquidity for certain securities also may make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing the Fund's portfolio.
Market quotations are generally available on many high yield/high risk
securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
It is expected that a significant portion of the high yield/high risk
securities acquired by the Fund will be purchased upon issuance, which may
involve special risks because the securities so acquired are new issues. In such
instances the Fund may be a substantial purchaser of the issue and therefore
have the opportunity to participate in structuring the terms of the offering.
Although this may enable the Fund to seek to protect itself against certain of
such risks, the considerations discussed herein would nevertheless remain
applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to adversely affect the Fund's net asset value. In addition, the Fund may
incur additional expenses to the extent that it is required to seek recovery
upon a default on a portfolio holding or participate in the restructuring of the
obligation. See Appendix A to this Statement of Additional Information --
"Ratings of Debt Securities and Preferred Stock" on page 35.
6
<PAGE> 53
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 (65)--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;
and Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor") since
1977.
DONALD CECIL (70)--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 (65)--Director(2)--Soldiers Field Road, Boston,
Massachusetts 02163. Currently James R. Williston Professor of Investment
Management Emeritus, Harvard Business School; James R. Williston Professor of
Investment Management, Harvard Business School, from 1971 to 1996; Director of
Cambridge Bancorp, Copley Properties, Inc. and Sun Life Assurance Company of
Canada.
EDWARD H. MEYER (70)--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 (68)--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 (58)--Director(2)--Suite 3405, One Tampa City Center,
201 North Franklin Street, 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).
TERRY K. GLENN (56)--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 (63)--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 (37)--Vice President(1)(2)--Vice President and Director of
Taxation of the Investment Adviser since 1990.
7
<PAGE> 54
WALTER CUJE (38)-- Vice President(1)--Vice President of the Investment
Adviser since 1991; Associate Portfolio Manager of the Fund since 1993.
KURT V. SCHANSINGER (37)--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 (48)--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.
- ---------------
(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, 1997, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At 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 (each a "non-interested
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 and Nominating Committee of the Board of
Directors (the "Committee"), which consists of all of the unaffiliated
Directors, an annual fee of $2,500. The Chairman of the Committee receives an
additional $1,000 annually. The Fund reimburses each unaffiliated Director for
his or her actual out-of-pocket expenses relating to attendance at Board and
Committee meetings. Fees and expenses paid to the Directors aggregated $41,192
for the fiscal year ended March 31, 1997.
8
<PAGE> 55
The following table sets forth, for the fiscal year ended March 31, 1997,
compensation paid by the Fund to the unaffiliated Directors and for the calendar
year ended December 31, 1996, 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 $268,933
M. Colyer Crum.................................. $ 8,000 None $117,600
Edward H. Meyer................................. $ 8,000 None $227,933
Jack B. Sunderland.............................. $ 8,000 None $128,100
J. Thomas Touchton.............................. $ 8,000 None $128,100
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (32 registered investment companies consisting of 32 portfolios); Mr.
Crum (14 registered investment companies consisting of 14 portfolios); Mr.
Meyer (32 registered investment companies consisting of 32 portfolios); Mr.
Sunderland (17 registered investment companies consisting of 29 portfolios);
and Mr. Touchton (17 registered investment companies consisting of 29
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, 1995, 1996 and 1997, the
advisory fees paid by the Fund to the Investment Adviser totaled $23,221,209,
$31,428,894 and $37,585,806, respectively.
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 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,
9
<PAGE> 56
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".
As described in the Prospectus, the Investment Adviser has also entered
into a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K.") pursuant to which MLAM U.K. provides investment advisory services
to the Investment Adviser with respect to the Fund.
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.
10
<PAGE> 57
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 adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege".
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies 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
For the fiscal year ended March 31, 1997 the gross sales charges for the
sale of Class A shares of the Fund were $621,183, of which $41,749 and $579,434
were received by the Distributor and Merrill Lynch, respectively. For such
period the Distributor received no CDSCs with respect to redemption within one
year after purchase of Class A shares purchased subject to a front-end sales
charge waiver. For the fiscal year ended March 31, 1997 the gross sales charges
for the sale of Class D shares of the Fund were $2,108,587, of which $144,815
and $1,963,772 were received by the Distributor and Merrill Lynch, respectively.
During such period the Distributor received CDSCs of $1,986 with respect to
redemptions within one year after purchase of Class D shares purchased subject
to front-end sales charge waivers. 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
11
<PAGE> 58
an individual, his or her spouse and their children under the age of 21 years
purchasing shares for his or her or their own account and to single purchases by
a trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account although more than one beneficiary is involved. The
term "purchase" also includes purchases by any "company", as that term is
defined in the Investment Company Act, but does not include purchases by any
such company that has not been in existence for at least six months or that has
no 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
12
<PAGE> 59
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 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
13
<PAGE> 60
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 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
14
<PAGE> 61
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 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(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through qualified authorized employers.
The initial minimum for such accounts is $500 except that the initial minimum
for shares purchased for such accounts pursuant to the Automatic Investment
Program is $50.
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 that (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, that
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
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.
15
<PAGE> 62
Additional information regarding purchases by employer-sponsored retirement or
savings plans and certain other arrangements is available toll-free from Merrill
Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and 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 Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge 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
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<PAGE> 63
sales. The Distributor retains the right to stop waiving the interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance fee.
In certain circumstances the amount payable pursuant to the voluntary maximum
may exceed the amount payable under the NASD formula. In such circumstances
payment in excess of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of March 31, 1997
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares, the Distributor's voluntary maximum.
DATA CALCULATED AS OF MARCH 31, 1997 (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, 1997: SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
- ------------------------------- ---------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as Adopted..... $5,226,422 $326,651 $ 75,050 $401,701 $171,788 $229,913 $ 37,330
Under Distributor's Voluntary
Waiver....................... $5,226,422 $326,651 $ 26,132 $352,783 $171,788 $180,995 $ 37,330
CLASS C, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO MARCH 31, 1997:
- -------------------------------
Under NASD Rule as Adopted..... $ 378,957 $ 23,684 $ 2,650 $26,334 $ 3,700 $ 22,634 $ 2,418
</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
7, 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
17
<PAGE> 64
(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 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 certain instances, including in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or on redemptions of Class B
shares following the death or disability of a Class B shareholder. Redemptions
for which the waiver applies in the case of such withdrawals are: (a) any
partial or complete redemption in connection with a 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, 1995, 1996 and
1997, the Distributor received CDSCs of $3,965,708, $4,025,586 and $6,950,823,
respectively, with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Similarly, for the fiscal period October 21, 1994
(commencement of operations) to March 31, 1995 and for the fiscal years ended
March 31, 1996 and 1997, the Distributor received CDSCs of $4,929, $75,917 and
$202,197, respectively, with respect to redemptions of Class C shares, all of
which were paid to Merrill Lynch.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in Blueprint. 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
18
<PAGE> 65
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 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
Conduct Rules 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, 1997, the Fund paid brokerage
commissions of $7,059,982 of which $456,609, or 6.5% was paid to Merrill Lynch
for effecting 6.4% 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. 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.
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 possibility of
seeking to recapture for the benefit of the Fund brokerage commissions, dealer
spreads and other expenses of possible portfolio transactions, such
19
<PAGE> 66
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 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.
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Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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. Securities
that are traded both in the OTC market and on a stock exchange are valued
according to the broadest and most representative market. When the Fund writes
an option, the amount of the premium received is recorded on the books of the
Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. 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
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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 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 NYSE on the ex-dividend date of such 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
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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 of the withdrawal payment will be
made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all 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
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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
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select Pricing(SM) System, Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his or her account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, 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.
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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 certain money market funds with a reduced or
without a sales charge.
In addition, each of the funds with Class B or Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding 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 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.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds 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
that 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 the newly acquired fund will be
aggregated with previous holding periods for purposes of reducing the CDSC.
Thus, for example, an investor may exchange Class B shares of the Fund for
shares of Merrill Lynch Institutional Fund ("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 that the shareholder continued 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.
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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 MLAM-advised mutual
funds, with shares for which certificates have not been issued may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed exchange application. This exchange
privilege may be modified or terminated 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"). As long as it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to Class
A, Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term 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
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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. 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
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beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized statistical rating organizations, and in
unrated securities ("high yield/high risk securities"), as previously described.
Some of these high yield/high risk securities may be purchased at a discount and
may therefore cause the Fund to accrue income before amounts due under the
obligations are paid. In addition, a portion of the interest payments on such
high yield/high risk securities may be treated as dividends for Federal income
tax purposes; in such case, if the issuer of such high yield/high risk
securities is a domestic corporation, dividend payments by the Fund will be
eligible for the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.
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.
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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 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
29
<PAGE> 76
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
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.
30
<PAGE> 77
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
- ---------------------------------- ----------- ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
One Year Ended
March 31, 1997...... 6.70% $ 1,067.00 7.48% $1,074.80 10.45% $1,104.50 6.44% $1,064.40
Five Years Ended
March 31, 1997...... 11.58% $ 1,729.50 11.64% $1,734.20
Ten Years Ended
March 31, 1997...... 11.08% $ 2,860.90
Inception
(October 21, 1988)
to March 31, 1997*... 12.01% $2,605.30
Inception
(October 21, 1994)
to March 31, 1997**... 16.67% $1,457.00 15.01% $1,407.00
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
Year Ended March 31,
1997................ 12.62% $ 1,126.20 11.48% $1,114.80 11.45% $1,114.50 12.34% $1,123.40
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
(Table continued on the following page)
</TABLE>
31
<PAGE> 78
<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
- ---------------------------------- ----------- ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(November 8, 1973)
to March 31, 1974... (4.60)% $ 954.00
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
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
Inception
(November 8, 1973)
to March 31, 1997... 1,565.41% $16,654.10
Inception
(October 21, 1988)
to March 31,
1997*............... 160.53% $2,605.30
Inception
(October 21, 1994)
to March 31, 1997**... 45.70% $1,457.00 40.70% $1,407.00
</TABLE>
- ---------------
*Information as to Class B shares is presented only for the period October 21,
1988 to March 31, 1997. 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, 1997. 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 1,200,000,000 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 400,000,000 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
32
<PAGE> 79
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. 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, 1997, is set forth
below:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets........................... $3,291,219,375 $4,977,430,637 $322,437,598 $690,116,208
============= ============= =========== ===========
Number of Shares Outstanding......... 104,840,527 162,005,280 10,590,867 22,018,591
============= ============= =========== ===========
Net Asset Value per Share (net assets
divided by number of shares
outstanding)....................... $31.39 $30.72 $30.44 $31.34
Sales Charge for Class A and Class D
Shares: 5.25% of offering price
(5.54% of net amount invested*).... 1.74 ** ** 1.74
------ ------ ------ ------
Offering Price....................... $33.13 $30.72 $30.44 $33.08
====== ====== ====== ======
</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
33
<PAGE> 80
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, 1997.
34
<PAGE> 81
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
35
<PAGE> 82
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 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.
36
<PAGE> 83
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.
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.
37
<PAGE> 84
DESCRIPTION OF CORPORATE DEBT RATINGS OF STANDARD & POOR'S RATINGS SERVICES
("S&P")
An S&P 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 S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, 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 S&P. 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.
38
<PAGE> 85
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.
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 S&P 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 S&P'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
39
<PAGE> 86
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 S&P'S COMMERCIAL PAPER RATINGS
An S&P 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.
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 S&P
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 S&P by the issuer or obtained by S&P from other sources
it considers reliable. S&P 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 S&P'S PREFERRED STOCK RATINGS
An S&P 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.
40
<PAGE> 87
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 S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB
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 S&P does not rate a
particular type of obligation as a matter of policy.
PLUS (+) OR MINUS (-):
To provide more detailed indications of preferred stock quality, the
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
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 S&P by the issuer
or obtained by S&P from other sources it considers reliable. S&P 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.
41
<PAGE> 88
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,
1997, 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, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Capital Fund, Inc. as of March 31, 1997, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 9, 1997
42
<PAGE> 89
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Value Percent of
Industries Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Aerospace 1,125,000 Lockheed Martin Corp. $ 83,216,555 $ 94,500,000 1.0%
650,000 Rockwell International Corporation 22,013,254 42,168,750 0.5
-------------- -------------- ------
105,229,809 136,668,750 1.5
Automobile 1,900,000 Echlin Inc. 60,716,252 64,600,000 0.7
Equipment
Automotive 1,000,000 General Motors Corp. 47,511,108 55,375,000 0.6
Banking 1,300,000 The Chase Manhattan Corp. (a) 91,963,256 121,712,500 1.3
596,200 Union Planters Corp. 11,935,569 24,220,625 0.3
-------------- -------------- ------
103,898,825 145,933,125 1.6
Building Materials 2,400,000 Masco Corporation 75,254,389 85,800,000 0.9
Capital Goods 731,500 Kennametal, Inc. 25,706,750 26,516,875 0.3
1,500,000 United Dominion Industries, Ltd. 34,449,123 36,562,500 0.4
-------------- -------------- ------
60,155,873 63,079,375 0.7
Chemicals 500,000 du Pont (E.I.) de Nemours & Co. 40,114,877 53,000,000 0.6
1,340,000 Engelhard Corp. 24,234,839 28,140,000 0.3
700,000 Grace (W.R.) & Co. 36,613,755 33,162,500 0.3
2,000,000 Imperial Chemical Industries PLC
(ADR)* 98,975,520 91,000,000 1.0
500,000 Millennium Chemicals Inc. 13,552,415 9,375,000 0.1
-------------- -------------- ------
213,491,406 214,677,500 2.3
Communications 300,000 ++cisco Systems, Inc. 14,198,982 14,437,500 0.2
Equipment
Computer Software 1,100,000 Computer Associates International,
Inc. 48,167,431 42,762,500 0.5
450,000 ++Creative Technology, Ltd. 5,840,746 4,106,250 0.0
-------------- -------------- ------
54,008,177 46,868,750 0.5
Consumer Electronics 400,000 Nintendo Corp. Ltd. 28,474,285 28,675,577 0.3
Diversified 2,100,000 Tenneco, Inc. 85,408,129 81,900,000 0.9
Companies 6,000,000 Tomkins PLC 24,678,005 26,870,880 0.3
1,900,000 United Technologies Corp. 56,635,222 142,975,000 1.5
600,000 Varian Associates, Inc. 32,201,899 32,100,000 0.3
-------------- -------------- ------
198,923,255 283,845,880 3.0
Drug Stores 2,150,000 Rite Aid Corp. 68,282,570 90,300,000 1.0
Electrical 1,139,100 Belden Inc. 35,776,659 40,580,438 0.4
Equipment 900,000 Cooper Industries, Inc. 35,594,061 39,037,500 0.4
800,000 General Electric Co. 40,557,953 79,400,000 0.9
600,000 Philips Electronics N.V. (NY
Registered Shares) (b) 18,270,763 26,700,000 0.3
-------------- -------------- ------
130,199,436 185,717,938 2.0
Electronic Components 1,500,000 Avnet, Inc. 83,947,762 84,562,500 0.9
Financial Services 2,000,000 Federal National Mortgage Association 52,392,099 72,250,000 0.8
1,100,000 Transamerica Corporation 81,108,138 98,450,000 1.0
-------------- -------------- ------
133,500,237 170,700,000 1.8
Food Distribution 15,000,000 Dairy Farm International Holdings
Ltd. (Ordinary) 16,436,481 11,325,000 0.1
</TABLE>
43
<PAGE> 90
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Foods/Food 2,000,000 Archer-Daniels-Midland Co. $ 34,105,377 $ 35,750,000 0.4%
Processing 1,559,600 Grand Metropolitan PLC (ADR)* 47,735,069 49,712,250 0.5
99,000 Nestle S.A. 103,564,527 116,085,595 1.3
145,000 Thai Theparos Food Product Public
Company Limited (Foreign) 661,718 458,189 0.0
-------------- -------------- ------
186,066,691 202,006,034 2.2
Footwear 40,000,000 Yue Yuen Industrial (Holdings
Limited) 10,727,086 16,519,326 0.2
Forest Products 1,800,000 Weyerhaeuser Co. 82,324,720 80,325,000 0.9
Hardware & Tools 1,650,000 The Black & Decker Corporation 54,750,192 53,006,250 0.6
Hospital 3,200,000 Columbia/HCA Healthcare Corp. 102,856,502 107,600,000 1.2
Management 3,600,000 ++Tenet Healthcare Corp. 52,634,362 88,650,000 0.9
-------------- -------------- ------
155,490,864 196,250,000 2.1
Insurance 2,300,000 Allstate Corporation 69,292,895 136,562,500 1.5
800,000 American International Group, Inc. 54,533,179 93,900,000 1.0
1,000,000 Ayudhya Insurance Company, Ltd.
(Foreign) 7,458,665 8,863,198 0.1
1,200,000 Berkley (W.R.) Corporation (e) 62,155,679 60,900,000 0.7
1,900,000 EXEL Ltd. 41,181,437 80,275,000 0.9
2,300,000 Fremont General Corp. (e) 36,637,574 64,687,500 0.7
1,100,000 Horace Mann Educators Corp. 34,550,993 48,537,500 0.5
2,000,000 Lowndes Lambert Group Holdings PLC 4,960,638 3,556,440 0.0
2,000,000 Penncorp Financial Group, Inc. (e) 62,850,797 64,000,000 0.7
2,000,000 Provident Companies, Inc. 79,650,937 109,500,000 1.2
1,600,000 TIG Holdings, Inc. 48,600,848 50,800,000 0.5
3,000,000 Travelers Group, Inc. 39,986,618 143,625,000 1.5
-------------- -------------- ------
541,860,260 865,207,138 9.3
Iron & Steel 1,600,000 Birmingham Steel Corp. (e) 28,005,214 28,000,000 0.3
594,600 Cleveland-Cliffs, Inc. (e) 19,673,194 25,121,850 0.3
900,000 Nucor Corporation 45,502,522 41,175,000 0.4
-------------- -------------- ------
93,180,930 94,296,850 1.0
Leisure/Hotels 2,200,000 Carnival Corp. (Class A) 57,830,550 81,400,000 0.9
3,000,000 ++Harrah's Entertainment, Inc. 55,543,541 51,375,000 0.5
4,400,000 Mandarin Oriental International Ltd. 4,670,990 5,412,000 0.1
-------------- -------------- ------
118,045,081 138,187,000 1.5
Machinery & 789,300 Cincinnati Milacron, Inc. 19,182,130 14,799,375 0.2
Machine Tools
Metals & Basic 1,200,000 Industrias Penoles S.A. 5,465,971 5,903,128 0.1
Materials 1,721,275 Minsura Sociedad Limitada S.A.
(T Shares) 5,179,884 6,753,794 0.1
-------------- -------------- ------
10,645,855 12,656,922 0.2
Natural Gas 1,300,000 Coastal Corp. 46,005,120 62,400,000 0.7
Suppliers 1,100,000 El Paso Natural Gas Co. 44,841,788 62,287,500 0.6
5,200,000 Williams Companies, Inc. (e) 92,336,036 231,400,000 2.5
-------------- -------------- ------
183,182,944 356,087,500 3.8
</TABLE>
44
<PAGE> 91
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Oil--Integrated 900,000 ++Ente Nazionale Idrocarburi S.p.A.
(ENI) (ADR)* $ 42,218,082 $ 45,562,500 0.5%
200,000 Mobil Corporation 22,250,853 26,125,000 0.3
1,300,000 Phillips Petroleum Company 44,480,705 53,137,500 0.6
1,000,000 TOTAL S.A. (ADR)* 31,610,031 42,375,000 0.4
6,300,000 YPF S.A. (ADR)* 120,155,257 166,950,000 1.8
-------------- -------------- ------
260,714,928 334,150,000 3.6
Oil--Service 2,900,000 Dresser Industries, Inc. 77,166,439 87,725,000 0.9
Paper 790,000 Temple-Inland, Inc. 36,163,014 41,475,000 0.4
Pharmaceuticals 176,200 Block Drug, Inc. (Class A) 6,909,930 7,576,600 0.1
3,500,000 Glaxo Wellcome PLC (ADR)* (c) 91,075,165 123,812,500 1.3
400,000 Merck & Co., Inc. 19,645,017 33,700,000 0.4
40,000 Novartis AG (d) 46,608,686 49,714,683 0.5
300,000 Pfizer, Inc. 17,304,400 25,237,500 0.3
-------------- -------------- ------
181,543,198 240,041,283 2.6
Railroads 1,500,000 Kansas City Southern Industries, Inc. 65,462,741 75,000,000 0.8
Real Estate 825,000 CarrAmerica Realty Corp. 22,317,053 25,368,750 0.3
Investment Trusts 1,800,000 RFS Hotel Investors, Inc. (e) 27,076,754 31,275,000 0.3
742,200 Walden Residential Properties, Inc. 13,173,382 17,905,575 0.2
-------------- -------------- ------
62,567,189 74,549,325 0.8
Restaurants 500,000 McDonald's Corporation 23,648,532 23,625,000 0.3
Retail Trade 3,060,000 Wal-Mart Stores, Inc. 74,771,939 85,297,500 0.9
Telecommunications 1,900,000 Frontier Corporation 54,362,106 33,962,500 0.4
1,800,000 GTE Corp. 59,065,028 83,925,000 0.9
1,000,000 Nokia Corp. (ADR)* 40,607,101 58,250,000 0.6
800,000 Telecomunicacoes Brasileiras
S.A.--Telebras (ADR)* 43,785,833 81,900,000 0.9
-------------- -------------- ------
197,820,068 258,037,500 2.8
Tires & Rubber 3,000,000 The Goodyear Tire & Rubber Co. 119,321,790 156,750,000 1.7
Utilities--Electric, 365,700 Pinnacle West Capital Corp. 7,773,323 11,016,713 0.1
Gas & Water
Total Common Stocks 3,956,638,761 5,099,575,611 55.0
<CAPTION>
Face Amount Corporate Bonds
<S> <C> <C> <C> <C> <C>
Aerospace US$ 15,000,000 Lockheed Martin Corp., 6.85% due
5/15/2001 14,987,850 14,851,950 0.2
Automobile Parts 20,000,000 Eaton Corp., 6.50% due 6/01/2025 19,929,200 18,893,400 0.2
Automotive Hertz Corp.:
25,000,000 6.70% due 6/15/2002 24,815,300 24,232,500 0.3
13,000,000 6% due 1/15/2003 12,891,670 12,185,030 0.1
-------------- -------------- ------
37,706,970 36,417,530 0.4
</TABLE>
45
<PAGE> 92
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Face Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Banking US$ 10,000,000 Banco Rio de la Plata, 8.75% due
12/15/2003 $ 10,045,700 $ 9,850,000 0.1%
25,000,000 Bank of Boston Corp., 6.625% due
12/01/2005 23,519,000 23,528,500 0.2
BankAmerica Corp.:
15,000,000 6.875% due 6/01/2003 14,149,050 14,637,450 0.2
30,000,000 6.75% due 9/15/2005 29,591,750 28,552,200 0.3
Bankers Trust Company:
10,000,000 7.50% due 1/15/2002 9,688,700 10,055,600 0.1
35,000,000 7.125% due 3/15/2006 34,548,800 33,907,300 0.4
The Chase Manhattan Corp.:
20,000,000 6.50% due 8/01/2005 19,403,800 18,770,800 0.2
10,000,000 6.25% due 1/15/2006 9,137,000 9,192,000 0.1
6,000,000 First Hawaiian, Inc., 6.25% due
8/15/2000 5,841,600 5,819,760 0.1
20,000,000 First Security Corp., 7% due
7/15/2005 19,803,850 19,205,280 0.2
30,000,000 First Union Corp., 6.55% due
10/15/2035 29,953,350 28,313,700 0.3
22,750,000 Firstbank Puerto Rico, 7.625% due
12/15/2005 22,140,802 22,199,223 0.2
10,000,000 Great Western Financial Corp.,
6.375% due 7/01/2000 9,998,800 9,791,300 0.1
Household Bank:
10,000,000 6.87% due 5/15/2001 9,868,800 9,885,500 0.1
20,000,000 6.875% due 3/17/2003 19,886,200 19,518,000 0.2
10,300,000 6.50% due 7/15/2003 10,202,253 9,816,724 0.1
NationsBank Corp.:
40,000,000 5.60% due 2/07/2001 40,000,000 37,946,800 0.4
10,000,000 6.20% due 8/15/2003 9,670,360 9,425,300 0.1
25,000,000 6.50% due 8/15/2003 22,104,200 23,986,250 0.3
25,500,000 PNC Funding Corp., 6.125% due
9/01/2003 24,922,025 23,867,235 0.3
20,000,000 People's Bank-Bridgeport, 7.20%
due 12/01/2006 19,956,700 19,191,000 0.2
25,000,000 Provident Bank, 6.375% due 1/15/2004 24,296,430 23,442,000 0.2
Union Planters Corp.:
20,000,000 6.25% due 11/01/2003 18,756,100 18,693,800 0.2
7,500,000 6.75% due 11/01/2005 7,205,925 7,075,350 0.1
-------------- -------------- ------
444,691,195 436,671,072 4.7
Beverages 19,000,000 Coca-Cola Femsa S.A., 8.95% due
11/01/2006 18,969,595 18,841,692 0.2
Broadcasting 20,000,000 British Sky Broadcasting Group
PLC, 7.30% due 10/15/2006 20,037,440 19,477,200 0.2
Chemicals 8,000,000 Airgas, Inc., 7.14% due 3/08/2004 8,000,000 7,861,784 0.1
24,250,000 Lyondell Petrochemical Company,
6.50% due 2/15/2006 23,022,540 22,341,525 0.2
25,000,000 Union Carbide Corp., 6.79% due
6/01/2025 25,000,000 23,837,750 0.3
-------------- -------------- ------
56,022,540 54,041,059 0.6
Consumer Loewen Group, Inc.:
Services 12,000,000 7.75% due 10/15/2001 11,994,600 11,981,400 0.1
20,000,000 8.25% due 10/15/2003 20,130,300 20,018,860 0.2
-------------- -------------- ------
32,124,900 32,000,260 0.3
Diversified 10,000,000 Tenneco, Inc., 6.70% due 12/15/2005 9,808,500 9,505,370 0.1
Companies
Electronics 16,000,000 Litton Industries, Inc., 6.98% due
3/15/2006 16,000,000 15,463,696 0.2
15,000,000 Philips Electronics N.V., 7.125%
due 5/15/2025 14,954,200 14,487,600 0.2
-------------- -------------- ------
30,954,200 29,951,296 0.4
</TABLE>
46
<PAGE> 93
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Face Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Finance Ford Motor Credit Co.:
US$ 40,000,000 5.75% due 1/25/2001 $ 39,596,900 $ 38,231,200 0.4%
9,000,000 5.90% due 2/23/2001 8,704,260 8,648,460 0.1
General Motors Acceptance Corp.:
50,000,000 6.375% due 4/04/2000 49,887,500 49,201,900 0.5
55,000,000 5.625% due 2/15/2001 54,450,000 52,309,400 0.6
30,000,000 6.75% due 6/10/2002 29,520,300 29,362,500 0.3
15,000,000 Household Finance Corp., 7.05% due
6/06/2001 15,013,950 14,970,600 0.2
20,000,000 International Lease Finance Corp.,
5.62% due 2/01/2000 19,876,200 19,353,200 0.2
10,000,000 Margaretten Financial Corp., 6.75%
due 6/15/2000 9,621,060 9,882,100 0.1
Sears, Roebuck Acceptance Corp.:
25,000,000 5.71% due 2/06/2001 25,000,000 23,885,000 0.3
50,000,000 5.63% due 2/07/2001 49,996,500 47,676,250 0.5
15,000,000 USL Capital Corp., 5.79% due 1/23/2001 14,995,800 14,332,500 0.1
-------------- -------------- ------
316,662,470 307,853,110 3.3
Financial GATX Corp.:
Leasing 7,000,000 6.66% due 3/15/2001 6,997,900 6,868,400 0.1
12,000,000 6.27% due 12/05/2001 11,823,270 11,512,920 0.1
25,000,000 6.69% due 11/30/2005 24,984,750 23,608,250 0.3
XTRA Corp.:
20,000,000 6.79% due 8/01/2001 19,945,800 19,675,720 0.2
20,000,000 6.68% due 11/30/2001 20,000,000 19,543,140 0.2
-------------- -------------- ------
83,751,720 81,208,430 0.9
Financial 10,000,000 American Express Credit Corp.,
Services 6.125% due 11/15/2001 9,963,300 9,607,200 0.1
Finova Capital Corp.:
25,000,000 6.45% due 6/01/2000 24,766,550 24,536,750 0.3
15,000,000 5.98% due 2/27/2001 14,968,950 14,391,870 0.2
10,000,000 6.56% due 11/15/2002 10,000,000 9,640,800 0.1
McDonnell Douglas Finance Corp.:
5,000,000 5.48% due 2/08/1999 4,997,600 4,865,250 0.0
20,000,000 6.78% due 12/19/2003 19,993,400 19,069,000 0.2
20,000,000 6.965% due 9/12/2005 20,049,200 19,371,520 0.2
35,000,000 Morgan Stanley Group, Inc., 5.75%
due 2/15/2001 34,968,150 33,431,510 0.4
Salomon Inc.:
10,000,000 6.75% due 2/15/2003 9,804,000 9,647,810 0.1
5,000,000 6.875% due 12/15/2003 4,968,500 4,818,530 0.0
15,000,000 7.20% due 2/01/2004 15,088,650 14,707,950 0.2
Smith Barney Shearson Holdings, Inc.:
10,000,000 5.875% due 2/01/2001 9,621,300 9,608,300 0.1
15,000,000 6.50% due 10/15/2002 14,690,800 14,473,800 0.2
30,000,000 7% due 3/15/2004 29,927,700 29,302,830 0.3
-------------- -------------- ------
223,808,100 217,473,120 2.4
Food & Tobacco Nabisco Inc.:
20,000,000 6.70% due 6/15/2002 19,838,770 19,394,400 0.2
20,000,000 6.85% due 6/15/2005 20,000,000 19,148,200 0.2
-------------- -------------- ------
39,838,770 38,542,600 0.4
</TABLE>
47
<PAGE> 94
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Face Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Foreign Republic of Argentina:
Government US$ 50,634,000 Floating Rate Brady Bonds, Series
Obligations L, 6.75% due 3/31/2005++++++ $ 33,835,320 $ 45,190,845 0.5%
97,000,000 Global Bonds, 8.375% due 12/20/2003 79,422,500 92,271,250 1.0
35,000,000 Global Bonds, 11% due 10/09/2006 36,846,700 35,918,750 0.4
10,000,000 Global Bonds, 11.375% due 1/30/2017 9,941,600 10,300,000 0.1
-------------- -------------- ------
160,046,120 183,680,845 2.0
Forest Products 20,400,000 Champion International Corp., 6.40%
due 2/15/2026 20,238,456 19,038,157 0.2
Hardware & Tools 20,000,000 The Black & Decker Corporation,
6.625% due 11/15/2000 19,217,900 19,654,000 0.2
Hospital 22,000,000 Tenet Healthcare Corp., 8% due
Management 1/15/2005 21,997,750 21,505,000 0.2
Industrial 7,000,000 Cummins Engine Company, Inc., 6.75%
due 2/15/2007 6,978,790 6,670,412 0.1
12,750,000 Diamond Shamrock, Inc., 7.65% due
7/01/2026 12,741,187 13,034,325 0.1
7,800,000 Interface, Inc., 9.50% due 11/15/2005 7,552,000 7,761,000 0.1
50,000,000 Williams Holdings of Delaware, Inc.,
6.25% due 2/01/2006 49,739,500 45,885,500 0.5
-------------- -------------- ------
77,011,477 73,351,237 0.8
Insurance 10,125,000 Integon Corp., 8% due 8/15/1999 10,208,769 10,210,759 0.1
20,000,000 Travelers Inc., 6.875% due 6/01/2025 20,037,200 19,429,400 0.2
-------------- -------------- ------
30,245,969 29,640,159 0.3
Machinery 20,000,000 FMC Corp., 6.375% due 9/01/2003 18,940,800 18,825,400 0.2
22,500,000 Harris Corp., 6.375% due 8/15/2002 22,461,850 21,510,900 0.2
-------------- -------------- ------
41,402,650 40,336,300 0.4
Manufactured 3,000,000 Oakwood Homes Corp., 9.125% due
Housing 6/01/2007 3,000,000 2,958,750 0.0
Natural Gas 20,000,000 Coastal Corp., 6.70% due 2/15/2027 19,800,400 19,123,560 0.2
Suppliers 15,000,000 ENSERCH Corporation, 7.125% due
6/15/2005 15,095,150 14,601,000 0.2
-------------- -------------- ------
34,895,550 33,724,560 0.4
Oil--Integrated 18,375,000 Occidental Petroleum Corp., 6.24%
due 11/24/2000 18,135,306 17,822,464 0.2
Oryx Energy Co.:
5,500,000 8% due 10/15/2003 5,380,610 5,536,465 0.0
15,000,000 8.375% due 7/15/2004 15,024,550 15,373,320 0.2
Union Texas Petroleum Holdings, Inc.:
10,000,000 6.70% due 11/18/2002 10,000,000 9,651,390 0.1
20,000,000 6.81% due 12/05/2007 20,000,000 18,785,800 0.2
10,000,000 Unocal Corporation, 6.11% due 2/17/2004 10,000,000 9,280,280 0.1
30,000,000 YPF S.A., 8% due 2/15/2004 26,252,500 28,800,000 0.3
-------------- -------------- ------
104,792,966 105,249,719 1.1
Oil--Related Tosco Corporation:
20,000,000 7% due 7/15/2000 19,894,250 19,852,400 0.2
20,000,000 7.25% due 1/01/2007++++ 20,299,500 19,500,020 0.2
-------------- -------------- ------
40,193,750 39,352,420 0.4
</TABLE>
48
<PAGE> 95
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Face Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Services US$ 20,000,000 ADT Operations, 8.25% due 8/01/2000 $ 20,158,312 $ 20,500,000 0.2%
Telecommuni- 10,000,000 Pacific Telecom, Inc., 6.625% due
cations 10/20/2005 10,000,000 9,434,070 0.1
23,200,000 PanAmSat L.P., 9.42%*** due 8/01/2003 21,968,973 21,808,000 0.2
25,000,000 Worldcom Inc., 7.55% due 4/01/2004 24,958,500 24,843,750 0.3
-------------- -------------- ------
56,927,473 56,085,820 0.6
Tires & Rubber 40,000,000 The Goodyear Tire & Rubber Co.,
6.625% due 12/01/2006 39,840,000 37,460,000 0.4
Transportation 10,000,000 General American Transportation
Corp., 6.44% due 11/13/2001 10,000,000 9,667,600 0.1
15,000,000 Transportacion Maritima Mexicana,
S.A. de C.V., 10% due 11/15/2006 15,130,250 14,325,000 0.2
-------------- -------------- ------
25,130,250 23,992,600 0.3
Travel & Lodging Royal Caribbean Cruises Ltd.:
10,000,000 7.125% due 9/18/2002 9,900,050 9,877,500 0.1
10,000,000 7.25% due 8/15/2006 9,854,415 9,662,700 0.1
-------------- -------------- ------
19,754,465 19,540,200 0.2
Utilities--Electric, 25,000,000 Empresa Nacional de Electricidad
Gas & Water S.A. (Endesa), 7.325% due 2/01/2037 25,000,000 24,295,575 0.3
30,000,000 Enron Corp., 6.75% due 7/01/2005 28,878,400 28,680,900 0.3
5,000,000 Long Island Lighting Co., 7.625%
due 4/15/1998 4,986,210 5,056,800 0.1
20,000,000 PECO Energy Co., 5.625% due 11/01/2001 18,908,800 18,873,000 0.2
5,000,000 United Illuminating Co., 6.20% due
1/15/1999 4,693,050 4,952,450 0.0
-------------- -------------- ------
82,466,460 81,858,725 0.9
Total Corporate Bonds 2,146,612,998 2,123,656,581 22.9
Collateralized Mortgage Obligations
Federal Home Loan Mortgage Corp.:
9,241,900 6.50% due 5/15/2008 8,831,790 8,612,600 0.1
5,000,000 7% due 8/15/2008 4,762,500 4,762,500 0.1
13,000,000 6% due 2/15/2011 12,020,937 11,598,438 0.1
Federal National Mortgage
Association:
13,400,000 7% due 7/25/2006 13,236,687 13,035,654 0.2
12,000,000 6.50% due 1/25/2008 11,608,125 11,373,720 0.1
5,010,000 6.50% due 4/25/2008 4,653,037 4,645,992 0.0
Total Collateralized Mortgage
Obligations 55,113,076 54,028,904 0.6
US Government Obligations
US Treasury Notes:
525,000,000 5.75% due 8/15/2003 509,755,000 495,552,750 5.3
420,000,000 5.875% due 2/15/2004 417,427,344 397,294,800 4.3
760,000,000 5.875% due 11/15/2005 746,852,419 707,871,600 7.6
135,000,000 6.25% due 8/15/2023 121,434,766 119,622,150 1.3
Total US Government Obligations 1,795,469,529 1,720,341,300 18.5
</TABLE>
49
<PAGE> 96
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Industries Face Amount Short-Term Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Commercial US$ 43,919,000 Clipper Receivables Corp., 5.54%
Paper** due 4/21/1997 $ 43,783,827 $ 43,783,827 0.5%
12,000,000 GTE Corporation, 5.56% due 4/14/1997 11,975,907 11,975,907 0.1
84,615,000 General Motors Acceptance Corp.,
6.75% due 4/01/1997 84,615,000 84,615,000 0.9
40,982,000 International Securitization Corp.,
5.40% due 4/14/1997 40,902,085 40,902,085 0.5
21,000,000 Transamerica Finance Corp., 5.55%
due 4/07/1997 20,980,575 20,980,575 0.2
-------------- -------------- ------
202,257,394 202,257,394 2.2
Commercial Czk 300,000,000 International Bank for Reconstruction
Paper-- & Development, 11.50% due 10/09/1997 11,157,441 10,289,800 0.1
Foreign**
US Government US$ 50,000,000 Federal Home Loan Mortgage Corp.,
& Agency 5.39% due 4/18/1997 49,872,736 49,872,736 0.5
Obligations**
Total Short-Term Investments 263,287,571 262,419,930 2.8
Total Investments $8,217,121,935 9,260,022,326 99.8
==============
Other Assets Less Liabilities 21,181,492 0.2
-------------- ------
Net Assets $9,281,203,818 100.0%
============== ======
</TABLE>
[FN]
*American Depositary Receipt (ADR).
**Commercial Paper, Commercial Paper--Foreign and certain 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.
***Represents a step-up bond; the interest rate shown is the effective yield
at the time of purchase by the Fund.
++Non-income producing security.
++++The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
++++++Brady Bonds are securities which have been issued to refinance commercial
bank loans and other debt. The risk associated with these instruments is
the amount of any uncollateralized principal or interest payments since
there is a high default rate of commercial bank loans by countries
issuing these securities.
(a)Formerly Chemical Banking Corp.
(b)Shares of Philips Electronics N.V. (ADR) were converted into
shares of Philips Electronics N.V. (NY Registered Shares).
(c)Formerly Glaxo Holdings PLC (ADR).
(d)Formerly Sandoz AG.
(e)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:
<TABLE>
<CAPTION>
Net Share Net Dividend
Industry Affiliate Activity Cost Income
<S> <C> <C> <C> <C>
Insurance Berkley (W.R.)
Corporation 1,200,000 $62,155,679 $ 289,226
Insurance Fremont General
Corp. 142,000 6,697,088 1,440,255
Insurance Penncorp Financial
Group, Inc. 1,800,000 56,478,296 260,400
Iron & Steel Birmingham Steel
Corp. 1,108,000 17,678,280 498,180
Iron & Steel Cleveland-Cliffs, Inc. (259,400) (9,246,929) 1,027,650
Natural Gas Williams
Suppliers Companies, Inc. 1,440,000 (8,811,012) 5,311,000
Real Estate RFS Hotel
Investment Investors, Inc. 46,000 605,705 2,571,260
Trusts
</TABLE>
See Notes to Financial Statements.
50
<PAGE> 97
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of March 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$8,217,121,935)
(Note 1a) $9,260,022,326
Foreign cash (Note 1c) 102,850
Receivables:
Interest $ 64,355,674
Securities sold 28,616,621
Capital shares sold 16,755,706
Dividends 13,146,885 122,874,886
--------------
Prepaid registration fees and other assets (Note 1f) 89,854
--------------
Total assets 9,383,089,916
--------------
Liabilities: Payables:
Capital shares redeemed 52,074,008
Securities purchased 37,903,976
Distributor (Note 2) 4,796,896
Investment adviser (Note 2) 3,279,289 98,054,169
--------------
Accrued expenses and other liabilities 3,831,929
--------------
Total liabilities 101,886,098
--------------
Net Assets: Net assets $9,281,203,818
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 400,000,000
Consist of: shares authorized $ 10,484,053
Class B Shares of Common Stock, $0.10 par value, 400,000,000
shares authorized 16,200,528
Class C Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized 1,059,087
Class D Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized 2,201,859
Paid-in capital in excess of par 7,854,537,739
Undistributed investment income--net 73,174,307
Undistributed realized capital gains on investments and
foreign currency transactions--net 280,717,740
Unrealized appreciation on investments and foreign
currency transactions--net 1,042,828,505
--------------
Net assets $9,281,203,818
==============
Net Asset Value: Class A--Based on net assets of $3,291,219,375 and
104,840,527 shares outstanding $ 31.39
==============
Class B--Based on net assets of $4,977,430,637 and
162,005,280 shares outstanding $ 30.72
==============
Class C--Based on net assets of $322,437,598 and
10,590,867 shares outstanding $ 30.44
==============
Class D--Based on net assets of $690,116,208 and
22,018,591 shares outstanding $ 31.34
==============
See Notes to Financial Statements.
</TABLE>
51
<PAGE> 98
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended March 31, 1997
<S> <S> <C> <C>
Investment Interest and discount earned $ 305,335,388
Income Dividends (net of $3,200,996 foreign withholding tax) 118,405,274
(Notes 1d & 1e): Other 246,545
--------------
Total income 423,987,207
--------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 51,006,246
Investment advisory fees (Note 2) 37,585,806
Transfer agent fees--Class B (Note 2) 7,549,478
Transfer agent fees--Class A (Note 2) 4,213,126
Account maintenance and distribution fees--Class C (Note 2) 3,085,780
Account maintenance fees--Class D (Note 2) 1,545,620
Transfer agent fees--Class D (Note 2) 792,666
Custodian fees 781,110
Printing and shareholder reports 618,405
Transfer agent fees--Class C (Note 2) 489,379
Registration fees (Note 1f) 487,319
Professional fees 106,956
Directors' fees and expenses 41,192
Pricing fees 13,342
Other 89,520
--------------
Total expenses 108,405,945
--------------
Investment income--net 315,581,262
--------------
Realized & Realized gain from:
Unrealized Gain Investments--net 526,239,016
(Loss) on Foreign currency transactions--net 509,088 526,748,104
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 208,721,438
(Notes 1b, 1c, Foreign currency transactions--net (65,632) 208,655,806
1e & 3): -------------- --------------
Net realized and unrealized gain on investments and foreign
currency transactions 735,403,910
--------------
Net Increase in Net Assets Resulting from Operations $1,050,985,172
==============
See Notes to Financial Statements.
</TABLE>
52
<PAGE> 99
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 315,581,262 $ 271,962,871
Realized gain on investments and foreign currency transactions
--net 526,748,104 843,050,533
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 208,655,806 481,215,982
-------------- --------------
Net increase in net assets resulting from operations 1,050,985,172 1,596,229,386
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (129,132,730) (107,615,888)
Shareholders Class B (153,592,754) (124,808,348)
(Note 1g): Class C (9,633,153) (4,109,418)
Class D (22,687,022) (12,210,426)
Realized gain on investments--net:
Class A (200,341,016) (215,994,688)
Class B (318,637,995) (336,099,182)
Class C (19,360,951) (11,431,655)
Class D (37,329,858) (27,764,995)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (890,715,479) (840,034,600)
-------------- --------------
Capital Share Net increase in net assets derived from capital shares
Transactions transactions 88,941,831 1,885,677,575
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 249,211,524 2,641,872,361
Beginning of year 9,031,992,294 6,390,119,933
-------------- --------------
End of year* $9,281,203,818 $9,031,992,294
============== ==============
<FN>
*Undistributed investment income--net (Note 1h) $ 73,174,307 $ 71,862,639
============== ==============
See Notes to Financial Statements.
</TABLE>
53
<PAGE> 100
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived Class A from
information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 30.90 $ 27.74 $ 27.46 $ 27.89 $ 26.90
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net 1.25 1.21 1.01 .97 .87
Realized and unrealized gain on
investments and foreign currency
transactions--net 2.43 5.41 1.77 .50 1.99
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.68 6.62 2.78 1.47 2.86
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (1.25) (1.16) (.94) (.95) (.87)
Realized gain on investments--net (1.94) (2.30) (1.56) (.95) (1.00)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (3.19) (3.46) (2.50) (1.90) (1.87)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 31.39 $ 30.90 $ 27.74 $ 27.46 $ 27.89
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 12.62% 24.50% 10.95% 5.39% 11.33%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses .55% .56% .57% .53% .55%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 3.99% 4.09% 3.81% 3.52% 3.56%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $3,291,219 $3,225,758 $2,507,767 $2,237,492 $2,056,023
========== ========== ========== ========== ==========
Portfolio turnover 47% 84% 89% 86% 55%
========== ========== ========== ========== ==========
Average commission rate paid++ $ .0432 $ .0382 -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effect of sales loads.
++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may
significantly affect the rate shown.
++++Based on average shares outstanding during the year.
See Notes to Financial Statements.
</TABLE>
54
<PAGE> 101
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived Class B from
information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 30.30 $ 27.28 $ 27.04 $ 27.49 $ 26.58
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .91 .90 .74 .70 .65
Realized and unrealized gain on
investments and foreign currency
transactions--net 2.39 5.29 1.72 .48 1.89
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.30 6.19 2.46 1.18 2.54
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.94) (.87) (.66) (.68) (.63)
Realized gain on investments--net (1.94) (2.30) (1.56) (.95) (1.00)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (2.88) (3.17) (2.22) (1.63) (1.63)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 30.72 $ 30.30 $ 27.28 $ 27.04 $ 27.49
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 11.48% 23.22% 9.81% 4.36% 10.16%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.57% 1.58% 1.59% 1.55% 1.56%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 2.97% 3.07% 2.79% 2.50% 2.53%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $4,977,431 $5,025,504 $3,664,250 $3,079,332 $2,694,774
========== ========== ========== ========== ==========
Portfolio turnover 47% 84% 89% 86% 55%
========== ========== ========== ========== ==========
Average commission rate paid++ $ .0432 $ .0382 -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effect of sales loads.
++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may
significantly affect the rate shown.
++++Based on average shares outstanding during the year.
See Notes to Financial Statements.
</TABLE>
55
<PAGE> 102
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
The following per share data and ratios have Period Period
been derived from information provided in the For the Oct. 21, For the Oct. 21,
financial statements. Year Ended 1994++++ to Year Ended 1994++++ to
March 31, March 31, March 31, March 31,
Increase (Decrease) in Net Asset Value: 1997++++++ 1996 1995 1997++++++ 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 30.08 $ 27.17 $ 26.81 $ 30.86 $ 27.72 $ 27.27
Performance: -------- -------- -------- -------- -------- --------
Investment income--net .90 .92 .49 1.17 1.16 .48
Realized and unrealized
gain on investments and
foreign currency
transactions--net 2.36 5.24 1.03 2.43 5.38 1.15
-------- -------- -------- -------- -------- --------
Total from investment
operations 3.26 6.16 1.52 3.60 6.54 1.63
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net (.96) (.95) (.43) (1.18) (1.10) (.45)
Realized gain on
investments--net (1.94) (2.30) (.73) (1.94) (2.30) (.73)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (2.90) (3.25) (1.16) (3.12) (3.40) (1.18)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 30.44 $ 30.08 $ 27.17 $ 31.34 $ 30.86 $ 27.72
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 11.45% 23.25% 6.07%+++ 12.34% 24.21% 6.42%+++
======== ======== ======== ======== ======== ========
Ratios to Average Expenses 1.58% 1.59% 1.64%* .80% .81% .87%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income--net 2.96% 3.08% 3.22%* 3.75% 3.84% 3.94%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $322,438 $259,131 $ 46,902 $690,116 $521,599 $171,201
======== ======== ======== ======== ======== ========
Portfolio turnover 47% 84% 89% 47% 84% 89%
======== ======== ======== ======== ======== ========
Average commission rate
paid++ $ .0432 $ .0382 -- $ .0432 $ .0382 --
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
++For the fiscal years beginning on or after September 1,
1995, the Fund is required to disclose its average
commission rate per share for purchases and sales of equity
securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been
converted into US dollars using the prevailing exchange
rate on the date of the transaction. Such conversions may
significantly affect the rate shown.
++++Commencement of Operations.
++++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
56
<PAGE> 103
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Capital Fund, Inc. (the "Fund") is registered 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 contingent
deferred sales charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its account
maintenance and distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of 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 representative
market. Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Options purchased are valued at
the last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last bid price. Short- term
securities are valued at amortized cost, which approximates market value.
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. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked to market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written options are non-income producing investments.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(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 dates. Dividends from foreign
securities where the ex- dividend date may have passed are subsequently
recorded when the Fund has determined the ex-dividend date. Interest income
(including amortization
57
<PAGE> 104
NOTES TO FINANCIAL STATEMENTS (continued)
of discount) is recognized 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 adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $776,065 have been reclassified between undistributed
net realized capital gains and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). The general partner of MLAM is Princeton
Services, Inc. ("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered
into a Distribution Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of
Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee
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.
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:
<TABLE>
<CAPTION>
Account Distribution
Maintenance Fee Fee
<S> <C> <C>
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the year ended March 31, 1997, MLFD earned underwriting discounts and
commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A $ 41,749 $ 579,434
Class D $144,815 $1,963,772
</TABLE>
For the year ended March 31, 1997, MLPF&S received contingent deferred sales
charges of $6,950,823 and $202,197 relating to transactions in Class B and
Class C Shares, respectively.
In addition, MLPF&S received $456,609 in commissions on the execution of
portfolio security transactions for the year ended March 31, 1997.
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, 1997, Merrill Lynch Security Pricing Service,
an affiliate of MLPF&S, received $7,139 for security price quotations to
compute the net asset value of the Fund.
58
<PAGE> 105
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended March 31, 1997 were $4,235,082,311 and $4,613,872,337, respectively.
Net realized and unrealized gains (losses) as of March 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Gains (Losses)
<S> <C> <C>
Long-term investments $526,109,522 $1,043,768,032
Short-term investments 7,326 (867,641)
Paydowns 122,168 --
Foreign currency
transactions 509,088 (71,886)
------------ --------------
Total $526,748,104 $1,042,828,505
============ ==============
</TABLE>
As of March 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $1,040,426,260 of which $1,246,338,886 related to
appreciated securities and $205,912,626 related to depreciated securities. At
March 31, 1997, the aggregate cost of investments for Federal income tax
purposes was $8,219,596,066.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$88,941,831 and $1,885,677,575 for the years ended March 31, 1997 and March 31,
1996, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
Class A Shares for the
Year Ended Dollar
March 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 17,867,783 $553,401,282
Shares issued to share-
holders in reinvestment of
dividends and
distributions 9,986,061 300,989,719
------------ ------------
Total issued 27,853,844 854,391,001
Shares redeemed (27,414,603) (850,370,114)
------------ ------------
Net increase 439,241 $ 4,020,887
============ ============
<CAPTION>
Class A Shares for the
Year Ended Dollar
March 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 19,027,848 $584,244,547
Shares issued to shareholders
in reinvestment of dividends
and 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
============ ============
<CAPTION>
Class B Shares for the
Year Ended Dollar
March 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 27,179,336 $ 802,909,943
Shares issued to shareholders
in reinvestment of dividends
and distributions 14,204,232 420,101,200
-------------- --------------
Total issued 41,383,568 1,223,011,143
Shares redeemed (44,055,095) (1,317,756,891)
Automatic conversion of
shares (1,163,610) (35,786,707)
-------------- --------------
Net decrease (3,835,137) $ (130,532,455)
============== ==============
<CAPTION>
Class B Shares for the
Year Ended Dollar
March 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 45,146,025 $1,369,296,478
Shares issued to shareholders
in reinvestment of dividends
and 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
============== ==============
<CAPTION>
Class C Shares for the
Year Ended Dollar
March 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 4,367,744 $ 131,117,286
Shares issued to shareholders
in reinvestment of dividends
and distributions 889,233 26,090,088
------------- --------------
Total issued 5,256,977 157,207,374
Shares redeemed (3,280,962) (98,987,162)
------------- --------------
Net increase 1,976,015 $ 58,220,212
============= ==============
</TABLE>
59
<PAGE> 106
NOTES TO FINANCIAL STATEMENTS (concluded)
<TABLE>
<CAPTION>
Class C Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 7,451,321 $ 221,649,300
Shares issued to shareholders
in reinvestment of dividends
and 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
============= ==============
<CAPTION>
Class D Shares for the Year Dollar
Ended March 31, 1997 Shares Amount
<S> <C> <C>
Shares sold 7,903,395 $244,928,191
Automatic conversion of
shares 1,141,681 35,786,707
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,738,833 52,347,617
------------ ------------
Total issued 10,783,909 333,062,515
Shares redeemed (5,669,032) (175,829,328)
------------ ------------
Net increase 5,114,877 $157,233,187
============ ============
<CAPTION>
Class D Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 10,198,663 $303,203,877
Automatic conversion of
shares 2,406,945 71,651,206
Shares issued to shareholders
in reinvestment of dividends
and 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
============ ============
</TABLE>
5. Loaned Securities:
At March 31, 1997, the Fund held US Treasury Notes having an aggregate value of
approximately $188,691,000 as collateral for portfolio securities loaned having
a market value of approximately $187,125,000.
60
<PAGE> 107
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<PAGE> 108
[This page is intentionally left blank.]
<PAGE> 109
- ------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and
Policies......................... 2
Management of the Fund............. 7
Directors and Officers........... 7
Compensation of Directors........ 8
Management and Advisory
Arrangements.................. 9
Purchase of Shares................. 11
Initial Sales Charge Alternatives
--
Class A and Class D Shares.... 11
Reduced Initial Sales Charges.... 12
Employer-Sponsored Retirement or
Savings Plans and Certain
Other Arrangements............ 15
Distribution Plans............... 16
Limitations on the Payment of
Deferred Sales Charges........ 16
Redemption of Shares............... 17
Deferred Sales Charge --
Class B and Class C Shares.... 18
Portfolio Transactions and
Brokerage........................ 18
Determination of Net Asset Value... 20
Shareholder Services............... 21
Investment Account............... 21
Automatic Investment Plans....... 22
Automatic Reinvestment of
Dividends and Capital Gains
Distributions................. 22
Systematic Withdrawal Plans --
Class A and Class D Shares.... 22
Retirement Plans................. 23
Exchange Privilege............... 24
Dividends, Distributions and
Taxes............................ 26
Dividends and Distributions...... 26
Taxes............................ 26
Tax Treatment of Options
Transactions.................. 28
Special Rules for Certain Foreign
Currency Transactions......... 29
Performance Data................... 29
General Information................ 32
Description of Shares............ 32
Computation of Offering Price
per Share..................... 33
Independent Auditors............. 33
Custodian........................ 34
Transfer Agent................... 34
Legal Counsel.................... 34
Reports to Shareholders.......... 34
Additional Information........... 34
Appendix A......................... 35
Independent Auditors' Report....... 42
Financial Statements............... 43
Code #10257-0797
</TABLE>
YZa
Merrill Lynch
Capital Fund, Inc.
MLYNCH COMPASS
STATEMENT OF
ADDITIONAL
INFORMATION
July 21, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 110
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>
<PAGE> 111
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<S> <C>
(a) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the ten-year period ended March
31, 1997.
Contained in Part B:
Schedule of Investments, as of March 31, 1997.
Statement of Assets and Liabilities, as of March 31, 1997.
Statement of Operations for the year ended March 31, 1997.
Statements of Changes in Net Assets for each of the years in the two-year
period ended March 31, 1997.
Financial Highlights for each of the years in the five-year period ended March
31, 1997.
(b) EXHIBITS:
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------
<C> <C> <S>
1(a) -- Articles of Incorporation of the Registrant.(a)
(b) -- Articles of Amendment, dated October 3, 1988, to Articles of Incorporation
of the Registrant.(a)
(c) -- Articles of Merger between Merrill Lynch Capital Fund, Inc. and Merrill
Lynch New Capital Fund, Inc.(a)
(d) -- Articles of Amendment, dated May 27, 1988, to Articles of Incorporation of
the Registrant.(a)
(e) -- Articles of Amendment, dated October 17, 1994, to Articles of
Incorporation of the Registrant.(e)
(f) -- Articles Supplementary, dated October 17, 1994, to Articles of
Incorporation of the Registrant.(e)
(g) -- Articles Supplementary, dated March 17, 1995, to Articles of Incorporation
of the Registrant.(e)
2 -- By-Laws of the Registrant.(c)
3 -- None.
4 -- Portions of the Articles of Incorporation, as amended, and By-Laws of the
Registrant defining the rights of holders of shares of common stock of the
Registrant.(b)
5(a) -- Investment Advisory Agreement between the Registrant and Merrill Lynch
Asset Management, L.P.(a)
(b) -- Supplement to Investment Advisory Agreement between the Registrant and
Merrill Lynch Asset Management, L.P.(c)
(c) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset Management,
L.P. and Merrill Lynch Asset Management U.K. Limited.
6(a) -- Form of Revised Class A Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(d)
(b) -- Class B Distribution Agreement between the Registrant and Merrill Lynch
Funds Distributor, Inc.(a)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection with the
Merrill Lynch Mutual Fund Adviser program.(c)
(d) -- Form of Class C Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(d)
(e) -- Form of Class D Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(d)
7 -- None.
8(a) -- Custody Agreement between the Registrant and The Bank of New York.(a)
(b) -- Amendment to Custody Agreement between the Registrant and The Bank of New
York.(a)
</TABLE>
C-1
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------
<C> <C> <S>
9(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between the Registrant and Merrill Lynch Financial Data
Services, Inc.(a)
(b) -- Agreement and Plan of Reorganization between Merrill Lynch Capital Fund,
Inc. and Merrill Lynch New Capital Fund, Inc.(a)
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- None.
14 -- None.
15(a) -- Amended and Restated Class B Distribution Plan of the Registrant.(a)
(b) -- Form of Class C Distribution Plan of the Registrant and Class C
Distribution Plan Sub-Agreement.(d)
(c) -- Form of Class D Distribution Plan of the Registrant and Class D
Distribution Plan Sub-Agreement.(d)
16(a) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to item 22 relating to Class A
shares.(a)
(b) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to item 22 relating to Class B
shares.(a)
(c) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to item 22 relating to Class C
shares.(e)
(d) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to item 22 relating to Class D
shares.(e)
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
18 -- Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3.(f)
</TABLE>
- -------------------------
<TABLE>
<S> <C>
(a) Refiled, on July 27, 1995, as an Exhibit to Post-Effective Amendment No. 32 to
Registrant's Registration Statement on Form N-1A, pursuant to the Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") phase-in requirements.
(b) Reference is made to Article IV, Article V (Sections 3, 5, 6 and 7), Articles VI, VII
and IX of the Registrant's Articles of Incorporation, filed as Exhibits 1(a), (b), (c),
(d), (e) and (f) to Post-Effective Amendment No. 32 to the Registration Statement on
Form N-1A. and to Article II, Article III (Sections 1, 3, 5 and 6), Articles VI, VII,
XIII and XIV of the Registrant's By-Laws, filed as Exhibit 2 to Post-Effective Amendment
No. 30 to Registrant's Registration Statement on Form N-1A.
(c) Previously filed as an exhibit to Post-Effective Amendment No. 30 to Registrant's
Registration Statement on Form N-1A.
(d) Previously filed as an exhibit to Post-Effective Amendment No. 31 to Registrant's
Registration Statement on Form N-1A.
(e) Previously filed as an exhibit to Post-Effective Amendment No. 32 to Registrant's
Registration Statement on Form N-1A.
(f) Incorporated by reference to Post-Effective Amendment No. 13 to the Registration
Statement on Form N-1A of Merrill Lynch New York Municipal Bond Fund of Merrill Lynch
Multi-State Municipal Series Trust (File No. 2-99473), filed on January 25, 1996.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any
person.
C-2
<PAGE> 113
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS JUNE 30, 1997*
- ------------------------------------------------------------------------------- --------------
<S> <C>
Class A Common Stock, par value $0.10 per share................................ 218,440
Class B Common Stock, par value $0.10 per share................................ 321,973
Class C Common Stock, par value $0.10 per share................................ 32,073
Class D Common Stock, par value $0.10 per share................................ 50,928
</TABLE>
- -------------------------
* The number of holders shown in the table includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C
and Class D Shares Distribution Agreements.
Insofar as the conditional advancing of indemnification monies for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may be
concerned, Article VI of the Registrant's By-Laws provides that such payments
will be made only on the following conditions: (i) advances may be made only on
receipt of a written affirmation of such person's good faith belief that the
standard of conduct necessary for indemnification has been met and a written
undertaking to repay any such advance if it is ultimately determined that the
standard of conduct has not been met and (ii) (a) such promise must be secured
by a security for the undertaking, in form and amount acceptable to the
Registrant, (b) the Registrant is insured against losses arising by reason of
the advance, or (c) a majority of a quorum of the Registrant's disinterested,
non-party Directors, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that at the time the
advance is proposed to be made, there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (the "1933 Act" ), against certain types of civil liabilities arising in
connection with the Registration Statement or the Prospectus and Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Director, officer or controlling person of the Registrant and the
principal underwriter in connection with the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
or the principal underwriter in connection with the shares being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P. ("MLAM" or the "Investment
Adviser") acts the investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital Markets
Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc.,
Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings,
C-3
<PAGE> 114
Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund,
Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch Intermediate Government Bond Fund, Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc. and Hotchkis and Wiley funds (advised by Hotchkis and Wiley, a
division of MLAM); and for the following closed-end investment companies;
Convertible Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser
to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisory Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Municipal Series Trust, Merrill
Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
Municipal Fund Accumulation Program, Inc.; and for the following closed-end
registered investment companies: Apex Municipal Fund, Inc., Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Debt Strategies Fund, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced
Fund, Inc., MuniHoldings Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund,
Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan
Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey
Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York
Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund,
Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and
Worldwide DollarVest, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the Investment Adviser, FAM, Princeton
Services, Inc. ("Princeton Services") and Princeton Administrators L.P. is also
P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch
Funds Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey
08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281. The address of
the Fund's transfer agent, Merrill Lynch Financial Data Services, Inc. (the
"Transfer Agent"), is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
C-4
<PAGE> 115
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since March
31, 1995 for his or her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of all or substantially
all of the investment companies described in the first two paragraphs of this
Item 28, and Messrs. Giordano, Harvey, Kirstein and Monagle are directors,
trustees or officers of one or more such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITIONS WITH PROFESSION, VOCATION
NAME INVESTMENT ADVISER OR EMPLOYMENT
- ------------------------------ ------------------------ -------------------------------------
<S> <C> <C>
ML & Co. ..................... Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services............ General Partner General Partner of FAM
Arthur Zeikel................. President President of FAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.;
Terry K. Glenn................ Executive Vice President Executive Vice President of FAM;
Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of the
Transfer Agent; President of
Princeton Administrators, L.P.
Vincent R. Giordano........... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Elizabeth Griffin............. Senior Vice President Senior Vice President of FAM
Michael J. Hennewinkel........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein............ Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of FAM; Senior
Secretary Vice President, General Counsel,
Director and Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss............... Senior Vice President Senior Vice President and Controller
and Controller of FAM; Senior Vice President and
Controller of Princeton Services
Stephen M.M. Miller........... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael L. Quinn.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989
to 1995
Gerald M. Richard............. Senior Vice President Senior Vice President and Treasurer
and Treasurer of FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Ronald L. Welburn............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman............... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic
Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc. Merrill Lynch Global
C-5
<PAGE> 116
Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth
Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa
Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch Utility Income Fund,
Inc., Merrill Lynch Variable Series Funds, Inc., Merrill Lynch World Income
Fund, Inc. and Worldwide DollarVest Fund, Inc. The address of each of these
investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since March 31,
1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Harvey,
Richard and Yardley are officers of one or more of the registered investment
companies listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITIONS WITH MLAM OTHER SUBSTANTIAL BUSINESS,
NAME U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------- ---------------------- -------------------------------------------
<S> <C> <C>
Arthur Zeikel............ Director and Chairman President of the Manager and FAM; President
and Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML&Co.
Alan J. Albert........... Senior Managing Vice President of the Manager
Director
Terry K. Glenn........... Director Executive Vice President of the Manager and
FAM; Executive Vice President and
Director of Princeton Services; President
and Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Adrian Holmes............ Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand...... Director Director of Merrill Lynch Global Asset
Management
Edward Gobora............ Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride......... Director Managing Director of Merrill Lynch Global
Asset Management
Robert M. Ryan........... Director Vice President, Institutional Marketing,
Debt and Equity Group, Merrill Lynch
Capital Markets from 1989 to 1994
Gerald M. Richard........ Senior Vice President Senior Vice President and Treasurer of the
Manager and FAM; Senior Vice President
and Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Stephen J. Yardley....... Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham........ Company Secretary None
Debra Anne Searle........ Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., and The Municipal Fund
Accumulation Program, Inc.; and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of
C-6
<PAGE> 117
Messrs. Aldrich, Brady, Breen, Crook, Fatseas and Wasel is One Financial Center,
15th Floor, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- ------------------------------ ------------------------------------- ------------------------
<S> <C> <C>
Terry K. Glenn................ President and Director Executive Vice President
Arthur Zeikel................. Director President and Director
Philip L. Kirstein............ Director None
William E. Aldrich............ Senior Vice President None
Robert W. Crook............... Senior Vice President None
Kevin P. Boman................ Vice President None
Michael J. Brady.............. Vice President None
William M. Breen.............. Vice President None
Michael G. Clark.............. Vice President None
Mark A. DeSario............... Vice President None
James T. Fatseas.............. Vice President None
Debra W. Landsman-Yaros....... Vice President None
Michelle T. Lau............... Vice President None
Gerald M. Richard............. Vice President and Treasurer Treasurer
Salvatore Venezia............. Vice President None
William Wasel................. Vice President None
Robert Harris................. Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules thereunder are maintained at the
offices of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey
08536), and the Transfer Agent (4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484).
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund--Management and Advisory Arrangements" in the Prospectus constituting Part
A of the Registration Statement and under "Management of the Fund--Management
and Advisory Arrangements" in the Statement of Additional Information
constituting Part B of the Registration Statement, the Registrant is not a party
to any management-related service contracts.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Township of Plainsboro, and State of New Jersey, on the 18th day of July, 1997.
Merrill Lynch Capital Fund, Inc.
(Registrant)
By /s/ GERALD M. RICHARD
---------------------------------
Gerald M. Richard
Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- ----------------
<C> <S> <C>
ARTHUR ZEIKEL* President and Director
- --------------------------------------------- (Principal Executive
(Arthur Zeikel) Officer)
GERALD M. RICHARD* Treasurer (Principal
- --------------------------------------------- Financial and Accounting
(Gerald M. Richard) Officer)
DONALD CECIL* Director
- ---------------------------------------------
(Donald Cecil)
M. COLYER CRUM* Director
- ---------------------------------------------
(M. Colyer Crum)
EDWARD H. MEYER* Director
- ---------------------------------------------
(Edward H. Meyer)
JACK B. SUNDERLAND* Director
- ---------------------------------------------
(Jack B. Sunderland)
J. THOMAS TOUCHTON* Director
- ---------------------------------------------
(J. Thomas Touchton)
*By /s/ GERALD M. RICHARD July 18, 1997
- ---------------------------------------------
(Gerald M. Richard, Attorney-in-Fact)
</TABLE>
C-8
<PAGE> 119
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ------------------------------------------------------------------
<S> <C> <C>
5(c) -- Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K. Limited.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17(a) -- Financial Data Schedule for Class A shares.
(b) -- Financial Data Schedule for Class B shares.
(c) -- Financial Data Schedule for Class C shares.
(d) -- Financial Data Schedule for Class D shares.
</TABLE>
<PAGE> 1
EXHIBIT 5
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 18th day of July, 1997, by and between MERRILL
LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership ("MLAM"), and
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED, a corporation organized under the
laws of England and Wales ("MLAM U.K.").
W I T N E S E T H:
WHEREAS, MERRILL LYNCH CAPITAL FUND, INC. (the "Fund") is a
Maryland corporation engaged in business as a diversified, open-
end investment company registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in
rendering investment advisory services and are registered as
investment advisers under the Investment Advisers Act of 1940, as
amended; and
WHEREAS, MLAM U.K. is regulated by the Investment Management
Regulatory Organization, a self-regulating organization
recognized under the Financial Services Act of 1986 of the United
Kingdom ("IMRO"), and the conduct of its investment business is
regulated by IMRO; and
WHEREAS, MLAM has entered into an investment advisory agreement dated
as of June 16, 1976 (the "Investment Advisory Agreement"), pursuant to which
MLAM provides management and investment and advisory services to the Fund; and
<PAGE> 2
WHEREAS, MLAM U.K. is willing to provide investment advisory
services to MLAM in connection with the Fund's operations on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the
covenants hereinafter contained, MLAM U.K. and MLAM hereby agree
as follows:
ARTICLE I
Duties of MLAM U.K.
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and
to furnish, or arrange for affiliates to furnish, the investment advisory
services described below, subject to the broad supervision of MLAM and the Fund,
for the period and on the terms and conditions set forth in this Agreement. MLAM
U.K. hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Non Private
Customer as defined under the rules promulgated by IMRO (the "IMRO Rules"). MLAM
U.K. and its affiliates shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Fund in any way or
otherwise be deemed an agent of the Fund.
2
<PAGE> 3
MLAM U.K. shall have the right to make unsolicited calls on MLAM and
shall provide MLAM with such investment research, advice and supervision as the
latter from time to time may consider necessary for the proper supervision of
the assets of the Fund; shall make recommendations from time to time as to which
securities shall be purchased, sold or exchanged and what portion of the assets
of the Fund shall be held in the various securities in which the Fund invests,
options, futures, options on futures or cash; all of the foregoing subject
always to the restrictions of the Articles of Incorporation and By-Laws of the
Fund, as they may be amended and/or restated from time to time, the provisions
of the Investment Company Act and the statements relating to the Fund's
investment objective, investment policies and investment restrictions as the
same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and the "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to the
manner in which voting rights, rights to consent
3
<PAGE> 4
to corporate action and any other rights pertaining to the portfolio securities
of the Fund shall be exercised.
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will
MLAM U.K. be the registered holder of the registered investments of MLAM or the
Fund or be the custodian of documents or other evidence of title.
ARTICLE II
Allocation of Charges and Expenses
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
Compensation of MLAM U.K.
For the services rendered, the facilities furnished and expenses
assumed by MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be
determined from time to time by MLAM and MLAM U.K. but in no event in excess of
the amount that MLAM actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement.
4
<PAGE> 5
ARTICLE IV
Limitation of Liability of MLAM U.K.
MLAM U.K. shall not be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or omission in
the performance of sub-advisory services rendered with respect to the Fund,
except for willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates of
MLAM U.K. performing services for MLAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
Activities of MLAM U.K.
The services of MLAM U.K. to the Fund are not to be deemed to be
exclusive, MLAM U.K. and any person controlled by or under common control with
MLAM U.K. (for purposes of this Article V referred to as "affiliates") being
free to render services to others. It is understood that Directors, officers,
employees and shareholders of the Fund are or may become interested in MLAM U.K.
and its affiliates, as directors, officers, employees and shareholders or
otherwise and that directors, officers, employees and shareholders of MLAM U.K.
and its affiliates are or may become similarly interested in the Fund, and that
MLAM U.K. and directors, officers, employees, partners and shareholders of its
5
<PAGE> 6
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
MLAM U.K. Statements Pursuant to IMRO Rules
Any complaints concerning MLAM U.K. should be in writing addressed to
the attention of the Managing Director of MLAM U.K. MLAM has the right to obtain
from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO and
the Investment Ombudsman directly.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding Investments Not Readily
Realisable (as that term is used in the IMRO Rules) or investments denominated
in a currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment
restrictions referred to in Article I herein, regarding options, futures or
contracts for differences. Markets can be highly volatile and such investments
carry a high degree of risk of loss exceeding the original investment and any
margin on deposit.
6
<PAGE> 7
ARTICLE VII
Duration and Termination of this Agreement
This Agreement shall become effective as of the date first above
written and shall remain in force until June 15, 1997, and thereafter, but only
so long as such continuance is specifically approved at least annually by (i)
the Directors of the Fund or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of
any penalty, by MLAM or by vote of a majority of the outstanding voting
securities of the Fund, or by MLAM U.K., on sixty days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the Investment Advisory
Agreement. Any termination shall be without prejudice to the completion of
transactions already initiated.
ARTICLE VIII
Amendments of this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who
7
<PAGE> 8
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
ARTICLE IX
Definitions of Certain Terms
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
Governing Law
This Agreement shall be construed in accordance with the laws of the
State of New York and the applicable provisions of the Investment Company Act.
To the extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By:_________________________________________
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By:_________________________________________
Title:
9
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Capital Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 34 to Registration
Statement No. 2-49007 of our report dated May 9, 1997 appearing in the Statement
of Additional Information, which is a part of such Registration Statement, and
to the reference to us under the caption "Financial Highlights" appearing in the
Prospectus, which also is a part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
July 17, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000110055
<NAME> MERRILL LYNCH CAPITAL FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 8217121935
<INVESTMENTS-AT-VALUE> 9260022326
<RECEIVABLES> 122874886
<ASSETS-OTHER> 192704
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9383089916
<PAYABLE-FOR-SECURITIES> 37903976
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63982122
<TOTAL-LIABILITIES> 101886098
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7884483266
<SHARES-COMMON-STOCK> 104840527
<SHARES-COMMON-PRIOR> 104401286
<ACCUMULATED-NII-CURRENT> 73174307
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 280717740
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1042828505
<NET-ASSETS> 3291219375
<DIVIDEND-INCOME> 118405274
<INTEREST-INCOME> 305335388
<OTHER-INCOME> 246545
<EXPENSES-NET> (108405945)
<NET-INVESTMENT-INCOME> 315581262
<REALIZED-GAINS-CURRENT> 526748104
<APPREC-INCREASE-CURRENT> 208655806
<NET-CHANGE-FROM-OPS> 1050985172
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (129132730)
<DISTRIBUTIONS-OF-GAINS> (200341016)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17867783
<NUMBER-OF-SHARES-REDEEMED> (27414603)
<SHARES-REINVESTED> 9986061
<NET-CHANGE-IN-ASSETS> 249211524
<ACCUMULATED-NII-PRIOR> 71862639
<ACCUMULATED-GAINS-PRIOR> 330415520
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 37585806
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 108405945
<AVERAGE-NET-ASSETS> 3275641277
<PER-SHARE-NAV-BEGIN> 30.90
<PER-SHARE-NII> 1.25
<PER-SHARE-GAIN-APPREC> 2.43
<PER-SHARE-DIVIDEND> (1.25)
<PER-SHARE-DISTRIBUTIONS> (1.94)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 31.39
<EXPENSE-RATIO> .55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000110055
<NAME> MERRILL LYNCH CAPITAL FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 8217121935
<INVESTMENTS-AT-VALUE> 9260022326
<RECEIVABLES> 122874886
<ASSETS-OTHER> 192704
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9383089916
<PAYABLE-FOR-SECURITIES> 37903976
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63982122
<TOTAL-LIABILITIES> 101886098
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7884483266
<SHARES-COMMON-STOCK> 162005280
<SHARES-COMMON-PRIOR> 165840417
<ACCUMULATED-NII-CURRENT> 73174307
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 280717740
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1042828505
<NET-ASSETS> 4977430637
<DIVIDEND-INCOME> 118405274
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