As filed with the Securities and Exchange Commission on July 2, 1998
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. 35 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 24 [X]
(Check appropriate box or boxes)
---------------
Merrill Lynch Capital Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
---------------
800 Scudders Mill Road
Plainsboro, New Jersey
(Address of Principal Executive Offices)
08536
(Zip Code)
(609) 282-2800
(Registrant's Telephone Number,
including Area Code)
---------------
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.
---------------
Title of Securities Being Registered: Shares of Common Stock, par value $.10
per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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 .............. General Information
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>
PROSPECTUS
July 2, 1998
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, 1998, 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 4.
----------------
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 $250 and the minimum subsequent purchase is $50. Merrill Lynch may charge
its customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through Merrill Lynch
Financial Data Services, Inc. (the "Transfer Agent") are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated July 2, 1998 (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 Commission maintains a
Website (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information regarding
the Fund. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
----------------
Merrill Lynch Asset Management - Investment Adviser
Merrill Lynch Funds Distributor, Inc. - Distributor
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows.
<TABLE>
<CAPTION>
Class A(a)
===============
<S> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ............... 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments ..................................... None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever is
lower) ............................................ None(d)
Exchange Fee ....................................... None
Annual Fund Operating Expenses (as a percentage of
average net assets):
Investment Advisory Fees(g) ........................ 0.40%
12b-1 Fees(h):
Account Maintenance Fees .......................... None
Distribution Fees ................................. None
Other Expenses:
Shareholder Servicing Costs(i) .................... 0.13%
Other ............................................. 0.02%
Total Other Expenses ............................. 0.15%
----------
Total Fund Operating Expenses ...................... 0.55%
==========
<CAPTION>
Class B(b) Class C Class D
================================== ================ ===============
<S> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ............... None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments ..................................... None None None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, whichever is
lower) ............................................ 4.0% during the first year, 1.0% for one None(d)
decreasing 1.0% year(f)
annually thereafter to 0.0%
after the fourth year(e)
Exchange Fee ....................................... None None None
Annual Fund Operating Expenses (as a percentage of
average net assets):
Investment Advisory Fees(g) ........................ 0.40% 0.40% 0.40%
12b-1 Fees(h):
Account Maintenance Fees .......................... 0.25% 0.25% None
Distribution Fees ................................. 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:
Shareholder Servicing Costs(i) .................... 0.15% 0.16% 0.13%
Other ............................................. 0.02% 0.02% 0.02%
Total Other Expenses ............................. 0.17% 0.18% 0.15%
---- ---- --------
Total Fund Operating Expenses ...................... 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 participants in certain
fee-based programs. See "Purchase of Shares - Initial Sales Charge
Alternatives - Class A and Class D Shares" - page 22 and "Shareholder
Services - Fee-Based Programs" - page 34.
(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 24.
(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 22.
(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. A
0.75% sales charge for 401(k) purchases over $1,000,000 will apply. See
"Shareholder Services - Fee-Based Programs" - page 34.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services - Fee-Based Programs" - page 34.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services - Fee-Based Programs" - page 34.
(g) See "Management of the Fund - Management and Advisory Arrangements" - page
17.
(h) See "Purchase of Shares - Distribution Plans" - page 27.
(i) See "Management of the Fund - Transfer Agency Services" - page 19.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period of:
============================================
1 Year 3 Years 5 Years 10 Years
======== ========= ========= =========
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total Fund
Operating Expenses for each class set forth on page 2, (2) a 5%
annual return throughout the periods and (3) redemption at the end
of the period (including any applicable CDSC for Class B and
Class C shares):
Class A ........................................................ $ 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."
3
<PAGE>
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 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."
4
<PAGE>
<TABLE>
<CAPTION>
Account
Maintenance Distribution
Class Sales Charge(1) Fee Fee Conversion Feature
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(2)(3)
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(4) eight years(5)
C 1.0% CDSC for one year(6) 0.25% 0.75% No
D Maximum 5.25% initial 0.25% No No
sales charge(3)
</TABLE>
- --------
(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. A 0.75% charge for
401(k) purchases over $1,000,000 will apply. 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."
5
<PAGE>
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% and
an ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class B shares, as well as a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with certain fee-based programs. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in
the exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
Automatic conversion of Class B shares into Class D shares will occur at
least once each month on the basis of the relative net asset values of
the shares of the two classes on the conversion date, without the
imposition of any sales load, fee or other charge. Conversion of Class B
shares to Class D shares will not be deemed a purchase or sale of the
shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares and the conversion and holding periods for certain
retirement plans are modified as described under "Purchase of Shares -
Deferred Sales Charge Alternatives - Class B and Class C Shares -
Conversion of Class B Shares to Class D Shares."
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 after purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B shares), Class C shares have no
conversion feature and, accordingly, an investor that purchases Class C
shares will be subject to distribution fees that will be imposed on
Class C shares for an indefinite period subject to annual approval by
the Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D shares
are not subject to an ongoing distribution fee or any CDSC when they are
redeemed. The maximum initial sales charge 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. A 0.75% sales charge for
401(k) purchases over $1,000,000 will apply. 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."
6
<PAGE>
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 CDSCs imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares
of other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation 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>
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, 1998 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,
===========================================================
1998 ++ 1997 ++ 1996 1995
============== ============== ============== ==============
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
Per Share Operating
Performance:
Net asset value, beginning of year... $ 31.39 $ 30.90 $ 27.74 $ 27.46
----------- ---------- ---------- ----------
Investment income - net ............. 1.11 1.25 1.21 1.01
Realized and unrealized gain on
investments and foreign
currency transactions - net ........ 8.14 2.43 5.41 1.77
----------- ---------- ---------- ----------
Total from investment operations..... 9.25 3.68 6.62 2.78
----------- ---------- ---------- ----------
Less dividends and distributions:
Investment income - net ............ ( 1.11) ( 1.25) ( 1.16) ( .94)
Realized gain on
investments - net ................. ( 1.97) ( 1.94) ( 2.30) ( 1.56)
----------- ---------- ---------- ----------
Total dividends and distributions ... ( 3.08) ( 3.19) ( 3.46) ( 2.50)
----------- ---------- ---------- ----------
Net asset value, end of year ........ $ 37.56 $ 31.39 $ 30.90 $ 27.74
=========== ========== ========== ==========
Total Investment Return:*
Based on net asset value per share... 30.71% 12.62% 24.50% 10.95%
=========== ========== ========== ==========
Ratios To Average Net Assets:
Expenses ............................ .55% .55% .56% .57%
=========== ========== ========== ==========
Investment income - net ............. 3.21% 3.99% 4.09% 3.81%
=========== ========== ========== ==========
Supplemental Data:
Net assets, end of year (in
thousands) ......................... $4,155,677 $3,291,219 $3,225,758 $2,507,767
========== ========== ========== ==========
Portfolio turnover .................. 38% 47% 84% 89%
========== ========== ========== ==========
Average commission rate paid + ...... $ .0478 $ .0432 $ .0382 -
========== ========== ========== ==========
<CAPTION>
Class A
====================================================================================
For the Year Ended March 31,
====================================================================================
1994 1993 1992 1991 1990 1989
============== ============== ============== ============== ============ ===========
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset
Value:
Per Share Operating
Performance:
Net asset value, beginning of year... $ 27.89 $ 26.90 $ 25.38 $ 23.65 $ 22.33 $ 21.32
---------- ---------- ---------- ---------- -------- --------
Investment income - net ............. .97 .87 1.02 1.17 1.11 1.07
Realized and unrealized gain on
investments and foreign
currency transactions - net ........ .50 1.99 2.12 2.24 2.03 1.69
---------- --------- ---------- ---------- -------- --------
Total from investment operations..... 1.47 2.86 3.14 3.41 3.14 2.76
---------- --------- ---------- ---------- -------- --------
Less dividends and distributions:
Investment income - net ............ ( .95) ( .87) ( 1.02) ( 1.14) ( 1.10) ( .73)
Realized gain on
investments - net ................. ( .95) ( 1.00) ( .60) ( .54) ( .72) ( 1.02)
---------- ---------- ---------- ---------- -------- --------
Total dividends and distributions ... ( 1.90) ( 1.87) ( 1.62) ( 1.68) ( 1.82) ( 1.75)
---------- ---------- ---------- ---------- -------- --------
Net asset value, end of year ........ $ 27.46 $ 27.89 $ 26.90 $ 25.38 $ 23.65 $ 22.33
========== ========== ========== ========== ======== ========
Total Investment Return:*
Based on net asset value per share... 5.39% 11.33% 12.96% 15.17% 14.04% 13.42%
========== ========== ========== ========== ======== ========
Ratios To Average Net Assets:
Expenses ............................ .53% .55% .56% .58% .60% .64%
========== ========== ========== ========== ======== ========
Investment income - net ............. 3.52% 3.56% 4.21% 5.13% 4.80% 4.79%
========== ========== ========== ========== ======== ========
Supplemental Data:
Net assets, end of year (in
thousands) ......................... $2,237,492 $2,056,023 $1,533,530 $1,083,741 $866,924 $678,958
========== ========== ========== ========== ======== ========
Portfolio turnover .................. 86% 55% 59% 86% 85% 63%
========== ========== ========== ========== ======== ========
Average commission rate paid + ...... - - - - - -
========== ========== ========== ========== ======== ========
</TABLE>
- --------
* Total investment returns exclude the effects 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.
8
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
Class B
=======================================================
For the Year Ended March 31,
=======================================================
1998 ++ 1997 ++ 1996 1995
============ =========== ========= ==========
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period ........ $ 30.72 $ 30.30 $ 27.28 $ 27.04
----------- ---------- ---------- -----------
Investment income - net ..................... .74 .91 .90 .74
Realized and unrealized gain on
investments and foreign currency
transactions - net ......................... 7.96 2.39 5.29 1.72
----------- ---------- ---------- ----------
Total from investment operations ............ 8.70 3.30 6.19 2.46
----------- ---------- ---------- ----------
Less dividends and distributions:
Investment income - net .................... ( .77) ( .94) ( .87) ( .66)
Realized gain on investments - net ......... ( 1.97) ( 1.94) ( 2.30) ( 1.56)
----------- ---------- ---------- ----------
Total dividends and distributions ........... ( 2.74) ( 2.88) ( 3.17) ( 2.22)
----------- ---------- ---------- ----------
Net asset value, end of period .............. $ 36.68 $ 30.72 $ 30.30 $ 27.28
=========== ========== ========== ==========
Total Investment Return:**
Based on net asset value per share .......... 29.38% 11.48% 23.22% 9.81%
=========== ========== ========== ==========
Ratios To Average Net Assets:
Expenses .................................... 1.57% 1.57% 1.58% 1.59%
=========== ========== ========== ==========
Investment income - net ..................... 2.19% 2.97% 3.07% 2.79%
=========== ========== ========== ==========
Supplemental Data:
Net assets, end of period (in thousands)..... $5,938,708 $4,977,431 $5,025,504 $3,664,250
=========== ========== ========== ==========
Portfolio turnover .......................... 38% 47% 84% 89%
=========== ========== ========== ==========
Average commission rate paid +++ .......... $ .0478 $ .0432 $ .0382 -
=========== ========== ========== ==========
<CAPTION>
Class B
==============================================================================
For the Year Ended March 31,
==============================================================================
1994 1993 1992 1991 1990 1989 +
========== ========== ========== ======== ======== =========
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period ........ $ 27.49 $ 26.58 $ 25.14 $ 23.46 $ 22.27 $ 22.64
---------- ---------- ---------- -------- -------- ---------
Investment income - net ..................... .70 .65 .80 .96 .91 .22
Realized and unrealized gain on
investments and foreign currency
transactions - net ......................... .48 1.89 2.05 2.19 1.96 .72
---------- ---------- --------- -------- -------- ---------
Total from investment operations ............ 1.18 2.54 2.85 3.15 2.87 .94
---------- ---------- --------- -------- -------- ---------
Less dividends and distributions:
Investment income - net .................... ( .68) ( .63) ( .81) ( .93) ( .96) ( .54)
Realized gain on investments - net ......... ( .95) ( 1.00) ( .60) ( .54) ( .72) ( .77)
---------- ---------- ---------- -------- -------- -------
Total dividends and distributions ........... ( 1.63) ( 1.63) ( 1.41) ( 1.47) ( 1.68) ( 1.31)
---------- ---------- ---------- -------- -------- -------
Net asset value, end of period .............. $ 27.04 $ 27.49 $ 26.58 $ 25.14 $ 23.46 $ 22.27
========== ========== ========== ======== ======== =========
Total Investment Return:**
Based on net asset value per share .......... 4.36% 10.16% 11.81% 14.03% 12.84% 4.42%#
========== ========== ========== ======== ======== =========
Ratios To Average Net Assets:
Expenses .................................... 1.55% 1.56% 1.58% 1.60% 1.62% 1.70%*
========== ========== ========== ======== ======== =========
Investment income - net ..................... 2.50% 2.53% 3.14% 4.11% 3.72% 4.43%*
========== ========== ========== ======== ======== =========
Supplemental Data:
Net assets, end of period (in thousands)..... $3,079,332 $2,694,774 $1,582,065 $620,842 $365,773 $ 32,254
========== ========== ========== ======== ======== =========
Portfolio turnover .......................... 86% 55% 59% 86% 85% 63%
========== ========== ========== ======== ======== =========
Average commission rate paid +++ .......... - - - - - -
========== ========== ========== ======== ======== =========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class B shares commenced operations on October 21, 1988.
++ Based on average shares outstanding.
+++ 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>
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
Class C
=========================================================
For the Year Ended
March 31, For the Period
====================================== October 21,
1994 + to
March 31,
1998 +++ 1997 +++ 1996 1995
========= ========== ========= ==================
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period .................. $ 30.44 $ 30.08 $ 27.17 $ 26.81
--------- --------- --------- ----------
Investment income - net ............................... .73 .90 .92 .49
Realized and unrealized gain on investments and foreign
currency transactions - net .......................... 7.89 2.36 5.24 1.03
--------- --------- --------- ----------
Total from investment operations ...................... 8.62 3.26 6.16 1.52
--------- --------- --------- ----------
Less dividends and distributions:
Investment income - net .............................. (.78) ( .96) ( .95) ( .43)
Realized gain on investments - net ................... (1.97) ( 1.94) ( 2.30) ( .73)
--------- --------- --------- ----------
Total dividends and distributions ..................... ( 2.75) ( 2.90) ( 3.25) ( 1.16)
--------- --------- --------- ----------
Net asset value, end of period ........................ $ 36.31 $ 30.44 $ 30.08 $ 27.17
========= ========= ========= ==========
Total Investment Return:**
Based on net asset value per share .................... 29.40% 11.45% 23.25% 6.07%++
========= ========= ========= ==========
Ratios To Average Net Assets:
Expenses .............................................. 1.58% 1.58% 1.59% 1.64%*
========= ========= ========= ==========
Investment income - net ............................... 2.18% 2.96% 3.08% 3.22%*
========= ========= ========= ==========
Supplemental Data:
Net assets, end of period (in thousands) .............. $ 512,783 $ 322,438 $ 259,131 $ 46,902
========= ========= ========= ==========
Portfolio turnover .................................... 38% 47% 84% 89%
========= ========= ========= ==========
Average commission rate paid # ........................ $ .0478 $ .0432 $ .0382 -
========= ========= ========= ==========
<CAPTION>
Class D
========================================================
For the Period
For the Year Ended October 21,
March 31, 1994 + to
=================================== March 31,
1998 +++ 1997 +++ 1996 1995
========== ========= ========= ==================
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period .................. $ 31.34 $ 30.86 $ 27.72 $ 27.27
---------- --------- --------- ----------
Investment income - net ............................... 1.02 1.17 1.16 .48
Realized and unrealized gain on investments and foreign
currency transactions - net .......................... 8.14 2.43 5.38 1.15
---------- --------- --------- ----------
Total from investment operations ...................... 9.16 3.60 6.54 1.63
---------- --------- --------- ----------
Less dividends and distributions:
Investment income - net .............................. ( 1.04) ( 1.18) ( 1.10) ( .45)
Realized gain on investments - net ................... ( 1.97) ( 1.94) ( 2.30) ( .73)
---------- --------- --------- ----------
Total dividends and distributions ..................... ( 3.01) ( 3.12) ( 3.40) ( 1.18)
---------- --------- --------- ----------
Net asset value, end of period ........................ $ 37.49 $ 31.34 $ 30.86 $ 27.72
========== ========= ========= ==========
Total Investment Return:**
Based on net asset value per share .................... 30.40% 12.34% 24.21% 6.42%++
========== ========= ========= ==========
Ratios To Average Net Assets:
Expenses .............................................. .80% .80% .81% .87%*
========== ========= ========= ==========
Investment income - net ............................... 2.95% 3.75% 3.84% 3.94%*
========== ========= ========= ==========
Supplemental Data:
Net assets, end of period (in thousands) .............. $1,280,317 $ 690,116 $ 521,599 $ 171,201
========== ========= ========= ==========
Portfolio turnover .................................... 38% 47% 84% 89%
========== ========= ========= ==========
Average commission rate paid # ........................ $ .0478 $ .0432 $ .0382 -
========== ========= ========= ==========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Aggregate total investment return.
+++ Based on average shares outstanding.
# 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>
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
11
<PAGE>
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 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, 1998,
approximately 63.3% 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
12
<PAGE>
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.
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
13
<PAGE>
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.
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.
Foreign Currency Hedging. The Fund may deal in forward foreign exchange
among currencies of the different countries in which it will invest and
multinational currency units as a hedge against possible variations in the
foreign exchange rates among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date (up to one year) and price set at the time of the contract. The
Fund's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of
shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency.
The Fund will not speculate in forward foreign exchange. The Fund may purchase
or sell listed or over-the-counter ("OTC") foreign currency options, foreign
currency futures and related options on foreign currency futures as a short or
long hedge against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-U.S. dollar
denominated securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
14
<PAGE>
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the rights to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade of
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities that it has committed
to, or anticipates it will, purchase that are denominated in such currency, and
in the case of securities that have been sold by the Fund but not yet
delivered, the proceeds thereof in its denominated currency. The Fund may not
incur potential net liabilities of more than [25%] of its total assets from
foreign currency options, futures or related options.
Risk Factors in Currency Hedging Transactions. Utilization of options and
futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the prices of the currencies that are the subject of the hedge. If the price of
the options or futures moves more or less than the price of the currencies, the
Fund will experience a gain or loss that will not be completely offset by
movements in the price of the currencies. The successful use of currency hedging
transactions also depends on the Investment Adviser's ability to predict
correctly price movements in the market involved in a particular options or
futures transaction.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Investment Adviser believes the Fund can receive on each business day at least
two independent bids or offers. There can be no assurance, however, that a
liquid secondary market will exist at any specific time. Thus, it may not be
possible to close an options or futures position. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its portfolio. There is also the risk of loss by
the Fund of margin deposits or collateral in the event of the bankruptcy of a
broker with whom the Fund has an open position in an option, a futures contract
or related option.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission (the "CFTC") applicable to the Fund
provide that the futures trading activities described herein will not result in
the Fund being deemed a "commodity pool," under such regulations if the Fund
adheres to certain restrictions. In particular, the Fund may purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's Custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
insuring that the use of such futures contract is unleveraged.
15
<PAGE>
Restrictions on OTC Options. The Fund will engage in OTC foreign currency
options and options on foreign currency futures. The Fund will acquire only
those OTC options (i) if the agreement pursuant to which the option is
purchased contains a formula price at which the option may be terminated or
sold or (ii) for which the Investment Adviser anticipates the Fund can receive
on each business day at least two independent bids or offers, unless a
quotation from only one dealer is available, in which case that dealer's
quotation may be used.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options (including OTC options on
futures contracts) if, as a result of such transaction, the sum of the market
value of OTC options currently outstanding that are held by the Fund, the
market value of the underlying securities covered by OTC call options currently
outstanding that were sold by the Fund and margin deposits on the Fund's
existing OTC options on futures contracts exceed 15% of the total assets of the
Fund, taken at market value, together with all other assets of the Fund that
are illiquid or are not otherwise readily marketable. However, if the OTC
option is sold by the Fund to a primary United States Government securities
dealer recognized by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer
at a predetermined price, then the Fund will treat as illiquid such amount of
the underlying securities as is equal to the repurchase price less the amount
by which the option is "in-the-money" (i.e., current market value of the
underlying security minus the option's strike price). The repurchase price with
the primary dealers is typically a formula price that is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Directors of the Fund without the
approval of the Fund's shareholders. However, the Fund will not change or
modify this policy prior to the change of modification by the Commission staff
of its position.
Other Investments and Risk. The Fund may from time to time be invested in
non-dollar-denominated securities of foreign issuers. Changes in foreign
currency exchange rates may affect the value of securities in the portfolio
and the unrealized appreciation or depreciation of investments insofar as
United States investors are concerned. Furthermore, the Fund's return on
investments in non-dollar-denominated securities may be reduced or enhanced as
a result of changes in foreign currency rates during the period in which the
Fund holds such investments.
16
<PAGE>
MANAGEMENT OF THE FUND
Board of Directors
The Board of Directors of the Fund consists of seven individuals, six 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* - Chairman of MLAM and its affiliate, Fund Asset
Management, L.P. ("FAM"); Chairman and Director of Princeton Services, Inc.
("Princeton Services"); and Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.").
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).
FRED G. WEISS - Managing Director of FGW Associates and Director of Noven
Corporation (a pharmaceutical company).
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
Management and Advisory Arrangements
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, acts as the
investment adviser for the Fund and provides the Fund with management and
investment advisory services. The Asset Management Group of ML & Co. (which
includes the Investment Adviser) acts as the investment adviser for more than
100 registered investment companies and provides investment advisory services
to individual and institutional accounts. As of May 1998, the Asset Management
Group had a total of approximately $489 billion in investment company and other
portfolio assets under management. This amount includes assets managed for
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 supervision 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.
17
<PAGE>
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,
1998, the Investment Adviser earned a fee of $41,894,654 (based upon average
net assets of approximately $10.4 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. For fiscal year ended
March 31, 1998, the Investment Adviser paid no fees to MLAM U.K. pursuant to
such agreement.
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, 1998, 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.
Kurt Schansinger has been the Senior Portfolio Manager of the Fund since
April 1996, a First Vice President of the Investment Adviser since November 1997
and was a Vice President of the Investment Adviser from January 1996 until
November 1997. From January 1996 until April 1996, Mr. Schansinger served as
Associate Portfolio Manager of the Fund and was a Senior Vice President of
Oppenheimer Capital L.P. prior thereto. Walter Cuje is the Associate Portfolio
Manager of the Fund. Mr. Cuje has been an Associate Portfolio Manager of the
Fund since October 1993, a Director of the Investment Adviser since 1997 and was
a Vice President thereof from July 1991 to November 1997.
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.
18
<PAGE>
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
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. Additionally, a $.20
monthly closed account charge will be assessed on all accounts that close
during the calendar year. Application of this fee will commence the month
following the month the account is closed. At the end of the calendar year, no
further fees will be due. For the 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, 1998, the total fee paid by the Fund to the
Transfer Agent was $14,747,964.
PURCHASE OF SHARES
The Distributor, an affiliate of each of the Investment Adviser, FAM and
Merrill Lynch, acts as the distributor of shares of the Fund. Shares of the
Fund are offered continuously for sale by the Distributor and other eligible
securities dealers (including Merrill Lynch). Shares of the Fund may be
purchased from securities dealers or by mailing a purchase order directly to
the Transfer Agent. The minimum initial purchase is $1,000, and the minimum
subsequent purchase is $50, except that for retirement plans, the minimum
initial purchase is $100, and the minimum subsequent purchase is $1 and for
participants in certain fee-based programs, the minimum initial purchase is
$250 and the minimum subsequent purchase is $50.
19
<PAGE>
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 4.
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. The proceeds from the account maintenance fees are used to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for
providing continuing account maintenance activities. 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
20
<PAGE>
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote 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>
<CAPTION>
Account
Maintenance Distribution
Class Sales Charge(1) Fee Fee Conversion Feature
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(2)(3)
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(4) eight years(5)
C 1.0% CDSC for one year(6) 0.25% 0.75% No
D Maximum 5.25% initial 0.25% No No
sales charge(3)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge Alternatives
- Class A and Class D Shares - Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may
not be subject to an initial sales charge but instead may be subject to a
1.0% CDSC if redeemed within one year. Such CDSC may be waived in
connection with certain fee-based programs. A 0.75% sales charge for
401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares, certain retirement
plans and certain fee-based programs was modified. Also, Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made
have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will
be tacked onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
21
<PAGE>
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 Sales Load Discount to
as Percentage* as Percentage* Selected Dealers
of Offering of the Net as Percentage* of the
Amount of Purchase Price Amount Invested 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 participants in connection with certain fee-based programs.
If the sales charge is waived in connection with a purchase of $1,000,000
or more, such 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, 1998, the Fund sold 18,254,019 of
its Class A shares for aggregate net proceeds to the Fund of $634,543,940. The
gross sales charges for the sale of Class A shares of the Fund for the year
were $553,366, of which $43,421 and $509,945 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, 1998, the Fund sold 9,630,431 of
its Class D shares for aggregate net proceeds to the Fund of $333,114,038. The
gross sales charges for the sale of Class D shares of the Fund for the year
were $2,040,769, of which $137,456 and $1,903,313 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.
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
22
<PAGE>
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 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.
23
<PAGE>
Deferred Sales Charge Alternatives - Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately eight years after Class B shares
are issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, 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 the Distributor and Merrill Lynch (pursuant to a sub-agreement)
for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so
that the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor to defray the
expenses of dealers (including Merrill Lynch) related to providing
distribution-related services to the Fund in connection with the sale of Class
B and Class C shares, such as the payment of compensation to financial
consultants for selling Class B and Class C shares, from the dealers' own
funds. The combination of the CDSC and the ongoing distribution fee facilitates
the ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares of the
Fund, which are subject to 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. Class B shareholders of the
Fund exercising the exchange privilege described under "Shareholder Services -
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
Contingent Deferred Sales Charges - Class B Shares. Class B shares that
are redeemed within four years of purchase may be subject to a CDSC at the
rates set forth below charged as a percentage of the dollar amount subject
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly,
no CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
24
<PAGE>
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
Class B CDSC
as a Percentage
Year Since Purchase of Dollar Amount
Payment Made Subject to 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, 1998, the Distributor received CDSCs
of $5,594,029 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the Distributor may have
been waived or converted to a contingent obligation in connection with
a shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible 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 (the "Code")) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans and in connection with certain group
plans 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 Information. The terms of the CDSC may be modified
in connection with certain fee-based programs. See "Shareholder Services -
Fee-Based Programs."
25
<PAGE>
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, 1998, the Distributor
received CDSCs of $91,818 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 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.
26
<PAGE>
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, 1998, the Fund paid the Distributor
$53,880,781 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $5.4
billion), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended March 31, 1998, the Fund paid the
Distributor $3,866,998 pursuant to the Class C Distribution Plan (based on
average daily net assets
27
<PAGE>
subject to such Class C Distribution Plan of approximately $386.7 million),
all of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C
shares. For the fiscal year ended March 31, 1998, the Fund paid the
Distributor $2,351,416 pursuant to the Class D Distribution Plan (based on
average daily net assets subject to such Class D Distribution Plan of
approximately $940.6 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, 1997, for Class B shares, fully allocated accrual
revenues incurred by the Distributor and Merrill Lynch exceeded fully allocated
accrual expenses for such period by approximately $14,130,000 (.24% of Class B
net assets at that date). As of March 31, 1998, for Class B shares, direct cash
revenues for the period since commencement of operations exceeded direct cash
expenses for such period by $178,032,573 (2.99% of Class B net assets at that
date). As of March 31, 1998, for Class C shares, fully allocated accrual
expenses for the period since October 21, 1994 (commencement of operations)
exceeded fully allocated accrual revenues by $767,000 (.14% of Class C net
assets at that date). As of March 31, 1998, for Class C shares, direct cash
revenues for the period since October 21, 1994 (commencement of operations)
exceeded direct cash expenses by $5,735,756 (1.07% 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."
28
<PAGE>
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,
29
<PAGE>
the existence and validity of which may be verified by the Transfer Agent
through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents, such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent, payment
will be mailed within seven days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment 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 Fund's 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 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.
30
<PAGE>
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.
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.
31
<PAGE>
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 the 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.
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.
32
<PAGE>
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 both
dividends and capital gains distributions, paid in cash rather than reinvested,
in which event payment will be mailed on or about the payment date (provided
that, in the event that a payment on an account maintained at the Transfer
Agent would amount to $10.00 or less, a shareholder will not receive such
payment in cash and such payment will automatically be reinvested in additional
shares.) The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distributions or redemption checks. 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 shareholder may elect to receive systematic withdrawal payments from his
or her Investment Account in the form of payments by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis. A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program, subject to certain conditions. With respect to redemptions
of Class B and Class C shares pursuant to a systematic withdrawal plan, the
maximum number of Class B or Class C shares that can be redeemed from an account
annually shall not exceed 10% of the value of shares of such class in that
account at the time the election to join the systematic withdrawal plan was
made. Any CDSC that otherwise might be due on such redemption of Class B or
Class C shares will be waived. Shares redeemed pursuant to a systematic
withdrawal plan will be redeemed in the same order as Class B or Class C shares
are otherwise redeemed. See "Purchase of Shares - Deferred Sales Charge
Alternatives - Class B and Class C Shares - Contingent Deferred Sales Charges -
Class B Shares" and " - Contingent Deferred Sales Charges - Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. See "Purchase of Shares - Deferred Sales Charge Alternatives - Class B
and Class C Shares - Conversion of Class B Shares to Class D Shares."
Automatic Investment Plans
Regular additions of Class A, Class B, Class C or Class D shares may be
made to an investor's Investment Account by 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.
33
<PAGE>
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 another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.
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.
34
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B
and Class C shares, and the maximum sales charge in the case of Class A and
Class D shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance fees, distribution charges and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that class.
The Fund will include performance data for all classes of shares of the Fund in
any advertisement or information including performance data of the Fund.
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.
35
<PAGE>
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.
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 capital gains, if any, will be distributed to the Fund's
shareholders annually after the close of the Fund's fiscal year. The per share
dividends and distributions on each class of shares will be reduced as a result
of any account maintenance, distribution and higher 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 year. Capital gains
distributions will be automatically reinvested in shares unless the shareholder
elects to receive such distributions in cash.
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, 1998, the Fund paid $3,755 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
36
<PAGE>
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.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Long positions in securities traded in the OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Short positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation.
Securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books
of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Any assets or liabilities expressed in terms of
foreign currencies are translated into U.S. dollars at the prevailing market
rates as obtained from one or more dealers. 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 futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.
37
<PAGE>
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income
dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. If the Fund pays
a dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax
under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the United
States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to
a 31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options generally will be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each 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.
38
<PAGE>
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state
and local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
Organization of the Fund
The Fund, a diversified, open-end investment company, was organized in
Maryland on July 29, 1987 and is a successor to a Delaware corporation that was
organized under the name Lionel D. Edie Capital Fund, Inc. in September 1973
and changed its name to Merrill Lynch Capital Fund, Inc. in June 1976. It has
an authorized capital of 1,200,000,000 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/or
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.
39
<PAGE>
Year 2000 Issues
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by the Manager or other Fund service
providers do not properly address this problem prior to January 1, 2000. The
Manager has established a dedicated group to analyze these issues and to
implement any systems modifications necessary to prepare for the Year 2000.
Currently, the Manager does not anticipate that the transition to the 21st
Century will have any material impact on its ability to continue to service the
Fund at current levels. In addition, the Manager has sought assurances from the
Fund's other service providers that they are taking all necessary steps to
ensure that their computer systems will accurately reflect the Year 2000, and
the Manager will continue to monitor the situation. At this time, however, no
assurance can be given that the Fund's other service providers have anticipated
every step necessary to avoid any adverse effect on the Fund attributable to
the Year 2000 Problem.
Shareholder Reports
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and/or mutual fund account numbers. If you have any questions
regarding this, please call your Merrill Lynch Financial Consultant or Merrill
Lynch Financial Data Services, Inc. at 800-637-3863.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
40
<PAGE>
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.
2.
3.
4.
5.
6.
Name
First Name Initial Last Name
Name of Co-Owner (if any) ................................................
First Name Initial Last Name
Address................................................................ ..
(Zip Code)
Date................................................................... ..
Occupation............................................................. ..
Signature of Owner
Name and Address of Employer........................................... ..
Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
2. Dividend and Capital Gain Distribution Options
Ordinary Income Dividends
Select [ ] Reinvest
One: [ ] Cash
Long-Term Capital Gains
Select [ ] Reinvest
One: [ ] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
If cash, specify how you would like your distributions paid to you: [ ] Check
or [ ] Direct Deposit to bank account
If direct deposit to bank account is selected, please complete below:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch 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>
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.
Signature of Owner Signature of Co-Owner (if
any)
4. Letter of Intention - Class A and Class D shares only (See terms and
conditions in the Statement
of Additional Information)
Date of initial purchase , 19............
Dear Sir/Madam:
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 the 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.
By:.................................................................... ..
Signature of Co-Owner
..........................................................................
Signature of Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related accounts
on which reduced offering
prices are to apply:
(1) Name........................ (2) Name
Account Number....................... Account Number.......................
5. For Dealer Only
Branch Office, Address, Stamp
- ----
----
- ----
----
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, FL 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
F/C Last Name
Branch-Code F/C No.
Dealer's Customer A/C No.
A-2
<PAGE>
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
(Please Print)
Name................................................................... ..
First Name Initial Last Name
Social Security No.
or Taxpayer Identification Number
Name of Co-Owner (if any).................................................
First Name Initial Last Name
Address...................................................................
(Zip Code)
Account Number...............
(if existing account)
2. Systematic Withdrawal Plan (See terms and conditions in the Statement of
Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for quarterly,
of [ ] Class A, [ ] Class B*, [ ] Class C* or [ ] Class D shares in Merrill
Lynch 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 withdrawal on ------ or as soon as possible
thereafter.
(month)
Specify the amount of the withdrawal you would like paid to you: [ ] $------
of (check one): [ ] Class A, [ ] Class
B*, [ ] Class C* or
[ ] Class D shares in the account.
Specify withdrawal method: [ ] check or [ ] direct deposit to bank account
(check one and complete part (a) or (b) below):
Draw checks payable (check one)
(a) I hereby authorize payment by check
[ ] as indicated in Item 1.
[ ] to the order of............................................... ..
Mail to (check one)
[ ] the address indicated in Item 1.
[ ] Name (please print)........................................... ..
Address................................................................ ..
Signature of Owner................................... Date................
Signature of Co-Owner (if any)......................................... ..
(b) I hereby authorize payment by direct deposit to bank account and, if
necessary, debit entries and adjustments for any credit entries made to my
account. I agree that this authorization will remain in effect until I provide
written notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account................................................... ..
Bank Name.............................................................. ..
Account Number............................................................
Bank Address........................................................... ..
Signature of Depositor....................................................
Signature of Depositor................................................. ..
(If joint account, both must sign)
Note: If direct deposit is elected, your blank, unsigned check marked "VOID" or
a deposit slip from your savings account should accompany this application.
*Annual withdrawal cannot exceed 10% of the value of shares of such class held
in the account at the time the election to join the Systematic Withdrawal Plan
is made.
A-3
<PAGE>
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 Signature of Depositor 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 Number Signature of Depositor
(If joint account, both must sign)
Note: If Automatic Investment Plan is elected, your blank, unsigned check
marked "VOID" should accompany this application.
A-4
<PAGE>
[This page intentionally left blank.]
<PAGE>
[This page intentionally left blank.]
<PAGE>
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>
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 .............. 4
Financial Highlights ............................. 8
Investment Objective and Policies ................ 11
Management of the Fund ........................... 17
Board of Directors ............................ 17
Management and Advisory Arrangements .......... 17
Code of Ethics ................................ 18
Transfer Agency Services ...................... 19
Purchase of Shares ............................... 19
Initial Sales Charge Alternatives - Class A and
Class D Shares ............................. 22
Deferred Sales Charge Alternatives - Class B
and Class C Shares ......................... 24
Distribution Plans ............................ 27
Limitations on the Payment of Deferred
Sales Charges .............................. 29
Redemption of Shares ............................. 29
Redemption .................................... 29
Repurchase .................................... 30
Reinstatement Privilege - Class A and
Class D Shares ............................. 30
Shareholder Services ............................. 31
Investment Account ............................ 31
Exchange Privilege ............................ 31
Automatic Reinvestment of Dividends and
Capital Gains Distributions ................ 33
Systematic Withdrawal Plans ................... 33
Automatic Investment Plans .................... 33
Fee-Based Programs ............................ 34
Portfolio Transactions and Brokerage ............. 34
Performance Data ................................. 35
Additional Information ........................... 36
Dividends and Distributions ................... 36
Determination of Net Asset Value .............. 36
Taxes ......................................... 37
Organization of the Fund ...................... 39
Year 2000 Issues .............................. 40
Shareholder Reports ........................... 40
Shareholder Inquiries ......................... 40
Authorization Form ............................... A-1
</TABLE>
Code #10044-0798
(Merrill Lynch logo appears here)
Merrill Lynch
Capital Fund, Inc.
Prospectus
July 2, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference
<PAGE>
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, 1998, approximately 63% 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
2, 1998 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing 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 2, 1998.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to achieve the highest total
investment return consistent with prudent risk through a fully managed
investment policy utilizing equity, debt (including money market) and
convertible securities. Reference is made to "Investment Objective and
Policies" in the Prospectus for a discussion of the investment objective and
policies of the Fund.
Portfolio Turnover. The rate of portfolio turnover is not a limiting
factor and, given the Fund's investment policies, it is anticipated that there
may be periods when high portfolio turnover will exist. The use of covered call
options at times when the underlying securities are appreciating in value may
result in higher portfolio turnover. The Fund pays brokerage commissions in
connection with writing call options and effecting closing purchase
transactions, as well as in connection with purchases and sales of portfolio
securities. Although the Fund anticipates that its annual portfolio turnover
rate should not exceed 100%, the turnover rate may vary greatly from year to
year or during periods within a year. A high rate of portfolio turnover results
in correspondingly greater brokerage commission expenses. The portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales
or purchases of portfolio securities (exclusive of purchases or sales of all
securities with maturities at the time of acquisition of one year or less) by
the monthly average value of the securities in the portfolio during the year.
The portfolio turnover rate for each of the fiscal years ended March 31, 1997
and 1998 was 47% and 38%, respectively.
Investment Restrictions. In addition to the investment policies and
restrictions set forth in the Prospectus, the Fund has adopted a number of
fundamental and non-fundamental investment policies and restrictions. The
fundamental policies and restrictions set forth below may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting shares, which for this purpose means the lesser of (a) 67% of the shares
represented at a meeting where more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares. Unless otherwise
provided, all references to the assets of the Fund below are in terms of
current market value. The Fund may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as amended
(the "Investment Company Act").
2. Invest more than 25% of its total assets, taken at market value, in
the securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
2
<PAGE>
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.
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 Investment Adviser, 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
3
<PAGE>
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
New York Stock Exchange("NYSE".) A call option gives the purchaser of an option
the right to buy, and obligates the writer (seller) to sell, the underlying
security at the exercise price during the option period. The option period
normally ranges from three to nine months from the date the option is written.
For writing an option, the Fund receives a premium, which is the price of such
an option on the exchange on which it is traded. The exercise price of the
option may be below, equal to or above the current market value of the
underlying security at the time the option is written.
The writer may terminate its obligation prior to the expiration date of
the option by executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in ownership of an option. A closing purchase
transaction ordinarily will be effected to realize a profit on an outstanding
call option, to prevent an underlying security from being called, to permit the
sale of the underlying security or to permit the writing of a new call option
containing different terms on such underlying
4
<PAGE>
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.
Foreign Currency Hedging. Generally, the foreign exchange transactions of
the Fund will be conducted on a spot (i.e., cash basis), at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. The
Fund may deal in forward foreign exchange among currencies of the different
countries in which it may invest as a hedge against possible variations in the
foreign exchange rate among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, the sale and redemption of shares of the Fund or the
payment of dividends and distributions by the Fund. Position hedging is the
sale of forward foreign currency with respect to portfolio security positions
denominated or quoted in such foreign currency. The Fund will not speculate in
forward foreign exchange. The Fund may not position hedge with respect to the
currency of a particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in its portfolio
denominated or quoted in that particular foreign currency. The Fund will enter
into such transactions only to the extent, if any, deemed appropriate by the
Investment Adviser. The Fund will not enter into a forward contract with a term
of more than one year.
The Fund may purchase or sell listed over-the-counter ("OTC") foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. dollars of an investment in a pound sterling denominated
security. In such circumstances, for example, the Fund may purchase a foreign
currency put option enabling it to sell a specified amount of pounds for
dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the pound relative to the dollar will tend
to be offset by an increase in the value of the put option. To offset in whole
or part the cost of acquiring such a put option, the Fund may also sell a call
option which, if exercised, requires it to sell a specified amount of pounds
for dollars at a specified price by a future date (a technique called a
"straddle"). By selling such call option in this illustration, the Fund gives
up the opportunity to profit without limit from increases in the relative value
of the pound to the dollar. The Investment Adviser believes that "straddles" of
the type which may be utilized by the Fund constitute hedging transactions and
are consistent with the policies described above.
5
<PAGE>
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange
usually are conducted on a principal basis, no fees or commissions are
involved.
Risk Factors in Currency Hedging Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
prices of options and futures and movements in the prices of the currencies
which are the subject of the hedge. If the prices of the options and futures
move more or less than the prices of the hedged currencies, the Fund will
experience a gain or loss which will not be completely offset by movements in
the prices of the currencies which are the subject of the hedge. The successful
currency hedging transactions also depends on the Investment Adviser's ability
to predict correctly price movements in the market involved in a particular
options or futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into options or futures
transactions on an exchange only if there appears to be a liquid secondary
market for such options or futures. However, there can be no assurance that a
liquid secondary market will exist for any particular call or put option or
futures contract at any specific time. Thus, it may not be possible to close an
option or futures position. The Fund will acquire only OTC options for which
management believes the Fund can receive on each business day at least two
independent bids or offers. In the case of a futures position or an option on a
futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security underlying futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. The risk of loss from investing in futures transactions is
theoretically unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying currency (whether or not covered) that may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number of contracts that
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Fund's portfolio.
Mortgage-Backed Securities. Mortgage-backed securities include mortgage
pass-through certificates and multiple-class pass-through securities, such as
REMIC pass-through certificates, CMOs and stripped mortgage-backed securities,
and other types of mortgage-backed securities that may be available in the
future.
6
<PAGE>
The Fund may invest in guaranteed mortgage pass-through securities which
represent participation interests in pools of residential mortgage loans and
which are issued by United States governmental lenders or by private lenders
and guaranteed by the United States Government or one of its agencies or
instrumentalities, including but not limited to the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
In general, Ginnie Mae certificates are guaranteed by the full faith and credit
of the United States Government for timely payment of principal and interest on
the certificates. Fannie Mae certificates are generally guaranteed by Fannie
Mae, a federally chartered and privately-owned corporation for full and timely
payment of scheduled principal and interest on the certificates. In general,
Freddie Mac certificates are guaranteed by Freddie Mac, a corporate
instrumentality of the United States Government, for timely payment of interest
and the ultimate collection of all principal of the related mortgage loans.
Mortgage-backed securities also include CMOs and REMIC pass-through or
participation certificates, which may be issued by, among others, United States
Government agencies and instrumentalities as well as private lenders. CMOs and
REMIC certificates are issued in multiple classes and the principal of and
interest on the mortgage assets may be allocated among the several classes of
CMOs or REMIC certificates in various ways. Each class of CMOs or REMIC
certificates, often referred to as a "tranche," is issued at a specified
adjustable or fixed interest rate and must be fully retired no later than its
final distribution date. Generally, interest is paid or accrues on all classes
of CMOs or REMIC certificates on a monthly basis. The Fund will not invest in
the lowest tranche of CMOs and REMIC certificates.
Typically, CMOs are collateralized by Ginnie Mae or Freddie Mac
certificates but also may be collateralized by other mortgage assets such as
whole loans or private mortgage pass-through securities. Debt service on CMOs
is provided from payments of principal and interest on collateral of mortgage
assets and any reinvestment income thereon.
A REMIC is a pool of assets that qualifies for special tax treatment under
the Code and consists of certain mortgages or deeds of trust primarily secured
by interests in real property and other permitted investments. Investors may
purchase "regular" and "residual" interests in REMIC trusts although the Fund
does not intend to invest in "residual interests."
Investing in mortgage-backed securities involves certain unique risks in
addition to those generally associated with investing in the real estate
industry in general. These unique risks include the failure of a party to meet
its commitments under the related operative documents, adverse interest rate
changes and the effects of prepayments on mortgage cash flows.
Risks Associated with Mortgage-Backed Securities. The Fund may invest up to
35% of its total assets in mortgage-backed securities. These risks include the
failure of a party to meet its commitments under the related operative
documents, adverse interest rate changes and the effects of prepayments on
mortgage cash flows. When interest rates decline, the value of an investment in
fixed rate obligations can be expected to rise. Conversely, when interest rates
rise, the value of an investment in fixed rate obligations can be expected to
decline. In contrast, since interest rates on adjustable rate mortgage loans are
reset periodically, yields on investments in such loans will gradually align
themselves to reflect changes in market interest rates, causing the value of
such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
Further, the yield characteristics of mortgage-backed securities, such as
those in which the Fund may invest, differ from those of traditional
fixed-income securities. The major differences typically include more frequent
7
<PAGE>
interest and principal payments (usually monthly), the adjustability of
interest rates, and the possibility that prepayments of principal may be made
substantially earlier than their stated final distribution dates.
Prepayment rates on mortgage loans are influenced by changes in current
interest rates and a variety of economic, geographic, social and other factors,
and cannot be predicted with certainty. Both adjustable rate mortgage loans and
fixed rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment and to a lesser rate of
principal prepayments in an increasing interest rate environment. Early payment
associated with mortgage-backed securities causes these securities to
experience significantly greater price and yield volatility than that
experienced by traditional fixed-income securities. Under certain interest rate
and prepayment rate scenarios, the Fund may fail to recoup fully its investment
in mortgage-backed securities notwithstanding any direct or indirect
governmental or agency guarantee. When the Fund reinvests amounts representing
payments and unscheduled prepayments of principal of the mortgage-backed
securities, it may receive a rate of interest that is lower than the rate on
existing mortgage-backed securities. Thus, mortgage-backed securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of fixed income securities as a means of "locking
in" interest rates.
Foreign Government Debt Securities. The Funds may invest in debt
securities issued by foreign governments. Investments in foreign government
debt securities, particularly those of emerging market country governments,
involve special risks. Certain emerging market countries have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
balance of payments and trade difficulties and extreme poverty and
unemployment. The issuer or governmental authority that controls the repayment
of an emerging market country's debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt. A
debtor's willingness or ability to repay principal and interest due in a timely
manner may be affected by, among other factors, its cash flow situation, and,
in the case of a government debtor, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole and the
political constraints to which a government debtor may be subject. Government
debtors may default on their debt and may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others abroad
to reduce principal and interest arrearages on their debt. Holders of
government debt, including the Fund, may be requested to participate in the
rescheduling of such debt and to extend further loans to government debtors.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued
in the courts of the defaulting party itself, and the ability of the holder of
foreign government debt securities to obtain recourse may be subject to the
political climate in the relevant country. Government obligors in developing
and emerging market countries are among the world's largest debtors to
commercial banks, other governments, international financial organizations and
other financial institutions. Some issuers of the government debt securities in
which a Fund may invest have in the past experienced substantial difficulties
in servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit
agreements.
Other Investments and Risk. The Fund may from time to time be invested in
non-dollar-denominated securities of foreign issuers. Changes in foreign
currency exchange rates may affect the value of securities in the portfolio and
the unrealized appreciation or depreciation of investments insofar as United
States investors are concerned.
8
<PAGE>
Furthermore, the Fund's return on investments in non-dollar-denominated
securities may be reduced or enhanced as a result of changes in foreign currency
rates during the period in which the Fund holds such investments.
The Fund may engage in transactions, such as currency swaps and purchasing
and selling options on currencies, for purposes of hedging against the decline
in the value of currencies in which its portfolio holdings are denominated
against the US dollar. Although such instruments will be used with the
intention of hedging against adverse currency movements, transactions in such
instruments involve the risk that anticipated currency movements will not be
accurately predicted and that the Fund's hedging strategies will be ineffective
and may cause the Fund to realize losses.
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.
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
9
<PAGE>
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.
MANAGEMENT OF THE FUND
Directors and Officers
Information about the Directors, executive officers and portfolio manager
of the Fund, including their ages and their principal occupations for at least
the last five years, is set forth below. Unless otherwise noted, the address of
each executive officer and Director and the portfolio manager is c/o P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) - President and Director (1)(2) - Chairman of the
Investment Adviser and Fund Asset Management, L.P. ("FAM") (which terms, as
used herein, include their corporate predecessors) since 1997; President of the
Investment Adviser and FAM from 1977 to 1997; Chairman of Princeton Services,
Inc. ("Princeton Services") since 1997 and Director thereof since 1993;
President of Princeton Services from 1993 to 1997; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
DONALD CECIL (71) - Director (2) - 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
M. COLYER CRUM (66) - Director (2) - 104 Westcliff Road, Weston,
Massachusetts 02193. 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 (71) - Director (2) - 777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors
10
<PAGE>
since 1972; Director of The May Department Stores Company, Bowne & Co., Inc.
(financial printers), Ethan Allen Interiors, Inc. and Harman International
Industries, Inc.
JACK B. SUNDERLAND (69) - 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 (59) - Director (2) - Suite 3405, One Tampa City
Center, Tampa, Florida 33602. Managing Partner of The Witt-Touchton Company and
its predecessor The Witt Co. (a private investment partnership) since 1972;
Trustee Emeritus of Washington and Lee University; Director of TECO Energy,
Inc. (an electric utility holding company).
FRED G. WEISS (56) - Director (2) - 5141 Via de Amalfi Drive, Boca Raton,
Florida 33496. Managing Director of FGW Associates since 1997; Vice President,
Planning Investment, and Development of Warner Lambert Co. from 1979 to 1997;
Director of Noven Corporation (a pharmaceutical company) since 1997.
TERRY K. GLENN (57) - Executive Vice President (1)(2) - Executive Vice
President of the Investment Adviser and FAM since 1983; President of Merrill
Lynch Funds Distributor, Inc. (the "Distributor") since 1986 and Director
thereof since 1991; Executive Vice President and Director of Princeton Services
since 1993; President of Princeton Administrators, L.P. since 1988.
NORMAN R. HARVEY (64) - Senior Vice President (1)(2) - Senior Vice
President of the Investment Adviser and FAM since 1982; Senior Vice President
of Princeton Services since 1993.
KURT V. SCHANSINGER (38) - Senior Vice President (1) - First Vice President
of the Investment Adviser since 1997; Vice President of the Investment Adviser
from 1996 to 1997; Prior thereto, Senior Vice President of Oppenheimer Capital
L.P.
WALTER CUJE (39) - Vice President (1) - Director of the Investment Adviser
since 1997; Vice President of the Investment Adviser from 1991 to 1997.
GERALD M. RICHARD (49) - 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.
DONALD C. BURKE (38) - Vice President (1)(2) - First Vice President of the
Investment Adviser since 1997; Vice President of the Investment Adviser from
1990 to 1997; Director of Taxation of the Investment Adviser since 1990.
THOMAS D. JONES, III (33) - Secretary (1)(2) - Vice President of the
Investment Adviser since 1998; Attorney with the Investment Adviser since 1992.
- --------
(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 May 31, 1998, the Directors and officers of the Fund as a group (14
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.
11
<PAGE>
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 $47,273 for the fiscal year ended March 31, 1998.
The following table sets forth, for the fiscal year ended March 31, 1998,
compensation paid by the Fund to the non-affiliated Directors and, for the
calendar year ended December 31, 1997, the aggregate compensation paid by all
registered investment companies advised by MLAM and its affiliate, FAM
("MLAM/FAM Advised Funds"), to the non-affiliated Directors.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from Fund and
Aggregate Benefits Accrued MLAM/FAM Advised
Compensation as Part of Funds Paid to
Name of Trustee from Fund Fund Expenses Directors
=============================== ============== ================== =================
<S> <C> <C> <C>
Donald Cecil(1) ............... $9,000 None $275,850
M. Colyer Crum(1) ............. $8,000 None $115,600
Edward H. Meyer(1) ............ $8,000 None $222,100
Jack B. Sunderland(1) ......... $8,000 None $132,600
J. Thomas Touchton(1) ......... $8,000 None $132,600
Fred G. Weiss(1)(2) ........... $6,000 None $ -
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (33 registered investment companies consisting of 33 portfolios),
Mr. Crum (15 registered investment companies consisting of 15 portfolios),
Mr. Meyer (33 registered investment companies consisting of 33
portfolios), Mr. Sunderland (18 registered investment companies consisting
of 30 portfolios), Mr. Touchton (18 registered investment companies
consisting of 30 portfolios) and Mr. Weiss (15 registered investment
companies consisting of 15 portfolios).
(2) Mr. Weiss was elected a Director of the Fund on February 3, 1998.
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, 1996, 1997 and 1998, the
advisory fees paid by the Fund to the Investment Adviser totaled $31,428,894,
$37,585,806 and $41,894,654, respectively.
12
<PAGE>
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, 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. For the fiscal year ended
March 31, 1998, the Investment Adviser paid no fees to MLAM U.K. pursuant to
this arrangement.
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. Similarly,
the following entities may be considered "controlling persons" of MLAM U.K.:
Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch
International Holdings, Inc., a subsidiary of Merrill Lynch International,
Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein,
the Investment Advisory Agreement and the Sub-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
13
<PAGE>
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.
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 years ended March 31, 1996, 1997 and 1998 the gross sales
charges for the sale of Class A shares of the Fund were $1,218,807, $621,183 and
$553,366, respectively, of which $81,332, $41,749 and $43,411, respectively were
received by the Distributor and $1,167,475, $579,434 and $509,945, respectively
were received by Merrill Lynch. For such periods 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
years ended March 31, 1996, 1997 and 1998 the gross sales charges for the sale
of Class D shares of the Fund were $3,786,103, $2,108,587 and $2,040,769,
respectively, of which $247,249, $144,815 and $137,456, respectively were
received by the Distributor and $3,538,854, $1,963,772, and $1,903,313,
respectively were received by Merrill Lynch. The Distributor received CDSCs
which were de minimus for the fiscal year ended March 31, 1996 and $1,986 and
$986 for the fiscal years ended March 31, 1997 and 1998, respectively, 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."
14
<PAGE>
The term "purchase" as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his 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 on the right
of accumulation, the purchaser will be entitled on that purchase and subsequent
purchases
15
<PAGE>
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 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
16
<PAGE>
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 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
17
<PAGE>
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.
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.
18
<PAGE>
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 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,
1998 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares, the Distributor's voluntary maximum.
19
<PAGE>
Data Calculated as of March 31, 1998 (in Thousands)
<TABLE>
<CAPTION>
Allowable
Aggregate Interest on
Eligible Gross Sales Unpaid
Sales(1) Charges Balance(2)
================ =========== =============
<S> <C> <C> <C>
Class B, for the period October 21, 1998
(commencement of operations) to
March 31, 1998:
Under NASD Rule as Adopted ................. $5,982,406 $373,900 $97,610
Under Distributor's Voluntary Waiver ....... $5,982,406 $373,900 $29,912
Class C, for the period October 21, 1994
(commencement of operations) to
March 31, 1998:
Under NASD Rule as Adopted ................. $ 544,707 $ 34,044 $ 5,145
<CAPTION>
Annual
Distribution
Amounts Fee at
Maximum Previously Aggregate Current
Amount Paid to Unpaid Net Asset
Payable Distributor(3) Balance Level(4)
=========== ================ =========== =============
<S> <C> <C> <C> <C>
Class B, for the period October 21, 1998
(commencement of operations) to
March 31, 1998:
Under NASD Rule as Adopted ................. $471,510 $217,792 $253,718 $44,540
Under Distributor's Voluntary Waiver ....... $403,812 $217,792 $186,020 $44,540
Class C, for the period October 21, 1994
(commencement of operations) to
March 31, 1998:
Under NASD Rule as Adopted ................. $ 39,189 $ 6,692 $ 32,497 $ 3,846
</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. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares
in conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFA (SM)) program (the "MFA program").
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA program. See "Purchase of
Shares - Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
the Class B shares, the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to receive payment with respect to any redemption of shares may
be suspended by the Fund for a period of up to seven days. Suspensions of more
than seven days may not be made except (1) for any period (a) during which the
NYSE is closed other than customary weekend and holiday closings or (b) during
which trading on the NYSE is restricted; (2) for any period during which an
emergency exists as a result of which (a) disposal by the Fund of securities
owned by it is not reasonably practicable or (b) it is not reasonably
practicable for the Fund fairly to determine the value of its net assets; or
(3) for such other periods as the Commission may by order permit for the
protection of security holders of the Fund. The Commission shall by 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.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on market value of the securities held by the
Fund at any such time.
20
<PAGE>
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, 1996, 1997 and 1998, the Distributor received CDSCs of $4,025,586,
$6,950,823 and $5,994,029, respectively, with respect to redemptions of Class B
shares, all of which were paid to Merrill Lynch. Additional CDSCs payable to
the Distributor with respect to redemptions of Class B shares during the fiscal
years ended December 31, 1996, 1997 and 1998 may have been waived or converted
to a contingent obligation in connection with a shareholder's participation in
certain fee-based programs. For the fiscal years ended March 31, 1996, 1997 and
1998, the Distributor received CDSCs of $75,917, $202,197 and $91,818,
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 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
21
<PAGE>
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, 1998, the Fund paid brokerage
commissions of $5,117,527 of which $279,047, or 5.45% was paid to Merrill Lynch
for effecting 6.88% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. 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.
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 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
22
<PAGE>
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, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. The Fund also will determine its net asset
value on any day in which there is sufficient trading in its portfolio
securities that the net asset value might be materially affected, but only if
on any such day the Fund is required to sell or redeem shares. The net asset
value per share is computed by dividing the sum of the value of the securities
held by the Fund plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the investment advisory fees
and any account maintenance and/or distribution fees, are accrued daily. The
per share net asset value of Class B, Class C and Class D shares generally will
be lower than the per share net asset value of Class A shares reflecting the
daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover the per share net asset value of Class B
and Class C shares generally will be lower than the per share net asset value
of Class D shares reflecting the daily expense accruals of the distribution
fees and higher transfer agency fees applicable with respect to Class B and
Class C shares of the Fund. It is expected, however, that the per share net
asset value of the four classes will tend to converge (although not necessarily
meet) immediately after the payment of dividends or distributions, which will
differ by approximately the amount of the expense accrual differentials between
the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Long positions in securities traded in the OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Short positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books
of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price.
23
<PAGE>
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 capital gains distributions.
A shareholder may make additions to his or her Investment Account at any time
by mailing a check directly to the Transfer Agent.
Share certificates are issued only for full shares and only on the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A shares from Merrill
Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the Class A or Class D shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class
B or Class C shares from Merrill Lynch and who do not wish to have an
Investment Account maintained for such shares at the Transfer Agent may request
their new brokerage firm to maintain such shares in an account registered in
the name of the brokerage firm for the benefit of the shareholder at the
Transfer Agent. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he or she be
issued certificates for his or her shares, and then must turn the certificates
over to the new firm for re-registration as described in the preceding
sentence. Shareholders considering transferring a tax-deferred retirement
account such as an individual retirement account from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the retirement account is to be transferred will not take delivery of
shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the 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.
24
<PAGE>
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
(provided that, in the event that a payment in an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder will not receive
such payment in cash and such payment will automatically be reinvested in
additional shares).
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained by Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if the shareholder's account
is maintained by the Transfer Agent that they no longer wish to have their
dividends and/or 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. The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
Systematic Withdrawal Plans
A shareholder may elect to make withdrawals from an Investment Account of
Class A, Class B, Class C or Class D shares in the form of payments by check or
through automatic payment by direct deposit on either a monthly or quarterly
basis as provided below. Quarterly withdrawals are available for shareholders
who have acquired shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more and monthly withdrawals are available
for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed
from those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and class of shares to be redeemed. 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 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
25
<PAGE>
be made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all shares in the
Investment Account are reinvested automatically in shares of the Fund. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Fund, the Transfer Agent or the
Distributor. Withdrawal payments should not be considered as dividends, yield
or income. A withdrawal may be a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be reduced correspondingly. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for shares of the Fund from investors who maintain a Systematic Withdrawal Plan
unless such purchase is equal to at least one year's scheduled withdrawals or
$1,200, whichever is greater. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals.
A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the shareholder's
account three business days after the date the shares are redeemed. All
redemptions are made at net asset value. A shareholder may elect to have his or
her shares redeemed on the first, second, third or fourth Monday of each month,
in the case of monthly redemptions, or of every other month in the case of
bimonthly redemptions. For quarterly, semiannual or annual redemptions, the
shareholder may select the month in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
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.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
the Class B or Class C shares are otherwise redeemed. See "Purchase of Shares -
Deferred Sales Charge Alternatives - Class B and Class C Shares - Contingent
Deferred Sales Charges - Class B Shares" and " - Contingent Deferred Sales
Charges - Class C Shares" in the Prospectus. Where the systematic withdrawal
plan is applied to Class B shares, upon conversion of the last Class B shares
in an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See "Purchase of Shares
- - Deferred Sales Charge Alternatives - Class B and Class C Shares - Conversion
of Class B Shares to Class D Shares" in the Prospectus.
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
26
<PAGE>
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.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares -
Deferred Sales Charge Alternatives - Class B and Class C Shares - Contingent
Deferred Sales Charges - Class B Shares" and " - Contingent Deferred Sales
Charges - Class C Shares" in the Prospectus. Where the systematic withdrawal
plan is applied to Class B shares, upon conversion of the last Class B shares
is an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See "Purchase of Shares
- - Deferred Sales Charge Alternatives - Class B and Class C Shares - Conversion
of Class B Shares to Class D Shares" in the Prospectus; if an investor wishes
to change the amount being withdrawn in a systematic withdrawal plan the
investor should contact his or her Financial Consultant.
Retirement Plans
Individual retirement accounts and other retirement plans are available
from Merrill Lynch. Under these plans, investments may be made in the Fund and
in certain of the other mutual funds sponsored by Merrill Lynch as well as in
other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100 and the minimum subsequent purchase is $1.
27
<PAGE>
Capital gains and ordinary income received in each of the plans referred
to above are exempt from Federal taxation until distributed from the plans.
Different tax rules apply to Roth IRA plans. Investors considering
participation in any retirement 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.
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.
28
<PAGE>
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.
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.
29
<PAGE>
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 futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Recent legislation creates additional
categories of capital gains taxable at different rates. Generally not later
than 60 days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amounts of any ordinary
income dividends or capital gain dividends, as well as the amount of capital
gain dividends in the different categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income
dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. 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
30
<PAGE>
purposes as being paid by the Fund and received by its shareholders on December
31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax
under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the United
States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to
a 31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis
in the Class D shares acquired will be the same as such shareholder's basis in
the Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period of the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge such
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to 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 and distribute income
before amounts due under the obligations are paid. In addition, a portion of
the interest payments on such high yield/high risk securities may be treated as
dividends for Federal income tax purposes; in such case, if the issuer of such
high yield/high risk securities is a domestic corporation, dividend
31
<PAGE>
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, Futures and Forward Foreign Exchange Transactions
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is a non-equity
option or a regulated futures contract for a non-U.S. currency for which the
Fund elects to have gain or loss treated as ordinary gain or loss under Code
Section 988 (as described below), gain or loss from Section 1256 contracts will
be 60% long-term and 40% short-term capital gain or loss. Application of these
rules to Section 1256 contracts held by the Fund may alter the timing and
character of distributions to shareholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will
be marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward exchange contracts. Under Section 1092, the Fund may be required to
postpone recognition for tax purposes of losses incurred in certain sales of
securities and certain closing transactions in options.
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. Regulated
futures contracts, as described above, will be taxed under Code Section 1256
unless application of Section 988 is elected by the Fund. In general, however,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary income dividend distributions, and all
or a portion of distributions made before the losses were realized but in the
same taxable year generally would be recharacterized as a return of capital to
shareholders, thereby reducing the basis of each
32
<PAGE>
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than such shareholder's basis in Fund
shares (assuming the shares were held as a capital asset). These rules and the
mark-to-market rules described above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of currency
fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state
and local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return
and other total return data in advertisements or information furnished to
present or prospective shareholders. Total return figures are based on the
Fund's historical performance and are not intended to indicate future
performance. Average annual total return is determined separately for Class A,
Class B, Class C and Class D shares in accordance with the formula specified by
the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charge, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return 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.
33
<PAGE>
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
============================== ==============================
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at
$1,000 the end of $1,000 the end of
Period investment the period investment the period
============================== ============== =============== ============== ===============
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ending March 31,
1998 ........................ 23.85% $ 1,238.50 25.38% $ 1,253.80
Five Years Ending March 31,
1998 ........................ 15.22% $ 2,030.40 15.29% $ 2,036.80
Ten Years Ending March 31,
1998 ........................ 14.29% $ 3,803.80
Inception (October 21, 1988)
to March 31, 1998* .......... 13.74% $ 3,370.70
Inception (October 21, 1994)
to March 31, 1998** .........
<CAPTION>
Class C Shares Class D Shares
============================== =============================
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at
$1,000 the end of $1,000 the end of
Period investment the period investment the period
============================== ============== =============== ============== ==============
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ending March 31,
1998 ........................ 28.40% $ 1,284.00 23.55% $ 1,235.50
Five Years Ending March 31,
1998 ........................
Ten Years Ending March 31,
1998 ........................
Inception (October 21, 1988)
to March 31, 1998* ..........
Inception (October 21, 1994)
to March 31, 1998** ......... 20.23% $ 1,885.40 19.29% $ 1,834.70
</TABLE>
<TABLE>
<S> <C>
Class A Shares Class B Shares Class C Shares Class D Shares
============================== ============================== ============================== =============================
Expressed Redeemable Expressed Redeemable Expressed Redeemable Expressed Redeemable
as a value of a as a value of a as a value of a as a value of a
percentage hypothetical percentage hypothetical percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000 based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at hypothetical investment at hypothetical investment at
$1,000 the end of $1,000 the end of $1,000 the end of $1,000 the end of
investment the period investment the period investment the period investment the period
============== =============== ============== =============== ============== =============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Annual Total Return
(excluding maximum applicable sales charges)
Year Ended
March 31,
=============
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 ....... 30.71% $ 1,307.10 29.38% $ 1,293.80 29.40% $ 1,294.00 30.40% $ 1,304.00
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>
34
<PAGE>
<TABLE>
<CAPTION>
Class A Shares Class B Shares
============================== ==============================
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at
$1,000 the end of $1,000 the end of
Period investment the period investment the period
====================== ============== =============== ============== ===============
<S> <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** ..............
<CAPTION>
Class C Shares Class D Shares
============================== =============================
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at
$1,000 the end of $1,000 the end of
Period investment the period investment the period
====================== ============== =============== ============== ==============
<S> <C> <C> <C> <C>
Inception (November 8,
1973) to March 31,
1974 ................
Inception (October 21,
1988) to March 31,
1989* ...............
Inception (October 21,
1994) to March 31,
1995** .............. 6.07% $ 1,060.70 6.42% $ 1,064.20
</TABLE>
<TABLE>
Class A Shares Class B Shares
============================== ==============================
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at
$1,000 the end of $1,000 the end of
investment the period investment the period
============== =============== ============== ===============
<CAPTION>
Aggregate Total Return
(including maximum applicable sales charges)
<S> <C>
Inception (November 8, 1973)
to March 31, 1998 ........... 2,076.85% $ 21,768.50
Inception (October 21, 1988)
to March 31, 1998* .......... 237.07% $ 3,370.70
Inception (October 21, 1994)
to March 31, 1998** .........
<CAPTION>
Aggregate Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Class C Shares Class D Shares
============================== =============================
Expressed Redeemable Expressed Redeemable
as a value of a as a value of a
percentage hypothetical percentage hypothetical
based on a $1,000 based on a $1,000
hypothetical investment at hypothetical investment at
$1,000 the end of $1,000 the end of
investment the period investment the period
============== =============== ============== ==============
Inception (November 8, 1973)
to March 31, 1998 ...........
Inception (October 21, 1988)
to March 31, 1998* ..........
Inception (October 21, 1994)
to March 31, 1998** ......... 88.54% $ 1,885.40 83.47% $ 1,834.70
</TABLE>
- --------
* Information as to Class B shares is presented only for the period October 21,
1988 to March 31, 1998. 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, 1998. 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 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
35
<PAGE>
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, 1998, is set
forth below:
<TABLE>
<CAPTION>
Class A
===================
<S> <C>
Net Assets ............................................... $ 4,155,677,231
===============
Number of Shares Outstanding ............................. 110,643,239
===============
Net Asset Value per Share (net assets divided by number of
shares outstanding) ..................................... $ 37.56
Sales Charge for Class A and Class D
Shares: 5.25% of offering price (5.54% of net amount
invested*) .............................................. 2.08
---------------
Offering Price ........................................... $ 39.64
===============
<CAPTION>
Class B Class C Class D
=================== ================= ===================
<S> <C> <C> <C>
Net Assets ............................................... $ 5,938,708,616 $ 512,782,732 $ 1,280,316,815
=============== ============= ===============
Number of Shares Outstanding ............................. 161,887,699 14,124,050 34,155,217
=============== ============= ===============
Net Asset Value per Share (net assets divided by number of
shares outstanding) ..................................... $ 36.68 $ 36.31 $ 37.49
Sales Charge for Class A and Class D
Shares: 5.25% of offering price (5.54% of net amount
invested*) .............................................. ** ** 2.08
---------------- -------------- ---------------
Offering Price ........................................... $ 36.68 $ 36.31 $ 39.57
=============== ============= ===============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes the maximum sales
charge is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC upon redemption. See "Purchase of Shares -
Deferred Sales Charge Alternatives - Class B and Class C Shares" in the
Prospectus and "Redemption of Shares - Deferred Sales Charges - Class B and
Class C Shares" herein.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the 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.
36
<PAGE>
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 May 31, 1998.
37
<PAGE>
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 payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investments. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
38
<PAGE>
Description of Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representations as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act of 1933, as amended.
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers.
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term promissory obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, in assigning ratings
to such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols presented below are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
39
<PAGE>
Preferred stock rating symbols and their definitions are as follows:
"aaa" An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be
questionable over any great length of time.
"ba" An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
"b" An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be small.
"caa" An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
"ca" An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payments.
"c" This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Description of Corporate Debt Ratings of Standard & Poor's Ratings 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.
40
<PAGE>
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.
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.
41
<PAGE>
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 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 having an original maturity of no more than 365 days.
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 designation 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.
42
<PAGE>
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 an 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 payments 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.
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.
43
<PAGE>
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to make payments for a preferred stock in this category than for
issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance,
B as predominately speculative with respect to the issuer's capacity to
CCC 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.
44
<PAGE>
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, 1998, 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, 1998 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, 1998, 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 14, 1998
45
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aerospace 2,400,000 Boeing Co. (The) $ 116,958,469 $ 125,100,000 1.0%
815,000 Lockheed Martin Corporation 69,418,145 91,687,500 0.8
186,376,614 216,787,500 1.8
- ---------------------------------------------------------------------------------------------------------------------
Apparel 2,500,000++ Fruit of the Loom, Inc. (Class A) 70,546,151 76,562,500 0.6
- ---------------------------------------------------------------------------------------------------------------------
Appliances & 2,750,000 Sunbeam Corporation 113,382,466 121,171,875 1.0
Furniture
- ---------------------------------------------------------------------------------------------------------------------
Automobile Parts 1,850,000 Federal-Mogul Corp. 77,609,094 98,396,875 0.8
- ---------------------------------------------------------------------------------------------------------------------
Automotive 1,000,000 General Motors Corp. 44,944,948 67,437,500 0.6
- ---------------------------------------------------------------------------------------------------------------------
Banking 1,000,000 Chase Manhattan Corporation (The) 81,222,073 134,875,000 1.1
- ---------------------------------------------------------------------------------------------------------------------
Building Materials 2,000,000++ American Standard Companies, Inc. 93,322,961 91,750,000 0.8
2,400,000 Masco Corporation 75,254,389 142,800,000 1.2
------------- ------------- ---------
168,577,350 234,550,000 2.0
- ---------------------------------------------------------------------------------------------------------------------
Capital Goods 1,650,000 United Dominion Industries, Ltd. 38,856,970 53,521,875 0.5
Chemicals 1,600,000 du Pont (E.I.) de Nemours and Co. 74,606,947 108,800,000 0.9
2,000,000 Imperial Chemical Industries PLC (ADR)* 100,317,691 143,750,000 1.2
------------- ------------- ---------
174,924,638 252,550,000 2.1
- ---------------------------------------------------------------------------------------------------------------------
Communications 600,000++ Cisco Systems, Inc. 18,761,482 41,025,000 0.3
Equipment
- ---------------------------------------------------------------------------------------------------------------------
Computer Software 1,500,000 Computer Associates International, Inc. 44,432,476 86,625,000 0.7
- ---------------------------------------------------------------------------------------------------------------------
Consumer Electronics 400,000 Nintendo Corp. Ltd. 28,474,285 34,565,675 0.3
- ---------------------------------------------------------------------------------------------------------------------
Diversified 1,100,000 Corning, Inc. 43,667,986 48,675,000 0.4
Companies 310,000 GenCorp Inc. 9,173,452 9,532,500 0.1
1,200,000 Rockwell International Corporation 68,537,356 68,850,000 0.6
2,500,000 Tenneco, Inc. 102,219,111 106,718,750 0.9
10,000,000 Tomkins PLC 44,821,118 60,964,500 0.5
2,000,000 United Technologies Corp. 63,643,951 184,625,000 1.6
1,750,000 Varian Associates, Inc. (a) 93,141,060 96,906,250 0.8
------------- ------------- ---------
425,204,034 576,272,000 4.9
- ---------------------------------------------------------------------------------------------------------------------
Drug Stores 4,300,000 Rite Aid Corp. 68,282,570 147,275,000 1.2
- ---------------------------------------------------------------------------------------------------------------------
Electrical Equipment 1,500,000 Belden Inc. (a) 47,721,621 62,812,500 0.5
1,500,000 General Electric Co. 38,165,328 129,281,250 1.1
1,000,000 Philips Electronics N.V.
(NY Registered Shares) 70,415,130 73,437,500 0.6
------------- ------------- ---------
156,302,079 265,531,250 2.2
- ---------------------------------------------------------------------------------------------------------------------
Electronic 1,500,000 Avnet, Inc. 83,947,762 86,343,750 0.7
Components
- ---------------------------------------------------------------------------------------------------------------------
Financial Services 2,000,000 Federal National Mortgage Association 52,392,099 126,500,000 1.1
1,000,000 Transamerica Corporation 76,009,264 116,500,000 1.0
------------- ------------- ---------
128,401,363 243,000,000 2.1
- ---------------------------------------------------------------------------------------------------------------------
Food & Beverage 2,500,000 Diageo PLC (ADR)* 96,190,207 121,406,250 1.0
- ---------------------------------------------------------------------------------------------------------------------
Foods/Food 75,000 Nestle S.A. (Registered) 78,575,411 143,535,247 1.2
Processing
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Footwear 1,625,000 Nike, Inc. (Class B) $ 76,992,273 $ 71,906,250 0.6%
8,000,000 Yue Yuen Industrial (Holdings Limited) 10,727,086 15,591,120 0.1
------------- ------------- ---------
87,719,359 87,497,370 0.7
- ---------------------------------------------------------------------------------------------------------------------
Hospital Management 3,600,000++ Tenet Healthcare Corp. 52,634,362 130,725,000 1.1
- ---------------------------------------------------------------------------------------------------------------------
Hotels & Casinos 1,800,000++ Sun International Hotels Ltd. 68,687,868 85,275,000 0.7
- ---------------------------------------------------------------------------------------------------------------------
Information Systems 3,500,000 Reynolds & Reynolds Company (Class A) 70,124,940 76,562,500 0.7
- ---------------------------------------------------------------------------------------------------------------------
Insurance 2,300,000 Allstate Corporation 69,292,895 211,456,250 1.8
1,000,000 American International Group, Inc. 46,545,446 125,937,500 1.1
1,800,000 Berkley (W.R.) Corporation (a) 62,155,679 85,275,000 0.7
1,900,000 EXEL Ltd. 41,181,437 147,250,000 1.2
2,000,000 Fremont General Corp. (a) 33,362,385 117,625,000 1.0
2,200,000 Horace Mann Educators Corp. 34,550,993 77,275,000 0.6
2,000,000 Penncorp Financial Group, Inc. (a) 62,850,797 57,750,000 0.5
4,000,000 Provident Companies, Inc. 79,650,937 137,250,000 1.2
1,800,000 TIG Holdings, Inc. 54,108,848 47,362,500 0.4
4,500,000 Travelers Group, Inc. 39,986,618 270,000,000 2.3
------------- ------------- ---------
523,686,035 1,277,181,250 10.8
- ---------------------------------------------------------------------------------------------------------------------
Iron & Steel 1,600,000 Birmingham Steel Corp. (a) 28,005,214 26,200,000 0.2
- ---------------------------------------------------------------------------------------------------------------------
Leisure/Hotels 2,200,000 Carnival Corp. (Class A) 57,830,550 153,450,000 1.3
3,000,000++ Harrah's Entertainment, Inc. 55,543,541 73,687,500 0.6
------------- ------------- ---------
113,374,091 227,137,500 1.9
- ---------------------------------------------------------------------------------------------------------------------
Machinery & Machine 750,000++ SPX Corp. (a) 44,070,962 57,234,375 0.5
Tools
- ---------------------------------------------------------------------------------------------------------------------
Natural Gas 1,650,000 Coastal Corp. 66,552,668 107,456,250 0.9
Suppliers 1,300,000 El Paso Natural Gas Co. 56,192,288 91,731,250 0.8
8,290,000 Williams Companies, Inc. 74,032,333 265,280,000 2.2
------------- ------------- ---------
196,777,289 464,467,500 3.9
- ---------------------------------------------------------------------------------------------------------------------
Oil Field Equipment 210,000 McCormick & Company, Inc. 6,699,376 6,772,500 0.1
- ---------------------------------------------------------------------------------------------------------------------
Oil -- Integrated 1,100,000 Ente Nazionale Idrocarburi S.p.A.
(ENI) (ADR) *54,064,994 74,525,000 0.6
1,100,000 TOTAL S.A.(ADR)* 36,453,868 66,068,750 0.6
2,500,000 Unocal Corporation 95,486,005 96,718,750 0.8
5,000,000 Yacimientos Petroliferos
Fiscales S.A. (YPF) (ADR)* 95,920,616 170,000,000 1.4
------------- ------------- ---------
281,925,483 407,312,500 3.4
- ---------------------------------------------------------------------------------------------------------------------
Oil -- Service 2,500,000 Dresser Industries, Inc. 69,699,584 120,156,250 1.0
- ---------------------------------------------------------------------------------------------------------------------
Paper & Forest 1,900,000 Kimberly-Clark Corp. 95,282,857 95,237,500 0.8
Products 800,000 Temple-Inland, Inc. 36,743,614 49,700,000 0.4
1,641,500 Weyerhaeuser Co. 74,855,268 92,744,750 0.8
------------- ------------- ---------
206,881,739 237,682,250 2.0
- ---------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 2,000,000 Glaxo Wellcome PLC (ADR)* 54,175,864 108,250,000 0.9
50,000 Novartis AG (Registered) 61,610,822 88,627,554 0.8
------------- ------------- ---------
115,786,686 196,877,554 1.7
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Railroads 4,900,000 Kansas City Southern Industries, Inc. $ 74,694,146 $ 215,600,000 1.8%
1,925,000 Union Pacific Corporation 117,418,836 108,160,938 0.9
------------- ------------- ---------
192,112,982 323,760,938 2.7
- ---------------------------------------------------------------------------------------------------------------------
Real Estate 1,000,000 CarrAmerica Realty Corp. 26,832,805 30,000,000 0.3
Investment Trusts 2,600,000 Patriot American Hospitality, Inc. 69,867,303 70,200,000 0.6
1,000,000 Walden Residential Properties, Inc. (a) 20,679,751 25,250,000 0.2
------------- ------------- ---------
117,379,859 125,450,000 1.1
- ---------------------------------------------------------------------------------------------------------------------
Restaurants 2,000,000 McDonald's Corporation 98,086,085 120,000,000 1.0
- ---------------------------------------------------------------------------------------------------------------------
Retail Trade 250,000 Sears, Roebuck and Co. 11,748,382 14,359,375 0.1
3,000,000 Wal-Mart Stores, Inc. 73,541,970 152,437,500 1.3
------------- ------------- ---------
85,290,352 166,796,875 1.4
- ---------------------------------------------------------------------------------------------------------------------
Semiconductors 900,000 Motorola, Inc. 51,015,893 54,562,500 0.5
- ---------------------------------------------------------------------------------------------------------------------
Telecommunications 2,000,000 Frontier Corporation 55,148,100 65,125,000 0.5
600,000 Telecomunicacoes Brasileiras S.A. --
Telebras (ADR)* 51,096,291 77,887,500 0.7
------------- ------------- ---------
106,244,391 143,012,500 1.2
- ---------------------------------------------------------------------------------------------------------------------
Tires & Rubber 2,500,000 Goodyear Tire & Rubber Co. (The) 98,262,526 189,375,000 1.6
- ---------------------------------------------------------------------------------------------------------------------
Total Common Stocks 4,699,477,049 7,525,471,659 63.3
- ---------------------------------------------------------------------------------------------------------------------
Face
Amount Corporate Bonds
- ---------------------------------------------------------------------------------------------------------------------
Aerospace $ 12,500,000 Boeing Co. (The), 6.44% due 12/20/2004 12,560,000 12,546,875 0.1
- ---------------------------------------------------------------------------------------------------------------------
Automotive Hertz Corp.:
10,000,000 7% due 5/01/2002 10,305,500 10,179,800 0.1
25,000,000 6.70% due 6/15/2002 24,815,300 25,203,500 0.2
13,000,000 6% due 1/15/2003 12,891,670 12,733,630 0.1
20,000,000 Hyundai Motor Co., Ltd., 7.60%
due 7/15/2007+++ 19,916,100 15,000,000 0.1
------------- ------------- ---------
67,928,570 63,116,930 0.5
- ---------------------------------------------------------------------------------------------------------------------
Banking 30,000,000 Banco Nacional de Commercio Exterior SNC,
Global Bonds, 7.25% due 2/02/2004 28,187,700 28,650,000 0.2
13,600,000 Banco Rio de la Plata, 8.75% due 12/15/2003 13,751,700 13,974,000 0.1
29,000,000 Bank of Boston Corp., 6.625% due 12/01/2005 27,575,520 29,323,930 0.2
BankAmerica Corp.:
15,000,000 6.875% due 6/01/2003 14,149,050 15,378,300 0.1
30,000,000 6.75% due 9/15/2005 29,591,750 30,637,800 0.3
Chase Manhattan Corporation (The):
15,000,000 6.50% due 8/01/2005 14,552,850 15,053,550 0.1
15,000,000 6.25% due 1/15/2006 13,892,250 14,849,400 0.1
20,000,000 First Security Corp., 7% due 7/15/2005 19,803,850 20,662,060 0.2
30,000,000 First Union Corp., 6.55% due 10/15/2035 29,953,350 30,504,300 0.3
` 22,750,000 Firstbank Puerto Rico, 7.625% due 12/20/2005 22,140,802 23,363,841 0.2
10,000,000 Great Western Financial Corp., 6.375%
due 7/01/2000 9,998,800 10,020,200 0.1
Household Bank:
10,000,000 6.87% due 5/15/2001 9,868,800 10,158,090 0.1
20,000,000 6.875% due 3/17/2003 19,886,200 20,464,200 0.2
10,300,000 6.50% due 7/15/2003 10,202,253 10,344,187 0.1
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Banking NationsBank Corp.:
(concluded) $ 40,000,000 5.60% due 2/07/2001 $ 40,000,000 $ 39,533,600 0.3%
10,000,000 6.20% due 8/15/2003 9,670,360 10,015,300 0.1
25,000,000 6.50% due 8/15/2003 22,104,200 25,199,500 0.2
25,500,000 PNC Funding Corp., 6.125% due 9/01/2003 24,922,025 25,147,335 0.2
20,000,000 People's Bank -- Bridgeport, 7.20%
due 12/01/2006 19,956,700 20,493,400 0.2
26,000,000 Provident Bank, 6.375% due 1/15/2004 25,287,430 26,034,580 0.2
Union Planters Corp.:
20,000,000 6.25% due 11/01/2003 18,756,100 19,906,000 0.2
12,500,000 6.75% due 11/01/2005 12,001,875 12,634,625 0.1
------------- ------------- ---------
436,253,565 452,348,198 3.8
- ---------------------------------------------------------------------------------------------------------------------
Beverages 22,000,000 Coca-Cola Femsa S.A., 8.95% due 11/01/2006 21,984,595 23,224,476 0.2
10,000,000 Panamerican Beverages, Inc., 7.25% due
7/01/2009+++ 10,037,500 9,825,000 0.1
------------- ------------- ---------
32,022,095 33,049,476 0.3
- ---------------------------------------------------------------------------------------------------------------------
Broadcasting 20,000,000 British Sky Broadcasting Group PLC,
7.30% due 10/15/2006 20,037,440 20,712,000 0.2
Cable 10,000,000 Comcast Cable Communications, Inc.,
8.125% due 5/01/2004 9,991,000 10,758,600 0.1
Chemicals 8,000,000 Airgas, Inc., 7.14% due 3/08/2004 8,000,000 8,331,120 0.1
37,000,000 Lyondell Petrochemical Company, 6.50%
due 2/15/2006 35,447,015 36,518,260 0.3
40,000,000 Union Carbide Corp., 6.79% due 6/01/2025 40,292,500 40,234,000 0.3
------------- ------------- ---------
83,739,515 85,083,380 0.7
- ---------------------------------------------------------------------------------------------------------------------
Computers 15,000,000 Digital Equipment Corp., 8.625%
due 11/01/2012 17,050,650 17,254,200 0.2
- ---------------------------------------------------------------------------------------------------------------------
Consumer Services Loewen Group, Inc.:
16,000,000 6.70% due 10/01/1999 15,970,340 16,067,296 0.1
20,000,000 8.25% due 10/15/2003+++ 20,208,132 21,242,580 0.2
------------- ------------- ---------
36,178,472 37,309,876 0.3
- ---------------------------------------------------------------------------------------------------------------------
Electronics Tandy Corp.:
20,000,000 6.125% due 1/15/2003 19,971,600 19,821,600 0.2
15,000,000 6.95% due 9/01/2007 14,944,120 15,292,950 0.1
------------- ------------- ---------
34,915,720 35,114,550 0.3
- ---------------------------------------------------------------------------------------------------------------------
Finance 40,000,000 Ford Motor Credit Co., 5.75% due 1/25/2001 39,596,900 39,567,600 0.3
General Motors Acceptance Corp.:
30,000,000 6.375% due 4/04/2000 29,932,500 30,152,940 0.2
55,000,000 5.625% due 2/15/2001 54,450,000 54,331,200 0.5
30,000,000 6.75% due 6/10/2002 29,520,300 30,599,400 0.3
15,000,000 USL Capital Corp., 5.79% due 1/23/2001 14,995,800 14,897,700 0.1
------------- ------------- ---------
168,495,500 169,548,840 1.4
- ---------------------------------------------------------------------------------------------------------------------
Financial Leasing GATX Corp.:
25,000,000 6.875% due 11/01/2004 24,938,000 25,338,000 0.2
25,000,000 6.69% due 11/30/2005 24,984,750 25,437,000 0.2
XTRA Corp.:
20,000,000 6.79% due 8/01/2001 19,945,800 20,388,040 0.2
20,000,000 6.68% due 11/30/2001 20,000,000 20,325,320 0.2
------------- ------------- ---------
89,868,550 91,488,360 0.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Finova Capital Corp.:
Services $ 25,000,000 6.45% due 6/01/2000 $ 24,766,550 $ 25,160,000 0.2%
15,000,000 5.98% due 2/27/2001 14,968,950 14,888,775 0.1
10,000,000 6.56% due 11/15/2002 10,000,000 10,141,200 0.1
McDonnell Douglas Finance Corp.:
7,500,000 6.78% due 12/19/2003 7,497,525 7,610,775 0.1
20,000,000 6.965% due 9/12/2005 20,049,200 20,861,360 0.2
35,000,000 Morgan Stanley Group, Inc., 5.75%
due 2/15/2001 34,968,150 34,703,620 0.3
13,000,000 Norwest Financial, Inc., 6.625%
due 7/15/2004 13,000,000 13,253,240 0.1
Salomon, Inc.:
10,000,000 6.75% due 2/15/2003 9,804,000 10,157,940 0.1
5,000,000 6.875% due 12/15/2003 4,968,500 5,114,525 0.0
Smith Barney Shearson Holdings, Inc.:
25,000,000 6.625% due 7/01/2002 24,994,000 25,336,000 0.2
30,000,000 7% due 3/15/2004 29,927,700 30,801,060 0.3
------------- ------------- ---------
194,944,575 198,028,495 1.7
- ---------------------------------------------------------------------------------------------------------------------
Food & Tobacco Nabisco Inc.:
20,000,000 6.125% due 2/01/2033 19,915,200 19,640,400 0.1
20,000,000 6.375% due 2/01/2035 19,939,200 19,676,000 0.2
------------- ------------- ---------
39,854,400 39,316,400 0.3
- ---------------------------------------------------------------------------------------------------------------------
Foreign Government 10,000,000 Province of Mendoza, 10% due 9/04/2007+++ 9,931,700 9,750,000 0.1
Obligations Republic of Argentina:
45,000,000 8.75% due 7/10/2002 43,707,500 41,428,125 0.4
33,360,000 Floating Rate Brady Bonds, Series L,
6.6875% due 3/31/2005+ 24,661,342 30,774,600 0.3
40,000,000 Global Bonds, 8.375% due 12/20/2003 38,561,250 39,850,000 0.3
20,000,000 Republic of Colombia, Global Bonds, 7.625%
due 2/15/2007 18,825,650 18,850,000 0.2
15,000,000 Republic of Guatemala, 8.50%
due 8/03/2007+++ 15,082,250 14,887,500 0.1
Republic of Turkey+++:
15,000,000 9.875% due 2/23/2005 14,853,700 15,187,500 0.1
40,000,000 10% due 9/19/2007 39,980,625 40,400,000 0.3
50,000,000 United Mexican States, Global Bonds, 8.625%
due 3/12/2008 50,000,000 49,625,000 0.4
------------- ------------- ---------
255,604,017 260,752,725 2.2
- ---------------------------------------------------------------------------------------------------------------------
Hospital Management 34,625,000 Medpartners, Inc., 6.875% due 9/01/2000 34,411,290 34,319,608 0.3
26,500,000 Tenet Healthcare Corp., 8% due 1/15/2005 26,470,375 27,228,750 0.2
------------- ------------- ---------
60,881,665 61,548,358 0.5
- ---------------------------------------------------------------------------------------------------------------------
Industrial Interface, Inc.:
7,800,000 9.50% due 11/15/2005 7,552,000 8,326,500 0.1
8,000,000 7.30% due 4/01/2008 7,999,520 7,999,520 0.1
20,000,000 Reliance Industries Ltd., 8.25% 19,526,999 18,600,000 0.1
due 1/15/2027+++
25,000,000 Triton Energy Ltd., 8.75% due 4/15/2002 25,363,000 25,865,675 0.2
15,000,000 United Refining Co., 10.75% due 6/15/2007 15,000,000 15,750,000 0.1
Williams Holdings of Delaware, Inc.:
20,000,000 6.625% due 11/15/2004 19,908,000 20,113,000 0.2
50,000,000 6.25% due 2/01/2006 49,739,500 49,678,000 0.4
------------- ------------- ---------
145,089,019 146,332,695 1.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Information Reynolds & Reynolds Company:
Systems $ 10,000,000 5.875% due 3/20/2000 $ 9,992,900 $ 9,972,400 0.1%
28,750,000 6.12% due 3/02/2001 28,750,000 28,738,500 0.2
------------- ------------- ---------
38,742,900 38,710,900 0.3
- ---------------------------------------------------------------------------------------------------------------------
Machinery 20,000,000 FMC Corp., 6.375% due 9/01/2003 18,940,800 19,680,800 0.2
22,500,000 Harris Corp., 6.375% due 8/15/2002 22,461,850 22,641,525 0.2
------------- ------------- ---------
41,402,650 42,322,325 0.4
- ---------------------------------------------------------------------------------------------------------------------
Media/Publishing 15,000,000 News American, Inc., 6.75% due 1/09/2038+++ 15,000,000 14,756,250 0.1
- ---------------------------------------------------------------------------------------------------------------------
Natural Gas 27,500,000 Coastal Corp., 6.70% due 2/15/2027 27,225,400 28,690,998 0.3
Suppliers 15,000,000 ENSERCH Corporation, 7.125% due 6/15/2005 15,095,150 15,492,000 0.1
------------- ------------- ---------
42,320,550 44,182,998 0.4
- ---------------------------------------------------------------------------------------------------------------------
Oil -- Integrated 10,000,000 Giant Industries, Inc., 9% due 9/01/2007+++ 10,000,000 10,225,000 0.1
18,375,000 Occidental Petroleum Corp., 6.24% due
11/24/2000 18,135,306 18,416,160 0.1
Perez Companc S.A.+++:
10,000,000 9% due 1/30/2004 10,125,000 10,300,000 0.1
20,500,000 8.125% due 7/15/2007 20,201,470 20,090,000 0.2
Union Texas Petroleum Holdings, Inc.:
23,250,000 6.70% due 11/18/2002 23,190,070 23,598,634 0.2
20,000,000 6.81% due 12/05/2007 20,000,000 20,576,600 0.2
10,000,000 Unocal Corporation, 6.11% due 2/17/2004 10,000,000 9,935,830 0.0
20,000,000 Yacimientos Petroliferos Fiscales S.A. (YPF),
8% due 2/15/2004 18,334,375 20,317,400 0.2
------------- ------------- ---------
129,986,221 133,459,624 1.1
- ---------------------------------------------------------------------------------------------------------------------
Paper & Forest Boise Cascade Corporation:
Products 10,000,000 7.35% due 10/11/2004 10,316,700 10,300,000 0.1
20,000,000 7.66% due 5/27/2005 20,000,000 20,898,200 0.2
25,000,000 Champion International Corp., 6.65%
due 12/15/2037 25,000,000 25,382,500 0.2
------------- ------------- ---------
55,316,700 56,580,700 0.5
- ---------------------------------------------------------------------------------------------------------------------
Real Estate 10,000,000 Franchise Finance Corp. of America, 6.95%
Investment Trusts due 8/29/2007 10,000,000 9,843,190 0.1
- ---------------------------------------------------------------------------------------------------------------------
Telecommunications 10,000,000 Pacific Telecom, Inc., 6.625% due 10/20/2005 10,000,000 10,195,240 0.1
25,000,000 WorldCom, Inc., 7.55% due 4/01/2004 24,958,500 26,349,500 0.2
------------- ------------- ---------
34,958,500 36,544,740 0.3
- ---------------------------------------------------------------------------------------------------------------------
Tires & Rubber 40,000,000 Goodyear Tire & Rubber Co. (The), 6.625%
due 12/01/2006 39,840,000 40,149,200 0.3
- ---------------------------------------------------------------------------------------------------------------------
Transportation 12,500,000 Northwest Airlines Inc., 7.625%
due 3/15/2005 12,471,225 12,421,875 0.1
17,000,000 Transportacion Maritima Mexicana, S.A.
de C.V., 10% due 11/15/2006 17,152,730 17,063,750 0.2
15,000,000 Union Pacific Corp., 6.625% due 2/01/2008 14,776,750 14,784,900 0.1
------------- ------------- ---------
44,400,705 44,270,525 0.4
- ---------------------------------------------------------------------------------------------------------------------
Travel & Lodging Royal Caribbean Cruises Ltd.:
10,000,000 7.125% due 9/18/2002 9,900,050 10,227,700 0.1
10,000,000 7.25% due 8/15/2006 9,854,415 10,273,400 0.1
------------- ------------- ---------
19,754,465 20,501,100 0.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Utilities -- Connecticut Light & Power Co.:
Electric, $ 28,250,000 7.75% due 6/01/2002+++ $ 28,173,725 $ 28,589,847 0.2%
Gas & Water 20,000,000 7.875% due 10/01/2024 20,431,000 20,433,800 0.2
33,000,000 Empresa Nacional de Electricidad S.A.
(Endesa), 7.325% due 2/01/2037 33,065,750 32,885,622 0.3
38,500,000 Enron Corp., 6.75% due 7/01/2005 37,527,310 38,897,705 0.3
20,000,000 Niagara Mohawk Power Corp., 5.875% due
9/01/2002 19,504,200 19,486,600 0.2
17,500,000 Tata Electric Co., 8.50% due 8/19/2017+++ 17,313,775 15,692,250 0.1
------------- ------------- ---------
156,015,760 155,985,824 1.3
- ---------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds 2,333,153,204 2,371,617,334 20.0
- ---------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations
- ---------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.:
9,241,900 6.50% due 5/15/2008 8,831,790 9,054,104 0.1
5,000,000 7% due 8/15/2008 4,762,500 5,042,150 0.0
13,000,000 6% due 2/15/2011 12,020,937 12,593,750 0.1
5,010,000 Federal National Mortgage Association, 6.50%
due 4/25/2008 4,653,037 4,995,909 0.0
- ---------------------------------------------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations 30,268,264 31,685,913 0.2
- ---------------------------------------------------------------------------------------------------------------------
US Government Obligations
- ---------------------------------------------------------------------------------------------------------------------
US Treasury Bonds:
200,000,000 6.25% due 8/15/2023 184,808,984 206,156,000 1.7
75,000,000 6% due 2/15/2026 74,730,469 74,929,500 0.6
US Treasury Notes:
175,000,000 5.875% due 7/31/1999 175,533,203 175,602,000 1.5
200,000,000 5.75% due 8/15/2003 191,405,078 200,718,000 1.7
650,000,000 5.875% due 11/15/2005 634,453,981 655,278,000 5.5
225,000,000 5.625% due 2/15/2006 224,046,875 223,276,500 1.9
- ---------------------------------------------------------------------------------------------------------------------
Total US Government Obligations 1,484,978,590 1,535,960,000 12.9
- ---------------------------------------------------------------------------------------------------------------------
Short-Term Investments
- ---------------------------------------------------------------------------------------------------------------------
Commercial 35,000,000 Associates Corp. of North America, 6.07%
Paper** due 4/01/1998 35,000,000 35,000,000 0.3
25,000,000 BTAB Holdings Funding Corp., 5.65% due
4/21/1998 24,921,528 24,921,528 0.2
25,000,000 CXC Inc., 5.50% due 4/03/1998 24,992,361 24,992,361 0.2
Corporate Asset Funding Co. Inc.:
34,500,000 5.52% due 4/20/1998 34,399,490 34,399,490 0.3
20,000,000 5.52% due 4/22/1998 19,935,600 19,935,600 0.2
20,000,000 Finova Capital Corp., 5.49% due 4/17/1998 19,951,200 19,951,200 0.2
28,771,000 General Motors Acceptance Corp., 6.13%
due 4/01/1998 28,771,000 28,771,000 0.2
Lehman Brothers Holdings Inc.:
40,400,000 5.52% due 4/06/1998 40,369,027 40,369,027 0.3
20,000,000 5.52% due 4/13/1998 19,963,200 19,963,200 0.2
14,700,000 Lexington Parker Capital Co. LLC, 5.48%
due 4/02/1998 14,697,762 14,697,762 0.1
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 12,131,000 Park Avenue Receivables Corp., 5.57%
Paper** due 4/17/1998 $ 12,100,969 $ 12,100,969 0.1%
(concluded) 50,000,000 Riverwoods Funding Corp., 5.53%
due 5/01/1998 49,769,583 49,769,583 0.4
------------- ------------- ---------
324,871,720 324,871,720 2.7
- ---------------------------------------------------------------------------------------------------------------------
US Government 30,000,000 Federal Home Loan Banks, 5.45% due 4/08/1998 29,968,208 29,968,208 0.3
Agency
Obligations**
- ---------------------------------------------------------------------------------------------------------------------
Total Short-Term Investments 354,839,928 354,839,928 3.0
- ---------------------------------------------------------------------------------------------------------------------
Total Investments $8,902,717,035 11,819,574,834 99.4
==============
Other Assets Less Liabilities 67,910,560 0.6
--------------- ------
Net Assets $11,887,485,394 100.0%
=============== ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* American Depositary Receipts (ADR).
** Commercial Paper 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.
+ 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.
++ Non-income producing security.
+++ The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(a) Investments in companies 5% or more of whose outstanding securities are held
by the Fund (such companies are defined as "Affiliated Companies" in section
2(a)(3) of the Investment Company Act of 1940) are as follows:
- -----------------------------------------------------------------------------
Net Share Net Dividend
Industry Affiliate Activity Cost Income
- -----------------------------------------------------------------------------
Diversified Varian Associates,
Companies Inc. 1,150,000 $60,939,161 $ 570,433
Electrical Belden Inc. 360,900 11,944,962 295,000
Equipment
Insurance Berkley (W.R.)
Corporation 600,000 -- 792,000
Insurance Fremont General
Corp. (300,000) (3,275,189) 1,200,000
Insurance Penncorp Financial
Group, Inc. -- -- 400,000
Iron & Steel Birmingham Steel
Corp. -- -- 640,000
Machinery & SPX Corp. 750,000 44,070,962 #
Machine
Tools
Real Estate Walden Residential
Investment Properties, Inc. 257,800 7,506,369 1,491,987
Trusts
- -----------------------------------------------------------------------------
# Non-income producing security.
See Notes to Financial Statements.
53
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of March 31, 1998
<S> <C> <C> <C>
Assets: Investments, at value (identified cost --
$8,902,717,035) (Note 1a) $11,819,574,834
Cash 93,561
Foreign cash (Note 1c) 605,832
Receivables:
Securities sold $ 67,934,654
Interest 60,790,954
Capital shares sold 23,371,632
Dividends 11,047,785 163,145,025
-------------
Prepaid registration fees and other assets (Note 1f) 179,474
---------------
Total assets 11,983,598,726
---------------
- -----------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased 47,591,638
Capital shares redeemed 35,846,597
Distributor (Note 2) 5,854,636
Investment adviser (Note 2) 4,141,004 93,433,875
-------------
Accrued expenses and other liabilities 2,679,457
---------------
Total liabilities 96,113,332
---------------
- -----------------------------------------------------------------------------------------------------------------
Net Assets: Net assets $11,887,485,394
===============
- -----------------------------------------------------------------------------------------------------------------
Net Assets Class A Shares of Common Stock, $0.10 par value, 400,000,000 shares
Consist of: authorized $ 11,064,324
Class B Shares of Common Stock, $0.10 par value, 400,000,000 shares
authorized 16,188,770
Class C Shares of Common Stock, $0.10 par value, 200,000,000 shares
authorized 1,412,405
Class D Shares of Common Stock, $0.10 par value, 200,000,000 shares
authorized 3,415,522
Paid-in capital in excess of par 8,597,071,799
Undistributed investment income -- net 73,165,000
Undistributed realized capital gains on investments and foreign
currency transactions -- net 268,313,754
Unrealized appreciation on investments and foreign
currency transactions -- net 2,916,853,820
---------------
Net assets $11,887,485,394
===============
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A -- Based on net assets of $4,155,677,231 and 110,643,239 shares
outstanding $ 37.56
===============
Class B -- Based on net assets of $5,938,708,616 and 161,887,699 shares
outstanding $ 36.68
===============
Class C -- Based on net assets of $512,782,732 and 14,124,050 shares
outstanding $ 36.31
===============
Class D -- Based on net assets of $1,280,316,815 and 34,155,217 shares
outstanding $ 37.49
===============
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
54
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended March 31, 1998
<S> <C> <C> <C>
Investment Interest and discount earned $ 278,880,820
Income Dividends (net of $2,428,105 foreign withholding tax) 111,518,341
(Notes 1d & 1e): Other 647,445
---------------
Total income 391,046,606
---------------
- -----------------------------------------------------------------------------------------------------------------
Expenses: Account maintenance and distribution fees -- Class B (Note 2) $ 53,880,781
Investment advisory fees (Note 2) 41,894,654
Transfer agent fees -- Class B (Note 2) 8,024,817
Transfer agent fees -- Class A (Note 2) 4,858,453
Account maintenance and distribution fees -- Class C (Note 2) 3,866,998
Account maintenance fees -- Class D (Note 2) 2,351,416
Transfer agent fees -- Class D (Note 2) 1,250,921
Custodian fees 734,998
Transfer agent fees -- Class C (Note 2) 613,773
Printing and shareholder reports 395,906
Registration fees (Note 1f) 386,555
Professional fees 99,032
Directors' fees and expenses 47,273
Pricing fees 16,858
Other 83,625
-------------
Total expenses 118,506,060
---------------
Investment income -- net 272,540,546
---------------
- -----------------------------------------------------------------------------------------------------------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments -- net 571,665,488
(Loss) on Foreign currency transactions -- net (2,456,877) 569,208,611
Investments & -------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions -- Net Investments -- net 1,873,957,408
(Notes 1b, 1c, Foreign currency transactions -- net 67,907 1,874,025,315
1e & 3); ------------- ---------------
Net realized and unrealized gain on investments and foreign
currency transactions 2,443,233,926
---------------
Net Increase in Net Assets Resulting from Operations $ 2,715,774,472
===============
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
55
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year
Ended March 31,
------------------------------
Increase (Decrease) in Net Assets: 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment income -- net $ 272,540,546 $ 315,581,262
Realized gain on investments and foreign currency
transactions -- net 569,208,611 526,748,104
Change in unrealized appreciation on investments and foreign
currency transactions -- net 1,874,025,315 208,655,806
-------------- --------------
Net increase in net assets resulting from operations 2,715,774,472 1,050,985,172
-------------- --------------
- -----------------------------------------------------------------------------------------------------------------
Dividends & Investment income -- net:
Distributions to Class A (115,518,688) (129,132,730)
Shareholders Class B (119,396,439) (153,592,754)
(Note 1g): Class C (8,523,951) (9,633,153)
Class D (26,653,341) (22,687,022)
Realized gain on investments -- net:
Class A (204,758,968) (200,341,016)
Class B (306,423,980) (318,637,995)
Class C (21,655,996) (19,360,951)
Class D (51,231,087) (37,329,858)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (854,162,450) (890,715,479)
-------------- --------------
- -----------------------------------------------------------------------------------------------------------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 744,669,554 88,941,831
(Note 4): -------------- --------------
- -----------------------------------------------------------------------------------------------------------------
Net Assets: Total increase in net assets 2,606,281,576 249,211,524
Beginning of year 9,281,203,818 9,031,992,294
-------------- --------------
End of year* $11,887,485,394 $ 9,281,203,818
=============== ===============
- -----------------------------------------------------------------------------------------------------------------
* Undistributed investment income -- net (Note 1h) $ 73,165,000 $ 73,174,307
=============== ===============
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
56
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<CAPTION>
Class A
The following per share data and ratios have been derived ---------------------------------------------------------------
from information provided in the financial statements. For the Year Ended March 31,
---------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998++ 1997++ 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 31.39 $ 30.90 $ 27.74 $ 27.46 $ 27.89
Operating --------- ---------- ---------- ---------- ----------
Performance: Investment income -- net 1.11 1.25 1.21 1.01 .97
Realized and unrealized gain on investments
and foreign currency transactions -- net 8.14 2.43 5.41 1.77 .50
--------- ---------- ---------- ---------- ----------
Total from investment operations 9.25 3.68 6.62 2.78 1.47
--------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income -- net (1.11) (1.25) (1.16) (.94) (.95)
Realized gain on investments -- net (1.97) (1.94) (2.30) (1.56) (.95)
--------- ---------- ---------- ---------- ----------
Total dividends and distributions (3.08) (3.19) (3.46) (2.50) (1.90)
--------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 37.56 $ 31.39 $ 30.90 $ 27.74 $ 27.46
========= ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share 30.71% 12.62% 24.50% 10.95% 5.39%
Return:* ========= ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses .55% .55% .56% .57% .53%
Average ========= ========== ========== ========== ==========
Net Assets: Investment income -- net 3.21% 3.99% 4.09% 3.81% 3.52%
========= ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $4,155,677 $3,291,219 $3,225,758 $2,507,767 $2,237,492
Data: ========= ========== ========== ========== ==========
Portfolio turnover 38% 47% 84% 89% 86%
========= ========== ========== ========== ==========
Average commission rate paid+ $ .0478 $ .0432 $ .0382 -- --
========= ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects 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.
See Notes to Financial Statements.
57
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class B
The following per share data and ratios have been derived ---------------------------------------------------------------
from information provided in the financial statements. For the Year Ended March 31,
---------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998++ 1997++ 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 30.72 $ 30.30 $ 27.28 $ 27.04 $ 27.49
Operating --------- ---------- ---------- ---------- ----------
Performance: Investment income -- net .74 .91 .90 .74 .70
Realized and unrealized gain on investments
and foreign currency transactions -- net 7.96 2.39 5.29 1.72 .48
--------- ---------- ---------- ---------- ----------
Total from investment operations 8.70 3.30 6.19 2.46 1.18
--------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income -- net (.77) (.94) (.87) (.66) (.68)
Realized gain on investments -- net (1.97) (1.94) (2.30) (1.56) (.95)
--------- ---------- ---------- ---------- ----------
Total dividends and distributions (2.74) (2.88) (3.17) (2.22) (1.63)
--------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 36.68 $ 30.72 $ 30.30 $ 27.28 $ 27.04
========= ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share 29.38% 11.48% 23.22% 9.81% 4.36%
Return:* ========= ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses 1.57% 1.57% 1.58% 1.59% 1.55%
Average ========= ========== ========== ========== ==========
Net Assets: Investment income -- net 2.19% 2.97% 3.07% 2.79% 2.50%
========= ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of year (in thousands) $5,938,708 $4,977,431 $5,025,504 $3,664,250 $3,079,332
Data: ========= ========== ========== ========== ==========
Portfolio turnover 38% 47% 84% 89% 86%
========= ========== ========== ========== ==========
Average commission rate paid+ $ .0478 $ .0432 $ .0382 -- --
========= ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects 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.
See Notes to Financial Statements.
58
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<CAPTION>
Class C
-------------------------------------------
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year 1994++ to
Ended March 31, March 31,
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value: 1998+++ 1997+++ 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Per Share Net asset value, beginning of period $ 30.44 $ 30.08 $ 27.17 $ 26.81
Operating -------- -------- -------- --------
Performance: Investment income -- net .73 .90 .92 .49
Realized and unrealized gain on investments and
foreign currency transactions -- net 7.89 2.36 5.24 1.03
-------- -------- -------- --------
Total from investment operations 8.62 3.26 6.16 1.52
Less dividends and distributions:
Investment income -- net (.78) (.96) (.95) (.43)
-------- -------- -------- --------
Realized gain on investments -- net (1.97) (1.94) (2.30) (.73)
-------- -------- -------- --------
Total dividends and distributions (2.75) (2.90) (3.25) (1.16)
-------- -------- -------- --------
Net asset value, end of period $ 36.31 $ 30.44 $ 30.08 $ 27.17
======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share 29.40% 11.45% 23.25% 6.07%++++
Return:** ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses 1.58% 1.58% 1.59% 1.64%*
Average ======== ======== ======== ========
Net Assets: Investment income -- net 2.18% 2.96% 3.08% 3.22%*
======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $512,783 $322,438 $259,131 $ 46,902
Data: ======== ======== ======== ========
Portfolio turnover 38% 47% 84% 89%
======== ======== ======== ========
Average commission rate paid+ $ .0478 $ .0432 $ .0382 --
======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects 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.
++ Commencement of operations.
+++ Based on average shares outstanding.
++++ Aggregate total investment return.
See Notes to Financial Statements.
59
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class D
-------------------------------------------
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year 1994++ to
Ended March 31, March 31,
-----------------------------------------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value: 1998+++ 1997+++ 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Per Share Net asset value, beginning of period $ 31.34 $ 30.86 $ 27.72 $ 27.27
Operating ---------- -------- -------- --------
Performance: Investment income -- net 1.02 1.17 1.16 .48
Realized and unrealized gain on investments and
foreign currency transactions -- net 8.14 2.43 5.38 1.15
---------- -------- -------- --------
Total from investment operations 9.16 3.60 6.54 1.63
---------- -------- -------- --------
Less dividends and distributions:
Investment income -- net (1.04) (1.18) (1.10) (.45)
Realized gain on investments -- net (1.97) (1.94) (2.30) (.73)
---------- -------- -------- --------
Total dividends and distributions (3.01) (3.12) (3.40) (1.18)
---------- -------- -------- --------
Net asset value, end of period $ 37.49 $ 31.34 $ 30.86 $ 27.72
- -------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share 30.40% 12.34% 24.21% 6.42%++++
Return:** ========== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
Ratios to Expenses .80% .80% .81% .87%*
Average ========== ======== ======== ========
Net Assets: Investment income -- net 2.95% 3.75% 3.84% 3.94%*
========== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) $1,280,317 $690,116 $521,599 $171,201
Data: ========== ======== ======== ========
Portfolio turnover 38% 47% 84% 89%
========== ======== ======== ========
Average commission rate paid+ $ .0478 $ .0432 $ .0382 --
========== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects 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.
++ Commencement of operations.
+++ Based on average shares outstanding.
++++ Aggregate total investment return.
See Notes to Financial Statements.
60
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
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. Secu rities 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.
o 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 invest ment 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
61
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
ex-dividend date. Interest income (including amortization of discount) is
recognized on the accrual basis. Realized gains and losses on security
transactions are determined on the identified cost basis.
(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 $2,457,434 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 "Dis tributor"), 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 adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of the
shares as follows:
- ------------------------------------------------------
Account Distribution
Maintenance Fee Fee
- ------------------------------------------------------
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
- ------------------------------------------------------
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML & Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
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, 1998, 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:
- ------------------------------------------------------
MLFD MLPF&S
- ------------------------------------------------------
Class A $ 43,421 $ 509,945
Class D $137,456 $1,903,313
- ------------------------------------------------------
For the year ended March 31, 1998, MLPF&S received contingent deferred sales
charges of $5,593,399 and $91,818 relating to transactions in Class B and Class
C Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $60,049 and $18,937 relating to transactions subject to front-end
sales charge waivers in Class A Shares and Class D Shares, respectively.
In addition, MLPF&S received $279,047 in commissions on the execution of
portfolio security transactions for the year ended March 31, 1998.
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, 1998, Merrill Lynch Security Pricing Service, an
affiliate of MLPF&S, received $3,755 for security price quotations to compute
the net asset value of the Fund.
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
62
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments: Purchases and sales of investments, excluding short-term
securities, for the year ended March 31, 1998 were $3,821,996,903 and
$3,809,744,862, respectively.
Net realized gains (losses) for the year ended March 31, 1998 and net unrealized
gains (losses) as of March 31, 1998 were as follows:
- ---------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ---------------------------------------------------------
Long-term investments $573,598,239 $2,916,857,799
Short-term investments (1,932,751) --
Foreign currency
transactions (2,456,877) (3,979)
------------ --------------
Total $569,208,611 $2,916,853,820
============ ==============
- ---------------------------------------------------------
As of March 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $2,914,425,533, of which $2,959,300,597 related to
appreciated securi ties and $44,875,064 related to depreciated securities. At
March 31, 1998, the aggregate cost of investments for Federal income tax
purposes was $8,905,149,301.
4. Capital Share Transactions: Net increase in net assets derived from capital
share transactions was $744,669,554 and $88,941,831 for the years ended March
31, 1998 and March 31, 1997, respectively.
Transactions in capital shares for each class were as follows:
- -----------------------------------------------------------------
Class A Shares for the Dollar
Year Ended March 31, 1998 Shares Amount
- -----------------------------------------------------------------
Shares sold 18,254,019 $634,543,940
Shares issued to shareholders
in reinvestment of dividends
and distributions 8,638,512 294,091,362
----------- ------------
Total issued 26,892,531 928,635,302
Shares redeemed (21,089,819) (727,078,860)
----------- ------------
Net increase 5,802,712 $201,556,442
=========== ============
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Class A Shares for the Dollar
Year Ended March 31, 1997 Shares Amount
- -----------------------------------------------------------------
Shares sold 17,867,783 $553,401,282
Shares issued to shareholders
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
=========== ============
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Class B Shares for the Dollar
Year Ended March 31, 1998 Shares Amount
- -----------------------------------------------------------------
Shares sold 26,936,302 $915,743,174
Shares issued to shareholders
in reinvestment of dividends
and distributions 11,273,540 376,017,355
----------- ---------------
Total issued 38,209,842 1,291,760,529
Automatic conversion
of shares (7,065,614) (239,303,799)
Shares redeemed (31,261,809) (1,049,566,557)
----------- ---------------
Net increase (decrease) (117,581) $ 2,890,173
=========== ===============
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Class B Shares for the Dollar
Year Ended March 31, 1997 Shares Amount
- -----------------------------------------------------------------
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
Automatic conversion
of shares (1,163,610) (35,786,707)
Shares redeemed (44,055,095) (1,317,756,891)
----------- --------------
Net decrease (3,835,137) $(130,532,455)
=========== ==============
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Class C Shares for the Dollar
Year Ended March 31, 1997 Shares Amount
- -----------------------------------------------------------------
Shares sold 5,470,865 $ 185,136,065
Shares issued to shareholders
in reinvestment of dividends
and distributions 812,551 26,837,937
----------- --------------
Total issued 6,283,416 211,974,002
Shares redeemed (2,750,233) (91,023,357)
----------- --------------
Net increase 3,533,183 $ 120,950,645
=========== ==============
- -----------------------------------------------------------------
63
<PAGE>
Merrill Lynch Capital Fund, Inc. March 31, 1998
- -----------------------------------------------------------------
Class C Shares for the Dollar
Year Ended March 31, 1997 Shares Amount
- -----------------------------------------------------------------
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
=========== ==============
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Class D Shares for the Dollar
Year Ended March 31, 1998 Shares Amount
- -----------------------------------------------------------------
Shares sold 9,630,431 $ 333,114,038
Automatic conversion
of shares 6,920,593 239,303,799
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,068,449 70,372,205
----------- --------------
Total issued 18,619,473 642,790,042
Shares redeemed (6,482,847) (223,517,748)
----------- --------------
Net increase 12,136,626 $ 419,272,294
=========== ==============
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Class D Shares for the Dollar
Year Ended March 31, 1997 Shares Amount
- -----------------------------------------------------------------
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
=========== ==============
- -----------------------------------------------------------------
5. Loaned Securities:
At March 31, 1998, the Fund held US Treasury Notes having an aggregate value of
approximately $26,856,000 as collateral for portfolio securities loaned having a
market value of approximately $24,111,000.
64
<PAGE>
[This page intentionally left blank.]
<PAGE>
[This page intentionally left blank.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
=====
<S> <C>
Investment Objective and Policies ................... 2
Management of the Fund .............................. 10
Directors and Officers ........................... 10
Compensation of Directors ........................ 12
Management and Advisory
Arrangements .................................. 12
Purchase of Shares .................................. 14
Initial Sales Charge Alternatives -
Class A and Class D Shares .................... 14
Reduced Initial Sales Charges .................... 15
Employer-Sponsored Retirement or
Savings Plans and Certain
Other Arrangements ............................ 18
Distribution Plans ............................... 18
Limitations on the Payment of
Deferred Sales Charges ........................ 19
Redemption of Shares ................................ 20
Deferred Sales Charge -
Class B and Class C Shares .................... 21
Portfolio Transactions and Brokerage ................ 21
Determination of Net Asset Value .................... 23
Shareholder Services ................................ 24
Investment Account ............................... 24
Automatic Investment Plans ....................... 25
Automatic Reinvestment of Dividends and
Capital Gains Distributions ................... 25
Systematic Withdrawal Plans ...................... 25
Retirement Plans ................................. 27
Exchange Privilege ............................... 28
Dividends, Distributions and Taxes .................. 30
Dividends and Distributions ...................... 30
Taxes ............................................ 30
Tax Treatment of Options
Transactions .................................. 32
Special Rules for Certain Foreign
Currency Transactions ......................... 32
Performance Data .................................... 33
General Information ................................. 35
Description of Shares ............................ 35
Computation of Offering Price per Share .......... 36
Independent Auditors ............................. 36
Custodian ........................................ 36
Transfer Agent ................................... 36
Legal Counsel .................................... 37
Reports to Shareholders .......................... 37
Additional Information ........................... 37
Appendix A .......................................... 38
Independent Auditors' Report ........................ 45
Financial Statements ................................ 46
</TABLE>
(Logo) Code #10257-0798
Merrill Lynch
Capital Fund, Inc.
STATEMENT OF ADDITIONAL INFORMATION
July 2, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
Contained in Part A:
Financial Highlights for each of the years in the ten-year period ended
March 31, 1998.
Contained in Part B:
Schedule of Investments, as of March 31, 1998.
Statement of Assets and Liabilities, as of March 31, 1998.
Statement of Operations for the year ended March 31, 1998.
Statements of Changes in Net Assets for each of the years in the two-year
period ended March 31, 1998.
Financial Highlights for each of the years in the five-year period ended
March 31, 1998.
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
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.(b)
(d) - Articles of Amendment, dated May 27, 1988, to Articles of Incorporation of the Registrant.(b)
(e) - Articles of Amendment, dated October 17, 1994, to Articles of Incorporation of the Registrant.(b)
(f) - Articles Supplementary, dated October 17, 1994, to Articles of Incorporation of the Registrant.(b)
(g) - Articles Supplementary, dated March 17, 1995, to Articles of Incorporation of the Registrant.(b)
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.(d)
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. (e)
6(a) - Form of Revised Class A Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(f)
(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).(f)
(e) - Form of Class D Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(f)
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.(b)
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.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------- ----------------------------------------------------------------------------------------------------
<S> <C>
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.(f)
(c) - Form of Class D Distribution Plan of the Registrant and Class D Distribution Plan
Sub-Agreement.(f)
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.(b)
(d) - Schedule for computation of each performance quotation provided in the Registration Statement in
response to item 22 relating to Class D shares.(b)
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.(g)
</TABLE>
- ---------
(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) Previously filed as an exhibit to Post-Effective Amendment No. 32 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) 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.
(e) Previously filed as an exhibit to Post-Effective Amendment No. 34 to
Registrant's Registration Statement on Form N-1A.
(f) Previously filed as an exhibit to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A.
(g) 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.
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>
Item 26. Number of Holders of Securities.
<TABLE>
<CAPTION>
Number of
Holders at
Title of Class April 30, 1998*
- -------------------------------------------------- ----------------
<S> <C>
Class A Common Stock, par value $0.10 per share .. 249,596
Class B Common Stock, par value $0.10 per share .. 344,297
Class C Common Stock, par value $0.10 per share .. 42,649
Class D Common Stock, par value $0.10 per share .. 85,425
</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 as 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, Merrill Lynch Convertible Fund,Inc., Merrill
Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill
Lynch Global Holdings, 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
C-3
<PAGE>
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate
Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill
Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies; Merrill Lynch
High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate
Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio, two investment
portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of 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 Corporate High Yield
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State 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.,
Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt
Strategies Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings California Insured
Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings Florida
Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings New
Jersey Insured Fund, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New
York Insured 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. 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 and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665. 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 North Tower, World Financial Center,
250 Vesey Street, New York, New York 10281-1201. 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.
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, 1996 for his or her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President and Director
or Trustee, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President
of all or substantially all of the investment companies listed 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.
C-4
<PAGE>
<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 .............. Chairman Chairman of FAM; President of the Investment Adviser and
FAM from 1977 to 1997; Chairman and Director of
Princeton Services; President of Princeton Services from
1993 to 1997; Executive Vice President of ML & Co.
Jeffrey M. Peek ............ President President of FAM since 1997; President and Director of
Princeton Services since 1997; Executive Vice President of
ML & Co.; Managing Director and Co-Head of the
Investment Banking Division of Merrill Lynch (in 1997);
Senior Vice President and Director of the Global Securities
and Economics Division of Merrill Lynch (from 1995 to
1997)
Terry K. Glenn ............. Executive Vice President Executive Vice President of FAM; Executive Vice President
and Director of Princeton Services; President and Director
of MLFD; Director of the Transfer Agent; President of
Princeton Administrators, L.P.
Linda L. Federici .......... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Vincent R. Giordano ........ Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Elizabeth A. Griffin ....... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Norman R. Harvey ........... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Michael J. Hennewinkel ..... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Philip L. Kirstein ......... Senior Vice President, Senior Vice President, General Counsel and Secretary of
General Counsel and FAM; Senior Vice President, General Counsel, Director and
Secretary Secretary of Princeton Services
Ronald M. Kloss ............ Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Debra W. Landsman-Yaros..... Senior Vice President Senior Vice President of FAM; Vice President of MLFD;
Senior Vice President 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
Richard L. Reller .......... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services; Director of MLFD
Gerald M. Richard .......... Senior Vice President and Senior Vice President and Treasurer of FAM; Senior Vice
Treasurer President and Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Gregory D. Upah ............ Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
Ronald L. Welburn .......... Senior Vice President Senior Vice President of FAM; Senior Vice President of
Princeton Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: The Corporate
Fund Accumulation Program III, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill
Lynch Consults International Portfolio, Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Corporate
C-5
<PAGE>
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 Growth Fund, Inc., Merrill Lynch
Global Holdings, 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 International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Real
Estate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch 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., The Municipal Fund Accumulation Program, Inc.,
and Worldwide DollarVest Fund, Inc. The address of each of these registered
investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since March 31,
1996, 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>
Other Substantial Business,
Name Positions with MLAM U.K. Profession, Vocation or Employment
- ------------------------ ----------------------------- ---------------------------------------------------------
<S> <C> <C>
Arthur Zeikel .......... Director and Chairman Chairman of the Manager and FAM; President of the
Manager and FAM from 1977 to 1997; Chairman and
Director of Princeton Services; President of Princeton
Services from 1993 to 1997; Executive Vice President of
ML&Co.
Alan J. Albert ......... Senior Managing Director Vice President of the Manager
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
Nicholas C.D. Hall ..... Director Director of Merrill Lynch Europe PLC; General Counsel of
Merrill Lynch International Banking Group
Carol Ann Langham ...... Company Secretary None
Debra Anne Searle ...... Assistant Company Secretary None
</TABLE>
Item 29. Principal Underwriters.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end registered investment companies referred to in the first two
paragraphs of Item 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 registered 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 Messrs. Aldrich,
Breen, Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2646.
C-6
<PAGE>
<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
Richard L. Reller ........... Director None
Thomas J. Verage ............ Director None
William E. Aldrich .......... Senior Vice President None
Robert W. Crook ............. Senior Vice President None
William M. Breen ............ Vice President None
Michael G. Clark ............ 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 its transfer agent MLFDS, 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 the caption "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>
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 2nd day of July,
1998.
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
- ---------------------------------------- ----------------------------------- ------
<S> <C> <C>
ARTHUR ZEIKEL* President and Director (Principal
--------------------------------------
(Arthur Zeikel) Executive Officer)
GERALD M. RICHARD* Treasurer (Principal Financial and
--------------------------------------
(Gerald M. Richard) Accounting 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)
FRED G. WEISS* Director
--------------------------------------
(Fred G. Weiss)
</TABLE>
*By /s/ GERALD M. RICHARD
-------------------------------------
(Gerald M. Richard, Attorney-in-Fact)
July 2, 1998
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------- ---------------------------------------------------------------------------
<S> <C> <C>
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>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH CAPITAL FUND, INC. - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 8902717035
<INVESTMENTS-AT-VALUE> 11819574834
<RECEIVABLES> 163145025
<ASSETS-OTHER> 878867
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11983598726
<PAYABLE-FOR-SECURITIES> 47591638
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48521694
<TOTAL-LIABILITIES> 96113332
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8629152820
<SHARES-COMMON-STOCK> 110643239
<SHARES-COMMON-PRIOR> 104840527
<ACCUMULATED-NII-CURRENT> 73165000
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 268313754
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2916853820
<NET-ASSETS> 4155677231
<DIVIDEND-INCOME> 111518341
<INTEREST-INCOME> 278880820
<OTHER-INCOME> 647445
<EXPENSES-NET> (118506060)
<NET-INVESTMENT-INCOME> 272540546
<REALIZED-GAINS-CURRENT> 569208611
<APPREC-INCREASE-CURRENT> 1874025315
<NET-CHANGE-FROM-OPS> 2715774472
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (115518688)
<DISTRIBUTIONS-OF-GAINS> (204758968)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18254019
<NUMBER-OF-SHARES-REDEEMED> (21089819)
<SHARES-REINVESTED> 8638512
<NET-CHANGE-IN-ASSETS> 2606281576
<ACCUMULATED-NII-PRIOR> 73174307
<ACCUMULATED-GAINS-PRIOR> 280717740
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 41894654
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 118506060
<AVERAGE-NET-ASSETS> 3683318874
<PER-SHARE-NAV-BEGIN> 31.39
<PER-SHARE-NII> 1.11
<PER-SHARE-GAIN-APPREC> 8.14
<PER-SHARE-DIVIDEND> (1.11)
<PER-SHARE-DISTRIBUTIONS> (1.97)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 37.56
<EXPENSE-RATIO> .55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH CAPITAL FUND, INC. - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 8902717035
<INVESTMENTS-AT-VALUE> 11819574834
<RECEIVABLES> 163145025
<ASSETS-OTHER> 878867
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11983598726
<PAYABLE-FOR-SECURITIES> 47591638
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48521694
<TOTAL-LIABILITIES> 96113332
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8629152820
<SHARES-COMMON-STOCK> 161887699
<SHARES-COMMON-PRIOR> 162005280
<ACCUMULATED-NII-CURRENT> 73165000
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 268313754
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2916853820
<NET-ASSETS> 5938708616
<DIVIDEND-INCOME> 111518341
<INTEREST-INCOME> 278880820
<OTHER-INCOME> 647445
<EXPENSES-NET> (118506060)
<NET-INVESTMENT-INCOME> 272540546
<REALIZED-GAINS-CURRENT> 569208611
<APPREC-INCREASE-CURRENT> 1874025315
<NET-CHANGE-FROM-OPS> 2715774472
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (119396439)
<DISTRIBUTIONS-OF-GAINS> (306423980)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 26936302
<NUMBER-OF-SHARES-REDEEMED> (38327423)
<SHARES-REINVESTED> 11273540
<NET-CHANGE-IN-ASSETS> 2606281576
<ACCUMULATED-NII-PRIOR> 73174307
<ACCUMULATED-GAINS-PRIOR> 280717740
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 41894654
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 118506060
<AVERAGE-NET-ASSETS> 5388078079
<PER-SHARE-NAV-BEGIN> 30.72
<PER-SHARE-NII> .74
<PER-SHARE-GAIN-APPREC> 7.96
<PER-SHARE-DIVIDEND> (.77)
<PER-SHARE-DISTRIBUTIONS> (1.97)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 36.68
<EXPENSE-RATIO> 1.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH CAPITAL FUND, INC. - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 8902717035
<INVESTMENTS-AT-VALUE> 11819574834
<RECEIVABLES> 163145025
<ASSETS-OTHER> 878867
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11983598726
<PAYABLE-FOR-SECURITIES> 47591638
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48521694
<TOTAL-LIABILITIES> 96113332
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8629152820
<SHARES-COMMON-STOCK> 14124050
<SHARES-COMMON-PRIOR> 10590867
<ACCUMULATED-NII-CURRENT> 73165000
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 268313754
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2916853820
<NET-ASSETS> 512782732
<DIVIDEND-INCOME> 111518341
<INTEREST-INCOME> 278880820
<OTHER-INCOME> 647445
<EXPENSES-NET> (118506060)
<NET-INVESTMENT-INCOME> 272540546
<REALIZED-GAINS-CURRENT> 569208611
<APPREC-INCREASE-CURRENT> 1874025315
<NET-CHANGE-FROM-OPS> 2715774472
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8523951)
<DISTRIBUTIONS-OF-GAINS> (21655996)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5470865
<NUMBER-OF-SHARES-REDEEMED> (2750233)
<SHARES-REINVESTED> 812551
<NET-CHANGE-IN-ASSETS> 2606281576
<ACCUMULATED-NII-PRIOR> 73174307
<ACCUMULATED-GAINS-PRIOR> 280717740
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 41894654
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 118506060
<AVERAGE-NET-ASSETS> 386699797
<PER-SHARE-NAV-BEGIN> 30.44
<PER-SHARE-NII> .73
<PER-SHARE-GAIN-APPREC> 7.89
<PER-SHARE-DIVIDEND> (.78)
<PER-SHARE-DISTRIBUTIONS> (1.97)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 36.31
<EXPENSE-RATIO> 1.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH CAPITAL FUND, INC. - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 8902717035
<INVESTMENTS-AT-VALUE> 11819574834
<RECEIVABLES> 163145025
<ASSETS-OTHER> 878867
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11983598726
<PAYABLE-FOR-SECURITIES> 47591638
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48521694
<TOTAL-LIABILITIES> 96113332
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8629152820
<SHARES-COMMON-STOCK> 34155217
<SHARES-COMMON-PRIOR> 22018591
<ACCUMULATED-NII-CURRENT> 73165000
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 268313754
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2916853820
<NET-ASSETS> 1280316815
<DIVIDEND-INCOME> 111518341
<INTEREST-INCOME> 278880820
<OTHER-INCOME> 647445
<EXPENSES-NET> (118506060)
<NET-INVESTMENT-INCOME> 272540546
<REALIZED-GAINS-CURRENT> 569208611
<APPREC-INCREASE-CURRENT> 1874025315
<NET-CHANGE-FROM-OPS> 2715774472
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (26653341)
<DISTRIBUTIONS-OF-GAINS> (51231087)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16551024
<NUMBER-OF-SHARES-REDEEMED> (6482847)
<SHARES-REINVESTED> 2068449
<NET-CHANGE-IN-ASSETS> 2606281576
<ACCUMULATED-NII-PRIOR> 73174307
<ACCUMULATED-GAINS-PRIOR> 280717740
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 41894654
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 118506060
<AVERAGE-NET-ASSETS> 940566716
<PER-SHARE-NAV-BEGIN> 31.34
<PER-SHARE-NII> 1.02
<PER-SHARE-GAIN-APPREC> 8.14
<PER-SHARE-DIVIDEND> (1.04)
<PER-SHARE-DISTRIBUTIONS> (1.97)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 37.49
<EXPENSE-RATIO> .80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Capital Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 35 to Registration
Statement No. 2-49007 of our report dated May 14, 1998 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.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
June 29, 1998
