<PAGE>
As filed with the Securities and Exchange Commission on July 22, 1999
Securities Act File No. 2-49007
Investment Company Act File No. 811-2405
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [_]
[X]
Post-Effective Amendment No. 37
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
Amendment No. 25
(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 08536
(Address of Principal Executive Offices)
Registrant's telephone number, including Area Code (609) 282-2800
Terry K. Glenn
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:
Counsel for the Fund Michael J. Hennewinkel, Esq.
BROWN & WOOD LLP MERRILL LYNCH
One World Trade Center ASSET MANAGEMENT
New York, New York 10048-0557 P.O. Box 9011
Attention: Thomas R. Smith, Jr., Esq. Princeton, New Jersey 08543-9011
---------------
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: Common Stock, par value $.10 per share.
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<PAGE>
Prospectus
[LOGO] Merrill Lynch
Merrill Lynch Capital Fund, Inc.
[July 22, 1999]
This Prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for future
reference.
The Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the
adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
<PAGE>
Table of Contents
PAGE
[LOGO]
KEY FACTS
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The Merrill Lynch Capital Fund at a Glance................................... 3
Risk/Return Bar Chart........................................................ 5
Fees and Expenses............................................................ 6
[LOGO]
DETAILS ABOUT THE FUND
- -------------------------------------------------------------------------------
How the Fund Invests......................................................... 8
Investment Risks............................................................ 10
[LOGO]
YOUR ACCOUNT
- -------------------------------------------------------------------------------
Merrill Lynch Select Pricing SM System...................................... 19
How to Buy, Sell, Transfer and Exchange Shares.............................. 24
Participation in Merrill Lynch Fee-Based Programs........................... 28
[LOGO]
MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------
Merrill Lynch Asset Management.............................................. 31
Financial Highlights........................................................ 32
[LOGO]
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Shareholder Reports................................................. Back Cover
Statement of Additional Information................................. Back Cover
MERRILL LYNCH CAPITAL FUND, INC.
<PAGE>
[LOGO] Key Facts
THE MERRILL LYNCH CAPITAL FUND AT A GLANCE
- --------------------------------------------------------------------------------
What is the Fund's investment objective?
The investment objective of the Fund is to seek the highest total investment
return through a fully managed investment policy utilizing equity, debt
(including money market) and convertible securities.
What are the Fund's main investment strategies?
The Fund invests in equities and debt securities (including short term
securities). Fund management shifts the allocation among these securities
types. The proportion the Fund invests in each category at any given time
depends on Fund management's view of how attractive that category appears
relative to the others. This flexibility is the keystone of the Fund's
investment strategy. Although the Fund has the flexibility to invest entirely
in debt securities, entirely in equity securities or partially in equity
securities and partially in debt securities, Fund management expects that
usually a majority of the Fund's assets will be stocks of large companies. The
Fund's management chooses securities using a fundamental, value-oriented
investment style. The Fund purchases primarily U.S. securities, but can also
buy foreign securities, including securities denominated in foreign currencies.
The Fund may invest in debt securities of any maturity. The Fund may also
invest in high yield or "junk" bonds.
We cannot guarantee that the Fund will achieve its objective.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of Fund shares -- may go up or down. These changes may occur because
a particular stock market is rising or falling. At other times, there are
specific factors that may affect the value of a particular investment. Changes
in the value of the Fund's debt investments may occur in response to interest
rate movements -- generally, when interest rates go up, the value of debt
securities goes down. For certain debt investments, these specific factors
include the possibility that the issuer may default on its obligations. Changes
in the value of both the Fund's equity and debt investments may also occur as
the result of specific factors that affect particular investments. If the value
of the Fund's investments goes down, you may lose money.
The Fund can invest a significant portion of its assets in foreign securities.
Foreign investing involves special risks, including foreign currency risk and
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this prospectus in
the sidebar.
Total investment return -- the combination of capital appreciation (from
increases or decreases in market value) and current income (from dividends or
interest).
Equities -- Securities representing ownership of a company ("stock") or
securities whose price is linked to the value of securities that represent
company ownership.
Debt Securities -- securities representing an obligation to pay specified
amounts at specified times.
Maturity -- the time at which the principal amount of a debt security is
scheduled to be returned to investors.
MERRILL LYNCH CAPITAL FUND, INC.
3
<PAGE>
[LOGO] Key Facts
the possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
value than U.S. securities. These risks are greater for investments in emerging
markets.
High yield or "junk" bonds may be volatile and subject to liquidity, leverage
and other types of risk.
Who should invest?
The Fund may be an appropriate investment for you if you:
. Are looking for capital
appreciation for long term
goals, such as retirement or
funding a child's education, but
also seek some current income.
. Want a professionally managed
portfolio.
. Are willing to accept the risk
that the value of your
investment may decline.
MERRILL LYNCH CAPITAL FUND, INC.
4
<PAGE>
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of in-
vesting in the Fund. The bar chart shows changes in the Fund's performance for
Class B shares for each of the past ten calendar years. Sales charges are not
reflected in the bar chart. If these amounts were reflected, returns would be
less than those shown. The table compares the average annual total returns for
each class of the Fund's shares for the periods shown with those of the S&P 500
Index and the Merrill Lynch ("ML") U.S. Domestic Master Bond Index. How the
Fund performed in the past is not necessarily an indication of how the Fund
will perform in the future.
[BAR GRAPH APPEARS HERE]
1989 21.70%
1990 0.10%
1991 23.39%
1992 3.99%
1993 12.54%
1994 -0.10%
1995 31.52%
1996 11.50%
1997 20.20%
1998 5.11%
During the ten-year period shown in the bar chart, the highest return for a
quarter was 10.81% (quarter ended December 31, 1998) and the lowest return for
a quarter was -11.65% (quarter ended September 30, 1998). The Fund's year-to-
date return as of June 30, 1999 was 7.86%.
<TABLE>
<CAPTION>
Average Annual Total Returns (for
the
calendar year ended) December 31, Past Past Past Ten Years/
1998 One Year Five Years Since Inception
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Fund* -- Class A 0.61% 13.04% 13.07%
S&P 500 Index** 28.58% 24.05% 19.20%
ML US Domestic Master Bond Index*** 8.87% 7.33% 9.29%
- --------------------------------------------------------------------------
Capital Fund* -- Class B 1.13% 13.10% 12.53%+
S&P 500 Index** 28.58% 24.05% 19.20%
ML US Domestic Master Bond Index*** 8.87% 7.33% 9.29%
- --------------------------------------------------------------------------
Capital Fund* -- Class C 4.10% N/A 15.42%++
S&P 500 Index** 28.58% N/A 28.70%
ML US Domestic Master Bond Index*** 8.87% N/A 9.75%
- --------------------------------------------------------------------------
Capital Fund* -- Class D 0.35% N/A 14.83%++
S&P 500 Index** 28.58% N/A 28.70%
ML US Domestic Master Bond Index*** 8.87% N/A 9.75%
- --------------------------------------------------------------------------
</TABLE>
*Includes sales charge.
** The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices.
***This unmanaged Index is comprised of the entire universe of domestic
investment grade bonds, including US Treasury bonds, Corporate bonds and
mortgages.
+This performance does not reflect the effect of the conversion of Class B
shares to Class D shares after approximately eight years.
++ Inception date is October 21, 1994.
MERRILL LYNCH CAPITAL FUND, INC.
5
<PAGE>
[LOGO] Key Facts
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy
and hold the different classes of shares of the Fund. Future expenses may be
greater or less than those indicated below.
<TABLE>
<CAPTION>
Shareholder Fees (fees
paid directly
from your
investment)(a): Class A Class B(b) Class C Class D
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge
(Load) imposed on
purchases (as a
percentage of offering
price) 5.25%(c) None None 5.25%(c)
- ---------------------------------------------------------------
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d)
- ---------------------------------------------------------------
Maximum Sales Charge
(Load) imposed on
Dividend Reinvestments None None None None
- ---------------------------------------------------------------
Redemption Fee None None None None
- ---------------------------------------------------------------
Exchange Fee None None None None
- ---------------------------------------------------------------
- ---------------------------------------------------------------
Annual Fund Operating
Expenses (expenses
that are deducted from
your investment):
- ---------------------------------------------------------------
Management Fee(e) 0.40% 0.40% 0.40% 0.40%
- ---------------------------------------------------------------
Distribution and/or
Service (12b-1) Fees(f) None 1.00% 1.00% 0.25%
- ---------------------------------------------------------------
Other Expenses
(including transfer
agency fees)(g) 0.17% 0.19% 0.19% 0.17%
- ---------------------------------------------------------------
Total Annual Fund
Operating Expenses 0.57% 1.59% 1.59% 0.82%
- ---------------------------------------------------------------
</TABLE>
(a) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or sells shares.
(b) Class B shares automatically convert to Class D shares about eight years
after you buy them and will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e) 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, 1999, the Investment Adviser received a fee equal to
0.40% of the Fund's average daily net assets.
(f) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used in this Prospectus and in all other Fund
materials. If you hold Class B or Class C
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid directly by the shareholder:
Shareholder fees -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Management Fee -- a fee paid to the Investment Adviser for managing the Fund.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
Service (Account Maintenance) Fees -- fees used to compensate securities
dealers for account maintenance activities.
MERRILL LYNCH CAPITAL FUND, INC.
6
<PAGE>
(Footnotes continued from previous page)
shares for a long time, it may cost you more in distribution (12b-1) fees than
the maximum sales charge that you would have paid if you had bought one of the
other classes.
(g) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the fiscal year
ended March 31, 1999, the Fund paid the Transfer Agent fees totaling
$17,846,626.
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
--
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------
<S> <C> <C> <C> <C>
Class A $580 $698 $827 $1,201
- -------------------------------------------
Class B $562 $702 $866 $1,688*
- -------------------------------------------
Class C $262 $502 $866 $1,889
- -------------------------------------------
Class D $604 $773 $956 $1,485
- -------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
------
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------
<S> <C> <C> <C> <C>
Class A $580 $698 $827 $1,201
- -------------------------------------------
Class B $162 $502 $866 $1,688*
- -------------------------------------------
Class C $162 $502 $866 $1,889
- -------------------------------------------
Class D $604 $773 $956 $1,485
- -------------------------------------------
</TABLE>
* Assumes conversion to Class D shares approximately eight years after
purchase. See note (b) to the Fees and Expenses table above.
MERRILL LYNCH CAPITAL FUND, INC.
7
<PAGE>
[LOGO] Details About the Fund
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund can invest in both equity securities and debt securities (including
money market) and convertible securities. The Fund may invest entirely in
equity securities, entirely in debt securities or partly in equity securities
and partly in debt securities. Fund management expects that usually a majority
of the Fund's assets will be stocks of large companies.
The Fund's management will select the percentages of the total portfolio
invested in equity securities and debt securities based on its perception of
the relative valuation of each asset class compared with that asset class'
historical valuation levels. When Fund management believes equity securities
generally are reasonably valued or undervalued, Fund management will focus on
equity investments. When Fund management believes equity securities generally
are valued at high levels, however, Fund management may increase the percentage
of the Fund's portfolio invested in debt securities. Fund management may
increase the Fund's investments in debt securities whenever it believes that it
is appropriate to do so in order to reduce the level of risk in the Fund's
portfolio or that investments in debt securities could potentially provide
higher total returns than equity investments.
The equity securities in which the Fund invests will primarily be common stocks
of large companies, although the Fund may invest in the securities of smaller
or emerging growth companies. The Fund's management chooses equity securities
using a fundamental, value-oriented investment style. This means that the Fund
seeks to invest in companies that the Fund's management believes to be
undervalued. A company's stock is undervalued when the stock's current price is
less than what the Fund believes a share of the company is worth. A company's
worth can be assessed by several factors, such as financial resources, value of
tangible assets, sales and earnings growth, rate of return on capital, product
development, quality of management and overall business prospects. A company's
stock may become undervalued when most investors fail to perceive the company's
strengths in one or more of these areas. Fund management may also determine a
company is undervalued if its stock price is down because of temporary factors
from which Fund management believes the company will recover. The Fund will
seek to invest in the stock of large, "quality" companies with strong financial
resources, reasonable rates of return on capital and experienced management
whenever Fund management believes such stocks are undervalued.
ABOUT THE PORTFOLIO MANAGER
Kurt Schansinger is the Senior Portfolio Manager of the Fund. He has served as
First Vice President of MLAM since 1997 and Vice President from 1995 to 1997.
Prior to joining MLAM, he was a Senior Vice President of Oppenheimer Capital
L.P.
Walter Cuje is the Associate Portfolio Manager of the Fund. Mr. Cuje has been
an Associate Portfolio Manager of MLAM since October 1993, First Vice President
since 1997 and Vice President from 1991 to 1997.
MERRILL LYNCH CAPITAL FUND, INC.
8
<PAGE>
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management.
Investment Grade -- any of the four highest debt obligation rating categories
by recognized rating agencies, including Moody's Investors Service, Inc., and
Standard & Poor's.
Yield -- the income generated by an investment in the Fund.
Liquidity -- the ease with which a security can be traded. Securities that are
less liquid have fewer potential buyers and, as a consequence, greater
volatility.
Volatility -- the frequency and amount of changes to a security's market value.
The debt securities in which the Fund may invest include:
.corporate debt securities
.mortgage backed securities and asset backed securities
.U.S. and foreign government debt securities
.corporate debt securities convertible into common stock
.money market securities
The Fund may invest in debt securities of any maturity. Changes in the value of
debt securities may occur in response to interest rate movements -- generally,
when interest rates go up, the value of most debt securities goes down. In most
cases, when interest rates go up, the value of debt securities with longer term
maturities does down more than the value of debt securities with shorter
maturities. Because the Fund may invest a substantial portion of its assets in
debt securities with long term maturities, rising interest rates may cause the
value of the Fund's debt investments to decline significantly .
Although Fund management anticipates that the Fund will focus on debt
securities that are rated investment grade, the Fund has established no rating
criteria for such debt securities. In addition, the Fund may invest a portion
of its assets in low rated debt securities, which are commonly called "junk
bonds." Although junk bonds generally have higher yields than debt securities
with higher credit ratings, they are high risk investments that may not pay
interest or return principal as scheduled. Junk bonds generally are less liquid
and experience more price volatility than higher rated fixed income securities.
The Fund does not intend to invest in excess of 35% of its assets in junk
bonds.
The Fund may invest up to 35% of its assets in various types of mortgage backed
securities. Mortgage backed securities represent the right to receive a portion
of principal and/or interest payments made on a pool or residential or
commercial mortgage loans. Mortgage backed securities frequently react
differently to changes in interest rates than other debt securities.
The Fund may invest up to 25% of its assets in securities of foreign issuers.
The Fund may invest in issuers from any country. The Fund's management,
however, anticipates that a substantial portion of the Fund's foreign equity
and debt investments will be in issuers in the developed countries of Europe
and the Far East. The Fund may also invest in equity and debt securities of
issuers in emerging markets, but the Fund's management anticipates that a
MERRILL LYNCH CAPITAL FUND, INC.
9
<PAGE>
[LOGO] Details About the Fund
greater portion of the Fund's foreign investments will be in issuers in
developed countries.
The Fund may invest in securities denominated in currencies other than the U.S.
dollar.
The Fund may as a temporary defensive measure, and without limitation, hold
assets in cash or money market securities. Normally a portion of the Fund's
assets would be held in these securities in anticipation of investment in
equities or to meet redemptions. Investments in money market securities can be
sold easily and have limited risk of loss but may not achieve the Fund's
investment objective.
The Fund has no stated minimum holding period for investments, and will buy or
sell securities whenever the Fund's management sees an appropriate opportunity.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any fund, there can be no guarantee that the Fund will meet
its goals or that the Fund's performance will be positive for any period of
time.
Market and Selection Risk -- Market risk is the risk that the stock market in
one or more countries in which the Fund invests will go down in value,
including the possibility that one or more markets will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the stock markets or other funds with
similar investment objectives and investment strategies.
Foreign Market Risk -- Since the Fund invests in foreign securities, it offers
the potential for more diversification than an investment only in the United
States. This is because stocks traded on foreign markets have often (though not
always) performed differently than stocks in the United States. However, such
investments involve special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, the Fund is
subject to the risk that because there are generally fewer investors on foreign
exchanges and a smaller number of shares traded each day, it may make it
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
MERRILL LYNCH CAPITAL FUND, INC.
10
<PAGE>
Foreign Economy Risk -- The economies of certain foreign markets often do not
compare favorably with the economy of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources
and balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income
back into the United States, or otherwise adversely affect the Fund's
operations. Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
Currency Risk -- Securities in which the Fund invests are usually denominated
or quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated
in that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a strong U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards --Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws
to protect investors the way that the U.S. securities laws do. For example,
some foreign countries may have no laws or rules against insider trading.
Insider trading occurs when a person buys or sells a
MERRILL LYNCH CAPITAL FUND, INC.
11
<PAGE>
[LOGO] Details About the Fund
company's securities based on nonpublic information about that company.
Accounting standards in other countries are not necessarily the same as in the
United States. If the accounting standards in another country do not require as
much detail as U.S. accounting standards, it may be harder for Fund management
to completely and accurately determine a company's financial condition. Also,
brokerage commissions and other costs of buying or selling securities often are
higher in foreign countries than they are in the United States. This reduces
the amount the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States --The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents,
goes bankrupt. In addition, it is often more expensive for the Fund to buy,
sell and hold securities in certain foreign markets than in the U.S. The
increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the U.S.
Settlement Risk -- Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign
settlement procedures and trade regulations also may involve certain risks
(such as delays in payment for or delivery of securities) not typically
generated by the settlement of U.S. investments. Communications between the
United States and emerging market countries may be unreliable, increasing the
risk of delayed settlements or losses of security certificates. Settlements in
certain foreign countries at times have not kept pace with the number of
securities transactions; these problems may make it difficult for the Fund to
carry out transactions. If the Fund cannot settle or is delayed in settling a
purchase of securities, it may miss attractive investment opportunities and
certain of its assets may be uninvested with no return earned thereon for some
period. If the Fund cannot settle or is delayed in settling a sale of
securities, it may lose money if the value of the security then declines or, if
it has contracted to sell the security to another party, the Fund could be
liable to that party for any losses incurred.
MERRILL LYNCH CAPITAL FUND, INC.
12
<PAGE>
European Economic and Monetary Union ("EMU") -- Certain European countries have
entered into EMU in an effort to, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
countries. EMU established a single common European currency (the "euro") that
was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro,
and are listed, trade and make dividend and other payments only in euros.
Although EMU is generally expected to have a beneficial effect, it could
negatively affect the Fund in a number of situations, including as follows:
. If the transition to euro, or EMU
as a whole, does not proceed as
planned, the Fund's investments
could be adversely affected. For
example, sharp currency
fluctuations, exchange rate
volatility and other disruptions
of the markets could occur.
. Withdrawal from EMU by a
participating country could also
have a negative effect on the
Fund's investments, for example
if securities redenominated in
euros are transferred back into
that country's national currency.
Emerging Markets Risk -- The risks of foreign investments are usually much
greater for emerging markets. These investments in emerging markets may be
considered speculative. Emerging markets include those in countries defined as
emerging or developing by the World Bank, the International Finance Corporation
or the United Nations. Emerging markets are riskier because they develop
unevenly and may never fully develop. They are more likely to experience
hyperinflation and currency devaluations, which adversely affects returns to
U.S. investors. In addition, the securities markets in many of these countries
have far lower trading volumes and less liquidity than developed markets. Since
these markets are so small, they may be more likely to suffer sharp and
frequent price changes or long term price depression due to adverse publicity,
investor perceptions, or the actions of a few large investors. In addition,
traditional measures of investment value used in the United States, such as
price to earnings ratios, may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
MERRILL LYNCH CAPITAL FUND, INC.
13
<PAGE>
[LOGO] Details About the Fund
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
Borrowing and Leverage Risk -- The Fund may borrow for temporary emergency
purposes including to meet redemptions. Borrowing may exaggerate changes in the
net asset value of Fund shares and in the yield on the Fund's portfolio.
Borrowing will cost the Fund interest expense and other fees. The cost of
borrowing may reduce the Fund's return. Certain securities that the Fund buys
may create leverage including futures and options.
Securities Lending -- The Fund may lend securities to financial institutions
which provide government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be a delay in
recovering the loaned securities. The Fund could also lose money if it does not
recover the securities and the value of the collateral falls. These events
could trigger adverse tax consequences to the Fund.
Risks associated with certain types of securities in which the Fund may invest
include:
Convertibles -- Convertibles are generally debt securities or preferred stocks
that may be converted into common stock. Convertibles typically pay current
income as either interest (debt security convertibles) or dividends (preferred
stocks). A convertible's value usually reflects both the stream of current
income payments and the value of the underlying common stock. The market value
of a convertible performs like a regular debt security, that is, if market
interest rates rise, the value of a convertible usually falls. Since it is
convertible into common stock, the convertible also has the same types of
market and issuer risk as the underlying common stock.
Mortgage backed securities -- Mortgage backed securities represent the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. When interest rates fall, borrowers
may refinance or otherwise repay principal on their mortgages
MERRILL LYNCH CAPITAL FUND, INC.
14
<PAGE>
earlier than scheduled. When this happens, certain types of mortgage backed
securities will be paid off more quickly than originally anticipated and the
Fund has to invest the proceeds in securities with lower yields. This risk is
known as "prepayment risk." When interest rates rise, certain types of mortgage
backed securities will be paid off more slowly than originally anticipated and
the value of these securities will fall. This risk is known as extension risk.
Because of prepayment risk and extension risk mortgage backed securities react
differently to changes in interest rates than other fixed income securities.
Small movements in interest rates (both increases and decreases) may quickly
and significantly reduce the value of certain mortgage backed securities.
Most mortgage backed securities are issued by Federal government agencies, such
as the Government National Mortgage Association (Ginnie Mae), the Federal Home
Loan Mortgage Corporation (Freddie Mac) on Federal National Mortgage
Association (Fannie Mae) Principal and interest payments on mortgage backed
securities issued by the Federal government agencies are guaranteed by either
Federal government or the government agency. Such securities have very little
credit risk. Mortgage backed securities that are issued by private corporations
rather than Federal agencies have credit risk as well as prepayment risk and
extension risk.
Mortgage backed securities may be either pass-through securities or
collateralized mortgage obligations (CMOs). Pass through securities represent a
right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing costs).
CMOs are created by dividing the principal and interest payments collected on a
pool of mortgages into several revenue streams (tranches) with different
priority rights to portions of the underlying mortgage payments. Certain CMO
tranches may represent a right to receive interest only (IOs), principal only
(POs), or an amount that remains after other floating-rate tranches are paid
(an inverse floater). These securities are frequently referred to as "mortgage
derivatives" and may be extremely sensitive to changes in interest rates. If
the Fund invests in CMO tranches (including CMO tranches issued by government
agencies) and interest rates move in a manner not anticipated by Fund
management, it is possible that the Fund could lose all or substantially all of
its investment.
MERRILL LYNCH CAPITAL FUND, INC.
15
<PAGE>
[LOGO] Details About the Fund
Small Cap and Emerging Growth Securities -- Small cap or emerging growth
companies may have limited product lines or markets. They may be less
financially secure than larger, more established companies. They may depend on
a small number of key personnel. If a product fails, or if management changes,
or there are other adverse developments, the Fund's investment in a small cap
or emerging growth company may lose substantial value.
Small cap or emerging growth securities generally trade in lower volumes and
are subject to greater and more unpredictable price changes than larger cap
securities or the stock market as a whole. Investing in small caps and emerging
growth securities requires a long term view.
Debt securities -- Debt securities, such as bonds, involve credit risk. This is
the risk that the borrower will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial condition
and on the terms of the bonds. These securities are also subject to interest
rate risk. This is the risk that the value of the security may fall when
interest rates rise. In general, the market price of debt securities with
longer maturities will go up or down more in response to changes in interest
rates than the market price of shorter term securities.
Junk Bonds -- Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally
pay higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. Junk bonds
generally are less liquid and experience more price volatility than higher
rated debt securities. The issuers of junk bonds may have a larger amount of
outstanding debt relative to their assets than issuers of investment grade
bonds. In the event of an issuer's bankruptcy, claims of other creditors may
have priority over the claims of junk bond holders, leaving few or no assets
available to repay junk bond holders. Junk bonds may be subject to greater call
and redemption risk than higher rated debt securities.
Sovereign Debt -- The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt subject the Fund to the risk that a government entity may
delay or refuse to pay interest or repay principal on its sovereign
MERRILL LYNCH CAPITAL FUND, INC.
16
<PAGE>
debt. Some of these reasons may include cash flow problems, insufficient
foreign currency reserves, political considerations, the relative size of its
debt position to its economy or its failure to put in place economic reforms
required by the International Monetary Fund or other multilateral agencies. If
a government entity defaults, it may ask for more time in which to pay or for
further loans. There may be no bankruptcy proceeding by which all or part of
sovereign debt that a government entity has not repaid may be collected.
Illiquid Securities -- The Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund
buys illiquid securities it may be unable to quickly resell them or may be able
to sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They may include private placement securities
that the Fund buys directly from the issuer. Private placement and other
restricted securities may not be listed on an exchange and may have no active
trading market.
Restricted securities may be illiquid. The Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the security.
Rule 144A Securities -- Rule 144A securities are restricted securities that can
be resold to qualified institutional buyers but not to the general public. Rule
144A securities may have an active trading market, but carry the risk that the
active trading market may not continue.
Derivatives -- The Fund may use derivative instruments including over-the-
counter foreign currency options and options on foreign currency futures.
Derivatives are financial instruments whose value is derived from another
security, a commodity (such as gold or oil) or an index such as Standard &
Poor's 500 Index. Derivatives allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments.
Derivatives are volatile and involve significant risks, including:
MERRILL LYNCH CAPITAL FUND, INC.
17
<PAGE>
[LOGO] Details About the Fund
Credit risk -- the risk that the
counterparty (the party on the
other side of the transaction) on
a derivative transaction will be
unable to honor its financial ob-
ligation to the Fund.
Currency risk -- the risk that
changes in the exchange rate be-
tween currencies will adversely
affect the value (in U.S. dollar
terms) of an investment.
Leverage risk -- the risk associ-
ated with certain types of in-
vestments or trading strategies
(such as borrowing money to in-
crease the amount of investments)
that relatively small market
movements may result in large
changes in the value of an in-
vestment. Certain investments or
trading strategies that involve
leverage can result in losses
that greatly exceed the amount
originally invested.
Liquidity risk -- the risk that
certain securities may be diffi-
cult or impossible to sell at the
time that the seller would like
or at the price that the seller
believes the security is cur-
rently worth.
The Fund may use derivatives for hedging purposes, including anticipatory
hedges. Hedging is a strategy in which the Fund uses a derivative to offset the
risk that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a
different manner than anticipated by the Fund or if the cost of the derivative
outweighs the benefit of the hedge. Hedging also involves the risk that changes
in the value of the derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the holdings being
hedged may not be reduced. There can be no assurance that the Fund's hedging
strategy will reduce risk or that hedging transactions will be either available
or cost effective. The Fund is not required to use hedging and may choose not
to do so.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH CAPITAL FUND, INC.
18
<PAGE>
[LOGO] Your
Account
MERRILL LYNCH SELECT PRICING SM SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.25%. You may be eligible for a sales
charge waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B
or C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
MERRILL LYNCH CAPITAL FUND, INC.
19
<PAGE>
[LOGO] Your Account
The table below summarizes key features of the Merrill Lynch Select Pricing SM
System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors through Merrill through Merrill through Merrill
including: Lynch. Limited Lynch. Limited Lynch. Limited
. Current Class A availability through availability through availability
shareholders other securities other securities through other
. Certain dealers. dealers. securities dealers.
Retirement Plans
. Participants in
certain Merrill
Lynch-
sponsored programs
. Certain
affiliates of
Merrill Lynch.
- -------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at No. Entire purchase No. Entire purchase Yes. Payable at
Charge? time of purchase. price is invested in price is invested in time of purchase.
Lower sales charges shares of the Fund. shares of the Fund. Lower sales charges
available for available for
larger investments. larger investments.
- -------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within one
one year.) year.)
- -------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.75% Distribution 0.75% Distribution No Distribution
Fee. Fee. Fee.
- -------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
eight years.
- -------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CAPITAL FUND, INC.
20
<PAGE>
Right of Accumulation -- permits you to pay the sales charge that would apply
to the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
Letter of Intent -- permits you to pay the sales charge that would be
applicable if you add up all shares of Merrill Lynch Select PricingSM System
funds that you agree to buy within a 13 month period. Certain restrictions
apply.
Class A and Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the
time of purchase.
<TABLE>
<CAPTION>
Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* 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.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or
your redemption proceeds. A sales charge of 0.75% will be charged on
purchases of $1,000,000 or more of Class A or Class D shares by certain
employer- sponsored retirement or savings plans.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
. Purchases under a Right of Accumulation or Letter of Intent.
. Merrill Lynch Blueprint SM Program participants.
. TMA SM Managed Trusts.
. Certain Merrill Lynch investment
or central asset accounts.
. Certain employer-sponsored
retirement or savings plans.
MERRILL LYNCH CAPITAL FUND, INC.
21
<PAGE>
[LOGO] Your Account
. Purchases using proceeds from the
sale of certain Merrill Lynch
closed-end funds under certain
circumstances.
. Certain investors, including
directors or trustees of Merrill
Lynch mutual funds and Merrill
Lynch employees.
. Certain Merrill Lynch fee-based
programs.
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to a 0.25% account maintenance fee, while
Class A shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of
the same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.75% and account maintenance fees of 0.25% each year under
distribution plans that the Fund has adopted under Rule 12b-1. Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these
fees increase the cost of your investment and may cost you more than paying an
initial sales charge. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Consultant
or other securities dealer who assists you in purchasing Fund shares.
MERRILL LYNCH CAPITAL FUND, INC.
22
<PAGE>
Class B Shares
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases
as you hold your shares over time, according to the following schedule:
<TABLE>
<CAPTION>
Years Since
Purchase Sales Charge*
---------------------------------
<S> <C>
0 - 1 4.00%
---------------------------------
1 - 2 3.00%
---------------------------------
2 - 3 2.00%
---------------------------------
3 - 4 1.00%
---------------------------------
4 and thereafter 0.00%
---------------------------------
</TABLE>
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales
charge. Not all Merrill Lynch funds have identical deferred sales charge
schedules. If you exchange your shares for shares of another fund, the
higher charge will apply.
The deferred sales charge relating to Class B shares may be reduced or waived
in certain circumstances, such as:
. Certain post-retirement
withdrawals from an IRA or other
retirement plan if you are over
59 1/2 years old.
. Redemption by certain eligible
401(a) and 401(k) plans, certain
related accounts, certain group
plans participating in the
Merrill Lynch BlueprintSM Program
and certain retirement plan
rollovers.
. Redemption in connection with
participation in certain Merrill
Lynch fee-based programs.
. Withdrawals resulting from share-
holder death or disability
as long as the waiver request is
made within one year of death or
disability or, if later, reasona-
bly promptly following completion
of probate, or in connection with
involuntary termination of an ac-
count in which Fund shares are held.
. Withdrawal through the Merrill
Lynch Systematic Withdrawal Plan
of up to 10% per year of your
Class B account value at the time
the plan is established.
MERRILL LYNCH CAPITAL FUND, INC.
23
<PAGE>
[LOGO] Your Account
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class D
shares are subject to lower annual expenses than Class B shares. The conversion
of Class B to Class D shares is not a taxable event for Federal income tax
purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed income fund convert
approximately ten years after purchase compared to approximately eight years
for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's eight year
conversion schedule will apply. If you exchange your Class B shares in the Fund
for Class B shares of a fund with a longer conversion schedule, the other
fund's conversion schedule will apply. The length of time that you hold both
the original and exchanged Class B shares in both funds will count toward the
conversion schedule. The conversion schedule may be modified in certain other
cases as well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relative to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH CAPITAL FUND, INC.
24
<PAGE>
<TABLE>
<CAPTION>
Information Important for You to
If You Want To Your Choices Know
- -------------------------------------------------------------------------------
<C> <C> <S>
Buy Shares First, select the share Refer to the Merrill Lynch Select
class appropriate for Pricing table on page 19. Be sure to
you read this Prospectus carefully.
--------------------------------------------------------------------
Next, determine the The minimum initial investment for
amount of your the Fund is $1,000 for all accounts
investment except:
.$250 for certain Merrill Lynch
fee-based programs
.$100 for retirement plans.
(The minimums for initial
investments may be waived under
certain circumstances.)
--------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on
Financial Consultant or the next calculation of net asset
securities dealer submit value after your order is placed.
your purchase order Any purchase orders placed prior to
the close of business on the New
York Stock Exchange (generally 4:00
p.m. Eastern time) will be priced at
the net asset value determined that
day.
Purchase orders placed after that
time will be priced at the net asset
value determined on the next
business day. The Fund may reject
any order to buy shares and may
suspend the sale of shares at any
time. Merrill Lynch may charge a
processing fee to confirm a
purchase. This fee is currently
$5.35.
--------------------------------------------------------------------
Or contact the Transfer To purchase shares directly, call
Agent the Transfer Agent at 1-800-MER-FUND
and request a purchase application.
Mail the completed purchase
application to the Transfer Agent at
the address on the inside back cover
of this Prospectus.
- -------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for
Investment shares additional purchases is generally
$50 except that retirement plans
have a minimum additional purchase
of $1 and certain programs, such as
automatic investment plans, may have
higher minimums.
(The minimum for additional
purchases may be waived under
certain circumstances.)
--------------------------------------------------------------------
Acquire additional All dividends are automatically
shares through the reinvested without a sales charge.
automatic dividend
reinvestment plan
--------------------------------------------------------------------
Participate in the You may invest a specific amount on
automatic investment a periodic basis through certain
plan Merrill Lynch investment or central
asset accounts.
- -------------------------------------------------------------------------------
Transfer Shares Transfer to a You may transfer your Fund shares
to Another participating securities only to another securities dealer
Securities dealer that has entered into an agreement
Dealer with Merrill Lynch. Certain
shareholder services may not be
available for the transferred
shares. You may only purchase
additional shares of funds
previously owned before the
transfer. All future trading of
these assets must be coordinated by
the receiving firm.
--------------------------------------------------------------------
Transfer to a non- You must either:
participating securities .Transfer your shares to an account
dealer with the Transfer Agent; or
.Sell your shares.
- -------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CAPITAL FUND, INC.
25
<PAGE>
[LOGO] Your Account
<TABLE>
<CAPTION>
Information Important for You to
If You Want To Your Choices Know
- -------------------------------------------------------------------------------
<C> <C> <S>
Sell Your Have your Merrill Lynch The price of your shares is based on
Shares Financial Consultant or the next calculation of net asset
securities dealer submit value after your order is placed.
your sales order For your redemption request to be
priced at the net asset value on the
day of your request, you must submit
your request to your dealer prior to
that day's close of business on the
New York Stock Exchange (generally
4:00 p.m. Eastern time). Any
redemption request placed after that
time will be priced at the net asset
value at the close of business on
the next business day. Dealers must
submit redemption requests to the
Fund not more than thirty minutes
after the close of business on the
New York Stock Exchange on the day
the request was received.
Securities dealers, including
Merrill Lynch, may charge a fee to
process a redemption of shares.
Merrill Lynch currently charges a
fee of $5.35. No processing fee is
charged if you redeem shares
directly through the Transfer Agent.
The Fund may reject an order to sell
shares under certain circumstances.
--------------------------------------------------------------------
Sell through the You may sell shares held at the
Transfer Agent Transfer Agent by writing to the
Transfer Agent at the address on the
inside back cover of this
prospectus. All shareholders on the
account must sign the letter and
signatures must be guaranteed. If
you hold stock certificates, return
the certificates with the letter.
The Transfer Agent will normally
mail redemption proceeds within
seven days following receipt of a
properly completed request. If you
make a redemption request before the
Fund has collected payment for the
purchase of shares, the Fund or the
Transfer Agent may delay mailing
your proceeds. This delay will
usually not exceed ten days.
If you hold share certificates, they
must be delivered to the Transfer
Agent before they can be converted.
Check with the Transfer Agent or
your Merrill Lynch Financial
Consultant for details.
- -------------------------------------------------------------------------------
Sell Shares Participate in the You can choose to receive systematic
Systematically Fund's Systematic payments from your Fund account
Withdrawal Plan either by check or through direct
deposit to your bank account on a
monthly or quarterly basis. If you
hold your Fund Shares in a Merrill
Lynch CMA(R), CBA(R) or Retirement
Account you can arrange for
systematic redemptions of a fixed
dollar amount on a monthly, bi-
monthly, quarterly, semi-annual or
annual basis, subject to certain
conditions. Under either method you
must have dividends and other
distributions automatically
reinvested. For Class B and C shares
your total annual withdrawals cannot
be more than 10% per year of the
value of your shares at the time
your plan is established. The
deferred sales charge is waived for
systematic redemptions. Ask your
Merrill Lynch Financial Consultant
for details.
- -------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CAPITAL FUND, INC.
26
<PAGE>
<TABLE>
<CAPTION>
Information Important for You to
If You Want To Your Choices Know
- -------------------------------------------------------------------------------
<C> <C> <S>
Exchange Your Select the fund into You can exchange your shares of the
Shares which you want to Fund for shares of many other
exchange. Be sure to Merrill Lynch mutual funds. You must
read that fund's have held the shares used in the
prospectus exchange for at least 15 calendar
days before you can exchange to
another fund.
Each class of Fund shares is
generally exchangeable for shares of
the same class of another fund. If
you own Class A shares and wish to
exchange into a fund in which you
have no Class A shares, you will
exchange into Class D shares.
Some of the Merrill Lynch mutual
funds impose a different initial or
deferred sales charge schedule. If
you exchange Class A or D shares for
shares of a fund with a higher
initial sales charge than you
originally paid, you will be charged
the difference at the time of
exchange. If you exchange Class B
shares for shares of a fund with a
different deferred sales charge
schedule, the higher schedule will
apply. The time you hold Class B or
C shares in both funds will count
when determining your holding period
for calculating a deferred sales
charge at redemption. If you
exchange Class A or D shares for
money market fund shares, you will
receive Class A shares of Summit
Cash Reserves Fund. Class B or C
shares of the Fund will be exchanged
for Class B shares of Summit.
Although there is currently no limit
on the number of exchanges that you
can make, the exchange privilege may
be modified or terminated at any
time in the future.
- -------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH CAPITAL FUND, INC.
27
<PAGE>
[LOGO] Your Account
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, after the close of business on the Exchange (the Exchange
generally closes at 4:00 p.m. Eastern time). The net asset value used in
determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result,
the Fund's net asset value may change on days when you will not be able to
purchase or redeem the Fund's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class
D shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money
market fund. The class you receive may be the class you originally owned when
you entered the program, or in certain cases, a different class. If the
Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
MERRILL LYNCH CAPITAL FUND, INC.
28
<PAGE>
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute at least annually any net investment income and any
net realized long-term capital gains. The Fund may also pay a special
distribution at the end of the calendar year to comply with Federal tax
requirements. If your account is with Merrill Lynch and you would like to
receive dividends in cash, contact your Merrill Lynch Financial Consultant. If
your account is with the Transfer Agent and you would like to receive dividends
in cash, contact the Transfer Agent.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. Capital gain
dividends are generally taxed at different rates than ordinary income
dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
Dividends -- Ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
MERRILL LYNCH CAPITAL FUND, INC.
29
<PAGE>
[LOGO] Your Account
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number or if
the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
"BUYING A DIVIDEND"
Unless your investment is in a tax deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed income or capital
gains, you will pay the full price for the shares and then receive a portion of
the price back in the form of a taxable dividend. Before investing you may want
to consult your tax adviser.
MERRILL LYNCH CAPITAL FUND, INC.
30
<PAGE>
[LOGO] Management of the Fund
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Fund's Investment Adviser, manages the
Fund's investments and its business operations under the overall supervision of
the Fund's Board of Directors. The Investment Adviser has the responsibility
for making all investment decisions for the Fund. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an
affiliate, under which the Investment Adviser may pay a fee for services it
receives. 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, 1999, the Investment Adviser received a fee equal to 0.40% of
the Fund's average daily net assets.
Merrill Lynch Asset Management is part of the Merrill Lynch Asset Management
Group which had approximately $516 billion in investment company and other
portfolio assets under management as of June 1999. This amount includes assets
managed for Merrill Lynch affiliates.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Fund invests. This negative impact may be greater for companies in
foreign markets, since they may be less prepared for the Year 2000 Problem than
domestic companies and markets. If the companies in which the Fund invests have
Year 2000 Problems, the Fund's returns could be adversely affected.
MERRILL LYNCH CAPITAL FUND, INC.
31
<PAGE>
[LOGO] Management of the Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects fi-
nancial results for a single Fund share. The total returns in the table repre-
sent the rate an investor would have earned on an investment in the Fund (as-
suming reinvestment of all dividends). This information has been audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial state-
ments, are included in the Fund's annual report to shareholders, which is
available upon request.
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
For the Year Ended March 31,
-----------------------------------------------------------
Increase
(Decrease) in
Net Asset Value: 1999+ 1998+ 1997+ 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
- --------------------------------------------------------------------------------
Net asset value,
beginning of
year $ 37.56 $ 31.39 $ 30.90 $ 27.74 $ 27.46
- --------------------------------------------------------------------------------
Investment
income -- net 1.00 1.11 1.25 1.21 1.01
- --------------------------------------------------------------------------------
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net (1.28) 8.14 2.43 5.41 1.77
- --------------------------------------------------------------------------------
Total from
investment
operations (.28) 9.25 3.68 6.62 2.78
- --------------------------------------------------------------------------------
Less dividends
and
distributions:
Investment
income -- net (1.08) (1.11) (1.25) (1.16) (.94)
Realized gain on
investments --
net (1.17) (1.97) (1.94) (2.30) (1.56)
- --------------------------------------------------------------------------------
Total dividends
and
distributions (2.25) (3.08) (3.19) (3.46) (2.50)
- --------------------------------------------------------------------------------
Net asset value,
end of year $ 35.03 $ 37.56 $ 31.39 $ 30.90 $ 27.74
- --------------------------------------------------------------------------------
Total Investment Return:*
- --------------------------------------------------------------------------------
Based on net
asset value
per share (.68%) 30.71% 12.62% 24.50% 10.95%
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------
Expenses .57% .55% .55% .56% .57%
- --------------------------------------------------------------------------------
Investment
income -- net 2.86% 3.21% 3.99% 4.09% 3.81%
- --------------------------------------------------------------------------------
Supplemental
Data:
- --------------------------------------------------------------------------------
Net assets, end
of year (in
thousands) $3,631,440 $4,155,677 $3,291,219 $3,225,758 $2,507,767
- --------------------------------------------------------------------------------
Portfolio
turnover 33% 38% 47% 84% 89%
- --------------------------------------------------------------------------------
<CAPTION>
Class B
------------------------------------------------------------
For the Year Ended March 31,
------------------------------------------------------------
Increase
(Decrease) in
Net Asset Value: 1999+ 1998+ 1997+ 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
- --------------------------------------------------------------------------------
Net asset value,
beginning of
year $ 36.68 $ 30.72 $ 30.30 $ 27.28 $ 27.04
- --------------------------------------------------------------------------------
Investment
income -- net .63 .74 .91 .90 .74
- --------------------------------------------------------------------------------
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net (1.25) 7.96 2.39 5.29 1.72
- --------------------------------------------------------------------------------
Total from
investment
operations (.62) 8.70 3.30 6.19 2.46
- --------------------------------------------------------------------------------
Less dividends
and
distributions:
Investment
income -- net (.64) (.77) (.94) (.87) (.66)
Realized gain on
investments --
net (1.17) (1.97) (1.94) (2.30) (1.56)
- --------------------------------------------------------------------------------
Total dividends
and
distributions (1.81) (2.74) (2.88) (3.17) (2.22)
- --------------------------------------------------------------------------------
Net asset value,
end of year $34.25 $ 36.68 $ 30.72 $ 30.30 $ 27.28
- --------------------------------------------------------------------------------
Total Investment Return:*
- --------------------------------------------------------------------------------
Based on net
asset value
per share (1.65%) 29.38% 11.48% 23.22% 9.81%
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
- --------------------------------------------------------------------------------
Expenses 1.59% 1.57% 1.57% 1.58% 1.59%
- --------------------------------------------------------------------------------
Investment
income -- net 1.85% 2.19% 2.97% 3.07% 2.79%
- --------------------------------------------------------------------------------
Supplemental
Data:
- --------------------------------------------------------------------------------
Net assets, end
of year (in
thousands) $4,866,564 $5,938,708 $4,977,431 $5,025,504 $3,664,250
- --------------------------------------------------------------------------------
Portfolio
turnover 33% 38% 47% 84% 89%
- --------------------------------------------------------------------------------
</TABLE>
*Total investment returns exclude the effects of sales loads.
+Based on average shares outstanding.
MERRILL LYNCH CAPITAL FUND, INC.
32
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------
For the Year Ended
March 31, For the Period
--------------------------------------- October 21,
Increase 1994+ to March
(Decrease) in 31,
Net Asset Value: 1999++ 1998++ 1997++ 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of
period $ 36.31 $ 30.44 $ 30.08 $ 27.17 $ 26.81
- ------------------------------------------------------------------------------------------------
Investment
income -- net .62 .73 .90 .92 .49
- ------------------------------------------------------------------------------------------------
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net (1.25) 7.89 2.36 5.24 1.03
- ------------------------------------------------------------------------------------------------
Total from investment operations (.63) 8.62 3.26 6.16 1.52
- ------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment
income -- net (.69) (.78) (.96) (.95) (.43)
Realized gain
on
investments --
net (1.17) (1.97) (1.94) (2.30) (.73)
- ------------------------------------------------------------------------------------------------
Total dividends and distributions (1.86) (2.75) (2.90) (3.25) (1.16)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $33.82 $ 36.31 $ 30.44 $ 30.08 $ 27.17
- ------------------------------------------------------------------------------------------------
Total Investment
Return:**
- ------------------------------------------------------------------------------------------------
Based on net asset value per
share (1.70%) 29.40% 11.45% 23.25% 6.07%#
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------
Expenses 1.59% 1.58% 1.58% 1.59% 1.64%*
- ------------------------------------------------------------------------------------------------
Investment
income -- net 1.83% 2.18% 2.96% 3.08% 3.22%*
- ------------------------------------------------------------------------------------------------
Supplemental
Data:
- ------------------------------------------------------------------------------------------------
Net assets, end
of period (in
thousands) $491,234 $512,783 $322,438 $259,131 $46,902
- ------------------------------------------------------------------------------------------------
Portfolio
turnover 33% 38% 47% 84% 89%
- ------------------------------------------------------------------------------------------------
<CAPTION>
Class D
-----------------------------------------------------------
For the Year Ended
March 31,
-------------------------------------------- For the Period
Increase October 21,
(Decrease) in 1994+ to March
Net Asset Value: 1999++ 1998++ 1997++ 1996 31, 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of
period $37.49 $ 31.34 $ 30.86 $ 27.72 $ 27.27
- ------------------------------------------------------------------------------------------------
Investment
income -- net .91 1.02 1.17 1.16 .48
- ------------------------------------------------------------------------------------------------
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions --
net (1.28) 8.14 2.43 5.38 1.15
- ------------------------------------------------------------------------------------------------
Total from investment operations (.37) 9.16 3.60 6.54 1.63
- ------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment
income -- net (.98) (1.04) (1.18) (1.10) (.45)
Realized gain
on
investments --
net (1.17) (1.97) (1.94) (2.30) (.73)
- ------------------------------------------------------------------------------------------------
Total dividends and distributions (2.15) (3.01) (3.12) (3.40) (1.18)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $34.97 $ 37.49 $ 31.34 $ 30.86 $ 27.72
- ------------------------------------------------------------------------------------------------
Total Investment
Return:**
- ------------------------------------------------------------------------------------------------
Based on net asset value per
share (.92%) 30.40% 12.34% 24.21% 6.42%#
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------
Expenses .82% .80% .80% .81% .87%*
- ------------------------------------------------------------------------------------------------
Investment
income -- net 2.60% 2.95% 3.75% 3.84% 3.94%*
- ------------------------------------------------------------------------------------------------
Supplemental
Data:
- ------------------------------------------------------------------------------------------------
Net assets, end
of period (in
thousands) $1,513,406 $1,280,317 $690,116 $521,599 $171,201
- ------------------------------------------------------------------------------------------------
Portfolio
turnover 33% 38% 47% 84% 89%
- ------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
MERRILL LYNCH CAPITAL FUND, INC. 33
<PAGE>
[This page intentionally left blank]
MERRILL LYNCH CAPITAL FUND, INC.
<PAGE>
------------------------------
POTENTIAL
_____________ INVESTORS ____________
| Open an account (two options). |
| ------------------------------ |
1 2
| |
- ----------------------- --------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT FINANCIAL DATA SERVICES, INC.
OR SECURITIES DEALER P.O. Box 45289
Advises shareholders on Jacksonville, Florida 32232-5289
their Fund investments. Performs recordkeeping and
- ----------------------- reporting services.
| --------------------------------
| |
|_______________________________________________________|
|
|
----------------------------------------------
DISTRIBUTOR
MERRILL LYNCH FUNDS DISTRIBUTOR,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
----------------------------------------------
|
|
- ---------------------- | -----------------------------
COUNSEL --------------------- CUSTODIAN
BROWN & WOOD LLP ___ THE FUND ___ THE BANK OF NEW YORK
One World Trade Center The Board of Directors 90 Washington Streets
New York, New York oversees the Fund. 12th Floor
10048-0557 --------------------- New York, New York 10286
Provides legal advice | | Holds the Fund's assets
to the Fund. | | for safekeeping.
- ----------------------- | | -----------------------------
| |
___________| |_________________
| |
- ---------------------------------- -----------------------------------------
INDEPENDENT AUDITORS INVESTMENT ADVISER
DELOITTE & TOUCHE LLP MERRILL LYNCH
117 Campus Drive ASSET MANAGEMENT, L.P.
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
- ---------------------------------- P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day activities.
-----------------------------------------
[CHART APPEARS HERE]
MERRILL LYNCH CAPITAL FUND, INC.
<PAGE>
[LOGO] For More Information
[LOGO] Prospectus
[MERRILL LYNCH LOGO APPEARS HERE]
Merrill Lynch
Capital Fund, Inc.
[LOGO July 22, 1999]
Shareholder Reports
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch
Financial Consultant or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and Merrill Lynch
brokerage or mutual fund account number. If you have any questions, please call
your Merrill Lynch Financial Consultant or the Transfer Agent at 1-800-MER-
FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated above, if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site
at http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by writing the Public Reference Section of the SEC, Washington, D.C.
20549-6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.
Investment Company Act file #811-2405
Code #10044-07-99
(C)Merrill Lynch Asset Management, L.P.
<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 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,
1999, approximately 64% 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, see "Investment Objective and Policies."
Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Purchase of Shares."
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated July 22,
1999 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
(800) MER-FUND or by writing the Fund at the above address. The Prospectus is
incorporated by reference into this Statement of Additional Information, and
this Statement of Additional Information is incorporated by reference into the
Prospectus. The Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.
----------------
Merrill Lynch Asset Management -- Investment Adviser
Merrill Lynch Funds Distributor -- Distributor
----------------
The date of this Statement of Additional Information is July 22, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objective and Policies......................................... 2
Description of Certain Investments....................................... 2
Mortgage Backed Securities............................................... 6
Investment in Foreign Issuers............................................ 7
European Economic and Monetary Union ("EMU")............................. 8
Derivatives.............................................................. 9
Other Investment Policies and Practices.................................. 12
Investment Restrictions.................................................. 14
Portfolio Turnover....................................................... 16
Management of the Fund.................................................... 17
Directors and Officers................................................... 17
Compensation of Directors................................................ 18
Management and Advisory Arrangements..................................... 18
Code of Ethics........................................................... 20
Purchase of Shares........................................................ 20
Initial Sales Charge Alternatives -- Class A and Class D Shares.......... 21
Deferred Sales Charge Alternatives -- Class B and Class C Shares......... 25
Distribution Plans....................................................... 29
Limitations on the Payment of Deferred Sales Charges..................... 30
Redemption of Shares...................................................... 31
Redemption............................................................... 32
Repurchase............................................................... 32
Reinstatement Privilege -- Class A and Class D Shares.................... 32
Pricing of Shares......................................................... 33
Determination of Net Asset Value......................................... 33
Computation of Offering Price Per Share.................................. 34
Portfolio Transactions.................................................... 34
Shareholder Services...................................................... 36
Investment Account....................................................... 36
Exchange Privilege....................................................... 36
Fee-Based Programs....................................................... 38
Retirement and Education Savings Plans................................... 39
Automatic Investment Plans............................................... 39
Automatic Dividend Reinvestment Plan..................................... 39
Systematic Withdrawal Plan............................................... 40
Dividends and Taxes....................................................... 41
Dividends................................................................ 41
Taxes.................................................................... 41
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 42
Special Rules for Certain Foreign Currency Transactions.................. 43
Performance Data.......................................................... 44
General Information....................................................... 46
Description of Shares.................................................... 46
Independent Auditors..................................................... 46
Custodian................................................................ 46
Transfer Agent........................................................... 47
Legal Counsel............................................................ 47
Reports to Shareholders.................................................. 47
Shareholder Inquiries.................................................... 47
Additional Information................................................... 47
Financial Statements...................................................... 48
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to achieve the highest total
investment return. 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 in the medium to low
rating categories of nationally recognized statistical rating organizations
such as Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Ratings Services ("S&P") or which, in the Investment Adviser's judgment,
possess similar credit characteristics. Such securities, are sometimes
referred to as "high yield/high risk securities" or "junk bonds." The Fund
does not intend to invest in excess of 35% of its total assets in high
yield/high risk securities. See Appendix A -- "Ratings of Debt Securities and
Preferred Stock" for additional information regarding ratings of debt
securities.
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, 1999, approximately 64% of the Fund's
portfolio was invested in equity securities.
Description of Certain Investments
Convertible Securities. Convertible securities entitle the holder to receive
interest payments 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 characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases,
the relatively high yield received from dividend or interest payments as
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compared to common stock dividends and decreased risks of decline in value
relative to the underlying common stock due to their fixed-income nature. As a
result of the conversion feature, however, the interest rate or dividend
preference on a convertible security is generally less than would be the case
if the securities were issued in nonconvertible form.
In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the
United States, the Euromarket and Japan. Issuers during this period have
included major corporations domiciled in the United States, Japan, France,
Switzerland, Canada and the United Kingdom. Even in cases where a substantial
portion of the convertible securities held by the Fund are denominated in
United States dollars, the underlying equity securities may be quoted in the
currency of the country where the issuer is domiciled. With respect to
convertible securities denominated in a currency different from that of the
underlying equity securities, the conversion price may be based on a fixed
exchange rate established at the time the security is issued. As a result,
fluctuations in the exchange rate between the currency in which the debt
security is denominated and the currency in which the share price is quoted
will affect the value of the convertible security. As described herein, the
Fund is authorized to enter into foreign currency hedging transactions in
which it may seek to reduce the effect of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable
issuers and by the value of the underlying common stock. The value of a
convertible security viewed without regard to its conversion feature (i.e.,
strictly on the basis of its yield) is sometimes referred to as its
"investment value." To the extent interest rates change, the investment value
of the convertible security typically will fluctuate. However, at the same
time, the value of the convertible security will be influenced by its
"conversion value," which is the market value of the underlying common stock
that would be obtained if the convertible security were converted. Conversion
value fluctuates directly with the price of the underlying common stock. If,
because of a low price for the underlying common stock the conversion value is
substantially below the investment value of the convertible security, the
price of the convertible security is governed principally by its investment
value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common
stock while holding a fixed-income security. The yield and conversion premium
of convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security,
convert it into the underlying common stock or sell it to a third party.
Certain convertible debt securities may provide a put option to the holder
which entitles the holder to cause the security to be redeemed by the issuer
at a premium over the stated principal amount of the debt security under
certain circumstances.
Securities of Smaller or Emerging Growth Companies. An investment in the
Fund involves greater risk than is customarily associated with funds that
invest in more established 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. Because of
these factors, the Fund believes that its shares may be suitable for
investment by persons who can invest without concern for current income and
who are in a financial position to assume above-average investment risk in
search of above-average long-term reward. It is not intended as a complete
investment program but is designed for those long-term investors who are
prepared to experience above-average fluctuations in net asset value.
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While the issuers in which the Fund will primarily invest may offer greater
opportunities for capital appreciation than large cap issuers, investments in
smaller or emerging growth companies may involve greater risks and thus may be
considered speculative. Management believes that properly selected companies
of this type have the potential to increase their earnings or market valuation
at a rate substantially in excess of the general growth of the economy. Full
development of these companies and trends frequently takes time and, for this
reason, the Fund should be considered as a long-term investment and not as a
vehicle for seeking short-term profits.
The securities in which the Fund invests will often be traded only in the
over-the-counter market or on a regional securities exchange and may not be
traded every day or in the volume typical of trading on a national securities
exchange. As a result, the disposition by the Fund of portfolio securities to
meet redemptions or otherwise may require the Fund to sell these securities at
a discount from market prices or during periods when in management's judgment
such disposition is not desirable or to make many small sales over a lengthy
period of time.
While the process of selection and continuous supervision by management does
not, of course, guarantee successful investment results, it does provide
access to an asset class not available to the average individual due to the
time and cost involved. Careful initial selection is particularly important in
this area as many new enterprises have promise but lack certain of the
fundamental factors necessary to prosper. Investing in small and emerging
growth companies requires specialized research and analysis. In addition, many
investors cannot invest sufficient assets in such companies to provide wide
diversification.
Small companies are generally little known to most individual investors
although some may be dominant in their respective industries. Management of
the Fund believes that relatively small companies will continue to have the
opportunity to develop into significant business enterprises. The Fund may
invest in securities of small issuers in the relatively early stages of
business development which have a new technology, a unique or proprietary
product or service, or a favorable market position. Such companies may not be
counted upon to develop into major industrial companies, but management
believes that eventual recognition of their special value characteristics by
the investment community can provide above-average long-term growth to the
portfolio.
Equity securities of specific small cap issuers may present different
opportunities for long-term capital appreciation during varying portions of
economic or securities markets cycles, as well as during varying stages of
their business development. The market valuation of small cap issuers tends to
fluctuate during economic or market cycles, presenting attractive investment
opportunities at various points during these cycles.
Smaller companies, due to the size and kinds of markets that they serve, may
be less susceptible than large companies to intervention from the Federal
government by means of price controls, regulations or litigation.
Temporary Investments. The Fund reserves the right, as a temporary defensive
measure, to hold, without limitation, assets in temporary investments
("Temporary Investments") including cash and money market securities. Under
certain adverse investment conditions, the Fund may restrict the markets in
which its assets will be invested and may increase the proportion of assets
invested in Temporary Investments. Investments made for defensive purposes
will be maintained only during periods in which the Investment Adviser
determines that economic or financial conditions are adverse for holding or
being primarily invested in equity securities. A portion of the Fund normally
would be held in Temporary Investments in anticipation of investment in equity
securities or to provide for possible redemptions.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its net
assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
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The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between the issuers and their purchasers and may be neither listed on an
exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded
securities. To the extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their securities were
publicly traded. If any privately placed securities held by the Fund are
required to be registered under the securities laws of one or more
jurisdictions before being resold, the Fund may be required to bear the
expenses of registration. Certain of the Fund's investments in private
placements may consist of direct investments and may include investments in
smaller, less-seasoned issuers, which may involve greater risks. These issuers
may have limited product lines, markets or financial resources, or they may be
dependent on a limited management group. In making investments in such
securities, the Fund may obtain access to material nonpublic information which
may restrict the Fund's ability to conduct portfolio transactions in such
securities.
144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either freely tradable in their primary markets
offshore or have been determined to be liquid in accordance with the policies
and procedures adopted by the Fund's Board. The Board of Directors has adopted
guidelines and delegated to the Investment Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board of
Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to predict with
assurance exactly how this market for restricted securities sold and offered
under Rule 144A will continue to develop, the Board of Directors will
carefully monitor the Fund's investments in these securities. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing these securities.
Investment in Other Investment Companies. The Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Fund. In accordance with the Investment Company Act, the
Fund may invest up to 10% of its total assets in securities of other
investment companies. In addition, under the Investment Company Act the Fund
may not own more than 3% of the total outstanding voting stock of any
investment company and not more than 5% of the value of the Fund's total
assets may be invested in the securities of any investment company. If the
Fund acquires shares in investment companies, shareholders would bear both
their proportionate share of expenses in the Fund (including management and
advisory fees) and, indirectly, the expenses of such investment companies
(including management and advisory fees). Investments by the Fund in wholly
owned investment entities created under the laws of certain countries will not
be deemed an investment in other investment companies.
Junk Bonds. Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally
pay higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. The major
risks in junk bond investments include the following:
Junk bonds may be issued by less creditworthy companies. These securities
are vulnerable to adverse changes in the issuer's industry and to general
economic conditions. Issuers of junk bonds may be unable to meet their
interest or principal payment obligations because of an economic downturn,
specific issuer developments or the unavailability of additional financing.
The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the
issuer experiences financial stress, it may be unable to meet its debt
obligations. The issuer's ability to pay its debt obligations also may be
lessened by specific issuer developments, or the unavailability of
additional financing.
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Junk bonds are frequently ranked junior to claims by other creditors. If
the issuer cannot meet its obligations, the senior obligations are
generally paid off before the junior obligations.
Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from the Fund before it matures. If an issuer
redeems the junks bonds, the Fund may have to invest the proceeds in bonds
with lower yields and may lose income.
Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds
than on other higher rated fixed income securities.
Junk bonds may be less liquid than higher rated fixed income securities
even under normal economic conditions. There are fewer dealers in the junk
bond market, and there may be significant differences in the prices quoted
for junk bonds by the dealers. Because they are less liquid, judgement may
play a greater role in valuing certain of the Fund's portfolio securities
than in the case of securities trading in a more liquid market.
The Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
Mortgage Backed Securities
The Fund may invest up to 35% of its total assets in mortgage backed
securities. Mortgage backed securities in which the Fund invests include
mortgage pass-through certificates and multiple-class pass-through securities,
such as REMIC pass-through certificates, CMOs and stripped mortgage backed
securities, and other types of mortgage backed securities that may be
available in the future.
The Fund may invest in guaranteed mortgage pass-through securities which
represent participation interests in pools of residential mortgage loans and
which are issued by United States governmental lenders or by private lenders
and guaranteed by the United States Government or one of its agencies or
instrumentalities, including but not limited to the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
In general, Ginnie Mae certificates are guaranteed by the full faith and
credit of the United States Government for timely payment of principal and
interest on the certificates. Fannie Mae certificates are generally guaranteed
by Fannie Mae, a federally chartered and privately-owned corporation for full
and timely payment of scheduled principal and interest on the certificates. In
general, Freddie Mac certificates are guaranteed by Freddie Mac, a corporate
instrumentality of the United States Government, for timely payment of
interest and the ultimate collection of all principal of the related mortgage
loans.
Mortgage backed securities also include CMOs and REMIC pass-through or
participation certificates, which may be issued by, among others, United
States Government agencies and instrumentalities as well as private lenders.
CMOs and REMIC certificates are issued in multiple classes and the principal
of and interest on the mortgage assets may be allocated among the several
classes of CMOs or REMIC certificates in various ways. Each class of CMOs or
REMIC certificates, often referred to as a "tranche," is issued at a specified
adjustable or fixed interest rate and must be fully retired no later than its
final distribution date. Generally, interest is paid or accrues on all classes
of CMOs or REMIC certificates on a monthly basis. The Fund will not invest in
the lowest tranche of CMOs and REMIC certificates.
Typically, CMOs are collateralized by Ginnie Mae or Freddie Mac certificates
but also may be collateralized by other mortgage assets such as whole loans or
private mortgage pass-through securities. Debt service on CMOs is provided
from payments of principal and interest on collateral of mortgage assets and
any reinvestment income thereon.
A REMIC is a pool of assets that qualifies for special tax treatment under
the Code and consists of certain mortgages or deeds of trust primarily secured
by interests in real property and other permitted investments. Investors may
purchase "regular" and "residual" interests in REMIC trusts although the Fund
does not intend to invest in "residual interests."
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Risks Associated with Mortgage-Backed Securities. 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.
Mortgage backed securities are "pass-through" securities, meaning that
principal and interest payments made by the borrower on the underlying
mortgages are passed through to the Fund. The value of mortgage backed
securities, like that of traditional fixed-income securities, typically
increases when interest rates fall and decreases when interest rates rise.
However, mortgage backed securities differ from traditional fixed-income
securities because of their potential for prepayment without penalty. The
price paid by the Fund for its mortgage backed securities, the yield the Fund
expects to receive from such securities and the average life of the securities
are based on a number of factors, including the anticipated rate of prepayment
of the underlying mortgages. In a period of declining interest rates,
borrowers may prepay the underlying mortgages more quickly than anticipated,
thereby reducing the yield to maturity and the average life of the mortgage
backed securities. Moreover, when the Fund reinvests the proceeds of a
prepayment in these circumstances, it will likely receive a rate of interest
that is lower than the rate on the security that was prepaid.
To the extent that the Fund purchases mortgage backed securities at a
premium, mortgage foreclosures and principal prepayments may result in a loss
to the extent of the premium paid. If the Fund buys such securities at a
discount, both scheduled payments of principal and unscheduled prepayments
will increase current and total returns and will accelerate the recognition of
income which, when distributed to shareholders, will be taxable as ordinary
income. In a period of rising interest rates, prepayments of the underlying
mortgages may occur at a slower than expected rate, creating maturity
extension risk. This particular risk may effectively change a security that
was considered short or intermediate-term at the time of purchase into a long-
term security. Since long-term securities generally fluctuate more widely in
response to changes in interest rates than shorter-term securities, maturity
extension risk could increase the inherent volatility of the Fund. Under
certain interest rate and prepayment scenarios, the Fund may fail to recoup
fully its investment in mortgage backed securities notwithstanding any direct
or indirect governmental or agency guarantee.
Investment in Foreign Issuers
General. The Fund may invest up to 25% of its total net assets in the
securities of foreign issuers. Investment in securities of foreign issuers
involves certain risks not typically involved in domestic investments,
including fluctuations in foreign exchange rates, future political and
economic developments, different legal systems and the possible imposition of
exchange controls or other foreign governmental laws or restrictions.
Securities prices in different countries are subject to different economic,
financial, political and social factors. Changes in foreign currency exchange
rates will affect the value of securities in the Fund and the unrealized
appreciation or depreciation of investments. In addition, with respect to
certain foreign countries, there is the possibility of expropriation of
assets, confiscatory taxation, difficulty in obtaining or enforcing a court
judgment, economic, political or social instability or diplomatic developments
that could affect investments in those countries. Certain foreign investments
also may be subject to foreign withholding taxes. These risks often are
heightened for investments in smaller, emerging capital markets.
Public Information. Securities of foreign issuers may not be registered with
the Commission, nor may the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly available
information about a foreign issuer than about a U.S. issuer and such foreign
issuers may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of U.S issuers.
Trading Volume, Clearance and Settlement. Foreign financial markets, while
generally growing in trading volume, typically have substantially less volume
than U.S. markets, and securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable domestic
companies. The foreign markets also have different clearance and settlement
procedures. Delays in settlement could result in periods when assets of the
Fund are uninvested and no return is earned thereon. The inability to dispose
of a portfolio security due to settlement problems could result either in
losses to the Fund due to subsequent declines in the value of such
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portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Government Supervision and Regulation. There generally is less governmental
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the United States. For example, there may be no
comparable provisions under certain foreign laws to insider trading and
similar investor protection securities laws that apply with respect to
securities transactions consummated in the United States. Further, brokerage
commissions and other transaction costs on foreign securities exchanges
generally are higher than in the United States.
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 the 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.
European Economic and Monetary Union ("EMU")
For a number of years, certain European countries have been seeking economic
unification that would, among other things, reduce barriers between countries,
increase competition among companies, reduce government subsidies in certain
industries, and reduce or eliminate currency fluctuations among these European
countries. The Treaty on European Union (the "Maastricht Treaty") set out a
framework for the European Economic and Monetary Union ("EMU") among the
countries that comprise the European Union ("EU"). EMU established a single
common European currency (the "euro") that was introduced on January 1, 1999
and is expected to replace the existing national currencies of all EMU
participants by July 1, 2002. EMU took effect for the initial EMU participants
as of January 1, 1999. Certain securities issued in participating EU countries
(beginning with government and corporate bonds) were redenominated in the
euro, and are listed, traded and make dividend and other payments only in
euros.
No assurance can be given that EMU will take full effect, that all the
changes planned for the EU can be successfully implemented, or that these
changes will result in the economic and monetary unity and stability intended.
There is a possibility that EMU will not be completed, or will be completed
but then partially or completely unwound. Because any participating country
may opt out of EMU within the first three years, it is also
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possible that a significant participant could choose to abandon EMU, which
could diminish its credibility and influence. Any of these occurrences could
have adverse effects on the markets of both participating and non-
participating countries, including sharp appreciation or depreciation of
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of
confidence in the European markets, an undermining of European economic
stability, the collapse or slowdown of the drive toward European economic
unity, and/or reversion of the attempts to lower government debt and inflation
rates that were introduced in anticipation of EMU. Also, withdrawal from EMU
by an initial participant could cause disruption of the financial markets as
securities redenominated in euros are transferred back into that country's
national currency, particularly if the withdrawing country is a major economic
power. Such developments could have an adverse impact on the Fund's
investments in Europe generally or in specific countries participating in EMU.
Gains or losses from euro conversions may be taxable to Fund shareholders
under foreign or, in certain limited circumstances, U.S. tax laws.
Derivatives
The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index ( a measure of value or rates,
such as the Standard & Poor's 500 Index or the prime lending rate).
Derivatives allow the Fund to increase or decrease the level of risk to which
the Fund is exposed more quickly and efficiently than transactions in other
types of instruments.
Hedging
The Fund may use Derivatives for hedging purposes. Hedging is a strategy in
which a Derivative is used to offset the risk that other Fund holdings may
decrease in value. Losses on the other investment may be substantially reduced
by gains on a Derivative that reacts in an opposite manner to market
movements. While hedging can reduce losses, it can also reduce or eliminate
gains if the market moves in a different manner than anticipated by the Fund
or if the cost of the Derivative outweighs the benefit of the hedge. Hedging
also involves the risk that changes in the value of the Derivative will not
match those of the holdings being hedged as expected by the Fund, in which
case any losses on the holdings being hedged may not be reduced. This risk is
known as "Correlation Risk."
The Fund may use the following types of Derivative instruments and trading
strategies:
Options on Securities and Securities Indices
Writing Call Options. The Fund may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of
which correlates with securities held in its portfolio. When the Fund writes a
call option, in return for an option premium the Fund gives another party the
right to buy specified securities owned by the Fund at the exercise price on
or before the expiration date, in the case of an option on securities, or
agrees to pay to another party an amount based on any gain in a specified
securities index beyond a specified level on or before the expiration date, in
the case of an option on a securities index. The Fund may write call options
to earn income, through the receipt of option premiums. In the event the party
to which the Fund has written an option fails to exercise its rights under the
option because the value of the underlying securities is less than the
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, the Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price, while the option
remains outstanding. Writing a call option may involve correlation risk.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the OTC markets. In
general, exchange-traded options have standardized exercise prices and
expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection
with such options is guaranteed by the exchange or a related clearing
corporation. OTC options have more flexible terms negotiated between the buyer
and the seller, but generally do not require the
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parties to post margin and are subject to greater credit risk. OTC options
also involve greater liquidity risk. See "Additional Risk Factors of OTC
Transactions; Limitation on the Use of OTC Derivatives" below.
Futures
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a
specified future date at a specified price. No price is paid upon entering
into a futures contract. Rather, upon purchasing or selling a futures contract
the Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 5%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing
any loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day. Futures involve substantial leverage risk.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in value or the Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying asset is
a currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.
Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the U.S.
dollar.
Forward Foreign Exchange Transactions. Forward foreign exchange transactions
are OTC contracts to purchase or sell a specified amount of a specified
currency or multinational currency unit at a price and future date set at the
time of the contract. Spot foreign exchange transactions are similar but
require current, rather than future, settlement. The Fund will enter into
foreign exchange transactions only for purposes of hedging either a specific
transaction or a portfolio position. The Fund may enter into a foreign
exchange transaction for purposes of hedging a specific transaction by, for
example, purchasing a currency needed to settle a security transaction or
selling a currency in which the Fund has received or anticipates receiving a
dividend or distribution. The Fund may enter into a foreign exchange
transaction for purposes of hedging a portfolio position by selling forward a
currency in which a portfolio position of the Fund is denominated or by
purchasing a currency in which the Fund anticipates acquiring a portfolio
position in the near future. The Fund may also hedge portfolio positions
through currency swaps, which are transactions in which one currency is
simultaneously bought for a second currency on a spot basis and sold for the
second currency on a forward basis. Forward foreign exchange transactions
involve substantial currency risk, and also involve credit and liquidity risk.
Currency Futures. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through use of currency futures or
options thereon. Currency futures are similar to forward foreign exchange
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transactions except that futures are standardized, exchange-traded contracts.
See "Futures." Currency futures involve substantial currency risk, and also
involve leverage risk.
Currency Options. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through the use of currency options.
Currency options are similar to options on securities, but in consideration
for an option premium the writer of a currency option is obligated to sell (in
the case of a call option) or purchase (in the case of a put option) a
specified amount of a specified currency on or before the expiration date for
a specified amount of another currency. The Fund may engage in transactions in
options on currencies either on exchanges or OTC markets. See "Types of
Options" above and "Additional Risk Factors of OTC Transactions; Limitations
on the Use of OTC Derivatives" below. Currency options involve substantial
currency risk, and may also involve credit, leverage or liquidity risk.
Limitations on Currency Hedging. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates
purchasing, which are denominated in such currency. The Fund may, however,
hedge a currency by entering into a transaction in a Currency Instrument
denominated in a currency other than the currency being hedged (a "cross-
hedge"). The Fund will only enter into a cross-hedge if the Investment Adviser
believes that (i) there is a demonstrable high correlation between the
currency in which the cross-hedge is denominated and the currency being
hedged, and (ii) executing a cross-hedge through the currency in which the
cross-hedge is denominated will be significantly more cost-effective or
provide substantially greater liquidity than executing a similar hedging
transaction by means of the currency being hedged.
Risk Factors in Hedging Foreign Currency Risks. Hedging transactions
involving Currency Instruments involve substantial risks, including
correlation risk. While the Fund's use of Currency Instruments to effect
hedging strategies is intended to reduce the volatility of the net asset value
of the Fund's shares, the net asset value of the Fund's shares will fluctuate.
Moreover, although Currency Instruments will be used with the intention of
hedging against adverse currency movements, transactions in Currency
Instruments involve the risk that anticipated currency movements will not be
accurately predicted and that the Fund's hedging strategies will be
ineffective. To the extent that the Fund hedges against anticipated currency
movements which do not occur, the Fund may realize losses, and decreases its
total return, as the result of its hedging transactions. Furthermore, the Fund
will only engage in hedging activities from time to time and may not be
engaging in hedging activities when movements in currency exchange rates
occur.
It may not be possible for the Fund to hedge against currency exchange rate
movements, even if correctly anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Fund is not able
to enter into a hedging transaction at an effective price, or (ii) the
currency exchange rate movement relates to a market with respect to which
Currency Instruments are not available and it is not possible to engage in
effective foreign currency hedging.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit Risk -- the risk that the counterparty on a Derivative transaction
will be unable to honor its financial obligation to the Fund.
Currency Risk -- the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage Risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large
changes in the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that greatly exceed the
amount originally invested.
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Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price that
the seller believes the security is currently worth.
Use of Derivatives for hedging purposes involves correlation risk. If the
value of the Derivative moves more or less than the value of the hedged
instruments the Fund will experience a gain or loss which will not be
completely offset by movements in the value of the hedged instruments.
The Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives." However, there can
be no assurance that, at any specific time, either a liquid secondary market
will exist for a Derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may therefore not be possible to close a
position in a Derivative without incurring substantial losses, if at all.
Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund.
When the Fund engages in such a transaction, the Fund will deposit in a
segregated account at its custodian liquid securities with a value at least
equal to the Fund's exposure, on a mark-to-market basis, to the transaction
(as calculated pursuant to requirements of the Commission). Such segregation
will ensure that the Fund has assets available to satisfy its obligations with
respect to the transaction, but will not limit the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives
Certain Derivatives traded in OTC markets, including OTC options, involve
substantial liquidity risk. The absence of liquidity may make it difficult or
impossible for the Fund to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for the Fund
to ascertain a market value for such instruments. The Fund will therefore
acquire illiquid OTC instruments (i) if the agreement pursuant to which the
instrument is purchased contains a formula price at which the instrument may
be terminated or sold, or (ii) for which the 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.
Because Derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that the Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty the Fund is at risk that its counterparty
will become bankrupt or otherwise fail to honor its obligations. The Fund will
attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in
Strategic Instruments traded in OTC markets only with financial institutions
which have substantial capital or which have provided the Fund with a third-
party guaranty or other credit enhancement.
Other Investment Policies and Practices
Borrowing and Leverage. The Fund may borrow up to 33 1/3% of its total
assets, taken at market value, but only from banks as a temporary measure for
extraordinary or emergency purposes, including to meet redemptions (so as not
to force the Fund to liquidate securities at a disadvantageous time) or to
settle securities transactions. The Fund will not purchase securities at any
time when borrowings exceed 5% of its total assets, except (a) to honor prior
commitments or (b) to exercise subscription rights when outstanding borrowings
have been obtained exclusively for settlements of other securities
transactions. The purchase of securities while borrowings are outstanding will
have the effect of leveraging the Fund. Such leveraging increases the Fund's
exposure to capital risk, and borrowed funds are subject to interest costs
that will reduce net income.
The use of leverage by the Fund creates an opportunity for greater total
return, but, at the same time, creates special risks. For example, leveraging
may exaggerate changes in the net asset value of Fund shares and in the yield
on the Fund's portfolio. Although the principal of such borrowings will be
fixed, the Fund's assets may
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change in value during the time the borrowings are outstanding. Borrowings
will create interest expenses for the Fund which can exceed the income from
the assets purchased with the borrowings. To the extent the income or capital
appreciation derived from securities purchased with borrowed funds exceeds the
interest the Fund will have to pay on the borrowings, the Fund's return will
be greater than if leverage had not been used. Conversely, if the income or
capital appreciation from the securities purchased with such borrowed funds is
not sufficient to cover the cost of borrowing, the return to the Fund will be
less than if leverage had not been used, and therefore the amount available
for distribution to shareholders as dividends and other distributions will be
reduced. In the latter case, the Investment Adviser in its best judgment
nevertheless may determine to maintain the Fund's leveraged position if it
expects that the benefits to the Fund's shareholders of maintaining the
leveraged position will outweigh the current reduced return.
Certain types of borrowings by the Fund may result in the Fund being subject
to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing
the Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the
specified cure period may result in acceleration of outstanding indebtedness
and require the Fund to dispose of portfolio investments at a time when it may
be disadvantageous to do so.
The Fund at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are not less favorable than those
available from comparable sources of funds in the marketplace.
Lending of Portfolio Securities. Subject to investment restriction (5)
below, the Fund may lend securities with a value not exceeding 20% its total
assets. In return, the Fund receives collateral in an amount equal to at least
100% of the current market value of the loaned securities in cash or
securities issued or guaranteed by the U.S. Government. The Fund receives
securities as collateral for the loaned securities and the Fund and the
borrower negotiate a rate for the loan premium to be received by the Fund for
the loaned securities, which increases the Fund's yield. The Fund may receive
a flat fee for its loans. The loans are terminable at any time and the
borrower, after notice, is required to return borrowed securities within five
business days. The Fund may pay reasonable finder's, administrative and
custodial fees in connection with its loans. In the event that the borrower
defaults on its obligation to return borrowed securities because of insolvency
or for any other reason, the Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent the value of
the collateral falls below the market value of the borrowed securities.
No Rating Criteria for Debt Securities. The Fund has not established any
rating criteria for the debt securities in which it may invest and such
securities may not be rated at all for creditworthiness. Securities rated in
the medium to low rating categories of nationally recognized statistical
rating organizations, such as S&P and Moody's and unrated securities of
comparable quality (such lower rated and unrated securities are referred to
herein as "high yield/high risk securities" or "junk bonds") are speculative
with respect to the capacity to pay interest and repay principal in accordance
with the terms of the security and generally involve a greater volatility of
price than securities in higher rating categories. In purchasing such
securities, the Fund will rely on the Investment Adviser's judgment, analysis
and experience in evaluating the creditworthiness of an 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 the issuer's
management and regulatory matters. The Fund does not intend to purchase debt
securities that are in default or that the Investment Adviser believes will be
in default.
The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of
such issuers generally is greater than is the case with higher rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of high yield/high risk securities may be more
likely to experience financial stress especially if such issuers are highly
leveraged. During such periods, service of debt obligations also may be
adversely affected by specific issuer developments, or the issuer's inability
to meet specific projected business forecasts, or the unavailability of
additional financing. The risk of loss due to default by the issuer is
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<PAGE>
significantly greater for the holders of high yield/high risk securities
because such securities may be unsecured and may be subordinated to other
creditors of the issuer.
High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and,
consequently, dividends to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it generally is not as liquid as the secondary market for higher
rated securities. Reduce secondary market liquidity may have an adverse impact
on market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations
generally are available on many high yield/high risk securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. The Fund's Directors, or the Investment
Adviser will consider carefully the factors affecting the market for high
yield/high risk, lower rated securities in determining whether any particular
security is liquid or illiquid and whether current market quotations are
readily available.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to affect adversely the Fund's net asset value. In addition, the Fund
may incur additional expenses to the extent it is required to seek recovery
upon a default on a portfolio holding or participate in the restructuring of
the obligations.
Suitability. The economic benefit of an investment in the Fund depends upon
many factors beyond the control of the Fund, the Investment Adviser and its
affiliates. Because of its emphasis on foreign securities, the Fund should be
considered a vehicle for diversification and not as a balanced investment
program. The suitability for any particular investor of a purchase of shares
in the Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks associated with
investing in foreign securities, including the risk of loss of principal.
Investment Restrictions
The Fund has adopted a number of fundamental and non-fundamental investment
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
of 1940, as amended (the "Investment Company Act") means the lesser of (i) 67%
of the Fund's shares present at a meeting at which more than 50% of the
outstanding shares of the Fund are represented or (ii) more than 50% of the
Fund's 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.
(2) Invest more than 25% of its total assets, taken at market value at
the time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities).
(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.
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(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 and 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 Prospectus and this
Statement of Additional Information, as they may be amended from time to
time.
(6) Issue senior securities to the extent such issuance would violate
applicable law.
(7) Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by 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 the Prospectus and this
Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
(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 investment restrictions,
which may be changed by the Board of Directors without shareholder approval,
the Fund may not:
(a) Purchase securities of other investment companies, except to the
extent such purchases are 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" provisions) of the
Investment Company Act at any time the Fund's shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
(b) Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund does not, however,
currently intend to engage in short sales, except short sales "against
the box."
(c) Invest in securities that cannot be readily resold because of legal
or contractual restrictions or that cannot otherwise be marketed, redeemed
or put to the issuer or to a third party, if at the time of acquisition
more than 15% of its net assets would be invested in such securities. This
restriction shall not apply to securities that mature within seven days or
securities that 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. 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 as a temporary measure for extraordinary or
emergency purposes.
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Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Investment Adviser or its affiliates or any of their
directors, officers or employees, acting as principal, unless pursuant to a
rule or exemptive order under the Investment Company Act.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of any such
transaction, the sum of the market value of OTC options currently outstanding
that are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding that were sold by the Fund
and margin deposits on the Fund's existing OTC options on financial futures
contracts exceeds 15% of the net assets of the Fund, taken at market value,
together with all other assets of the Fund that are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund
to a primary U.S. Government securities dealer recognized by the Federal
Reserve Bank of New York and if the Fund has the unconditional contractual
right to repurchase such OTC option from the dealer at a predetermined price,
then the Fund will treat as illiquid such amount of the underlying securities
as is equal to the repurchase price less the amount by which the option is
"in-the-money" (i.e., current market value of the underlying securities minus
the option's strike price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a multiple of the
premium received for the option, plus the amount by which the option is "in-
the-money." This policy as to OTC options is not a fundamental policy of the
Fund and may be amended by the Board of Directors of the Fund without the
approval of the Fund's shareholders. However, the Fund will not change or
modify this policy prior to the change or modification by the Commission staff
of its position.
In addition, as a non-fundamental policy which may be changed by the Board
of Directors and to the extent required by the Commission or its staff, the
Fund will, for purposes of investment restriction (1), treat securities issued
or guaranteed by the government of any one foreign country as the obligations
of a single issuer.
As another non-fundamental policy, the Fund will not invest in securities
that are subject to material legal restrictions on repatriation of assets or
(b) cannot be readily resold because of legal or contractual restrictions or
which are not otherwise readily marketable, including repurchase agreements
and purchase and sale contracts maturing in more than seven days, if,
regarding all such securities, more than 15% of its net assets, taken at
market value, would be invested in such securities.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or
its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions permitted pursuant to an exemptive order under the Investment
Company Act. See "Portfolio Transactions." Without such an exemptive order,
the Fund is prohibited from engaging in portfolio transactions with Merrill
Lynch or its affiliates acting as principal.
Portfolio Turnover
The Investment Adviser will effect portfolio transactions without regard to
the time the securities have been held, if, in its judgment, such transactions
are advisable in light of a change in circumstances of a particular company or
within a particular industry or in general market, financial or economic
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions and the Fund's portfolio turnover
rate may vary greatly from year to year or during periods within a year. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio
during the year. A high portfolio turnover may result in negative tax
consequences, such as an increase in capital gain dividends. High portfolio
turnover may also involve correspondingly greater transaction costs in the
form of dealer spreads and brokerage commissions, which are borne directly by
the Fund.
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MANAGEMENT OF THE FUND
Directors and Officers
The Directors of the Fund consist of eight individuals, six of whom are not
"interested persons" of the Fund as defined in the Investment Company Act (the
"non-interested Directors"). The Directors are responsible for the overall
supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the Investment Company
Act. Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
Terry K. Glenn (58) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and Fund Asset Management, L.P. ("FAM")
(which terms as used herein include their corporate predecessors) since 1983;
President of Princeton Funds Distributor, Inc. ("PFD") since 1986 and Director
thereof since 1991; Executive Vice President and Director of Princeton
Services, Inc. ("Princeton Services") since 1993; President of Princeton
Administrators, L.P. since 1988.
Donald Cecil (72) -- Director(2)(3) -- 1114 Avenue of the Americas, New
York, New York 10036. Special Limited Partner of Cumberland Associates (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 (67) -- Director(2)(3) -- 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 (72) -- Director(2)(3) -- 777 Third Avenue, New York, New
York 10017. President of Grey Advertising Inc. since 1968, Chief Executive
Officer since 1970 and Chairman of the Board of Directors since 1972; Director
of The May Department Stores Company, Bowne & Co., Inc. (financial printers),
Harman International Industries, Inc. and Ethan Allen Interiors, Inc.
Jack B. Sunderland (70) -- Director(2)(3) -- 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 (60) -- Director(2)(3) -- Suite 3405, One Tampa City
Center, 201 North Franklin Street, Tampa, Florida 33062. 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 (57) -- Director(2)(3) -- 16410 Maddalena Place, Del Ray
Beach, Florida 33446. Managing Director of FGW Associates since 1997; Vice
President, Planning Investment, and Development of Warner Lambert Co. from
1979 to 1997.
Arthur Zeikel (67) -- Director(1)(2) -- 300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Investment Adviser and FAM from 1997 to 1999 and
President thereof from 1977 to 1997; Chairman of Princeton Services from 1997
to 1999, Director thereof from 1993 to 1999 and President thereof from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from
1990 to 1999.
Kurt Schansinger (39) -- 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 (40) -- Vice President(1) -- Director (Equity Fund Management)
of the Investment Adviser since 1997; Vice President of the Investment Adviser
from 1991 to 1997.
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Donald C. Burke (39) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; Vice President
of PFD since 1999; First Vice President of the Investment Adviser from 1997 to
1999; Vice President of the Investment Adviser from 1990 to 1997; Director of
Taxation of the Investment Adviser since 1990.
Thomas D. Jones, III (34) -- Secretary(1)(2) -- Vice President of the
Investment Adviser since 1998; Attorney with the Investment Adviser and FAM
since 1992.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a trustee, director or officer of certain
other investment companies for which MLAM or FAM acts as the investment
adviser or manager.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Directors.
As of July 1, 1999, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, Mr. Glenn, a Director
and officer of the Fund, and the other officers of the Fund owned an aggregate
of less than 1% of the outstanding shares of common stock of ML & Co.
Compensation of Directors
The Fund pays each non-interested Director a fee of $3,500 per year plus
$500 per Board meeting attended. The Fund also compensates each member of the
Audit and Nominating Committee (the "Committee"), which consists of the non-
interested Directors at a rate of $2,500 per Committee meeting attended. The
Fund pays the Chairman of the Committee an additional fee of $1,000 per
Committee meeting attended. The Fund reimburses each non-interested Director
for his out-of-pocket expenses relating to attendance at Board and Committee
meetings.
The following table shows the compensation earned by the non-interested
Directors for the fiscal year ended March 31, 1999 and the aggregate
compensation paid to them from all registered investment companies advised by
the Manager and its affiliate, FAM ("MLAM/FAM-advised funds"), for the
calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregate
Pension or Estimated Compensation from
Retirement Benefits Annual Fund and Other
Position with Compensation Accrued as Part of Benefits upon MLAM/FAM-
Name Fund From Fund Fund Expense Retirement Advised Funds(1)
- ---- ------------- ------------ ------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Donald Cecil............ Director $9,000 None None $277,808
M. Colyer Crum.......... Director $8,000 None None $116,600
Edward H. Meyer......... Director $8,000 None None $214,558
Jack B. Sunderland...... Director $8,000 None None $133,600
J. Thomas Touchton...... Director $8,000 None None $133,600
Fred G. Weiss........... Director $8,000 None None $140,842
</TABLE>
- ----------
(1) The Trustees serve on the boards of MLAM/FAM-advised funds as follows: Mr.
Cecil (35 registered investment companies consisting of 35 portfolios);
Mr. Crum (16 registered investment companies consisting of 16 portfolios);
Mr. Meyer (35 registered investment companies consisting of 35
portfolios); Mr. Sunderland (19 registered investment companies consisting
of 31 portfolios); Mr. Touchton (19 registered investment companies
consisting of 31 portfolios); and Mr. Weiss (16 registered investment
companies consisting of 16 portfolios).
Directors of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares--Reduced Initial Sales Charges--Purchase Privilege of Certain
Persons."
Management and Advisory Arrangements
Investment Advisory Services. The Investment Adviser provides the Fund with
investment advisory and management services. Subject to the supervision of the
Directors, the Investment Adviser is responsible for the
18
<PAGE>
actual management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Investment Adviser. The Investment Adviser
performs certain of the other administrative services and provides all the
office space, facilities, equipment and necessary personnel for management of
the Fund.
Investment Advisory Fee. The Fund has entered into an investment advisory
agreement with the Investment Adviser (the "Advisory Agreement"), pursuant to
which the Investment Adviser receives for its services to the Fund monthly
compensation 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. The table below sets forth information about
the total management fees paid by the Fund to the Investment Adviser for the
periods indicated.
<TABLE>
<CAPTION>
Investment
Advisory
Period Fee
------ -----------
<S> <C>
Fiscal year ended March 31, 1999.............................. $45,106,929
Fiscal year ended March 31, 1998.............................. $41,894,654
Fiscal year ended March 31, 1997.............................. $37,585,806
</TABLE>
The Investment Adviser has entered into a sub-advisory agreement with
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") pursuant to which
MLAM U.K. provides investment advisory services to the Investment Adviser with
respect to the Fund. The Investment Adviser paid no fees to MLAM U.K. for the
fiscal years ended March 31, 1999, 1998 and 1997.
Payment of Fund Expenses. The Investment Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the
Fund connected with investment and economic research, trading and investment
management of the Fund, as well as the fees of all Directors of the Fund who
are affiliated persons of the Investment Adviser. The Fund pays all other
expenses incurred in the operation of the Fund, including among other things:
taxes, expenses for legal and auditing services, costs of printing proxies,
stock certificates, shareholder reports, prospectuses and statements of
additional information, except to the extent paid by Merrill Lynch Funds
Distributor, a division of PFD (the "Distributor"); charges of the custodian
and sub-custodian, and the transfer agent; expenses of redemption of shares;
SEC fees; expenses of registering the shares under Federal, state or foreign
laws; fees and expenses of non-interested Directors; insurance; interest;
brokerage costs; litigation and other extraordinary or non-recurring expenses;
and other expenses properly payable by the Fund. Accounting services are
provided for the Fund by the Investment Adviser. The Distributor will pay
certain promotional expenses of the Fund incurred in connection with the
offering of shares of the Fund. Certain expenses will be financed by the Fund
pursuant to distribution plans in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares --Distribution Plans."
Organization of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are ML & Co., a financial services holding
company and the parent of Merrill Lynch, and Princeton Services. ML & Co. and
Princeton Services are "controlling persons" of the Investment Adviser as
defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.
The 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 Sub-Advisory Agreement will continue in
effect from year to year if approved annually (a) by the Directors of the Fund
or by a majority of the voting securities of the Fund and (b) by a majority of
the Directors
19
<PAGE>
who are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contracts are not assignable
and may be terminated without penalty on 60 days' written notice at the option
of either party or by vote of the shareholders of the Fund.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant
to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent
receives a fee of $11.00 per Class A or Class D account and $14.00 per Class B
or Class C account and is entitled to reimbursement for certain transaction
charges and out-of-pocket expenses incurred by the Transfer Agent under the
Transfer Agency Agreement. Additionally, a $.20 monthly closed account charge
will be assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the month the
account is closed. At the end of the calendar year, no further fees will be
due. For purposes of the Transfer Agency Agreement, the term "account"
includes a shareholder account maintained directly by the Transfer Agent and
any other account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the recordkeeping
system is maintained by a subsidiary of ML & Co.
Distribution Expenses. The Fund has entered into four separate distribution
agreements with the Distributor in connection with the continuous offering of
each class of shares of the Fund (the "Distribution Agreements"). The
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays
for the printing and distribution of copies thereof used in connection with
the offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreement described above.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act that incorporates the Code of Ethics of
the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.
The Codes require that all employees of the Investment Adviser pre-clear any
personal securities investment (with limited exceptions, such as government
securities). The pre-clearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the 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).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System: shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives and shares of Class B and Class
C are sold to investors choosing the deferred sales charge alternatives. Each
Class A, Class B, Class C or Class D share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees (also
20
<PAGE>
known as service fees) and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. The contingent deferred
sales charges ("CDSCs"), distribution fees and account maintenance fees that
are imposed on Class B and Class C shares, as well as the account maintenance
fees that are imposed on Class D shares, are imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
do not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares are calculated in the same manner at the same time and
differ only to the extent that account maintenance and distribution fees and
any incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The Merrill Lynch Select Pricing SM System is used by more than 50
registered investment companies advised by the Investment Adviser or its
affiliate, FAM. Funds advised by the Investment Adviser or FAM that utilize
the Merrill Lynch Select Pricing SM System are referred to herein as "Select
Pricing Funds."
The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering
from time to time. Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change. Merrill Lynch
may charge its customers a processing fee (presently $5.35) to confirm a sale
of shares to such customers. Purchases made directly through the Transfer
Agent are not subject to the processing fee.
Initial Sales Charge Alternatives -- Class A and Class D Shares
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase
Class A shares should purchase Class A shares rather than Class D shares
because there is an account maintenance fee imposed on Class D shares.
Investors qualifying for significantly reduced initial sales charges may find
the initial sales charge alternative particularly attractive because similar
sales charge reductions are not available with respect to the deferred sales
charges imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charges and, in the case of Class D shares, the
account maintenance fee. Although some investors who previously purchased
Class A shares may no longer be eligible to purchase Class A shares of other
Select Pricing Funds, those previously purchased Class A shares, together with
Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for a reduced initial sales charge
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class
C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for
a single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
21
<PAGE>
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment
adviser.
Eligible Class A Investors
Class A shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares. Investors
who currently own Class A shares, including participants in the Merrill Lynch
Blueprint SM Program, are entitled to purchase additional Class A shares of
the Fund in that account. Certain employer-sponsored retirement or savings
plans, including eligible 401(k) plans, may purchase Class A shares at net
asset value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs and U.S. branches of foreign banking
institutions provided that the program has $3 million or more initially
invested in Select Pricing Funds. Also eligible to purchase Class A shares at
net asset value are participants in certain investment programs including
TMA SM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and certain purchases made in connection
with certain fee-based programs. In addition, Class A shares are offered at
net asset value to ML & Co. and its subsidiaries and their directors and
employees and to members of the Boards of MLAM-advised investment companies.
Certain persons who acquired shares of certain MLAM-advised closed-end funds
in their initial offerings who wish to reinvest the net proceeds from a sale
of their closed-end fund shares of common stock in shares of the Fund also may
purchase Class A shares of the Fund if certain conditions are met. In
addition, Class A shares of the Fund and certain other Select Pricing Funds
are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. and, if certain conditions are met, to shareholders
of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted
by such funds in shares of the Fund and certain other Select Pricing Funds.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
Class A and Class D Sales Charge Information
<TABLE>
<CAPTION>
Class A Shares
--------------------------------------------------------------------
Fiscal
Year
Ended Gross Sales Sales Charges Sales Charges CDSCs Received on
March Charges Retained by Paid to Redemption of
31, Collected Distributor Merrill Lynch Load-Waived Shares
------ ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1999 $375,455 $26,209 $349,246 $54,988
1998 $553,366 $43,421 $509,945 $60,049
1997 $621,183 $41,749 $579,434 $ 0
</TABLE>
<TABLE>
<CAPTION>
Class D Shares
--------------------------------------------------------------------
Fiscal
Year
Ended Gross Sales Sales Charges Sales Charges CDSCs Received on
March Charges Retained by Paid to Redemption of
31, Collected Distributor Merrill Lynch Load-Waived Shares
------ ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1999 $1,328,780 $ 89,253 $1,239,527 $19,091
1998 $2,040,769 $137,456 $1,903,313 $18,937
1997 $2,108,587 $144,815 $1,963,772 $ 0
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
22
<PAGE>
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
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.
Reinvested Dividends. No initial sales charges are imposed upon Class A and
Class D shares issued as a result of the automatic reinvestment of dividends.
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of any other Select Pricing Funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or
any Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available
only to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit
plans for which Merrill Lynch provides plan participant recordkeeping
services. The Letter of Intent is not a binding obligation to purchase any
amount of Class A or Class D shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intent may be
included under a subsequent Letter of Intent executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. The value of Class A and Class D shares of the Fund and of
other Select Pricing Funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intent, may be included as a credit toward the completion of such Letter, but
the reduced sales charge applicable to the amount covered by such Letter will
be applied only to new purchases. If the total amount of shares does not equal
the amount stated in the Letter of Intent (minimum of $25,000), the investor
will be notified and must pay, within 20 days of the expiration of such
Letter, the difference between the sales charge on the Class A or Class D
shares purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares equal
to at least 5.0% of the intended amount will be held in escrow during the 13-
month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intent must be at least
5.0% of the dollar amount of such Letter. If a purchase during the term of
such Letter would otherwise be subject to a further reduced sales charge based
on the right of accumulation, the purchaser will be entitled on that purchase
and subsequent purchases to the further reduced percentage sales charge that
would be applicable to a single purchase equal to the total dollar value of
the Class A or Class D shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charge on any previous
purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intent will be deducted
from the total purchases made under such Letter. An exchange from the Summit
Cash Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
Merrill Lynch Blueprint SM Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch BlueprintSM 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
23
<PAGE>
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 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
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA SM Managed Trusts. Class A shares are offered at net asset value to
TMA SM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
Employee Access SM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access SM Accounts available through authorized employers. The
initial minimum investment for such accounts is $500, except that the initial
minimum investment for shares purchased for such accounts pursuant to the
Automatic Investment Program is $50.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in
specified investments and/or the services provided by Merrill Lynch to the
plan. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM/FAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to
ML & Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) and their directors and employees,
and any trust, pension, profit-sharing or other benefit plan for such persons,
may purchase Class A shares of the Fund at net asset value. The Fund realizes
economies of scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Fund. Employees and directors or
trustees wishing to purchase shares of the Fund must satisfy the Fund's
suitability standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the Financial Consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and, second, the investor must establish that such
24
<PAGE>
redemption had been made within 60 days prior to the investment in the Fund
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice") if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such other fund were subject to a sales charge either at the time of
purchase or on a deferred basis; and, second, such purchase of Class D shares
must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of
no less than six months; and, second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net
asset value to shareholders of certain closed-end funds advised by FAM or MLAM
who purchased such closed-end fund shares prior to October 21, 1994 (the date
the Merrill Lynch Select Pricing SM System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other Select Pricing
Funds ("Eligible Class D Shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch, and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible Class D Shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering. Third, the
closed-end fund shares must have been continuously maintained in a Merrill
Lynch securities account. Fourth, there must be a minimum purchase of $250 to
be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. and Merrill Lynch Senior Floating Rate Fund II, Inc. will receive Class A
shares of the Fund and shareholders of Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. will receive
Class D shares of the Fund, except that shareholders already owning Class A
shares of the Fund will be eligible to purchase additional Class A shares
pursuant to this option, if such additional Class A shares will be held in the
same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the
Fund. This investment option is available only with respect to eligible shares
as to which no Early Withdrawal Charge or CDSC (each as defined in the
eligible fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related tender offer terminates and will be effected at
the net asset value of the designated class of the Fund on such day.
Acquisition of Certain Investment Companies. Class D shares may be offered
at net asset value 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.
25
<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 Select Pricing Funds.
Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the
investor's dollars to work from the time the investment is made. The deferred
sales charge alternatives may be particularly appealing to investors that do
not qualify for the reduction in initial sales charges. Both Class B and Class
C shares are subject to ongoing account maintenance fees and distribution
fees; however, the ongoing account maintenance and distribution fees
potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will
be subject to lower ongoing fees.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.
Contingent Deferred Sales Charges -- Class B Shares
Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest applicable rate being charged. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
net asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends. It will be assumed
that the redemption is first of shares held for over four years or shares
acquired pursuant to reinvestment of dividends and then of shares held longest
during the four-year period. A transfer of shares from a shareholder's account
to another account will be assumed to be made in the same order as a
redemption.
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC as a Percentage
of Dollar Amount
Year Since Purchase Payment Made Subject to Charge
-------------------------------- --------------------
<S> <C>
0-1............................................... 4.0%
1-2............................................... 3.0%
2-3............................................... 2.0%
3-4............................................... 1.0%
4 and thereafter.................................. None
</TABLE>
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the charge is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase for shares
purchased on or after October 21, 1994).
The Class B CDSC may be waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder
(including one who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of the death or
initial determination of disability or, if later, reasonably promptly
following completion of probate. The Class B CDSC also may be waived on
redemptions of shares by certain eligible 401(a) and 401(k)
26
<PAGE>
plans in connection with group plans placing orders through the Merrill Lynch
Blueprint SM Program. The CDSC may also be waived for any Class B shares that
are purchased by eligible 401(k) or eligible 401(a) plans that are rolled over
into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in
such account at the time of redemption. The Class B CDSC may be waived for any
Class B shares that were acquired and held at the time of the redemption in an
Employee AccessSM Account available through employers providing eligible
401(k) plans. The Class B CDSC may also be waived for any Class B shares that
are purchased by a Merrill Lynch rollover IRA that was funded by a rollover
from a terminated 401(k) plan managed by the MLAM Private Portfolio Group and
held in such account at the time of redemption. The Class B CDSC may also be
waived or its terms may be modified in connection with certain fee-based
programs. The Class B CDSC may also be waived in connection with involuntary
termination of an account in which Fund shares are held or for withdrawals
through the Merrill Lynch Systematic Withdrawal Plan. See "Shareholder
Services -- Fee Based Programs" and "--Systematic Withdrawal Plan."
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the
CDSC upon redemption, based on the number of employees or number of employees
eligible to participate in the plan, the aggregate amount invested by the plan
in specified investments and/or the services provided by Merrill Lynch to the
plan. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing Fund.
Minimum purchase requirements may be waived or varied for such plans.
Additional information regarding purchases by employer-sponsored retirement or
savings plans and certain other arrangements is available toll-free from
Merrill Lynch Business Financial Services at (800) 237-7777.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group
IRAs and participants in certain affinity groups such as trade associations
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.
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 the average daily net assets
but are not subject to the distribution fee that is borne by Class B shares.
Automatic conversion of Class B shares into Class D shares will occur at least
once each month (on the "Conversion Date") on the basis of the relative net
asset value of the shares of the two classes on the Conversion Date, without
the imposition of any sales load, fee or other charge. Conversion of Class B
shares to Class D shares will not be deemed a purchase or sale of the shares
for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at the Conversion Date the conversion of Class B shares to
Class D shares of the Fund in a single account will result in less than $50
worth of Class B shares being left in the account, all of the Class B shares
of the Fund held in the account on the Conversion Date will be converted to
Class D shares of the Fund.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B
27
<PAGE>
shares with an eight-year Conversion Period for Class B shares with a ten-year
Conversion Period, or vice versa, the Conversion Period applicable to the
Class B shares acquired in the exchange will apply and the holding period for
the shares exchanged will be tacked on to the holding period for the shares
acquired. The Conversion Period also may be modified for investors that
participate in certain fee-based programs. See "Shareholder Services --Fee-
Based Programs."
Class B shareholders of the Fund exercising the exchange privilege described
under "Shareholder Services --Exchange Privilege" will continue to be subject
to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares acquired as a result of the exchange.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no Class C CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no Class C CDSC
will be assessed on shares derived from reinvestment of dividends. It will be
assumed that the redemption is first of shares held for over one year or
shares acquired pursuant to reinvestment of dividends and then of shares held
longest during the one-year period. A transfer of shares from a shareholder's
account to another account will be assumed to be made in the same order as a
redemption. The Class C CDSC may be waived in connection with involuntary
termination of an account in which Fund shares are held and withdrawals
through the Merrill Lynch Systematic Withdrawal Plans. See "Shareholder
Services--Systematic Withdrawal Plan." The Class C CDSC of the Fund and
certain other MLAM-advised mutual funds may be waived with respect to Class C
shares purchased by an investor with the net proceeds of a tender offer made
by certain MLAM-advised closed end funds, including Merrill Lynch Senior
Floating Rate Fund II, Inc. Such waiver is subject to the requirement that the
tendered shares shall have been held by the investor for a minimum of one year
and to such other conditions as are set forth in the prospectus for the
related closed end fund.
Class B and Class C Sales Charge Information
<TABLE>
<CAPTION>
Class B Shares*
--------------------------------------
Fiscal
Year
Ended
March CDSCs Received CDSCs Paid to
31, by Distributor Merrill Lynch
------ -------------- -------------
<S> <C> <C>
1999 $5,913,754 $5,913,754
1998 $4,375,961 $4,375,961
1997 $6,030,689 $6,030,689
* Additional Class B 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.
<CAPTION>
Class C Shares
--------------------------------------
Fiscal
Year
Ended
March CDSCs Received CDSCs Paid to
31, by Distributor Merrill Lynch
------ -------------- -------------
<S> <C> <C>
1999 $ 277,813 $ 277,813
1998 $ 91,818 $ 91,818
1997 $ 202,197 $ 202,197
</TABLE>
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and are used in
whole or in part by the Distributor to defray the expenses of dealers
(including Merrill Lynch) related to
28
<PAGE>
providing distribution-related services to the Fund in connection with the
sale of the Class B and Class C shares, such as the payment of compensation to
financial consultants for selling Class B and Class C shares from the dealer's
own funds. The combination of the CDSC and the ongoing distribution fee
facilitates the ability of the Fund to sell the Class B and Class C shares
without a sales charge being deducted at the time of purchase. See
"Distribution Plans" below. Imposition of the CDSC and the distribution fee on
Class B and Class C shares is limited by the NASD asset-based sales charge
rule. See "Limitations on the Payment of Deferred Sales Charges" below.
Distribution Plans
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans for Class B, Class
C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
The Distribution Plans for Class B, Class C and Class D shares each provides
that the Fund pay the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) in connection with account
maintenance activities with respect to Class B, Class C and Class D shares.
Each of those classes has exclusive voting rights with respect to the
Distribution Plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan).
The Distribution Plans for Class B and Class C shares each provides that the
Fund also pay the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that,
so long as the Distribution Plan remains in effect, the selection and
nomination of non-interested Directors shall be committed to the discretion of
the non-interested Directors then in office. In approving each Distribution
Plan in accordance with Rule 12b-1, the non-interested Directors concluded
that there is reasonable likelihood that each Distribution Plan will benefit
the Fund and its related class of shareholders. Each Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the non-
interested 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 non-interested Directors who have no direct or
indirect financial interest in the Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of the Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of the Distribution
Plan or such report, the first two years in an easily accessible place.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on a percentage
of average daily net assets attributable to the shares regardless of the
amount of expenses incurred and, accordingly, distribution-related
29
<PAGE>
revenues from the Distribution Plans may be more or less than distribution-
related expenses. Information with respect to the distribution-related
revenues and expenses is presented to the Directors for their consideration in
connection with their deliberations as to the continuance of the Class B and
Class C Distribution Plans annually, as of December 31 of each year, on a
"fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully 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, 1998, the fully allocated accrual revenues incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded the fully allocated accrual expenses by
approximately $36,033,000 (.67% of Class B net assets at that date). As of
March 31, 1999, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $225,762,367
(4.64% of Class B net assets at that date). As of December 31, 1998, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for
the period since the commencement of operations of Class C shares exceeded the
fully allocated accrual revenues by approximately $1,628,000 (.30% of Class C
net assets at that date). As of March 31, 1999, direct cash revenues for the
period since the commencement of operations of Class C shares exceeded direct
cash expenses by $9,805,773 (2.00% of Class C net assets at that date).
For the fiscal year ended March 31, 1999, the Fund paid the Distributor
$54,169,400 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, 1999, the Fund paid
the Distributor $5,360,592 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $536.1 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, 1999,
the Fund paid the Distributor $3,492,956 pursuant to the Class D Distribution
Plan (based on average daily net assets subject to such Class D Distribution
Plan of approximately $1.4 billion), all of which was paid to Merrill Lynch
for providing account maintenance activities in connection with Class D
shares.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the 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 fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund will
not make further payments of the distribution fee with respect to Class B
shares and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance
fee. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
30
<PAGE>
The following table sets forth comparative information as of March 31, 1999
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B shares, the Distributor's
voluntary maximum.
<TABLE>
<CAPTION>
Data Calculated as of March 31, 1999
-------------------------------------------------------------------------------------
(in thousands)
Annual
Distribution
Allowable Amounts Fee at
Eligible Allowable Interest on Maximum Previously Aggregate Current Net
Gross Aggregate Unpaid Amount Paid to Unpaid Asset
Sales(1) Sales Charge(2) Balance(3) Payable Distributor(4) Balance Level(5)
---------- --------------- ----------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares for the
period October 21, 1988
(commencement of
operations) to March
31, 1999
Under NASD Rule as
Adopted................ $6,680,392 $ 416,901 $122,127 $539,028 $265,436 $273,592 $36,499
Under Distributor's
Voluntary Waiver....... $6,680,392 $ 416,901 $ 34,025 $450,926 $265,436 $185,490 $36,499
Class C Shares, for the
period October 21, 1994
(commencement of
operations) to March
31, 1999
Under NASD Rule as
Adopted................ $ 707,644 $ 44,228 $ 8,706 $ 52,934 $ 10,990 $ 41,830 $ 3,684
</TABLE>
- ----------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of
Summit can only be purchased by exchange from another fund (the "redeemed
fund"). Upon such an exchange, the maximum allowable sales charge payment
to the redeemed fund is reduced in accordance with the amount of the
redemption. This amount is then added to the maximum allowable sales
charge payment with respect to Summit. Upon an exchange out of Summit, the
remaining balance of this amount is deducted from the maximum allowable
sales charge payment to Summit and added to the maximum allowable sales
charge payment to the fund into which the exchange is made.
(3) 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.
(4) Consists of CDSC payments, distribution fee payments and accruals. See
"What are the Fund's fees and expenses?" in the Prospectus. 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.
(5) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period
during which trading on the New York Stock Exchange (the "NYSE") is restricted
as determined by the Commission or the NYSE is closed (other than customary
weekend and holiday closings), for any period during which an emergency exists
as defined by the Commission as a result of which disposal of portfolio
securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
31
<PAGE>
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-
5289. Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares
deposited with the Transfer Agent may be accomplished by a written letter
requesting redemption. Proper notice of redemption in the case of shares for
which certificates have been issued may be accomplished by a written letter as
noted above accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s) on the
Transfer Agent's register. The signature(s) on the redemption requests must be
guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent,
payments will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash, Federal funds or certified check drawn on a United
States bank) has been collected for the purchase of such Fund shares, which
will not usually exceed 10 days.
Repurchase
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the
net asset value calculated on the day the request is received, provided that
the request for repurchase is submitted to the dealer prior to the regular
close of business on the NYSE (generally, the NYSE closes at 4:00 p.m.,
Eastern time) and such request is received by the Fund from such dealer not
later than 30 minutes after the close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to the
Fund not later than 30 minutes after the close of business on the NYSE, in
order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms that do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill
Lynch may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through the
Transfer Agent on accounts held at the Transfer Agent are not subject to the
processing fee. The Fund reserves the right to reject any order for
repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem Fund shares as
set forth above.
Reinstatement Privilege -- Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement
32
<PAGE>
privilege may be exercised through the investor's Merrill Lynch Financial
Consultant within 30 days after the date the request for redemption was
accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday after the close of business on the NYSE on
each day the NYSE is open for trading. The NYSE generally closes at 4:00 p.m.,
Eastern time. Any assets or liabilities initially expressed in terms of non-
U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of
valuation. The NYSE is not open for trading on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the securities held by
the 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 fees payable to the Manager and
Distributor are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net
asset value of the Class B and Class C shares generally will be lower than the
per share net asset value of Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends, which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Directors as the primary
market. Long positions in securities traded in the OTC market are valued at
the last available bid price in the OTC market prior to the time of valuation.
Short positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation.
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
When the Fund writes an option, the amount of the premium received is recorded
on the books of the Fund as an asset and an equivalent liability. The amount
of the liability is subsequently valued to reflect the current market value of
the option written, based upon the last sale price in the case of exchange-
traded options or, in the case of options traded in the OTC market, the last
asked price. Options purchased by the Fund are valued at their last sale price
in the case of exchange-traded options or, in the case of options traded in
the OTC market, the last bid price. Other investments, including financial
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not readily available are stated at
fair value as determined in good faith by or under the direction of the
Directors of the Fund. Such valuations and procedures will be reviewed
periodically by the Directors.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day
at various times prior to the close of business on the NYSE. The
33
<PAGE>
values of such securities used in computing the net asset value of the Fund's
shares are determined as of such times. Foreign currency exchange rates are
also generally determined prior to the close of business on the NYSE.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and the close
of business on the NYSE that may not be reflected in the computation of the
Fund's net asset value.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on March 31, 1999 is set forth below.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Net Assets.............. $3,631,440,458 $4,866,563,935 $491,233,573 $1,513,406,168
============== ============== ============ ==============
Number of Shares
Outstanding............ 103,655,142 142,107,730 14,523,935 43,280,328
============== ============== ============ ==============
Net Asset Value Per
Share (net assets
divided by number of
shares outstanding).... $ 35.03 $ 34.25 $ 33.82 $ 34.97
Sales Charge (for Class
A and Class D shares:
5.25% of offering
price; 5.54%
of net asset value per
share)* ............... 1.94 ** ** 1.94
-------------- -------------- ------------ --------------
Offering Price.......... $ 36.97 $ 34.25 $ 33.82 $ 36.91
============== ============== ============ ==============
</TABLE>
- ----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
herein.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions and the allocation of brokerage. The Fund has no
obligation to deal with any broker or group of brokers in the execution of
transactions in portfolio securities and does not use any particular broker or
dealer. In executing transactions with brokers and dealers, the Investment
Adviser seeks to obtain the best net results for the Fund, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates,
the Fund does not necessarily pay the lowest spread or commission available.
In addition, consistent with the Conduct Rules of the NASD and policies
established by the Board of Directors of the Fund, the Manager may consider
sales of shares of the Fund as a factor in the selection of brokers or dealers
to execute portfolio transactions for the Fund; however, whether or not a
particular broker or dealer sells shares of the Fund neither qualifies nor
disqualifies such broker or dealer to execute transactions for the Fund.
Subject to obtaining the best price and execution, brokers who provide
supplemental investment research services 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,
and the expenses of the Investment Adviser will not necessarily be reduced as
a result of the receipt of such supplemental information. If in the judgment
of the Investment Adviser the Fund will benefit from supplemental research
services, the Investment Adviser is authorized to pay brokerage commissions to
a broker furnishing such services that are in excess of commissions that
another broker may have charged for effecting the same transaction. Certain
supplemental research services may primarily benefit one or more other
investment companies or other accounts for which the Investment Adviser
exercises investment discretion. Conversely, the Fund may be the primary
34
<PAGE>
beneficiary of the supplemental research services received as a result of
portfolio transactions effected for such other accounts or investment
companies.
The Fund anticipates that its brokerage transactions involving securities of
issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
<TABLE>
<CAPTION>
Aggregate Brokerage Commissions Paid
Period Commissions Paid to Merrill Lynch
------ ------------------- ----------------
<S> <C> <C>
Fiscal year ended March 31, 1999....... $6,476,661 $429,881
Fiscal year ended March 31, 1998....... $5,117,527 $279,047
Fiscal year ended March 31, 1997....... $7,059,982 $456,609
</TABLE>
For the fiscal year ended March 31, 1999, the brokerage commissions paid to
Merrill Lynch represented 6.64% of the aggregate brokerage commissions paid
and involved 5.56% of the Fund's dollar amount of transactions involving
payment of brokerage commissions.
The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in 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 and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained
from the Commission. Since transactions in the OTC market usually involve
transactions with the dealers acting as principal for their own accounts, the
Fund will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated
person of the Fund may serve as its broker in OTC transactions conducted on an
agency basis provided that, among other things, the fee or commission received
by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable
transactions. In addition, the Fund may not purchase securities during the
existence of any underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures approved by the Board of
Directors of the Fund that either comply with rules adopted by the Commission
or with interpretations of the Commission staff. See "Investment Objective and
Policies--Investment Restrictions."
Section 11(a) of the Exchange Act generally prohibits members of the United
States national securities exchanges from executing exchange transactions for
their affiliates and institutional accounts that they manage unless the member
(i) has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with the aggregate
compensation received by the member in effecting such transactions, and (iii)
complies with any rules the Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply
to Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund and annual statements as
to aggregate compensation will be provided to the Fund.
The Board of Directors of the Fund has considered the possibility of seeking
to recapture for the benefit of the Fund brokerage commissions and other
expenses of possible portfolio transactions by conducting portfolio
transactions through affiliated entities. For example, brokerage commissions
received by affiliated brokers could be offset against the advisory fee paid
by the Fund to the Investment Adviser. After considering all factors deemed
relevant, the Board of Directors made a determination not to seek such
recapture. The Board will reconsider this matter from time to time.
35
<PAGE>
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Fund or other clients or
funds for which the Investment Adviser or an affiliate acts as manager
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Investment
Adviser or an affiliate during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
and instructions as to how to participate in the various services or plans, or
how to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch. Certain of these services are available only to U.S.
investors.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of dividends. The
statements will also show any other activity in the account since the previous
statement. Shareholders will also receive separate confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of dividends. A shareholder with an account held at the Transfer
Agent may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent. A shareholder may also
maintain an account through Merrill Lynch. Upon the transfer of shares out of
a Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with
Merrill Lynch. Certain shareholder services may not be available for the
transferred shares. After the transfer, the shareholder may purchase
additional shares of funds owned before the transfer and all future trading of
these assets must be coordinated by the new firm. If a shareholder wishes to
transfer his or her shares to a securities dealer that has not entered into a
selected dealer agreement with Merrill Lynch, the shareholder must either (i)
redeem his or her shares, paying any applicable CDSC or (ii) continue to
maintain an Investment Account at the Transfer Agent for those shares. The
shareholder may also request the new securities dealer to maintain the shares
in an account at the Transfer Agent registered in the name of the securities
dealer for the benefit of the shareholder whether the securities dealer has
entered into a selected dealer agreement or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer 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.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves
Fund ("Summit"), a series of Financial Institutions Series Trust, which is a
Merrill Lynch-sponsored money market fund specifically designated for exchange
by holders of Class A, Class B, Class C and Class D shares of Select Pricing
Funds. Shares with a net asset value of at least $100 are required
36
<PAGE>
to qualify for the exchange privilege and any shares utilized in an exchange
must have been held by the shareholder for at least 15 days. Before effecting
an exchange, shareholders should obtain a currently effective prospectus of
the fund into which the exchange is to be made. Exercise of the exchange
privilege is treated as a sale of the exchanged shares and a purchase of the
acquired shares for Federal income tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second fund in 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 Select
Pricing Fund, but does not hold Class A shares of the second fund in his or
her account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also
may be exchanged for Class A shares of a second Select Pricing Fund at any
time as long as, at the time of the exchange, the shareholder holds Class A
shares of the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund. Class D
shares are exchangeable with shares of the same class of other Select Pricing
Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds
or for Class A shares of Summit, ("new Class A or Class D shares") are
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any, between
the sales charge previously paid on the outstanding Class A or Class D shares
and the sales charge payable at the time of the exchange on the new Class A or
Class D shares. With respect to outstanding Class A or Class D shares as to
which previous exchanges have taken place, the "sales charge previously paid"
shall include the aggregate of the sales charges paid with respect to such
Class A or Class D shares in the initial purchase and any subsequent exchange.
Class A or Class D shares issued pursuant to dividend reinvestment are sold on
a no-load basis in each of the funds offering Class A or Class D shares. For
purposes of the exchange privilege, Class A or Class D shares acquired through
dividend reinvestment shall be deemed to have been sold with a sales charge
equal to the sales charge previously paid on the Class A or Class D shares on
which the dividend was paid. Based on this formula, Class A and Class D shares
generally may be exchanged into the Class A or Class D shares, respectively,
of the other funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with
Class B or Class C shares outstanding ("outstanding Class B or Class C
shares") offer to exchange their Class B or Class C shares for Class B or
Class C shares, respectively, of certain other Select Pricing Funds or for
Class B shares of Summit ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B shares of the Fund acquired
through use of the exchange privilege will be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the
Class B shares of the fund from which the exchange has been made. For purposes
of computing the CDSC that may be payable on a disposition of the new Class B
or Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having
held the Fund's Class B shares for two and a half years. The 2% CDSC that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption,
since by "tacking" the two and a half year holding period of Fund Class B
shares to the three-year holding period for the Special Value Fund Class B
shares, the investor will be deemed to have held the Special Value Fund Class
B shares for more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares
37
<PAGE>
of Summit have an exchange privilege back into Class A or Class D shares of
Select Pricing Funds; Class B shares of Summit have an exchange privilege back
into Class B or Class C shares of Select Pricing Funds and, in the event of
such an exchange, the period of time that Class B shares of Summit are held
will count toward satisfaction of the holding period requirement for purposes
of reducing any CDSC and toward satisfaction of any Conversion Period with
respect to Class B shares. Class B shares of Summit will be subject to a
distribution fee at an annual rate of 0.75% of average daily net assets of
such Class B shares. This exchange privilege does not apply with respect to
certain Merrill Lynch fee-based programs for which alternative exchange
arrangements may exist. Please see your Merrill Lynch Financial Consultant for
further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-
sponsored money market funds other than Summit. Shareholders who exchanged
Select Pricing Fund shares for shares of such other money market funds and
subsequently wish to exchange those money market fund shares for shares of the
Fund will be subject to the CDSC schedule applicable to such Fund shares, if
any. The holding period for the money market fund shares will not count toward
satisfaction of the holding period requirement for reduction of the CDSC
imposed on such shares, if any, and, with respect to Class B shares, toward
satisfaction of the Conversion Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund
on the basis of relative net asset values in connection with the commencement
of participation in the MFA Program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA Program, Class A
shares will be re-exchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon redemption of Class B
or Class C shares so reacquired, or the Conversion Period for Class B shares
so reacquired, the holding period for the Class A shares will be "tacked" to
the holding period for the Class B or Class C shares originally held. The
Fund's exchange privilege is also modified with respect to purchases of Class
A and Class D shares by non-retirement plan investors under the MFA Program.
First, the initial allocation of assets is made under the MFA Program. Then,
any subsequent exchange under the MFA Program of Class A or Class D shares of
a Select Pricing Fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between
the sales charge previously paid on the shares of the other Select Pricing
Fund and the sales charge payable on the shares of the Fund being acquired in
the exchange under the MFA Program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and
shareholders of the other Select Pricing Funds with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated in accordance with the rules of the Commission. The
Fund reserves the right to limit the number of times an investor may exercise
the exchange privilege. Certain funds may suspend the continuous offering of
their shares to the general public at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
Fee-Based Programs
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of
38
<PAGE>
participation in a Program, shares that have been held for less than specified
periods within such Program may be subject to a fee based upon the current
value of such shares. These Programs also generally prohibit such shares from
being transferred to another account at Merrill Lynch, to another broker-
dealer or to the Transfer Agent. Except in limited circumstances (which may
also involve an exchange as described above), such shares must be redeemed and
another class of shares purchased (which may involve the imposition of initial
or deferred sales charges and distribution and account maintenance fees) in
order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at 1-
800-MER-FUND (1-(800)-637-3863).
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and education savings
plans are available from Merrill Lynch. Under these plans, investments may be
made in the Fund and certain of the other mutual funds sponsored by Merrill
Lynch as well as in other securities. Merrill Lynch may charge an initial
establishment fee and an annual fee for each account. Information with respect
to these plans is available on request from Merrill Lynch.
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 and education savings plans.
Investors considering participation in any retirement or education savings
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.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Fund's Automatic Investment Plan. The Fund would be authorized,
on a regular basis, to provide systematic additions to the Investment Account
of such shareholder through charges of $50 or more to the regular bank account
of the shareholder by either pre-authorized checks or automated clearing house
debits. Alternatively, an investor that maintains a CMA(R) or CBA(R) account
may arrange to have periodic investments made in the Fund in amounts of $100
($1 for retirement accounts) or more through the CMA(R) or CBA(R) Automated
Investment Program.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in
additional full and fractional shares of the Fund. Such reinvestment will be
at the net asset value of shares of the Fund as of the close of business on
the NYSE on the monthly payment date for such dividends. No CDSC will be
imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or
by telephone (1-800-MER-FUND) to the Transfer Agent, if their account is
maintained with the Transfer Agent elect to have subsequent dividends paid in
cash, rather than reinvested in shares of the Fund or vice versa (provided
that, in the event that a payment on an account maintained at the Transfer
Agent would amount to $10.00 or less, a shareholder will not receive such
payment in cash and such payment will automatically be reinvested in
additional shares). Commencing ten days after the receipt by the Transfer
Agent of such notice, those instructions will be effected. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed dividend
checks. Cash payments can also be directly deposited to the shareholder's bank
account.
39
<PAGE>
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering
price, of $5,000 or more, and monthly withdrawals are available for
shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and the class of shares to be redeemed. Redemptions will be made at net
asset value as determined 15 minutes after the close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of
each month or the 24th day of the last month of each quarter, whichever is
applicable. If the NYSE is not open for business on such date, the shares will
be redeemed at the close of business on the following business day. The check
for the withdrawal payment will be made, on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends on
all shares in the Investment Account are reinvested automatically in Fund
shares. A shareholder's Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and 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 be applied thereafter to Class D shares if the
shareholder so elects. If an investor wishes to change the amount being
withdrawn in a systematic withdrawal plan the investor should contact his or
her Merrill Lynch Financial Consultant.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals
are ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. The Fund will not knowingly accept purchase orders for shares
of the Fund from investors that maintain a Systematic Withdrawal Plan unless
such purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Automatic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R) or CBA(R)
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 Automated Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
40
<PAGE>
DIVIDENDS AND TAXES
Dividends
The Fund intends to distribute substantially all of its net investment
income, if any. Dividends from such net investment income will be paid at
least annually. All net realized capital gains, if any, will be distributed to
the Fund's shareholders at least annually. 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. If in any
fiscal year, the Fund has net income from certain foreign currency
transactions, such income will be distributed at least annually.
See "Shareholder Services -- Automatic Dividend Reinvestment Plan" for
information concerning the manner in which dividends may be reinvested
automatically in shares of the Fund. 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 in cash. Dividends are taxable
to shareholders, as discussed below, whether they are reinvested in shares of
the Fund or received in cash. The per share dividends on Class B and Class C
shares will be lower than the per share dividends 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 on Class D shares will be lower
than the per share dividends on Class A shares as a result of the account
maintenance fees applicable with respect to the Class D shares. See "Pricing
of Shares--Determination of Net Asset Value."
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 that it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.
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). Certain categories
of capital gains are taxable at different rates. Generally not later than 60
days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amount of any capital gain
dividends as well as any 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 that was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
41
<PAGE>
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the
Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge paid to the
Fund on the exchanged shares reduces any sales charge the shareholder would
have owed upon the purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The 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 rating organizations, and in unrated
securities ("high yield bonds"), as previously described. Some of these high
yield bonds 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
securities may be treated as dividends for Federal income tax purposes; in
such case, if the issuer of such high yield/high risk securities is a domestic
corporation, dividend payments by the Fund will be eligible for the dividends
received deduction to the extent of the deemed dividend portion of such
interest payments.
Tax Treatment of Options, 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
42
<PAGE>
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 foreign exchange contracts. Under Section 1092, the Fund
may be required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in options,
futures and forward foreign exchange contracts.
Special Rules for Certain Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stocks, 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, futures or
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 foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary
income or loss under Code Section 988. In certain circumstances, the Fund may
elect capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a
capital gain for any shareholder who received a distribution greater than such
shareholder's 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 that
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
43
<PAGE>
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with formulas specified by the
Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period as in the case
of Class B and Class C shares and the maximum sales charge in the case of
Class A and D shares. Dividends paid by the Fund with respect to all shares,
to the extent any dividends are paid, will be calculated in the same manner at
the same time on the same day and will be in the same amount, except that
account maintenance and distribution 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 annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average rates of return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time. In
advertisements distributed to investors whose purchases are subject to reduced
sales charges (such as investors in certain retirement plans) performance data
may 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 such total return on a hypothetical $1,000 investment in the Fund
at the beginning of each specified period.
44
<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 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
Period investment the period investment the period investment the period investment the period
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ending
March 31,
1999........... (5.90%) $ 941.00 (5.38%) $ 946.20 (2.63%) $ 973.70 (6.12%) $ 938.80
Five Years
Ending March
31, 1999....... 13.86% $ 1,913.50 13.93% $ 1,919.60
Ten Years Ending
March 31,
1999........... 12.79% $ 3,331.00 12.25% $ 3,174.90
Inception
(October 21,
1994) to March
31, 1999....... 14.90% $ 1,853.30 14.40% $ 1,817.80
<CAPTION>
Annual Total Return
(excluding maximum applicable sales charges)
Year Ended March
31,
- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999............ (0.68%) $ 993.20 (1.65%) $ 983.50 (1.70%) $ 983.00 (0.92%) $ 990.80
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
<CAPTION>
Period
------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(October 21,
1994) to March
31, 1995....... 6.07% $ 1,060.70 6.42% $ 1,064.20
<CAPTION>
Aggregate Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(November 8,
1973) to March
31, 1999....... 2,062.03% $ 21,620.30
Inception
(October 21,
1988) to March
31, 1999....... 231.52% $ 3,315.20
Inception
(October 21,
1994) to March
31, 1999....... 85.33% $ 1,853.30 81.78% $ 1,817.80
</TABLE>
- ---------
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of
Shares," the total return data quoted by the Fund in advertisements directed
to such investors may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC, and therefore may reflect
greater total return since, due to the reduced sales charges or the waiver of
CDSCs, a lower amount of expenses may be deducted.
45
<PAGE>
On occasion, the Fund may compare its performance to various indices
including the Merrill Lynch Master Bond Index, the Standard & Poor's 500
Index, the Dow Jones Industrial Average, or to performance data published by
Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), CDA Investment Technology, Inc., Money Magazine, U.S. News &
World Report, Business Week, Forbes Magazine, Fortune Magazine or other
industry publications. When comparing its performance to a market index, the
Fund may refer to various statistical measures derived from the historic
performance of the Fund and the index, such as standard deviation and beta. In
addition, from time to time, the Fund may include the Fund's Morningstar risk-
adjusted performance ratings in advertisements or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered indicative of the Fund's relative performance for any future
period.
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.
GENERAL INFORMATION
Description of Shares
The Fund, a diversified, open-end investment company, 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 1,300,000,000
shares of Common Stock, par value $0.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock. Class A
consists of 400,000,000 shares, Class B consists of 500,000,000 shares and
Classes C and D each consist 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 have identical voting, dividend, liquidation and other rights and
the same terms and conditions except that the Class B, Class C and Class D
shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The Board of Directors of the Fund may classify and reclassify the shares of
the Fund into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold annual meetings of shareholders in any year in which the Investment
Company Act does not require shareholders to act upon any of the following
matters: (i) election of Directors; (ii) approval of an investment 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. Each share of Class A, Class B, Class C and Class D Common
Stock is entitled to participate equally in dividends and distributions
declared by the Fund and in the net assets of the Fund upon liquidation or
dissolution after satisfaction of outstanding liabilities. Stock certificates
will be issued by the Transfer Agent only on specific request. Certificates
for fractional shares are not issued in any case.
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"). Under its
contract with the Fund, the Custodian is authorized, among other
46
<PAGE>
things, to establish separate accounts in foreign currencies and to cause
foreign securities owned by the Fund to be held in its offices outside of the
United States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "How to Buy,
Sell, Transfer and Exchange Shares--Through the Transfer Agent" in the
Prospectus.
Legal Counsel
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on 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.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
Additional Information
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted ML & Co. under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by ML & Co.
To the knowledge of the Fund, the following entities owned beneficially 5%
or more of a class of the Fund's shares as of July 1, 1999:
<TABLE>
<CAPTION>
Name Address Percent of Class
---- ------- ----------------
<S> <C> <C>
Merrill Lynch Trust Co., Trustee 285 Davisdson Ave. #4 7% of Class A
FBO Chrysler Salaried Employee's Somerset, NJ 08873
Savings Plan
Attn: Group Employee's Services
Merrill Lynch Trust Co., Trustee P.O. Box 30532 6% of Class A
FBO Merrill Lynch Savings and New Brunswick, NJ 08989
Investment Plan
Investment Account
Attn: Robert Arimenta, Jr.
</TABLE>
47
<PAGE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.
48
<PAGE>
APPENDIX A
RATINGS OF DEBT SECURITIES AND PREFERRED STOCK
Description of Moody's Investors Service, Inc.'s ("Moody's") Corporate Ratings
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in "Aaa" securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in "Aaa" securities.
A Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated "Baa" are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and 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 Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
Description of Moody's Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's makes no
representation that rated bank or insurance company obligations are exempt
from registration under the Securities Act of 1933 or issued in conformity
with any other applicable law or regulation. Nor does Moody's
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represent that any specific bank or insurance company obligation is legally
enforceable or a valid senior obligation of a rated issuer. Moody's employs
the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
. Leading market positions in well-established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and may require relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime. Issuers rated Not Prime do not fall within any of the Prime
rating categories.
If any issuer represents to Moody's that its short-term debt obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within the parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representation and gives no opinion on the legal
validity or enforceability of any support arrangement.
Moody's ratings are opinions, not recommendations to buy or sell, and their
accuracy is not guaranteed. A rating should be weighed solely as one factor in
an investment decision and you should make your own study and evaluation of
any issuer whose securities or debt obligations you consider buying or
selling.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and bonds, a
variation of our familiar bond rating symbols is used in the quality ranking
of preferred stock. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stock occupies a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
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 to be a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
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a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be questionable
over any great length of time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividends
payments. This rating designation does not purport to indicate the future
status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking and the modifier 3 indicates that the issuer ranks in the lower end of
its generic rating category.
Description of Standard & Poor's ("Standard & Poor's") Corporate Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current opinion
of the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation.
The debt rating is not recommendation to purchase, sell or hold a financial
obligation, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform any audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of payment -- capacity and willingness of the obligor to
meet its financial commitment on the obligation in accordance with
the terms of the obligation;
II.Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial commitment on the obligation
is extremely strong.
AA Debt rated "AA" differs from the highest rated obligations only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
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A Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Debt rated "BB", "B", "CCC", "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such debt will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB Debt rated "BB" is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
the obligor's inadequate capacity to meet its financial commitment on the
obligation.
B Debt rated "B" is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to
meet its financial commitments on the obligation.
CCC Debt rated "CCC" is currently vulnerable to non-payment, and is dependent
upon favorable business, financial, or economic conditions for the
obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions, the obligor is
not likely to have the capacity to meet its financial commitment on the
obligation.
CC The rating "CC" is currently highly vulnerable to non-payment.
C A subordinated debt or preferred stock obligation rated "C" is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The "C" rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action
taken, but payments on this obligation are being continued. A "C" also
will be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
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.
r This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk--such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R. indicates not rated.
Debt obligations of issuers outside the United States and its territories
are rated on 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. Also, the
laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries in general.
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Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A"
for the highest-quality obligations to "D" for the lowest. These categories
are as follows:
A-1 A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor's capacity to meet its financial commitment on these obligations
is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity
to meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to Standard & Poor's by the issuer or obtained by Standard & Poor's
from other sources it considers reliable. Standard & Poor's does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information or based on
other circumstances.
Description of Standard & Poor's Preferred Stock Ratings
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the debt rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
A preferred stock rating is not a recommendation to purchase, sell, or hold
a security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based on the following considerations:
I. Likelihood of payment-capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation;
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II.Nature of, and provisions of, the issue;
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay
the preferred stock obligations.
AA A preferred stock issue, rated AA also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations is
very strong, although not as overwhelming as for issues rated AAA.
A An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated BBB is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the A
category.
BB Preferred stock rated BB, B and CCC are regarded, on balance, as
predominantly speculative with
B respect to the issuer's capacity to pay preferred stock obligations. BB
indicates the lowest degree
CCC of speculation and CCC the highest. While such issues will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating CC is reserved for a preferred stock issue that is in arrears
on dividends or sinking fund payments, but that is currently paying.
C A preferred stock rated C is a nonpaying issue.
D A preferred stock rated D is a nonpaying issue with the issuer in default
on debt instruments.
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Plus (+) or minus (-): To provide more detailed indications of preferred
stock quality, ratings from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.
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CODE #: 10257-07-99
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PART C. OTHER INFORMATION
Item 23. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1(a) --Articles of Incorporation of the Registrant, dated July 29, 1987.(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. dated July 29, 1988.(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)
(h) --Articles Supplementary, dated November 4, 1998, to Articles of
Incorporation of the Registrant.(c)
2 --By-Laws of the Registrant.(d)
3(a) --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.(e)
4(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.(d)
(c) --Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K. Limited.(f)
5(a) --Form of Revised Class A Distribution Agreement between the
Registrant and Princeton Funds Distributor, Inc. (including Form of
Selected Dealers Agreement).(g)
(b) --Class B Distribution Agreement between the Registrant and Princeton
Funds Distributor, Inc.(a)
(c) --Letter Agreement between the Registrant and Princeton Funds
Distributor, Inc., dated September 15, 1993, in connection with the
Merrill Lynch Mutual Fund Adviser program.(d)
(d) --Form of Class C Distribution Agreement between the Registrant and
Princeton Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(g)
(e) --Form of Class D Distribution Agreement between the Registrant and
Princeton Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(g)
6 --None.
7(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)
8(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and 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)
9(a) --Opinion and Consent of Brown & Wood LLP, Counsel to the
Registrant.(c)
(b) --Consent of Brown & Wood LLP, Counsel to the Registrant.
10 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 --None.
12 --None.
13(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.(g)
(c) --Form of Class D Distribution Plan of the Registrant and Class D
Distribution Plan Sub-Agreement.(g)
14(a) --Financial Data Schedule for Class A shares.(c)
(b) --Financial Data Schedule for Class B shares.(c)
(c) --Financial Data Schedule for Class C shares.(c)
(d) --Financial Data Schedule for Class D shares.(c)
18 --Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
3.(h)
</TABLE>
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(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) Filed on May 26, 1999 as an Exhibit to Post-Effective Amendment No. 36 to
the Registration Statement.
(d) Previously, filed as an exhibit to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A.
(e) Reference is made to Articles IV, Article V (Sections 3, 5, 6 and 7),
Articles VI, VII and IX of the Registrant's Articles of Incorporation, as
filed as Exhibit 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.
(f) Previously filed as an exhibit to Post-Effective Amendment No. 34 to
Registrant's Registration Statement on Form N-1A.
(g) Previously filed as an exhibit to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A.
(h) 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.
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Item 24. Persons Controlled by or under Common Control with Registrant.
The Registrant is not controlled by or under common control with any other
person.
Item 25. Indemnification.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of 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 26. Business and Other Connections of Investment Adviser.
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, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Disciplined
Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc.,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government
Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
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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., Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill Lynch
Senior Floating Rate Fund II, 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 Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc.; and for the following closed-end registered
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc.,
Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies
Fund III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund,
Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II,
Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings California
Insured Fund II, Inc., MuniHoldings California Insured Fund III, Inc.,
MuniHoldings California Insured Fund IV, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund
III, MuniHoldings Florida Insured Fund IV, MuniHoldings Insured Fund, Inc.,
MuniHoldings Insured Fund II, Inc., MuniHoldings Insured Fund III, Inc.,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New Jersey Insured
Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New
Jersey Insured Fund III, Inc., MuniHoldings New York Fund, Inc., MuniHoldings
New York Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc.,
MuniHoldings New York Insured Fund III, Inc., MuniHoldings Pennsylvania
Insured Fund, MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest
New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona
Fund, Inc., MuniYield California Fund, Inc., MuniYield California Insured
Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida
Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured
Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund,
Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund
II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc. and Worldwide
DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-
2665. The address of the Investment Adviser, FAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Princeton Funds Distributor, Inc. ("PFD") and of Merrill Lynch
Funds Distributor ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and ML & Co. is World Financial Center, North Tower, 250 Vesey Street,
New York, New York 10281-1201. The address of the Fund's transfer agent,
Financial Data Services, Inc. ("FDS"), is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
C-3
<PAGE>
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged since April 1, 1997 for his, her or its own account or in the
capacity of director, officer, partner or trustee. In addition, Mr. Glenn is
President and Mr. Burke is Vice President and Treasurer of all or
substantially all of the investment companies described in the first two
paragraphs of this Item 26, and Messrs. Giordano and Monagle are officers of
one or more of such companies.
<TABLE>
<CAPTION>
Other Substantial Business,
Position(s) with the Profession, Vocation or
Name Investment Adviser Employment
---- ------------------------ ---------------------------
<C> <C> <S>
ML & Co.................. Limited Partner Financial Services Holding
Company;
Limited Partner of FAM
Princeton Services....... General Partner General Partner of FAM
Jeffrey M. Peek.......... President President of FAM; President
and Director of Princeton
Services; Executive Vice
President of ML & Co.;
Managing Director and Co-
Head of the Investment
Banking Division of Merrill
Lynch in 1997
Terry K. Glenn........... Executive Vice President Executive Vice President of
FAM; Executive Vice
President and Director of
Princeton Services;
President and Director of
PFD; Director of FDS;
President of Princeton
Administrators
Gregory A. Bundy......... Chief Operating Officer Chief Operating Officer and
and Managing Director Managing Director of FAM;
Chief Operating Officer and
Managing Director of
Princeton Services; Co-CEO
of Merrill Lynch Australia
from 1997 to 1999
Donald C. Burke.......... Senior Vice President, Senior Vice President and
Treasurer and Director Treasurer of FAM; Senior
of Taxation Vice President and
Treasurer of Princeton
Services; Vice President of
PFD; First Vice President
of the Manager from 1997 to
1999; Vice President of the
Manager from 1990 to 1997
Michael G. Clark......... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services;
Treasurer and Director of
PFD; First Vice President
of the Manager from 1997 to
1999; Vice President of the
Manager from 1996 to 1997
Robert C. Doll........... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services;
Chief Investment Officer of
Oppenheimer Funds, Inc. in
1999 and Executive Vice
President thereof from 1991
to 1999
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
Michael J. Hennewinkel... Senior Vice President, Senior Vice President,
Secretary and General Secretary and General
Counsel Counsel of FAM; Senior Vice
President of Princeton
Services
Philip L. Kirstein....... Senior Vice President Senior Vice President of
FAM; Senior Vice President,
Secretary, General Counsel
and Director of Princeton
Services
Ronald M. Kloss.......... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
Debra W. Landsman-Yaros.. Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services; Vice
President of PFD
Stephen M. M. Miller..... Senior Vice President Executive Vice President of
Princeton Administrators;
Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr. .. Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
Brian A. Murdock......... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
Gregory D. Upah.......... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
</TABLE>
C-4
<PAGE>
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Consults International Portfolio, Merrill Lynch Convertible
Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate
High Yield Fund, Inc. Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill
Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Senior Floating Rate Fund
II, 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 33 King William
Street, London EC4R 9AS, 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 April 1,
1997, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Glenn, Burke and Albert are officers
of one or more of the registered investment companies listed in the first two
paragraphs of this Item 26.
<TABLE>
<CAPTION>
Other Substantial Business,
Position with Profession, Vocation or
Name MLAM U.K. Employment
---- --------------------------- -----------------------------
<C> <C> <S>
Terry K. Glenn...... Director and Chairman Executive Vice President of
MLAM and FAM; Executive Vice
President and Director of
Princeton Services; President
and Director of PFD;
President of Princeton
Administrators
Alan J. Albert...... Senior Managing Director Vice President of the Manager
Nicholas C.D. Hall.. Director Director of Merrill Lynch
Europe PLC.; General Counsel
of Merrill Lynch
International Private Banking
Group
Donald C. Burke..... Treasurer Senior Vice President and
Treasurer of MLAM and FAM;
Director of Taxation of MLAM;
Senior Vice President and
Treasurer of Princeton
Services; Vice President of
PFD; First Vice President of
MLAM from 1997 to 1999; Vice
President of MLAM from 1990
to 1997
Carol Ann Langham... Company Secretary None
Debra Anne Searle... Assistant Company Secretary None
</TABLE>
C-5
<PAGE>
Item 27. Principal Underwriters.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies
referred to in the first two paragraphs of Item 26 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc. and The Municipal Fund Accumulation Program, Inc. MLFD also acts
as the principal underwriter for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc., Merrill Lynch Senior Floating
Rate Fund, Inc. and Merrill Lynch Senior Floating Rate Fund II, Inc. A
separate division of PFD acts as the principal underwriter of a number of
other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
Position(s) and Position(s) and Office(s)
Name Office(s) with PFD with Registrant
- ---- ---------------------- ----------------------------
<S> <C> <C>
Terry K. Glenn............. President and Director President and Director
Michael G. Clark........... Treasurer and Director None
Thomas J. Verage........... Director None
Robert W. Crook............ Senior Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
Donald C. Burke............ Vice President Vice President and Treasurer
James T. Fatseas........... Vice President None
Debra W. Landsman-Yaros.... Vice President None
Michelle T. Lau............ Vice President None
Salvatore Venezia.......... Vice President None
William Wasel.............. Vice President None
Robert Harris.............. Secretary None
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended (the "1940 Act") and
the rules thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its transfer agent,
Financial Data Services, Inc. (4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484).
Item 29. Management Services.
Other than as set forth under the caption "Management of the Fund -- Merrill
Lynch Asset Management" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund --Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
Item 30. Undertakings.
Not applicable.
C-6
<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
22nd day of July, 1999.
Merrill Lynch Capital Fund, Inc.
(Registrant)
/s/ Donald C. Burke
By: ____________________________________
Donald C. Burke, Vice President and
Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Terry K. Glenn* President and Director
______________________________________ (Principal Executive
(Terry K. Glenn) Officer )
Donald C. Burke* Vice President and
______________________________________ Treasurer (Principal
(Donald C. Burke) Financial
and 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)
Arthur Zeikel* Director
______________________________________
(Arthur Zeikel)
/s/ Donald C. Burke July 22, 1999
*By: _________________________________
(Donald C. Burke, Attorney-in-Fact)
</TABLE>
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
9(b) Consent of Brown & Wood LLP, counsel to the Registrant.
10 Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
</TABLE>
<PAGE>
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, N.Y. 10048-0057
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
July 22, 1999
Merrill Lynch Capital Funds, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
We consent to the incorporation by reference in Post-Effective Amendment No.37
to the Registration Statement on Form N-1A (File Nos. 2-49007 and 811-2405) of
our opinion filed as an Exhibit to Post-Effective Amendment No.36 to such
Registration Statement and to the use of our name in the prospectus and
statement of additional information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
<PAGE>
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Capital Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 37 to Registration Statement No. 2-49007 of our report dated May 14, 1999
appearing in the annual report to shareholders of Merrill Lynch Capital Fund,
Inc. for the year ended March 31, 1999, and to the reference to us under the
caption "Financial Highlights" in the Prospectus, which is a part of such
Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
July 21, 1999
