As filed with the Securities and Exchange Commission on June 30,
2000
Securities Act
File No. 2-49007
Investment Company
Act File No. 811-2405
SECURITIES AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
N-1A
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REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 |
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x |
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Pre-Effective
Amendment No. |
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¨ |
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Post-Effective
Amendment No. 38 |
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x |
and/or
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REGISTRATION
STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |
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x |
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Amendment No.
26 |
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x |
(Check appropriate
box or boxes)
Merrill Lynch
Balanced 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
Balanced 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
BROWN & WOOD
LLP
One World Trade
Center
New York, New
York 10048-0557
Attention:
Thomas R. Smith, Jr., Esq.
|
|
Michael J.
Hennewinkel, Esq.
MERRILL
LYNCH
INVESTMENT
MANAGERS
P.O. Box
9011
Princeton, New
Jersey 08543-9011
|
|
It is proposed that
this filing will become effective (check appropriate box)
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¨ immediately upon filing pursuant to paragraph
(b)
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x on July
3, 2000 pursuant to paragraph (b)
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¨ 60 days
after filing pursuant to paragraph (a)(1)
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¨ on
(date) pursuant to paragraph (a)(1)
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¨ 75 days
after filing pursuant to paragraph (a)(2)
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¨ on
(date) pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check
the following box:
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¨ This
post-effective amendment designates a new effective date for a previously
filed post-effective amendment.
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Title of
Securities Being Registered: Common Stock, par value $.10 per
share.
*
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Formerly, Merrill
Lynch Capital Fund, Inc.
|
Prospectus
[LOGO OF MERRILL
LYNCH]
|
Merrill Lynch
Balanced Capital Fund, Inc.
|
July 3, 2000
|
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.
|
Table of Contents
MERRILL LYNCH BALANCED
CAPITAL FUND, INC.
[GRAPHIC] Key
Facts
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 BALANCED 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.
The Fund cannot
guarantee that it will achieve its objective.
What are the main risks
of investing in the Fund?
As with any
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 in which the
Fund invests 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
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:
|
Ÿ
|
Are looking
for capital appreciation for long term goals, such as retirement or
funding a child’s education, but also seek some current
income
|
|
Ÿ
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Want a
professionally managed and diversified portfolio
|
|
Ÿ
|
Are willing
to accept the risk that the value of your investment may decline in
order to seek the highest total investment return
|
MERRILL LYNCH BALANCED
CAPITAL FUND, INC.
4
The bar chart and table shown below provide an indication of the risks
of investing in the Fund. The bar chart shows changes in the
Fund’s performance for Class B shares for 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
Standard & Poor’s (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.
[GRAPH]
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%
1999 3.45%
During the ten-year
period shown in the bar chart, the highest return for a quarter was
10.81% (quarter ended December 31, 1999) and the lowest return for a
quarter was –11.65% (quarter ended September 30, 1998). The
Fund’s year-to-date return as of March 31, 2000 was
1.60%.
Average Annual
Total Returns (for the
calendar year ended) December 31, 1999 |
|
Past
One Year |
|
Past
Five Years |
|
Past Ten Years/
Since Inception |
|
| Balanced Capital
Fund* — Class A |
|
(0.95)% |
|
13.84 |
% |
|
11.25% |
| S&P 500 Index** |
|
21.04% |
|
28.54 |
% |
|
18.20% |
| ML
US Domestic Master Bond Index*** |
|
(0.96)% |
|
7.73 |
% |
|
7.75% |
|
| Balanced Capital
Fund* — Class B |
|
(0.24)% |
|
13.90 |
% |
|
10.72%† |
| S&P 500 Index** |
|
21.04% |
|
28.54 |
% |
|
18.20% |
| ML
US Domestic Master Bond Index*** |
|
(0.96)% |
|
7.73 |
% |
|
7.75% |
|
| Balanced Capital
Fund* — Class C |
|
2.55% |
|
13.89% |
|
|
13.02%†† |
| S&P 500 Index** |
|
21.04% |
|
28.54% |
|
|
27.19%††† |
| ML
US Domestic Master Bond Index*** |
|
(0.96)% |
|
7.73% |
|
|
7.60%††† |
|
| Balanced Capital
Fund* — Class D |
|
(1.19)% |
|
13.55% |
|
|
12.72%†† |
| S&P 500 Index** |
|
21.04% |
|
28.54% |
|
|
27.19%††† |
| ML
US Domestic Master Bond Index*** |
|
(0.96)% |
|
7.73% |
|
|
7.60%††† |
|
**
|
The S&P
500® is the Standard & Poor’s Composite Index of 500
Stocks, a widely recognized, unmanaged index of common stock prices.
Past performance is not predictive of future
performance.
|
***This
unmanaged Index is comprised of the entire universe of domestic
investment grade bonds, including US Treasury bonds, Corporate bonds
and mortgages. Past performance is not predictive of future
performance.
|
|
†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.
|
†††Since October 31, 1994.
MERRILL LYNCH BALANCED
CAPITAL FUND, INC.
5
[GRAPHIC] Key
Facts
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 and other financial
intermediaries, advertising and promotion.
Service (Account
Maintenance) Fees — fees
used to compensate securities dealers and other financial
intermediaries for account maintenance activities.
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.
Shareholder
Fees (fees paid directly
from your investment)(a): |
|
Class
A |
|
Class
B(b) |
|
Class
C |
|
Class
D |
|
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) |
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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) |
|
0.16% |
|
|
0.18% |
|
0.19% |
|
0.16% |
|
| Total
Annual Fund Operating Expenses |
|
0.56% |
|
|
1.58% |
|
1.59% |
|
0.81% |
|
|
| (a) In
addition, Merrill Lynch may charge clients a processing fee
(currently $5.35) when a client buys or sells shares. See “How
to Buy, Sell, Transfer and Exchange 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,
2000, 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 |
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
(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, 2000, the Fund paid the
Transfer Agent fees totaling $14,499,620.
|
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:
| |
|
1
Year |
|
3
Years |
|
5
Years |
|
10
Years |
|
| Class A |
|
$579 |
|
$695 |
|
$821 |
|
$1,190 |
|
|
| Class B |
|
$561 |
|
$699 |
|
$860 |
|
$1,677 |
* |
|
| Class C |
|
$262 |
|
$502 |
|
$866 |
|
$1,889 |
|
|
| Class D |
|
$603 |
|
$770 |
|
$951 |
|
$1,474 |
|
|
|
| EXPENSES IF YOU
DID NOT REDEEM YOUR SHARES: |
|
|
| |
|
1
Year |
|
3
Years |
|
5
Years |
|
10
Years |
|
| Class A |
|
$579 |
|
$695 |
|
$821 |
|
$1,190 |
|
|
| Class B |
|
$161 |
|
$499 |
|
$860 |
|
$1,677 |
* |
|
| Class C |
|
$162 |
|
$502 |
|
$866 |
|
$1,889 |
|
|
| Class D |
|
$603 |
|
$770 |
|
$951 |
|
$1,474 |
|
|
*
|
Assumes
conversion to Class D shares approximately eight years after
purchase. See note (b) to the Fees and Expenses table
above.
|
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
7
[GRAPHIC] Details
About the Fund
ABOUT THE
PORTFOLIO MANAGERS
Kurt Schansinger
is the Senior Portfolio Manager of the Fund. He has served as
First Vice President of MLIM since 1997 and Vice President from
1995 to 1997. Prior to joining MLIM, 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 MLIM since October 1993, First
Vice President since 1997 and Vice President from 1991 to
1997.
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. The Fund presently has a policy (that may be changed by
the Board of Directors) of investing at least 25% of net assets
in fixed income senior securities, such as debt securities. 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.
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
8
ABOUT THE
INVESTMENT ADVISER
The Fund is
managed by Merrill Lynch Investment Managers.
Preferred
Stock — class of stock that often pays
dividends at a specified rate and has preference over common
stock in dividend payments and liquidation of assets. Preferred
stock may also be convertible into common stock.
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 amount and frequency of
changes to a security’s market value.
The debt
securities in which the Fund may invest include:
|
Ÿ
corporate debt securities
|
|
Ÿ
mortgage backed securities and asset backed
securities
|
|
Ÿ U.S.
and foreign government debt securities
|
|
Ÿ
corporate debt securities convertible into common
stock
|
|
Ÿ 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 goes 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. The
Fund also may invest in preferred
stock.
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
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.
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 securities 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
securities 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
BALANCED CAPITAL FUND, INC.
10
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
may be 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 countries may have no laws or rules
against insider trading. Insider trading occurs when a person
buys or sells a 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 United States. 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 United States.
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
BALANCED CAPITAL FUND, INC.
12
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) have been 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:
|
Ÿ
|
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.
|
|
Ÿ
|
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. 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
because of 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
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 with a
value not exceeding 20% of its assets to financial institutions
that provide government securities as collateral. Securities
lending involves the risk that the borrower may fail to return
the securities in a timely manner or at all. As a result, the
Fund may lose money and there may be a delay in recovering the
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
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
BALANCED CAPITAL FUND, INC.
15
[GRAPHIC] 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.
The
securities of small cap and emerging growth companies generally
trade in lower volumes and are subject to greater and less
predictable price changes than the securities of larger, more
established companies. Investing in smaller and emerging growth
companies 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
debt.
Some of the reasons for that 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
BALANCED CAPITAL FUND, INC.
17
[GRAPHIC] 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 obligation to
the Fund.
|
|
Currency risk — the
risk that changes in the exchange rate between currencies will
adversely affect the value (in U.S. dollar terms) of an
investment.
|
|
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.
|
|
Liquidity
risk — the
risk that certain securities may be difficult or impossible to
sell at the time that the seller would like or at the price
that the seller believes the
security is currently worth.
|
The Fund
may use derivatives for hedging purposes, including anticipatory
hedges. 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
BALANCED CAPITAL FUND, INC.
18
[GRAPHIC] 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 reduction or
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 FAM Distributors, Inc., an affiliate
of Merrill Lynch.
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
19
[GRAPHIC] Your
Account
The
table below summarizes key features of the Merrill Lynch Select
Pricing
SM
System.
| |
|
Class A |
|
Class B |
|
Class C |
|
Class D |
|
| Availability |
|
Limited to
certain
investors including:
Ÿ Current Class A
shareholders
Ÿ Certain Retirement
Plans
Ÿ Participants in
certain Merrill Lynch-
sponsored programs
Ÿ Certain affiliates of
Merrill Lynch,
selected securities
dealers and other
financial
intermediaries. |
|
Generally
available
through Merrill Lynch.
Limited
availability through
selected securities
dealers and other
financial
intermediaries. |
|
Generally
available
through Merrill Lynch.
Limited
availability through
selected securities
dealers and other
financial
intermediaries. |
|
Generally
available
through Merrill Lynch.
Limited availability
through selected
securities dealers and
other financial
intermediaries. |
| |
|
Initial Sales
Charge? |
|
Yes. Payable at
time
of purchase. Lower
sales charges available
for larger
investments. |
|
No. Entire
purchase
price is invested in
shares of the Fund. |
|
No. Entire
purchase
price is invested in
shares of the Fund. |
|
Yes. Payable at
time
of purchase. Lower
sales charges available
for larger
investments. |
|
Deferred Sales
Charge? |
|
No. (May be
charged
for purchases over
$1 million that are
redeemed within
one year.) |
|
Yes. Payable if
you
redeem within four
years of purchase. |
|
Yes. Payable if
you
redeem within one
year of purchase. |
|
No. (May be
charged
for purchases over
$1 million that are
redeemed within one
year.) |
| |
|
Account
Maintenance and
Distribution Fees? |
|
No. |
|
0.25% Account
Maintenance Fee
0.75% Distribution
Fee. |
|
0.25% Account
Maintenance Fee
0.75% Distribution
Fee. |
|
0.25% Account
Maintenance Fee
No Distribution Fee. |
|
Conversion to
Class D shares? |
|
No. |
|
Yes,
automatically
after approximately
eight years. |
|
No. |
|
No. |
| |
|
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
20
Right of
Accumulation — permits you to pay the
sales charge that would apply to the cost or value (whichever is
higher) of all shares you own in the Merrill Lynch mutual funds
that offer Select Pricing options.
Letter of
Intent — permits you to pay the sales charge
that would be applicable if you add up all shares of Merrill
Lynch Select Pricing
SM
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.
| Your
Investment |
|
As a % of
Offering Price |
|
As a % of
Your Investment* |
|
Dealer
Compensation
as a % of
Offering Price |
|
| 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% |
|
*
|
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. In that case, the
Investment Adviser compensates the selling dealer from its own
funds. 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:
|
Ÿ
|
Purchases under a Right of Accumulation
or Letter of Intent
|
|
Ÿ
|
Merrill
Lynch Blueprint
SM
Program participants
|
|
Ÿ
|
Certain
Merrill Lynch investment or central asset accounts
|
|
Ÿ
|
Certain
employer-sponsored retirement or savings plans
|
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
21
[GRAPHIC] Your
Account
|
Ÿ
|
Purchases using proceeds from the sale of certain
Merrill Lynch closed-end funds under certain
circumstances
|
|
Ÿ
|
Certain
investors, including directors or trustees of Merrill Lynch
mutual funds and Merrill Lynch employees
|
|
Ÿ
|
Certain
fee-based programs of Merrill Lynch and other financial
intermediaries that have agreements with the Distributor or
its affiliates
|
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, other financial
intermediary 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,
selected securities dealer or other financial intermediary who
assists you in purchasing Fund shares.
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
22
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:
| Years
Since Purchase |
|
Sales
Charge* |
|
| 0 – 1 |
|
4.00% |
|
| 1 – 2 |
|
3.00% |
|
| 2 – 3 |
|
2.00% |
|
| 3 – 4 |
|
1.00% |
|
| 4
and thereafter |
|
0.00% |
|
*
|
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:
|
Ÿ
|
Certain
post-retirement withdrawals from an IRA or other retirement
plan if you are over 59 1
/2 years
old
|
|
Ÿ
|
Redemption by certain eligible 401(a) and 401(k) plans,
certain related accounts, certain group plans participating in
the Merrill Lynch Blueprint
SM
Program and certain retirement plan rollovers
|
|
Ÿ
|
Redemption in connection with participation in certain
fee-based programs of Merrill Lynch or other financial
intermediaries that have agreements with the Distributor or
its affiliates
|
|
Ÿ
|
Withdrawals resulting from shareholder death or
disability as long as the waiver request is made within one
year of death or disability or, if later, reasonably promptly
following completion of probate, or in connection with
involuntary termination of an account in which Fund shares are
held
|
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
23
[LOGO] Your
Account
|
Ÿ
|
Withdrawals through the Merrill Lynch Systematic
Withdrawal Plan of up to 10% per year of your Class B account
value at the time the plan is established
|
Your
Class B shares convert automatically into Class D shares
approximately eight years after purchase. Any Class B shares
received through reinvestment 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 typically 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.
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
24
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
The chart
on the following pages summarizes how to buy, sell, transfer and
exchange shares through Merrill Lynch, selected securities
dealer, broker, investment adviser, service provider or other
financial intermediary. You may also buy shares through the
Transfer Agent. To learn more about buying, selling,
transferring or exchanging 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.
Because
of the high costs of maintaining smaller shareholder accounts,
the Fund may redeem the shares in your account (without charging
any deferred sales charge) if the net asset value of your
account falls below $500 due to redemptions you have made. You
will be notified that the value of your account is less than
$500 before the Fund makes an involuntary redemption. You will
then have 60 days to make an additional investment to bring the
value of your account to at least $500 before the Fund takes any
action. This involuntary redemption does not apply to retirement
plans or Uniform Gifts or Transfers to Minors Act
accounts.
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
25
[GRAPHIC] Your
Account
| If You Want
To |
|
Your
Choices |
|
Information
Important for You to Know |
|
| Buy
Shares |
|
First, select
the share class
appropriate for you |
|
Refer to the
Merrill Lynch Select Pricing table on page 20. Be sure
to read this Prospectus carefully. |
|
| |
|
Next, determine
the
amount of your investment |
|
The minimum
initial investment for the Fund is $1,000 for all
accounts except:
Ÿ $250 for
certain Merrill Lynch fee-based programs
Ÿ $100 for
retirement plans. |
| |
| |
|
|
|
(The minimums
for initial investments may be waived under certain
circumstances.) |
|
| |
|
Have your
Merrill Lynch
Financial Consultant or
securities dealer submit
your purchase order |
|
The price of
your shares is based on the next calculation of net
asset value after your order is placed. 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
Agent |
|
To purchase
shares directly, call 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
Investment |
|
Purchase
additional shares |
|
The minimum
investment for 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 minimums
for additional purchases may be waived under
certain circumstances.) |
|
| |
|
Acquire
additional shares
through the automatic
dividend reinvestment plan |
|
All dividends
are automatically reinvested without a sales
charge. |
|
| |
|
Participate in
the automatic
investment plan |
|
You may invest
a specific amount on a periodic basis through
certain Merrill Lynch investment or central asset
accounts. |
|
Transfer Shares
to
Another Selected
Securities Dealer
or Other Financial
Intermediary |
|
Transfer to a
participating
selected securities dealer or
other financial intermediary |
|
You may
transfer your Fund shares only to another securities dealer
or other financial intermediary that has entered into an
agreement
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-
participating selected
securities dealer or other
financial intermediary |
|
You must either:
Ÿ Transfer
your shares to an account with the Transfer Agent; or
Ÿ Sell your
shares paying any applicable deferred sales charge. |
|
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
26
[GRAPHIC] Your
Account
| If You Want
To |
|
Your
Choices |
|
Information
Important for You to Know |
|
| Sell Your
Shares |
|
Have your
Merrill Lynch
Financial Consultant,
selected securities dealer or
financial intermediary
submit your sales order |
|
The price of
your shares is based on the next calculation of net
asset value after your order is placed. 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. |
| |
| |
|
|
|
Securities
dealers or other financial intermediaries, 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 Transfer
Agent |
|
You may sell
shares held at the 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. A
signature guarantee will generally be required but may be waived
in
certain limited circumstances. You can obtain a signature
guarantee
from a bank, securities dealer, securities broker, credit union,
savings
association, national securities exchange or registered
securities
association. A notary public seal will not be acceptable. 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. |
| |
| |
|
|
|
You may also
sell shares held at the Transfer Agent by telephone
request if the amount being sold is less than $50,000 and if
certain
other conditions are met. Contact the Transfer Agent at
1-800-MER-
FUND for details. |
| |
|
Sell Shares
Systematically |
|
Participate in
the Fund’s
Systematic Withdrawal Plan |
|
You can choose
to receive systematic payments from your Fund
account 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®, CBA® 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
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 or other financial intermediary for
details. |
|
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
27
[GRAPHIC] Your
Account
| If You Want
To |
|
Your
Choices |
|
Information
Important for You to Know |
|
Exchange Your
Shares |
|
Select the fund
into which
you want to exchange. Be
sure to read that fund’s
prospectus |
|
You can
exchange your shares of the Fund for shares of many other
Merrill Lynch mutual funds. You must have held the shares used in
the 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 (and are
not eligible to purchase 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. |
| |
| |
|
|
|
To exercise the
exchange privilege contact your Merrill Lynch
Financial Consultant or call the Transfer Agent at
1-800-MER-FUND. |
| |
| |
|
|
|
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. |
| |
|
Certain
financial intermediaries may charge additional fees in
connection with transactions in Fund shares. The Fund may accept
orders from certain authorized financial intermediaries or their
designees. The Fund will be deemed to receive an order when
accepted by the intermediary or designee and the order will
receive the net asset value next computed by the Fund after such
acceptance. If the payment for a purchase order is not made by a
designated later time, the order will be canceled and the
financial intermediary could be held liable for any
losses.
The
Investment Adviser, the Distributor or their affiliates may make
payments out of their own resources to selected securities
dealers and other financial intermediaries for providing
services intended to result in the sale of Fund shares or for
shareholder servicing activities.
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
28
Net Asset
Value — the market value of the Fund’s
total assets after deducting liabilities, divided by the number
of shares outstanding.
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, as of the close of business on
the Exchange based on prices at the time of closing. The
Exchange generally closes at 4:00 p.m. Eastern time. The net
asset value used in determining your share 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 or other financial intermediaries, you may be able to buy
Class A shares at net asset value, including by exchanges from
other share classes. Sales charges on the shares being exchanged
may be reduced or waived under certain
circumstances.
You
generally cannot transfer shares held through a fee-based
program into another account. Instead, you will have to redeem
your shares held through the program and purchase shares of
another class, which may be subject to distribution and account
maintenance fees. This may be a taxable event and you will pay
any applicable sales charges.
If you
leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or
into a money market fund. The class you receive may be the class
you originally owned when you entered the program, or in certain
cases, a different class. If the
exchange is into Class B shares, the period before conversion to
Class D shares may be modified. Any redemption or exchange will
be at net asset value. However, if you participate in the
program for less than a specified period, you may be charged a
fee in accordance with the terms of the program.
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, selected
securities dealer or other financial intermediary.
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. Capital gains may
be taxable to you at different rates depending, in part, on how
long the Fund has held the assets sold.
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, you generally will be treated
as having sold your shares and 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.
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
30
“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.
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 redemption
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.
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
31
[LOGO] Management
of the Fund
MERRILL LYNCH INVESTMENT MANAGERS
Merrill Lynch Investment Managers, 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, 2000, the
Investment Adviser received a fee equal to 0.40% of the
Fund’s average daily net assets.
Merrill
Lynch Investment Managers was organized as an investment adviser
in 1977 and offers investment advisory services to more than 40
organized investment companies. Merrill Lynch Asset Management
is part of the Asset Management Group of ML&Co. The Asset
Management Group which had approximately $556 billion in
investment company and other portfolio assets under management
as of May 2000. This amount includes assets managed for Merrill
Lynch affiliates.
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
32
The Financial Highlights table is intended to help you understand
the Fund’s financial performance for the periods shown.
Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate an
investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends). This information has
been audited by Deloitte & Touche LLP, whose
report, along with the Fund’s financial statements, is
included in the Fund’s annual report to shareholders, which
is available upon request.
| |
|
Class A
|
|
Class B
|
| |
|
For the Year
Ended March 31,
|
|
For the Year
Ended March 31,
|
Increase
(Decrease) in
Net Asset Value: |
|
2000† |
|
1999† |
|
1998† |
|
1997† |
|
1996 |
|
2000† |
|
1999† |
|
1998† |
|
1997† |
|
1996 |
|
| Per Share Operating
Performance: |
|
| Net
asset value, beginning of year |
|
$35.03 |
|
|
$37.56 |
|
|
$31.39 |
|
|
$30.90 |
|
|
$27.74 |
|
|
$34.25 |
|
|
$36.68 |
|
|
$30.72 |
|
|
$30.30 |
|
|
$27.28 |
|
|
| Investment
income — net |
|
.94 |
|
|
1.00 |
|
|
1.11 |
|
|
1.25 |
|
|
1.21 |
|
|
.57 |
|
|
.63 |
|
|
.74 |
|
|
.91 |
|
|
.90 |
|
|
Realized and unrealized gain (loss) on
investments and foreign currency
transactions — net |
|
.62 |
|
|
(1.28 |
) |
|
8.14 |
|
|
2.43 |
|
|
5.41 |
|
|
.60 |
|
|
(1.25 |
) |
|
7.96 |
|
|
2.39 |
|
|
5.29 |
|
|
| Total from investment
operations |
|
1.56 |
|
|
(.28 |
) |
|
9.25 |
|
|
3.68 |
|
|
6.62 |
|
|
1.17 |
|
|
(.62 |
) |
|
8.70 |
|
|
3.30 |
|
|
6.19 |
|
|
| Less dividends and
distributions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investment
income — net |
|
(.94 |
) |
|
(1.08 |
) |
|
(1.11 |
) |
|
(1.25 |
) |
|
(1.16 |
) |
|
(.66 |
) |
|
(.64) |
|
|
(.77 |
) |
|
(.94 |
) |
|
(.87 |
) |
| Realized gain
on investments — net |
|
(2.99 |
) |
|
(1.17 |
) |
|
(1.97 |
) |
|
(1.94 |
) |
|
(2.30 |
) |
|
(2.99 |
) |
|
(1.17 |
) |
|
(1.97 |
) |
|
(1.94 |
) |
|
(2.30 |
) |
|
| Total dividends and
distributions |
|
(3.93 |
) |
|
(2.25 |
) |
|
(3.08 |
) |
|
(3.19 |
) |
|
(3.46 |
) |
|
(3.65 |
) |
|
(1.81 |
) |
|
(2.74 |
) |
|
(2.88 |
) |
|
(3.17 |
) |
|
| Net
asset value, end of year |
|
$32.66 |
|
|
$35.03 |
|
|
$37.56 |
|
|
$31.39 |
|
|
$30.90 |
|
|
$31.77 |
|
|
$34.25 |
|
|
$36.68 |
|
|
$30.72 |
|
|
$30.30 |
|
|
| Total Investment
Return:* |
|
| Based on net asset value per
share |
|
4.58 |
% |
|
(.68 |
%) |
|
30.71 |
% |
|
12.62 |
% |
|
24.50 |
% |
|
3.48 |
% |
|
(1.65 |
%) |
|
29.38 |
% |
|
11.48 |
% |
|
23.22 |
% |
|
| Ratios to Average Net
Assets: |
|
| Expenses |
|
.56 |
% |
|
.57 |
% |
|
.55 |
% |
|
.55 |
% |
|
.56 |
% |
|
1.58 |
% |
|
1.59 |
% |
|
1.57 |
% |
|
1.57 |
% |
|
1.58 |
% |
|
| Investment
income — net |
|
2.74 |
% |
|
2.86 |
% |
|
3.21 |
% |
|
3.99 |
% |
|
4.09 |
% |
|
1.71 |
% |
|
1.85 |
% |
|
2.19 |
% |
|
2.97 |
% |
|
3.07 |
% |
|
| Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net
assets, end of year (in thousands) |
|
$2,721,503 |
|
|
$3,631,440 |
|
|
$4,155,677 |
|
|
$3,291,219 |
|
|
$3,225,758 |
|
|
$2,853,699 |
|
|
$4,866,564 |
|
|
$5,938,708 |
|
|
$4,977,431 |
|
|
$5,025,504 |
|
|
| Portfolio turnover |
|
33 |
% |
|
33 |
% |
|
38 |
% |
|
47 |
% |
|
84 |
% |
|
33 |
% |
|
33 |
% |
|
38 |
% |
|
47 |
% |
|
84 |
% |
|
*
|
Total
investment returns exclude the effects of sales
charges.
|
†
|
Based
on average shares outstanding.
|
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
33
[GRAPHIC]
Management of the Fund
FINANCIAL
HIGHLIGHTS (concluded)
| |
|
Class
C
|
|
Class
D
|
| |
|
For the Year
Ended March 31,
|
|
For the Year
Ended March 31,
|
Increase
(Decrease) in
Net Asset Value: |
|
2000† |
|
1999† |
|
1998† |
|
1997† |
|
1996 |
|
2000† |
|
1999† |
|
1998† |
|
1997† |
|
1996 |
|
| Per Share Operating
Performance: |
|
| Net
asset value, beginning of year |
|
$33.82 |
|
|
$36.31 |
|
|
$30.44 |
|
|
$30.08 |
|
|
$27.17 |
|
|
$34.97 |
|
|
$37.49 |
|
|
$31.34 |
|
|
$30.86 |
|
|
$27.72 |
|
|
| Investment
income — net |
|
.57 |
|
|
.62 |
|
|
.73 |
|
|
.90 |
|
|
.92 |
|
|
.86 |
|
|
.91 |
|
|
1.02 |
|
|
1.17 |
|
|
1.16 |
|
|
Realized and unrealized gain (loss) on
investments and foreign currency
transactions — net |
|
.59 |
|
|
(1.25 |
) |
|
7.89 |
|
|
2.36 |
|
|
5.24 |
|
|
.60 |
|
|
(1.28 |
) |
|
8.14 |
|
|
2.43 |
|
|
5.38 |
|
|
| Total from investment
operations |
|
1.16 |
|
|
(.63 |
) |
|
8.62 |
|
|
3.26 |
|
|
6.16 |
|
|
1.46 |
|
|
(.37 |
) |
|
9.16 |
|
|
3.60 |
|
|
6.54 |
|
|
| Less dividends and
distributions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investment
income — net |
|
(.63 |
) |
|
(.69 |
) |
|
(.78 |
) |
|
(.96 |
) |
|
(.95 |
) |
|
(.86 |
) |
|
(.98 |
) |
|
(1.04 |
) |
|
(1.18 |
) |
|
(1.10 |
) |
| Realized gain
on investments — net |
|
(2.99 |
) |
|
(1.17 |
) |
|
(1.97 |
) |
|
(1.94 |
) |
|
(2.30 |
) |
|
(2.99 |
) |
|
(1.17 |
) |
|
(1.97 |
) |
|
(1.94 |
) |
|
(2.30 |
) |
|
| Total dividends and
distributions |
|
(3.62 |
) |
|
(1.86 |
) |
|
(2.75 |
) |
|
(2.90 |
) |
|
(3.25 |
) |
|
(3.85 |
) |
|
(2.15 |
) |
|
(3.01 |
) |
|
(3.12 |
) |
|
(3.40 |
) |
|
| Net
asset value, end of period |
|
$31.36 |
|
|
$33.82 |
|
|
$36.31 |
|
|
$30.44 |
|
|
$30.08 |
|
|
$32.58 |
|
|
$34.97 |
|
|
$37.49 |
|
|
$31.34 |
|
|
$30.86 |
|
|
| Total Investment
Return:* |
|
| Based on net asset value per
share |
|
3.50 |
% |
|
(1.70 |
%) |
|
29.40 |
% |
|
11.45 |
% |
|
23.25 |
% |
|
4.29 |
% |
|
(.92 |
%) |
|
30.40 |
% |
|
12.34 |
% |
|
24.21 |
% |
|
| Ratios to Average Net
Assets: |
|
| Expenses |
|
1.59 |
% |
|
1.59 |
% |
|
1.58 |
% |
|
1.58 |
% |
|
1.59 |
% |
|
81 |
% |
|
.82 |
% |
|
.80 |
% |
|
.80 |
% |
|
.81 |
% |
|
| Investment
income — net |
|
1.70 |
% |
|
1.83 |
% |
|
2.18 |
% |
|
2.96 |
% |
|
3.08 |
% |
|
2.50 |
% |
|
2.60 |
% |
|
2.95 |
% |
|
3.75 |
% |
|
3.84 |
% |
|
| Supplemental Data: |
|
| Net
assets, end of year (in thousands) |
|
$308,150 |
|
|
$491,234 |
|
|
$512,783 |
|
|
$322,438 |
|
|
$259,131 |
|
|
$1,428,120 |
|
|
$1,513,406 |
|
|
$1,280,317 |
|
|
$690,116 |
|
|
$521,599 |
|
|
| Portfolio turnover |
|
33 |
% |
|
33 |
% |
|
38 |
% |
|
47 |
% |
|
84 |
% |
|
33 |
% |
|
33 |
% |
|
38 |
% |
|
47 |
% |
|
84 |
% |
|
*
|
Total
investment returns exclude the effects of sales
charges.
|
†
|
Based
on average shares outstanding.
|
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
34
POTENTIAL
INVESTORS
Open an account (two options)
1 2
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT Financial Date Services, Inc.
OR SECURITIES DEALER ADMINISTRATIVE OFFICES
Advises shareholders on 4800 Deer Lake Drive East
their Fund investments. Jacksonville, Florida 32246-6484
MAILING ADDRESS
P.O. Box 45289
Jacksonville, Florida 32232-5289
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 100 Church Street
New York, New York 10048-0557 oversees the Fund New York, New York 10286
Provides legal advice to the Fund. Holds the Fund's assets
for safekeeping
INDEPENDENT AUDITORS INVESTMENT ADVISER
Deloitte & Touche LLP Merrill Lynch
Princeton Forrestal Village Asset Management, L.P.
116-300 Village Boulevard ADMINISTRATIVE OFFICES
Princeton, New Jersey 08540-6400 800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on MAILING ADDRESS
behalf of the shareholders. P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day activities
MERRILL LYNCH
BALANCED CAPITAL FUND, INC.
[GRAPHIC] For
More Information
|
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 1-202-942-8090 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
electronic request at the following E-mail address:
[email protected] or by writing the Public Reference Section of
the SEC, Washington, D.C. 20549-0102.
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
#10044-07-00
©
Merrill Lynch Investment Managers, L.P.
Prospectus
[LOGO OF MERRILL
LYNCH]
July 3,
2000
As Revised July
3, 2000
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Balanced Capital Fund,
Inc.
P.O. Box
9011, Princeton, New Jersey 08543-9011 Ÿ Phone
No. (609) 282-2800
Merrill
Lynch Balanced 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, 2000, approximately 63% 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 3, 2000 (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 2000 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. Eastern
time on any business day.
Merrill Lynch Investment
Managers — Investment Adviser
Merrill Lynch Funds
Distributor — Distributor
The date
of this Statement of Additional Information is July 3,
2000.
TABLE
OF CONTENTS
| |
|
Page
|
|
Investment Objective and Policies
|
|
2 |
| Description of Certain
Investments |
|
2 |
| Mortgage Backed
Securities |
|
6 |
| Investment in Foreign
Issuers |
|
7 |
| Derivatives |
|
9 |
| Other Investment Policies
and Practices |
|
12 |
| Investment
Restrictions |
|
14 |
| Portfolio
Turnover |
|
17 |
|
Management of the Fund
|
|
17 |
| Directors and
Officers |
|
17 |
| Compensation of
Directors |
|
18 |
| Management and Advisory
Arrangements |
|
19 |
| Code of Ethics |
|
20 |
|
Purchase of Shares
|
|
21 |
| Initial Sales Charge
Alternatives — Class A and Class D
Shares |
|
21 |
| Reduced Initial Sales
Charges |
|
23 |
| Deferred Sales Charge
Alternatives — Class B and Class C
Shares |
|
26 |
| Distribution
Plans |
|
29 |
| Limitations on the
Payment of Deferred Sales Charges |
|
31 |
|
Redemption of Shares
|
|
32 |
| Redemption |
|
32 |
| Repurchase |
|
33 |
| Reinstatement
Privilege — Class A and Class D
Shares |
|
33 |
|
Pricing of Shares
|
|
34 |
| Determination of Net
Asset Value |
|
34 |
| Computation of Offering
Price Per Share |
|
35 |
|
Portfolio Transactions and Brokerage
|
|
35 |
|
Shareholder Services
|
|
37 |
| Investment
Account |
|
37 |
| Exchange
Privilege |
|
37 |
| Fee-Based
Programs |
|
40 |
| Retirement and Education
Savings Plans |
|
40 |
| Automatic Investment
Plans |
|
40 |
| Automatic Dividend
Reinvestment Plan |
|
41 |
| Systematic Withdrawal
Plan |
|
41 |
|
Dividends and Taxes
|
|
42 |
| Dividends |
|
42 |
| Taxes |
|
42 |
| Tax Treatment of Options,
Futures and Forward Foreign Exchange Transactions |
|
44 |
| Special Rules for Certain
Foreign Currency Transactions |
|
45 |
|
Performance Data
|
|
45 |
|
General Information
|
|
48 |
| Description of
Shares |
|
48 |
| Independent
Auditors |
|
48 |
| Custodian |
|
48 |
| Transfer Agent |
|
48 |
| Legal Counsel |
|
48 |
| Reports to
Shareholders |
|
49 |
| Shareholder
Inquiries |
|
49 |
| Additional
Information |
|
49 |
|
Financial Statements
|
|
49 |
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.
Merrill
Lynch Investment Managers (the “Investment Adviser” or
“MLIM”) 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, 2000, approximately 63% 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 paid on
corporate debt securities or the dividend preference on a
preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise
the conversion privilege.
The
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
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 relative to
its credit quality and the potential capital appreciation that
is offered by the underlying common stock, among other
things.
Convertible securities are issued and traded in a number
of securities markets. 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 of the common stock the conversion value
is substantially below the investment value of the convertible
security, the price of the convertible security is governed
principally by its investment value.
To the
extent the conversion value of a convertible security increases
to a point that approximates or exceeds its investment value,
the price of the convertible security will be influenced
principally by its conversion value. A convertible security will
sell at a premium over the conversion value to the extent
investors place value on the right to acquire the underlying
common stock while holding a fixed-income security. The yield
and conversion premium of convertible securities issued in Japan
and the Euromarket are frequently determined at levels that
cause the conversion value to affect their market value more
than the securities’ investment value.
Holders
of convertible securities generally have a claim on the assets
of the issuer prior to the common stockholders but may be
subordinated to other debt securities of the same issuer. A
convertible security may be subject to redemption at the option
of the issuer at a price established in the charter provision,
indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held
by the Fund is called for redemption, the Fund will be required
to redeem the security, convert it into the underlying common
stock or sell it to a third party. Certain convertible debt
securities may provide a put option to the holder which entitles
the holder to cause the security to be redeemed by the issuer at
a premium over the stated principal amount of the debt security
under certain circumstances.
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.
While the issuers
in which the Fund will 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.
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 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 has adopted guidelines and
delegated to the Investment Adviser the daily function of
determining and monitoring liquidity of restricted securities.
The Board, 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 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:
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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.
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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.
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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.
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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.
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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.
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The
Fund may incur expenses to the extent necessary to seek
recovery upon default or to negotiate new terms with a
defaulting issuer.
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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.”
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
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. 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 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.
The Fund
may use Derivatives and trading strategies including the
following:
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 over-the-counter (“OTC”) markets.
In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post
margin against their obligations, and the performance of the
parties’ obligations in connection with such options is
guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the
buyer and the seller, but generally do not require the parties
to post margin and are subject to greater 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 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.
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 Derivatives 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
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
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 to banks, brokers and other
financial institutions. In return, the Fund receives collateral
in cash or securities issued or guaranteed by the U.S.
government which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned
securities. This limitation is a fundamental policy and it may
not be changed without the approval of the holders of a majority
of the Fund’s outstanding voting securities, as defined in
the Investment Company Act of 1940, as amended (the
“Investment Company Act”). During the period of such a
loan, the Fund typically receives the income on both the loaned
securities and the collateral and thereby increases its yield.
In certain circumstances, the Fund may receive a flat fee for
its loans. Such 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 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.
|
|
(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.
|
|
(e) maintain less than 25% of the value of
its assets in fixed income senior securities, including but
not limited to debt securities and preferred
stock.
|
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 and
Brokerage.” Without such an exemptive order, the Fund is
prohibited from engaging in portfolio transactions with Merrill
Lynch or its affiliates acting as principal.
The
Fund’s investments will be limited in order to allow the
Fund to qualify as a “regulated investment company”
for purposes of the Code. See “Dividends and
Taxes—Taxes.” To qualify, among other requirements,
the Fund will limit its investments so that, at the close of
each quarter of the taxable year, (i) not more than 25% of the
market value of the Fund’s total assets will be invested in
the securities of a single issuer, and (ii) with respect to 50%
of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the
securities of a single issuer and the Fund will not own more
than 10% of the outstanding voting securities of a single
issuer. These tax-related limitations may be changed by the
Directors of the Fund to the extent necessary to comply with
changes to the Federal tax requirements. The Fund is
“diversified” under the Investment Company Act and
must satisfy the foregoing 5% and 10% requirements with respect
to 75% of its total assets.
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 U.S. Government securities and all other
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.
Directors and Officers
The
Directors of the Fund consist of seven individuals, five of whom
are not “interested persons” of the Fund as defined in
the Investment Company Act (the “non-interested
Directors”). The Directors are responsible for the overall
supervision of the operations of the Fund and perform the
various duties imposed on the directors of investment companies
by the Investment Company Act. Information about the Directors,
executive officers and the portfolio manager of the Fund,
including their ages and their principal occupations for at
least the last five years, is set forth below. Unless otherwise
noted, the address of each Director, executive officer and the
portfolio manager is P.O. Box 9011, Princeton, New Jersey
08543-9011.
TERRY
K. GLENN
(59) — 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 FAM
Distributors, Inc. (“FAMD”) 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.
M.
COLYER
CRUM
(68) — Director(2)(3) — 104
Westcliff Road, Weston, Massachusetts 02193. James R. Williston
Professor of Investment Management Emeritus, Harvard Business
School since 1996; James R. Williston Professor of Investment
Management, Harvard Business School, from 1971 to 1996; Director
of Cambridge Bancorp.
LAURIE
SIMON
HODRICK
(37) — Trustee(2)(3) — 809
Uris Hall, 3022 Broadway, New York, New York 10027. Professor of
Finance and Economics, Graduate School of Business, Columbia
University since 1998; Associate Professor of Finance and
Economics, Graduate School of Business, Columbia University from
1996 to 1998; Associate Professor of Finance, J.L. Kellogg
Graduate School of Management, Northwestern University from 1992
to 1996.
JACK
B. SUNDERLAND
(71) — 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
(61) — 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
(58) — Director(2)(3) — 16450
Maddalena Place, Delray Beach, Florida 33446. Managing Director
of FGW Associates since 1997; Vice President, Planning
Investment, and Development of Warner Lambert Co. from 1979 to
1997; Director of Watson Pharmaceutical, Inc. (a pharmaceutical
company) since 2000; Director of the Michael J. Fox Foundation
for Parkinson’s Research; Director of Laboratories Phoenix
USA, Inc. (a private drug delivery company); and Director of
Kann Institute for Medical Careers, Inc. (a private medical
education company).
ARTHUR
ZEIKEL
(68) — 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
(40) — Senior Vice
President(1)(2) — 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
(41) — Vice
President(1)(2) — Director (Equity Fund
Management) of the Investment Adviser since 1997; Vice President
of the Investment Adviser from 1991 to 1997.
DONALD
C. BURKE
(40) — 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 FAMD 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
(35) — Secretary(1)(2) —
Director (Legal Advisory) since 2000; 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 MLIM 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
June 1, 2000, the Directors and officers of the Fund as a group
(11 persons) owned an aggregate of less than 1% of the
outstanding shares of the Fund. At such date, Mr. Zeikel, a
Director 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,
2000 and the aggregate compensation paid to them from all
registered investment companies advised by the Investment
Adviser and its affiliate, FAM (“MLIM/FAM-advised
funds”), for the calendar year ended December 31,
1999.
Name
|
|
Position with
Fund
|
|
Compensation
From Fund
|
|
Pension or
Retirement Benefits
Accrued as Part of
Fund Expense
|
|
Estimated
Annual
Benefits upon
Retirement
|
|
Aggregate
Compensation from
Fund and Other
MLIM/FAM-
Advised Funds(1)
|
| M.
Colyer Crum |
|
Director |
|
$8,000 |
|
None |
|
None |
|
$122,975 |
| Laurie
Simon Hodrick(2) |
|
Director |
|
$7,000 |
|
None |
|
None |
|
$ 53,000 |
| Jack B.
Sunderland |
|
Director |
|
$8,000 |
|
None |
|
None |
|
$143,975 |
| J.
Thomas Touchton |
|
Director |
|
$8,000 |
|
None |
|
None |
|
$142,725 |
| Fred G.
Weiss |
|
Director |
|
$9,000 |
|
None |
|
None |
|
$122,975 |
(1)
|
The
Directors serve on the boards of MLIM/FAM-advised funds as
follows: Mr. Crum (14 registered investment companies
consisting of 14 portfolios); Ms. Hodrick (14 registered
investment companies consisting of 14 portfolios); Mr.
Sunderland (18 registered investment companies consisting of
33 portfolios); Mr. Touchton (18 registered investment
companies consisting of 33 portfolios); and Mr. Weiss (14
registered investment companies consisting of 14
portfolios).
|
(2)
|
Ms.
Hodrick was elected a Director of the Fund and certain other
MLIM/FAM Advised Funds on November 4, 1999.
|
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 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.
Period
|
|
Investment
Advisory Fee
|
| Fiscal
year ended March 31, 2000 |
|
$37,480,574 |
| Fiscal
year ended March 31, 1999 |
|
$45,106,929 |
| Fiscal
year ended March 31, 1998 |
|
$41,894,654 |
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, 2000, 1999 and 1998.
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 FAMD (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 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 approved a Code of Ethics under
Rule 17j-1 of the Investment Company Act that covers the Fund
and the Fund’s Investment Adviser and Distributor ( the
“Code of Ethics”). The Code of Ethics significantly
restricts the personal investing activities of all employees of
the Investment Adviser and Distributor and, as described below,
imposes additional more onerous restrictions on fund investment
personnel.
The Code
of Ethics requires that all employees of the Investment Adviser
and Distributor preclear any personal securities investments
(with limited exceptions, such as mutual funds, high-quality
short-term securities and direct obligations of the U.S.
government). The preclearance requirement and associated
procedures are designed to identify any substantive prohibition
or limitation applicable to the proposed investment. The
substantive restrictions applicable to all employees of the
Investment Adviser and Distributor 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 Code of Ethics provides for
trading “blackout periods” which prohibit trading by
investment personnel of the Fund within seven calendar days
before or after trading by the Fund in the same or equivalent
security.
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 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
offers its shares at a public offering price equal to the next
determined net asset value per share plus any sales charge
applicable to the class of shares selected by the investor. The
applicable offering price for purchase orders is based upon the
net asset value of the Fund next determined after receipt of the
purchase order by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on
the New York Stock Exchange (the “NYSE”) (generally
4:00 p.m., Eastern time) which includes orders received after
the determination of net asset value on the previous day, the
applicable offering price will be based on the net asset value
on the day the order is placed with the Distributor, provided
that the orders are received by the Distributor prior to 30
minutes after the close of business on the NYSE on that day. If
the purchase orders are not received prior to 30 minutes after
the close of business on the NYSE on that day, such orders shall
be deemed received on the next business day. Dealers have the
responsibility of submitting purchase orders to the Fund not
later than 30 minutes after the close of business on the NYSE in
order to purchase shares at that day’s offering
price.
The Fund
or the Distributor may suspend the continuous offering of the
Fund’s shares of any class at any time in response to
conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may
be rejected by the Fund or the Distributor. Neither the
Distributor nor the dealers or other financial intermediaries
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 “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 in a
shareholder’s account, including participants in the
Merrill Lynch Blueprint
SM
Program,
are entitled to purchase additional Class A shares of the Fund
in that account. Certain employer-sponsored retirement or
savings plans, including eligible 401(k) plans, may purchase
Class A shares at net asset value provided such plans meet the
required minimum number of eligible employees or required amount
of assets advised by MLIM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty
insurance reserve fund programs and U.S. branches of foreign
banking institutions provided that the program or the bank 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 MLIM/FAM-advised investment
companies. Certain persons who acquired shares of certain
MLIM/FAM-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.
Class
A and Class D Sales Charge Information
| Class A Shares |
|
Fiscal
Year Ended March 31,
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained by
Distributor
|
|
Sales Charges
Paid to
Merrill Lynch
|
|
CDSCs Received on
Redemption of
Load-Waived Shares
|
| 2000 |
|
$134,112 |
|
$ 9,755 |
|
$124,357 |
|
$ 17 |
| 1999 |
|
$375,455 |
|
$26,209 |
|
$349,246 |
|
$54,988 |
| 1998 |
|
$553,366 |
|
$43,421 |
|
$509,945 |
|
$60,049 |
| Class D Shares |
|
Fiscal
Year Ended March 31,
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained by
Distributor
|
|
Sales Charges
Paid to
Merrill Lynch
|
|
CDSCs Received on
Redemption of
Load-Waived Shares
|
| 2000 |
|
$ 297,549 |
|
$ 19,042 |
|
$ 278,507 |
|
$ 42 |
| 1999 |
|
$1,328,780 |
|
$ 89,253 |
|
$1,239,527 |
|
$19,091 |
| 1998 |
|
$2,040,769 |
|
$137,456 |
|
$1,903,313 |
|
$18,937 |
The
Distributor may reallow discounts to selected securities dealers
and other financial intermediaries and retain the balance over
such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling
Class A and Class D shares of the Fund will receive a concession
equal to most of the sales charge, they may be deemed to be
underwriters under the Securities Act.
Reduced Initial Sales Charges
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 or other financial
intermediary, 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
Blueprint
SM
Program
(“Blueprint”). In addition, participants in Blueprint
who own Class A shares of the Fund may purchase additional Class
A shares of the Fund through Blueprint. Blueprint is directed to
small investors, group IRAs and participants in certain affinity
groups such as credit unions and trade associations. Investors
placing orders to purchase Class A or Class D shares of the Fund
through Blueprint will acquire the Class A or Class D shares at
net asset value plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to
$300 at 4.25%, from $300.01 to $5,000 at 3.25% plus $3.00 and
$5,000.01 or more at the standard sales charge rates disclosed
in the Prospectus). In addition, Class A and Class D shares of
the Fund are being offered at net asset value plus a sales
charge 1
/2 of 1%
for corporate or group IRA programs placing orders to purchase
their Class A or Class D shares through Blueprint. Services,
including the exchange privilege, available to Class A and Class
D investors through Blueprint, however, may differ from those
available to other investors in Class A or Class D shares.
Class A
and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover
Program (the “IRA Rollover Program”) available from
Merrill Lynch Business Financial Services, a business unit of
Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer-sponsored retirement and
savings plans whose trustee and/or plan sponsor has entered into
a Merrill Lynch Directed IRA Rollover Program Service
Agreement.
Orders
for purchases and redemptions of Class A or Class D shares of
the Fund may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two
business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who
are part of an automatic investment plan. Additional information
concerning purchases through Blueprint, including any annual
fees and transaction charges, is available from Merrill Lynch,
Pierce, Fenner & Smith Incorporated, The Blueprint
SM
Program,
P.O. Box 30441, New Brunswick, New Jersey
08989-0441.
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 MLIM/FAM-advised investment
companies, ML & Co. and its subsidiaries (the term
“subsidiaries,” when used herein with respect to ML
& Co., includes MLIM, 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
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 MLIM 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 MLIM/FAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of
certain shares of common stock of such funds in shares of the
Fund. Upon exercise of this investment option, shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class
A shares of the Fund and shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that
shareholders already owning Class A shares of the Fund will be
eligible to purchase additional Class A shares pursuant to this
option, if such additional Class A shares will be held in the
same account as the existing Class A shares and the other
requirements pertaining to the reinvestment privilege are met.
In order to exercise this investment option, a shareholder of
one of the above-referenced continuously offered closed-end
funds (an “eligible fund”) must sell his or her shares
of common stock of the eligible fund (the “eligible
shares”) back to the 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.
Purchases Through Certain Financial
Intermediaries. Reduced sales charges
may be applicable for purchases of Class A or Class D shares of
the Fund through certain financial advisers, selected securities
dealers and other financial intermediaries that meet and adhere
to standards established by the Investment Adviser from time to
time.
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:
Year Since Purchase Payment
Made
|
|
CDSC as a Percentage
of Dollar Amount
Subject to Charge
|
| 0–1 |
|
4.0% |
| 1–2 |
|
3.0% |
| 2–3 |
|
2.0% |
| 3–4 |
|
1.0% |
| 4 and
thereafter |
|
None |
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) 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 Access
SM
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 MLIM
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 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
Select Pricing 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 MLIM/FAM-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
Class B Shares*
|
Fiscal
Year Ended March 31,
|
|
CDSCs Received
by Distributor
|
|
CDSCs Paid to
Merrill Lynch
|
| 2000 |
|
$6,595,342 |
|
$6,595,342 |
| 1999 |
|
$5,913,754 |
|
$5,913,754 |
| 1998 |
|
$4,375,961 |
|
$4,375,961 |
|
|
*
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. |
|
Class C Shares
|
Fiscal
Year Ended March 31,
|
|
CDSCs Received
by Distributor
|
|
CDSCs Paid to
Merrill Lynch
|
| 2000 |
|
$ 134,746 |
|
$ 134,746 |
| 1999 |
|
$ 277,813 |
|
$ 277,813 |
| 1998 |
|
$ 91,818 |
|
$ 91,818 |
Merrill
Lynch compensates its Financial Consultants for selling Class B
and Class C shares at the time of purchase from its own funds.
Proceeds from the CDSC and the distribution fee are paid to the
Distributor and are used in whole or in part by the Distributor
to defray the expenses of dealers (including Merrill Lynch)
related to providing distribution-related services to the Fund
in connection with the sale of the Class B and Class C shares,
such as the payment of compensation to financial consultants for
selling Class B and Class C shares from the dealer’s own
funds. The combination of the CDSC and the ongoing distribution
fee facilitates the ability of the Fund to sell the Class B and
Class C shares without a sales charge being deducted at the time
of purchase. See “Distribution Plans” below.
Imposition of the CDSC and the distribution fee on Class B and
Class C shares is limited by the National Association of
Securities Dealers, Inc. (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 each of the Class B, Class C and Class D
shares provides that the Fund pays the Distributor an account
maintenance fee relating to the shares of the relevant class,
accrued daily and paid monthly, at the annual rate of 0.25% of
the average daily net assets of the Fund attributable to shares
of the relevant class in order to compensate the Distributor and
selected securities dealers, including Merrill Lynch, or other
financial intermediaries (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 provides that
the Fund also pays the Distributor a distribution fee relating
to the shares of the relevant class, accrued daily and paid
monthly, at the annual rate of 0.75% of the average daily net
assets of the Fund attributable to the shares of the relevant
class in order to compensate the Distributor and selected
securities dealers, including Merrill Lynch, or other financial
intermediaries (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, selected securities dealers
and other financial intermediaries 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 selected securities
dealers and other financial intermediaries without the
assessment of an initial sales charge and at the same time
permit the dealer to compensate its financial consultants,
selected securities dealers and other financial intermediaries
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 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, 1999, 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 (1.01%
of Class B net assets at that date). As of March 31, 2000,
direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by
$265,961,856 (9.29% of Class B net assets at that date). As of
December 31, 1999, the fully allocated accrual revenues 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 (.43% of
Class C net assets at that date). As of March 31, 2000, direct
cash expenses for the period since the commencement of
operations of Class C shares exceeded direct cash expenses by
$12,791,729 (4.14% of Class C net assets at that
date).
For the
fiscal year ended March 31, 2000, the Fund paid the Distributor
$40,069,311 pursuant to the Class B Distribution Plan (based on
average daily net assets subject to such Class B Distribution
Plan of approximately $4.0 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, 2000, the
Fund paid the Distributor $4,201,316 pursuant to the Class C
Distribution Plan (based on average daily net assets subject to
such Class C Distribution Plan of approximately $420.1 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, 2000, the Fund paid the Distributor
$3,928,515 pursuant to the Class D Distribution Plan (based on
average daily net assets subject to such Class D Distribution
Plan of approximately $1.6 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 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.
The
following table sets forth comparative information as of March
31, 2000 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.
| |
|
Data Calculated as of March 31,
2000
|
| |
|
(in thousands) |
| |
|
Eligible
Gross
Sales(1)
|
|
Allowable
Aggregate
Sales Charge(2)
|
|
Allowable
Interest on
Unpaid
Balance(3)
|
|
Maximum
Amount
Payable
|
|
Amounts
Previously
Paid to
Distributor(4)
|
|
Aggregate
Unpaid
Balance
|
|
Annual
Distribution
Fee at
Current Net
Asset
Level(5)
|
Class B Shares for the period October
21, 1988 (commencement of
operations) to March 31,
2000 |
| Under
NASD Rule as Adopted |
|
$6,959,647 |
|
$433,805 |
|
$147,560 |
|
$
581,365 |
|
$302,426 |
|
$278,939 |
|
$21,476 |
| Under
Distributor’s Voluntary Waiver |
|
$6.959,647 |
|
$433,805 |
|
$ 35,971 |
|
$ 469,776 |
|
$302,426 |
|
$167,350 |
|
$21,476 |
| |
Class C Shares, for the period October
21, 1994 (commencement of
operations) to March 31,
2000 |
| Under
NASD Rule as Adopted |
|
$ 745,560 |
|
$ 46,411 |
|
$ 12,709 |
|
$ 59,120 |
|
$ 14,276 |
|
$ 44,843 |
|
$ 2,318 |
(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).
|
Reference
is made to “How to Buy, Sell, Transfer and Exchange
Shares” in the Prospectus.
The Fund
is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption
price is the net asset value per share next determined after the
initial receipt of proper notice of redemption. Except for any
CDSC that may be applicable, there will be no charge for
redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will
receive upon redemption all dividends reinvested through the
date of redemption.
The right
to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for
any period during which trading on the NYSE is restricted as
determined by the Commission or the NYSE is closed (other than
customary weekend and holiday closings), for any period during
which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or
determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the
Commission may by order permit for the protection of
shareholders of the Fund.
The value
of shares at the time of redemption may be more or less than the
shareholder’s cost, depending in part on the market value
of the securities held by the Fund at such time.
The Fund
has entered into a joint committed line of credit with other
investment companies advised by the Investment Adviser and its
affiliates and a syndicate of banks that is intended to provide
the Fund with a temporary source of cash to be used to meet
redemption requests from Fund shareholders in extraordinary or
emergency circumstances.
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 may
require a guarantee by an “eligible guarantor
institution” as such is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934 (the “Exchange Act”),
the existence and validity of which may be verified by the
Transfer Agent through the use of industry publications. In the
event a signature guarantee is required, notarized signatures
are not sufficient. In general, signature guarantees are waived
on redemptions of less than $50,000 as long as the following
requirements are met: (i) all requests require the signature(s)
of all persons in whose name(s) shares are recorded on the
Transfer Agent’s register; (ii) all checks must be mailed
to the stencil address of record on the Transfer Agent’s
register and (iii) the stencil address must not have changed
within 30 days. Certain rules may apply regarding certain
account types such as but not limited to UGMA/UTMA accounts,
Joint Tenancies With Rights of Survivorship, contra broker
transactions, and institutional accounts. 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.
A
shareholder may also redeem shares held with the Transfer Agent
by telephone request. To request a redemption from your account,
call the Transfer Agent at 1-800-MER-FUND. The request must be
made by the shareholder of record and be for an amount less than
$50,000. Before telephone requests will be honored, signature
approval from all shareholders of record on the account must be
obtained. The shares being redeemed must have been held for at
least 15 days. Telephone redemption requests will not be honored
in the following situations: the accountholder is deceased, the
proceeds are to be sent to someone other than the shareholder of
record, funds are to be wired to the client’s bank account,
a systematic withdrawal plan is in effect, the request is by an
individual other than the accountholder of record, the account
is held by joint tenants who are divorced, the address on the
account has changed within the last 30 days or share
certificates have been issued on the account.
Since
this account feature involves a risk of loss from unauthorized
or fraudulent transactions, the Transfer Agent will take certain
precautions to protect your account from fraud. Telephone
redemption may be refused if the caller is unable to provide:
the account number, the name and address registered on the
account and the social security number registered on the
account. The Fund or the Transfer Agent may temporarily suspend
telephone transactions at any time.
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
U.S. 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 U.S. bank) has been collected for the
purchase of such Fund shares, which will not usually exceed 10
days. In the event that a shareholder account held directly with
the Transfer Agent contains a fractional share balance, such
fractional share balance will be automatically redeemed by the
Fund.
Repurchase
The Fund
also will repurchase Fund shares through a shareholder’s
listed selected securities dealer or other financial
intermediary. 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 selected securities
dealer or other financial intermediary prior to the 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
selected securities dealer or other financial intermediary 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, another
selected securities dealer or other financial intermediary may
charge its customers a processing fee (Merrill Lynch currently
charges $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 privilege may be exercised
through the investor’s Merrill Lynch Financial Consultant
within 30 days after the date the request for redemption was
accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next
determined after the notice of reinstatement is received and
cannot exceed the amount of the redemption proceeds.
PRICING OF SHARES
Determination of Net Asset Value
Reference
is made to “How Shares are Priced” in the
Prospectus.
The net
asset value of the shares of all classes of the Fund is
determined once daily Monday through Friday as of the close of
business on the NYSE on each day the NYSE is open for trading
based on prices at the time of closing. 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 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 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, 2000 is set forth below.
| |
|
Class A
|
|
Class B
|
|
Class C
|
|
Class D
|
| Net
Assets |
|
$2,721,502,638 |
|
$2,853,698,663 |
|
$308,150,542 |
|
$1,428,120,496 |
| |
|
|
|
|
|
|
|
|
| Number
of Shares Outstanding |
|
83,337,007 |
|
89,822,342 |
|
9,826,762 |
|
43,837,364 |
| |
|
|
|
|
|
|
|
|
Net
Asset Value Per Share (net assets
divided by number of shares
outstanding) |
|
$
32.66 |
|
$
31.77 |
|
$
31.36 |
|
$
32.58 |
Sales
Charge (for Class A and Class D
shares: 5.25% of offering price;
5.54%
of net asset value per share)*
|
|
1.81 |
|
** |
|
** |
|
1.81 |
| |
|
|
|
|
|
|
|
|
| Offering Price |
|
$
34.47 |
|
$
31.77 |
|
$
31.36 |
|
$
34.39 |
| |
|
|
|
|
|
|
|
|
*
|
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 AND BROKERAGE
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 net results, 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
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:
Period
|
|
Aggregate Brokerage
Commissions Paid
|
|
Commissions Paid
to Merrill Lynch
|
| Fiscal
year ended March 31, 2000 |
|
$8,172,216 |
|
$704,936 |
| Fiscal
year ended March 31, 1999 |
|
$6,476,661 |
|
$429,881 |
| Fiscal
year ended March 31, 1998 |
|
$5,117,527 |
|
$279,047 |
For the
fiscal year ended March 31, 2000, the brokerage commissions paid
to Merrill Lynch represented 8.63% of the aggregate brokerage
commissions paid and involved 9.69% 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.
Because of
different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or
its affiliates 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.
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, Merrill Lynch, selected securities dealer or
other financial intermediary. Certain of these services are
available only to U.S. investors and certain of these services
are not available to investors who place purchase orders for the
Fund’s shares through the Merrill Lynch Blueprint
SM
Program.
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, selected securities dealer or
other financial intermediary. Upon the transfer of shares out of
a Merrill Lynch, selected securities dealer or other financial
intermediary 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, selected securities dealer or other financial
intermediary to another securities dealer or other financial
intermediary 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 or other financial
intermediary 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 or other
financial intermediary 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 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 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. However, the holding period for Class B
or Class C shares of the Fund received in exchange for such
money market fund shares will be aggregated with the holding
period for the fund shares originally exchanged for such money
market fund shares for purposes of reducing the CDSC or
satisfying the Conversion Period.
Exchanges by Participants in the MFA
Program. The exchange privilege is
modified with respect to certain retirement plans which
participate in the MFA Program. Such retirement plans may
exchange Class B, Class C or Class D shares that have been held
for at least one year for Class A shares of the same fund on the
basis of relative net asset values in connection with the
commencement of participation in the MFA Program, i.e.,
no CDSC will apply. The one year holding period does not apply
to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA Program, Class A shares
will be re-exchanged for the class of shares originally held.
For purposes of computing any CDSC that may be payable upon
redemption of Class B or Class C shares so reacquired, or the
Conversion Period for Class B shares so reacquired, the holding
period for the Class A shares will be “tacked” to the
holding period for the Class B or Class C shares originally
held. The Fund’s exchange privilege is also modified with
respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA Program. First, the
initial allocation of assets is made under the MFA Program.
Then, any subsequent exchange under the MFA Program of Class A
or Class D shares of a Select Pricing Fund for Class A or Class
D shares of the Fund will be made solely on the basis of the
relative net asset values of the shares being exchanged.
Therefore, there will not be a charge for any difference between
the sales charge 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 or other financial intermediaries. The
Fund reserves the right to require a properly completed Exchange
Application.
Telephone
exchange requests are also available in accounts held with the
Transfer Agent for amounts up to $50,000. To request an exchange
from your account, call the Transfer Agent at 1-800-MER-FUND.
The request must be from the shareholder of record. Before
telephone requests will be honored, signature approval from all
shareholders of record must be obtained. The shares being
exchanged must have been held for at least 15 days. Telephone
requests for an exchange will not be honored in the following
situations: the accountholder is deceased, the request is by an
individual other than the accountholder of record, the account
is held by joint tenants who are
divorced or the address on the account has changed within the last
30 days. Telephone exchanges may be refused if the caller is
unable to provide: the account number, the name and address
registered on the account and the social security number
registered on the account. The Fund or the Transfer Agent may
temporarily suspend telephone transactions at any
time.
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 and other financial intermediary fee-based
programs, including pricing alternatives for securities
transactions (each referred to in this paragraph as a
“Program”), may permit the purchase of Class A shares
at net asset value. Under specified circumstances, participants
in certain Programs may deposit other classes of shares which
will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be
waived or modified, as may the Conversion Period applicable to
the deposited shares. Termination of participation in a Program
may result in the redemption of shares held therein or the
automatic exchange thereof to another class at net asset value,
which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been
held for less than specified periods within such Program may be
subject to a fee based upon the current value of such shares.
These Programs also generally prohibit such shares from being
transferred to another account at Merrill Lynch or other
financial intermediary, 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. There may be fees associated with investing
through these plans. Information with respect to these plans is
available on request from Merrill Lynch.
Dividends
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® or CBA® Account may arrange to have
periodic investments made in the Fund in amounts of $100 ($1 or
more for retirement accounts) or more through the CMA® or
CBA® 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 determined 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.
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 determined as of 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 as of the
close of business on the NYSE on the following business day. The
check for the withdrawal payment will be mailed or the direct
deposit 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® or CBA® or Retirement Account may elect to have
shares redeemed on a monthly, bimonthly, quarterly, semiannual
or annual basis through the CMA® or CBA® 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® or CBA®
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® or
CBA® Systematic Redemption Program, eligible shareholders
should contact their Merrill Lynch Financial
Consultant.
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,
another selected securities dealer or other financial
intermediary 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.
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.
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.
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.
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.
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.
The Fund
may make investments that produce taxable income that is not
matched by a corresponding receipt of cash or an offsetting loss
deduction. Such investments would include obligations that have
original issue discount or that accrue discount, obligations
that accrue negative amortization and obligations that are
subordinated in the mortgaged-backed or asset-backed securities
structure. Such taxable income would be treated as income earned
by the Fund and would be subject to the distribution
requirements of the Code. Because such income may not be matched
by a corresponding receipt of cash by the Fund or an offsetting
deduction, the Fund may be required to borrow money or dispose
of other securities to be able to make distributions to
shareholders. The Fund intends to make sufficient and timely
distributions to shareholders so as to qualify for treatment as
a RIC at all times.
The Fund
may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an
investment company (or similar investment entity) organized
under foreign law, the Fund will be treated as owning shares in
a passive foreign investment company (“PFIC”) for U.S.
federal income tax purposes. The Fund may be subject to U.S.
federal income tax, and an additional tax in the nature of
interest (the “interest charge”), on a portion of the
distributions from such a company and on gain from the
disposition of the shares of such a company (collectively
referred to as “excess distributions”), even if such
excess distributions are paid by the Fund as a dividend to its
shareholders. The Fund may be eligible to make an election with
respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such
election may cause the Fund to recognize income in a particular
year in excess of the distributions received from such PFICs.
Alternatively, the Fund could elect to “mark to
market” at the end of each taxable year all shares that it
holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such
shares over their adjusted basis and as ordinary loss any
decrease in such value to the extent it did not exceed prior
increases. By making the mark-to-market election, the Fund could
avoid imposition of the interest charge with respect to its
distributions from PFICs, but in any particular year might be
required to recognize income in excess of the distributions it
received from PFICS and its proceeds from dispositions of PFIC
stock.
Tax
Treatment of Options, Futures and Forward Foreign Exchange
Transactions
The Fund
may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are
“Section 1256 contracts” will be “marked to
market” for Federal income tax purposes at the end of each
taxable year, i.e., each such option or futures contract
will be treated as sold for its fair market value on the last
day of the taxable year. Unless such contract is a forward
foreign exchange contract, or is a non-equity option or a
regulated futures contract for a non-U.S. currency for which the
Fund elects to have gain or loss treated as ordinary gain or
loss under Code Section 988 (as described below), gain or loss
from Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and
character of distributions to shareholders. The mark-to-market
rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk
of changes in price or interest or currency exchange rates with
respect to its investments.
A forward
foreign exchange contract that is a Section 1256 contract will
be marked to market, as described above. However, the character
of gain or loss from such a contract will generally be ordinary
under Code Section 988. The Fund may, nonetheless, elect to
treat the gain or loss from certain forward foreign exchange
contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a
Section 1256 contract will be characterized as 60% long-term and
40% short-term capital gain or loss.
Code Section
1092, which applies to certain “straddles,” may affect
the taxation of the Fund’s sales of securities and
transactions in options, futures and forward 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.
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.
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
investment of $1,000 or some other amount, 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.
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.
| |
|
Class A
Shares
|
|
Class B
Shares
|
|
Class C
Shares
|
|
Class D
Shares
|
Period
|
|
Expressed
as a
percentage
based on a
hypothetical
$1,000
investment
|
|
Expressed
as a
percentage
based on a
hypothetical
$1,000
investment
|
|
Expressed
as a
percentage
based on a
hypothetical
$1,000
investment
|
|
Expressed
as a
percentage
based on a
hypothetical
$1,000
investment
|
| |
|
Average Annual Total Return
(including maximum applicable sales charges) |
| |
| One
Year Ending March 31, 2000 |
|
(0.92% |
) |
|
(0.22% |
) |
|
2.57% |
|
(1.18% |
) |
| Five
Years Ending March 31, 2000 |
|
12.52% |
|
|
12.59% |
|
|
12.58% |
|
12.24% |
|
| Ten
Years Ending March 31, 2000 |
|
11.81% |
|
|
11.28% |
|
|
— |
|
— |
|
| Inception (October 21, 1994) to March 31,
2000 |
|
— |
|
|
— |
|
|
12.71% |
|
12.47% |
|
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.
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.
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. The Fund may
provide information designed to help investors understand how
the Fund is seeking to achieve its investment objectives. This
may include information about past, current or possible
economic, market, political, or other conditions, descriptive
information on general principles of investing such as asset
allocation, diversification and risk tolerance, discussion of
the Fund’s portfolio composition, investment philosophy,
strategy or investment techniques, comparisons of the
Fund’s performance or portfolio composition to that of
other funds or types of investments, indices relevant to the
comparison being made, or to a hypothetical or model portfolio.
The Fund may also quote various measures of volatility and
benchmark correlation in advertising and other materials, and
may compare these measures to those of other funds or types of
investments. As with other performance data, performance
comparisons should not be considered indicative of the
Fund’s relative performance for any future
period.
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. On
approximately July 1, 2000, the Fund changed its name to Merrill
Lynch Balanced Capital Fund, Inc. 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 are
issued by the Transfer Agent only on specific request.
Certificates for fractional shares are not issued in any
case.
Independent Auditors
Deloitte
& Touche LLP,
Princeton Forrestal Village, 116-300 Village Boulevard,
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, 100 Church Street, 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 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.
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 June 1,
2000:
Name
|
|
Address
|
|
Percent of Class
|
| Merrill
Lynch Trust Company |
|
P.O.
Box 30532
New Brunswick, NJ 08989 |
|
55.6%
of Class A |
| |
|
| Merrill
Lynch Trust Company |
|
P.O.
Box 30532
New Brunswick, NJ 08989 |
|
27.5%
of Class D |
FINANCIAL STATEMENTS
The
Fund’s audited financial statements are incorporated in
this Statement of Additional Information by reference to its
2000 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.
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
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:
|
|
Ÿ
|
Leading
market positions in well-established industries.
|
|
Ÿ
|
High
rates of return on funds employed.
|
|
Ÿ
|
Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
|
|
Ÿ
|
Broad
margins in earnings coverage of fixed financial charges and
high internal cash generation.
|
|
Ÿ
|
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.
|
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.
|
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
|
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.
|
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
|
The
‘r’ highlights derivative, hybrid, and certain other
obligations that Standard & Poor’s believes may
experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples of such
obligations are securities with principal or interest return
indexed to equities, commodities, or currencies; certain swaps
and options; and interest-only and principal-only mortgage
securities. The absence of an ‘r’ symbol should not
be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
|
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.
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.
CODE #: 10257-07-00
PART
C. OTHER INFORMATION
Item
23. Exhibits.
Exhibit
Number
|
|
Description
|
| 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) |
| |
|
(i) |
|
— |
|
Articles of Amendment, dated May 2, 2000, to the
Articles of Incorporation of the Registrant. |
| 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 Investment Managers,
L.P.(a) |
| |
|
(b) |
|
— |
|
Supplement to Investment Advisory Agreement between the
Registrant and Merrill Lynch Investment
Managers, L.P.(d) |
| |
|
(c) |
|
— |
|
Form of
Sub-Advisory Agreement between Merrill Lynch Investment
Managers, L.P. and Merrill
Lynch Asset Management U.K. Limited.(f) |
| 5 |
|
|
|
— |
|
Form of
Distribution Agreement between the Registrant and Princeton
Funds Distributor, Inc. (now
FAM Distributors, Inc.). |
| 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) |
| |
|
(c) |
|
— |
|
Credit
Agreement between the Registrant and a syndicate of
banks.(i) |
| 9 |
|
|
|
— |
|
Opinion
and Consent of Brown & Wood
LLP,
Counsel to the Registrant.(c) |
| 10 |
|
|
|
— |
|
Consent
of Deloitte & Touche
LLP,
independent auditors for the Registrant. |
| 11 |
|
|
|
— |
|
None. |
| 12 |
|
|
|
— |
|
None. |
| 13 |
|
(a) |
|
— |
|
Form of
Amended and Restated Class B Distribution Plan of the
Registrant. |
| |
|
(b) |
|
— |
|
Form of
Amended and Restated Class C Distribution Plan of the
Registrant and Class C Distribution
Plan Sub-Agreement. |
| |
|
(c) |
|
— |
|
Form of
Amended and Restated Class D Distribution Plan of the
Registrant and Class D Distribution
Plan Sub-Agreement. |
| 14 |
|
|
|
— |
|
Merrill
Lynch Select Pricing
SM
System
Plan pursuant to Rule 18f-3.(h) |
| 15 |
|
|
|
— |
|
Code of
Ethics.(j) |
(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.
|
(i)
|
Incorporated by reference to Exhibit 8(b) to the
Registration Statement on Form N-1A of Master Premier Growth
Trust (File No. 811-09733), filed on December 21,
1999.
|
(j)
|
Incorporated by reference to Exhibit 15 to
Post-Effective Amendment No. 8 to the Registration Statement
on Form N-1A of Merrill Lynch Middle East/Africa Fund, Inc.
(File No. 811-07155), filed on March 29, 2000.
|
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 Distribution Agreement.
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 Distribution Agreement 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 Investment Managers, L.P. (“MLIM” or the
“Investment Adviser”), acts as the investment adviser
for the following open-end registered investment companies:
Master Global Financial Series Trust, Merrill Lynch Adjustable
Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Balanced 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
Financial Services Fund, Inc., Merrill Lynch Global Growth Fund,
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 Index Funds, Inc., Merrill
Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund,
Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate
Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch U.S.
Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc., The Asset Program, Inc. and Hotchkis and
Wiley Funds (advised by Hotchkis and Wiley, a division of MLIM);
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. MLIM also acts as sub-adviser
to Merrill Lynch World Strategy Portfolio and Merrill Lynch
Basic Value Equity Portfolio, two investment portfolios of EQ
Advisors Trust.
Fund
Asset Management, L.P. (“FAM”), an affiliate of the
Investment Adviser, 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, Master Focus Twenty Trust,
Master Internet Strategies Trust, Master Large Cap Series Trust,
Master Premier Growth Trust, Mercury Global Holdings, Inc.,
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
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 Small Cap Value
Fund, Inc., Merrill Lynch U.S. Government Mortgage Fund, Inc.,
Merrill Lynch World Income Fund, Inc., The Asset Program, 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 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
II, Inc., MuniHoldings California Insured Fund V, Inc.,
MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured
Fund V, MuniHoldings Insured Fund, Inc., MuniHoldings Insured
Fund II, Inc., MuniHoldings Insured Fund III, Inc., MuniHoldings
Insured Fund IV, Inc., MuniHoldings Michigan Insured Fund II,
Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings
New Jersey Insured Fund IV, Inc., MuniHoldings New York Insured
Fund, Inc., MuniHoldings New York Insured Fund IV, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II,
Inc., 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 Pennsylvania Insured 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 FAM
Distributors, Inc. (“FAMD”) 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.
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, 1998 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. Doll, Giordano and Monagle are
officers of one or more of such companies.
Name
|
|
Position(s) with the
Investment Adviser
|
|
Other Substantial Business,
Profession, Vocation or Employment
|
| 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; Senior Vice President and Director of the
Global Securities and Economics Division of Merrill
Lynch from 1995 to 1997 |
| Terry
K. Glenn |
|
Executive Vice President |
|
Executive Vice President of FAM; Executive Vice
President and Director of Princeton Services;
President and Director of FAMD; Director of FDS;
President of Princeton Administrators |
| Gregory
A. Bundy |
|
Chief
Operating Officer
and Managing Director |
|
Chief
Operating Officer and 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,
Treasurer and Director
of Taxation |
|
Senior
Vice President and Treasurer of FAM; Senior
Vice President and Treasurer of Princeton Services;
Vice President of FAMD; 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
FAMD; First Vice President of the Manager from
1997 to 1999; Vice President of the Manager from
1996 to 1997 |
| Robert
C. Doll, Jr. |
|
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,
Secretary and General
Counsel |
|
Senior
Vice President, Secretary and General
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 |
| Debra
W. Landsman-Yaros |
|
Senior
Vice President |
|
Senior
Vice President of FAM; Senior Vice President
of Princeton Services; Vice President of FAMD |
| 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 |
| Gregory
D. Upah |
|
Senior
Vice President |
|
Senior
Vice President of FAM; Senior Vice President
of Princeton Services |
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 2000, Inc., Master Focus Twenty Trust, Master
Internet Strategies Trust, Master Premier Growth Trust, Master
Large Cap Series Trust, Mercury Global Holdings, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch Balanced Capital Fund,
Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Corporate Bond 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 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 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 Small Cap Value Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Inc., Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Funds,
Inc., Merrill Lynch World Income Fund, Inc., The Asset Program,
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 January 1, 1998, for his or her own account
or in the capacity of director, officer, partner or trustee. In
addition, Messrs. Glenn and Burke are officers of one or more of
the registered investment companies listed in the first two
paragraphs of this Item 26.
Name
|
|
Position with
MLAM U.K.
|
|
Other Substantial Business,
Profession, Vocation or Employment
|
| Terry
K. Glenn |
|
Director and Chairman |
|
Executive Vice President of MLIM and FAM;
Executive Vice President and Director of Princeton
Services; President and Director of FAMD; President
of Princeton Administrators |
| Nicholas C.D. Hall |
|
Director |
|
Director of Mercury Asset Management Ltd. and the
Institutional Liquidity Fund PLC; First Vice President
and General Counsel for Merrill Lynch Mercury Asset
Management |
| James
T. Statford |
|
Alternate Director |
|
Director of Mercury Asset Management Group Ltd.;
Head of Compliance, Merrill Lynch Mercury Asset
Management |
| Donald
C. Burke |
|
Treasurer |
|
Senior
Vice President and Treasurer of MLIM and
FAM; Director of Taxation of MLIM; Senior Vice
President and Treasurer of Princeton Services; Vice
President of FAMD; First Vice President of MLIM
from 1997 to 1999 |
| Carol
Ann Langham |
|
Company
Secretary |
|
None |
| Debra
Anne Searle |
|
Assistant Company Secretary |
|
None |
Item
27. Principal
Underwriters.
(a)
MLFD, a division of FAMD, 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 FAMD acts as
the principal underwriter of a number of other investment
companies.
(b)
Set forth below is information concerning each
director and officer of FAMD. 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.
Name
|
|
Position(s) and Office(s) with
FAMD
|
|
Position(s) and Office(s) with
Registrant
|
| 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 |
(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 Investment Managers” 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.
SIGNATURES
Pursuant to the requirements of the Securities Act and the
Investment Company Act, the Registrant certifies that it meets
all of the requirements for effectiveness of this registration
statement under Rule 485(b) under the Securities Act and has
duly caused this registration statement to be signed on its
behalf by the undersigned, duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 30th day of June,
2000.
|
MERRILL
LYNCH
BALANCED
CAPITAL
FUND
, INC
.
|
|
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.
Signature
|
|
Title
|
|
Date
|
| |
|
TERRY
K. GLENN
*
(Terry K. Glenn) |
|
President and Director
(Principal Executive Officer ) |
|
|
| |
|
DONALD
C. BURKE
*
(Donald C. Burke) |
|
Vice
President and Treasurer
(Principal Financial
and Accounting Officer) |
|
|
| |
|
M.
COLYER
CRUM
*
(M.
Colyer Crum) |
|
Director |
|
|
| |
|
LAURIE
SIMON
HODRICK
*
(Laurie Simon Hodrick) |
|
Director |
|
|
| |
|
JACK
B. SUNDERLAND
*
(Jack B. Sunderland) |
|
Director |
|
|
| |
|
J.
THOMAS
TOUCHTON
*
(J.
Thomas Touchton) |
|
Director |
|
|
| |
|
FRED
G. WEISS
*
(Fred G. Weiss) |
|
Director |
|
|
| |
|
ARTHUR
ZEIKEL
*
(Arthur Zeikel) |
|
Director |
|
|
| |
|
/s/ DONALD
C. BURKE
*By:
(Donald C. Burke, Attorney-in-Fact)
|
|
|
|
June
30, 2000 |
| |
POWER OF ATTORNEY
The
undersigned hereby authorizes Terry K. Glenn, Donald C. Burke
and Joseph T. Monagle, Jr. or any of them, as attorney-in-fact,
to sign on her behalf in the capacities indicated in any
Registration Statement or amendment thereto (including
post-effective amendments) for each of the following registered
investment companies and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission: Merrill
Lynch Basic Value Fund, Inc.; Merrill Lynch Capital Fund, Inc.;
Merrill Lynch Disciplined Equity Fund, Inc.; Merrill Lynch
Global Resources Trust; Merrill Lynch Global Growth Fund, Inc.;
Merrill Lynch Special Value Fund, Inc.; Merrill Lynch Ready
Assets Trust; Merrill Lynch U.S.A. Government Reserves; Merrill
Lynch U.S. Treasury Money Fund; MuniHoldings Michigan Insured
Fund II, Inc.; MuniVest Florida Fund; MuniVest Michigan Insured
Fund, Inc.; MuniVest New Jersey Fund, Inc.; MuniYield Florida
Insured Fund; MuniYield Pennsylvania Fund; MuniYield New Jersey
Insured Fund, Inc.; MuniYield Michigan Insured Fund,
Inc.
Dated:
November 22, 1999
/S
/ LAURIE
SIMON
HODRICK
|
|
|
| Laurie
Simon Hodrick |
|
|
| (Director/Trustee) |
|
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
| 1 |
|
(i) |
|
Articles of Amendment to the Articles of Incorporation
of the Registrant. |
| 5 |
|
|
|
Form of
Distribution Agreement between the Registrant and the
Distributor. |
| 10 |
|
|
|
Consent
of Deloitte & Touche LLP,
independent auditors for the Registrant. |
| 13 |
|
(a) |
|
Form of
Amended and Restated Class B Distribution Plan of the
Registrant. |
| |
|
(b) |
|
Form of
Amended and Restated Class C Distribution Plan of the
Registrant and Class C Distribution
Plan Sub-Agreement. |
| |
|
(c) |
|
Form of
Amended and Restated Class D Distribution Plan of the
Registrant and Class D Distribution
Plan Sub-agreement. |
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