EXHIBIT 17(a)
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:
|
• |
Are looking for capital appreciation for long term goals, such as
retirement or funding a child’s education, but also seek some current
income |
|
• |
Want a professionally managed and diversified
portfolio |
|
• |
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) |
|
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:
|
• corporate debt
securities |
|
• mortgage backed
securities and asset backed securities |
|
• U.S. and foreign
government debt securities |
|
• corporate debt
securities convertible into common stock |
|
• money market
securities |
The
Fund may invest in debt securities of any maturity. Changes in the value of debt
securities may occur in response to interest rate movements —generally,
when interest rates go up, the value of most debt securities goes down. In most
cases, when interest rates go up, the value of debt securities with longer term
maturities 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:
|
• |
If the transition to euro, or EMU as a whole, does not proceed as
planned, the Fund’s investments could be adversely affected. For example,
sharp currency fluctuations, exchange rate volatility and other
disruptions of the markets could occur. |
|
• |
Withdrawal from EMU by a participating country could also have a
negative effect on the Fund’s investments, for example if securities
redenominated in euros are transferred back into that country’s national
currency. |
Emerging Markets Risk — The
risks of foreign investments are usually much greater for emerging markets.
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:
•
Current Class A
shareholders
•
Certain Retirement
Plans
• Participants in
certain Merrill Lynch-
sponsored programs
• 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:
|
• |
Purchases under a Right of Accumulation or
Letter of Intent |
|
• |
Merrill Lynch Blueprint SM Program
participants |
|
• |
Certain Merrill Lynch investment or central asset
accounts |
|
• |
Certain employer-sponsored retirement or savings
plans |
MERRILL
LYNCH BALANCED CAPITAL FUND, INC.
21
[GRAPHIC]
Your Account
|
• |
Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain
circumstances |
|
• |
Certain investors, including directors or trustees of Merrill Lynch
mutual funds and Merrill Lynch employees |
|
• |
Certain 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:
|
• |
Certain post-retirement withdrawals from an IRA or other retirement
plan if you are over 59 1 /2 years old |
|
• |
Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts, certain group plans participating in the Merrill Lynch
Blueprint SM Program and certain retirement plan
rollovers |
|
• |
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 |
|
• |
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
|
• |
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:
• $250 for certain Merrill Lynch fee-based programs
• $100 for retirement plans. |
| |
| |
|
|
|
(The minimums for initial investments may
be waived under certain
circumstances.) |
|
| |
|
Have your Merrill Lynch
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:
• Transfer your shares to an account with the Transfer Agent;
or
• 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 • 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:
|
Junk bonds may be
issued by less creditworthy companies. These securities are vulnerable to
adverse changes in the issuer’s industry and to general economic
conditions. Issuers of junk bonds may be unable to meet their interest or
principal payment obligations because of an economic downturn, specific
issuer developments or the unavailability of additional
financing. |
|
The issuers of junk
bonds may have a larger amount of outstanding debt relative to their
assets than issuers of investment grade bonds. If the issuer experiences
financial stress, it may be unable to meet its debt obligations. The
issuer’s ability to pay its debt obligations also may be lessened by
specific issuer developments, or the unavailability of additional
financing. |
|
Junk bonds are
frequently ranked junior to claims by other creditors. If the issuer
cannot meet its obligations, the senior obligations are generally paid off
before the junior obligations. |
|
Junk bonds
frequently have redemption features that permit an issuer to repurchase
the security from the Fund before it matures. If an issuer redeems the
junks bonds, the Fund may have to invest the proceeds in bonds with lower
yields and may lose income. |
|
Prices of junk
bonds are subject to extreme price fluctuations. Negative economic
developments may have a greater impact on the prices of junk bonds than on
other higher rated fixed income
securities. |
|
Junk bonds may be
less liquid than higher rated fixed income securities even under normal
economic conditions. There are fewer dealers in the junk bond market, and
there may be significant differences in the prices quoted for junk bonds
by the dealers. Because they are less liquid, judgement may play a greater
role in valuing certain of the Fund’s portfolio securities than in the
case of securities trading in a more liquid
market. |
|
The Fund may incur expenses to the extent necessary to seek
recovery upon default or to negotiate new terms with a defaulting
issuer. |
Mortgage
Backed Securities
The Fund may invest up to
35% of its total assets in mortgage backed securities. Mortgage backed
securities in which the Fund invests include mortgage pass-through certificates
and multiple-class pass-through securities, such as REMIC pass-through
certificates, CMOs and stripped mortgage backed securities, and other types of
mortgage backed securities that may be available in the future.
The Fund may invest in
guaranteed mortgage pass-through securities which represent participation
interests in pools of residential mortgage loans and which are issued by United
States governmental lenders or by private lenders and guaranteed by the United
States Government or one of its agencies or instrumentalities, including but not
limited to the Government National Mortgage Association (“Ginnie Mae”), the
Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan
Mortgage Corporation (“Freddie Mac”). In general, Ginnie Mae certificates are
guaranteed by the full faith and credit of the United States Government for
timely payment of principal and interest on the certificates. Fannie Mae
certificates are generally guaranteed by Fannie Mae, a federally chartered and
privately-owned corporation for full and timely payment of scheduled principal
and interest on the certificates. In general, Freddie Mac certificates are
guaranteed by Freddie Mac, a corporate instrumentality of the United States
Government, for timely payment of interest and the ultimate collection of all
principal of the related mortgage loans.
Mortgage backed
securities also include CMOs and REMIC pass-through or participation
certificates, which may be issued by, among others, United States Government
agencies and instrumentalities as well as private lenders. CMOs and REMIC
certificates are issued in multiple classes and the principal of and interest on
the mortgage assets may be allocated among the several classes of CMOs or REMIC
certificates in various ways. Each class of CMOs or REMIC certificates, often
referred to as a “tranche,” is issued at a specified adjustable or fixed
interest rate and must be fully retired no later than its final distribution
date. Generally, interest is paid or accrues on all classes of CMOs or REMIC
certificates on a monthly basis. The Fund will not invest in the lowest tranche
of CMOs and REMIC certificates.
Typically, CMOs are
collateralized by Ginnie Mae or Freddie Mac certificates but also may be
collateralized by other mortgage assets such as whole loans or private mortgage
pass-through securities. Debt service on CMOs is provided from payments of
principal and interest on collateral of mortgage assets and any reinvestment
income thereon.
A REMIC is a pool of
assets that qualifies for special tax treatment under the Code and consists of
certain mortgages or deeds of trust primarily secured by interests in real
property and other permitted investments. Investors may purchase “regular” and
“residual” interests in REMIC trusts although the Fund does not intend to invest
in “residual interests.”
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: |
|
• |
Leading market positions in well-established
industries. |
|
•
|
High rates of return on funds
employed. |
|
•
|
Conservative capitalization structure with moderate reliance on
debt and ample asset protection. |
|
•
|
Broad margins in earnings coverage of fixed financial charges and
high internal cash generation. |
|
•
|
Well-established access to a range of financial markets and assured
sources of alternate liquidity. |
|
Prime-2. Issuers rated Prime-2 (or
supporting institutions) have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is
maintained. |
|
Prime-3. Issuers rated Prime-3 (or
supporting institutions) have an acceptable ability for repayment of
senior short-term obligations. The effect of industry characteristics and
market compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained. |
|
Not
Prime. Issuers rated Not Prime do not fall
within any of the Prime rating
categories. |
If any issuer represents
to Moody’s that its short-term debt obligations are supported by the credit of
another entity or entities, then the name or names of such supporting entity or
entities are listed within the parentheses beneath the name of the issuer, or
there is a footnote referring the reader to another page for the name or names
of the supporting entity or entities. In assigning ratings to such issuers,
Moody’s evaluates the financial strength of the affiliated corporations,
commercial banks, insurance companies, foreign governments or other entities,
but only as one factor in the total rating assessment. Moody’s makes no
representation and gives no opinion on the legal validity or enforceability of
any support arrangement.
Moody’s ratings are
opinions, not recommendations to buy or sell, and their accuracy is not
guaranteed. A rating should be weighed solely as one factor in an investment
decision and you should make your own study and evaluation of any issuer whose
securities or debt obligations you consider buying or selling.
Description
of Moody’s Preferred Stock Ratings
Because of the
fundamental differences between preferred stocks and bonds, a variation of our
familiar bond rating symbols is used in the quality ranking of preferred stock.
The symbols, presented below, are designed to avoid comparison with bond quality
in absolute terms. It should always be borne in mind that preferred stock
occupies a junior position to bonds within a particular capital structure and
that these securities are rated within the universe of preferred
stocks.
Preferred stock rating
symbols and their definitions are as follows:
|
aaa |
An issue which is rated “aaa” is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred
stocks. |
|
aa |
An issue which is rated “aa” is considered to be a high-grade
preferred stock. This rating indicates that there is a reasonable
assurance the earnings and asset protection will remain relatively well
maintained in the foreseeable future. |
|
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
