<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1994
SECURITIES ACT FILE NO. 2-58521
INVESTMENT COMPANY ACT FILE NO. 811-2739
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 23 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 20 /X/
(Check appropriate box or boxes)
---------------------
MERRILL LYNCH BASIC VALUE FUND, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH BASIC VALUE FUND, INC.
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and address of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C> <C>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN MARK B. GOLDFUS, ESQ.
BROWN & WOOD MERRILL LYNCH ASSET MANAGEMENT FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011 P.O. BOX 9011
NEW YORK, NEW YORK 10048 PRINCETON, NEW JERSEY PRINCETON, NEW JERSEY
ATTENTION: THOMAS R. SMITH, JR. 08543-9011 08543-9011
</TABLE>
It is proposed that this filing will become effective (check
appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on October 21, 1994 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of Rule
485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
---------------------
The Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The notice required by such rule for the Registrant's most recent
fiscal year was filed August 24, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MERRILL LYNCH BASIC VALUE FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
- -------- ----------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Not Applicable
Item 3. Condensed Financial Information......... Financial Highlights
Item 4. General Description of Registrant....... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund.................. Fee Table; Management of the Fund;
Portfolio Transactions and Brokerage;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance........................... Not Applicable
Item 6. Capital Stock and Other Securities...... Cover Page; Additional Information
Item 7. Purchase of Securities Being Offered.... Cover Page; Fee Table; Merrill Lynch
Select Pricing(SM) System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase................ Fee Table; Merrill Lynch Select
Pricing(SM) System; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal Proceedings............... Not Applicable
PART B
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Back Cover Page
Item 12. General Information and History......... Not Applicable
Item 13. Investment Objective and Policies....... Investment Objective and Policies
Item 14. Management of the Fund.................. Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities............................ Management of the Fund
Item 16. Investment Advisory and Other
Services.............................. Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices............................. Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities...... General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status.............................. Dividends, Distributions and Taxes
Item 21. Underwriters............................ Purchase of Shares
Item 22. Calculation of Performance Data......... Performance Data
Item 23. Financial Statements.................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
OCTOBER 21, 1994
MERRILL LYNCH BASIC VALUE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Basic Value Fund, Inc. (the "Fund") is a diversified,
open-end investment company seeking capital appreciation and, secondarily,
income by investing in securities, primarily equities, that management of the
Fund believes are undervalued and therefore represent basic investment value.
The Fund seeks special opportunities in securities that are selling at a
discount either from book value or historical price-earnings ratios, or seem
capable of recovering from temporarily out of favor considerations. Particular
emphasis is placed on securities which provide an above-average dividend return
and sell at a below-average price-earnings ratio.
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 System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant circumstances.
See "Merrill Lynch Select Pricing(SM) System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated October 21, 1994 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and
can be obtained, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
------------------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C(C) CLASS D(C)
---------- ---------------------- ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a 5.25%(d)
percentage of offering price)........................ None None 5.25%(d)
Sales Charge Imposed on Dividend None
Reinvestments........................................ None None None
Deferred Sales Charge (as a percentage of original None(e)
purchase price or redemption proceeds, whichever is
lower)............................................... 4.0% during the first 1.0% for None(e)
year, decreasing 1.0% one
annually thereafter to year
0.0% after the fourth
year
Exchange Fee........................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE
NET ASSETS)(F)
Investment Advisory Fees(g)............................ 0.41% 0.41% 0.41% 0.41%
12b-1 Fees(h):
Account Maintenance Fees............................. None 0.25% 0.25% 0.25%
Distribution Fees.................................... None 0.75% 0.75% None
(Class B shares
convert to Class D
shares automatically
after approximately
eight years and cease
being subject to
distribution fees)
Other Expenses:
Custodial Fees..................................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(i)..................... 0.09% 0.11% 0.11% 0.09%
Other.............................................. 0.02% 0.02% 0.02% 0.02%
Total Other Expenses........................... 0.12% 0.14% 0.14% 0.12%
Total Fund Operating Expenses.......................... 0.53% 1.55% 1.55% 0.78%
</TABLE>
- ------------------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 16.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 17.
(c) Prior to the date of this Prospectus, the Fund has not offered its Class C
or Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 16.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge will instead be subject to a CDSC of
1.0% of amounts redeemed within the first year after purchase.
(f) Information for Class A and Class B shares is stated for the fiscal year
ended June 30, 1994. Information under "Other Expenses" for Class C and
Class D shares is estimated for the fiscal year ending June 30, 1995.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
12.
(h) See "Purchase of Shares -- Distribution Plans" page 21.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 13.
2
<PAGE> 5
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ -------- -------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
including the maximum $52.50 initial sales charge (Class A and
Class D shares only) and assuming (1) the Total Fund Operating
Expenses for each class set forth above; (2) a 5% annual return
throughout the periods and (3) redemption at the end of the
period:
Class A......................................................... $ 58 $ 67 $ 81 $ 116
Class B......................................................... $ 56 $ 69 $ 84 $ 164*
Class C......................................................... $ 26 $ 49 $ 84 $ 185
Class D......................................................... $ 60 $ 76 $ 94 $ 144
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A......................................................... $ 58 $ 69 $ 81 $ 116
Class B......................................................... $ 16 $ 49 $ 84 $ 164*
Class C......................................................... $ 16 $ 49 $ 84 $ 185
Class D......................................................... $ 60 $ 76 $ 94 $ 144
</TABLE>
- ---------------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission ("Commission") regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C
shareholders who hold their shares for an extended period of time may pay more
in Rule 12b-1 distribution fees than the economic equivalent of the maximum
front-end sales charges permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ("NASD"). Merrill Lynch may
charge its customers a processing fee (presently $4.85) for confirming purchases
and redemptions. Purchases and redemptions directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares".
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing System is used by more than 50
mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM") or Fund
Asset Management, L.P. ("FAM" or the "Investment Adviser"), an affiliate of
MLAM. Funds advised by MLAM or FAM are referred to herein as "MLAM-advised
mutual funds".
3
<PAGE> 6
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges 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
the Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will 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
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing System, followed
by a more detailed description of each class and a discussion of the factors
that investors should consider in determining the method of purchasing shares
under the Merrill Lynch Select Pricing System that the investor believes is most
beneficial under his particular circumstances. More detailed information as to
each class of shares is set forth under "Purchase of Shares".
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(2)(3)
- ------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at 0.25% 0.75% B shares convert to D Shares
a rate of 4.0% during the automatically after
first year, decreasing 1.0% approximately eight years(4)
annually to 0.0%
- ------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ------------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(3)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ("CDSCs") are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(continued on next page)
4
<PAGE> 7
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See "Class
A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked on to the holding period for
the shares acquired.
Class A. Class A shares incur an initial sales charge when they are
purchased and bear no ongoing distribution or account maintenance
fees. Class A shares are offered to a limited group of investors
and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A
shares in a shareholder account are entitled to purchase
additional Class A shares in that account. Other eligible
investors include certain retirement plans and participants in
certain investment programs. In addition, Class A shares will be
offered to directors and employees of Merrill Lynch & Co., Inc.
and its subsidiaries (the term "subsidiaries", when used herein
with respect to Merrill Lynch & Co., Inc., includes MLAM, FAM and
certain other entities directly or indirectly wholly-owned and
controlled by Merrill Lynch & Co., Inc.) and to members of the
Boards of MLAM-advised mutual funds. The maximum initial sales
charge is 5.25%, which is reduced for purchases of $25,000 and
over. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived
such purchases will be subject to a contingent deferred sales
charge ("CDSC") of 1.0% if the shares are redeemed within one year
after purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of
all classes of all MLAM-advised mutual funds. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares".
Class B. Class B shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance
fee of 0.25% and an ongoing distribution fee of 0.75%, of the
Fund's average net assets attributable to the Class B shares, and
a CDSC if they are redeemed within four years of purchase.
Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are
subject to an account maintenance fee but no distribution fee;
Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made convert into Class D shares
automatically after approximately ten years. If Class B shares of
the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B
shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked on to the holding period
for the shares acquired. Automatic conversion of Class B shares
into Class D shares will occur at least once each month on the
basis of the relative net asset values of the shares of the two
classes on the conversion date, without the imposition of any
sales load, fee or other charge. Conversion of Class B shares to
Class D shares will not be deemed a purchase or sale of the shares
for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for
dividend reinvestment shares and
5
<PAGE> 8
for certain retirement plans is modified as described under
"Purchase of Shares -- Deferred Sales Charge Alternatives -- Class
B and Class C Shares -- Conversion of Class B Shares to Class D
Shares".
Class C. Class C shares do not incur a sales charge when they are
purchased, but they are subject to an ongoing account maintenance
fee of 0.25% and an ongoing distribution fee of 0.75% of the
Fund's average net assets attributable to Class C shares. Class C
shares are also subject to a CDSC if they are redeemed within one
year of purchase. Although Class C shares are subject to a 1.0%
CDSC for only one year (as compared to four years for Class B),
Class C shares have no conversion feature and, accordingly, an
investor that purchases Class C shares will be subject to
distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board
of Directors and regulatory limitations.
Class D. Class D shares incur an initial sales charge when they are
purchased and are subject to an ongoing account maintenance fee of
0.25% of the Fund's average net assets attributable to Class D
shares. Class D shares are not subject to an ongoing distribution
fee or any CDSC when they are redeemed. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the
initial sales charge is waived such purchases will be subject to a
CDSC of 1.0% if the shares are redeemed within one year after
purchase. The schedule of initial sales charges and reductions for
Class D shares is the same as the schedule for Class A shares.
Class D shares also will be issued upon conversion of Class B
shares as described above under "Class B". See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the 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 charge and, in the case of Class D shares, the account
maintenance fee. Although some investors that previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other
MLAM-advised mutual funds, those previously purchased Class A shares, together
with Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C shares
to have higher expense ratios, pay lower dividends and have lower total returns
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
6
<PAGE> 9
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges".
7
<PAGE> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in connection
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the year ended June
30, 1994 and the independent auditors' report thereon are included in the
Statement of Additional Information. The following per share data and ratios
have been derived from information provided in the Fund's audited financial
statements. Financial information is not presented for Class B shares for the
period July 1, 1984 to October 20, 1988 since no shares of that class were
publicly issued prior to October 20, 1988, and financial information is not
presented for Class C or Class D shares, since no shares of those classes are
publicly issued as of the date of this Prospectus. Further information about the
performance of the Fund is contained in the Fund's most recent annual report to
shareholders which may be obtained, without charge, by calling or by writing the
Fund at the telephone number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 23.31 $ 20.57 $ 18.90 $ 19.32 $ 20.03 $ 18.60 $ 20.26 $ 18.07
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment income--net........ .62 .71 .70 .87 .95 .85 .74 .65
Realized and unrealized gain
(loss) on
investments--net............ .67 3.03 2.02 (.02) (.56) 1.99 (.44) 3.04
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations.................... 1.29 3.74 2.72 .85 .39 2.84 .30 3.69
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net........ (.70) (.64) (.76) (.97) (.87) (.75) (.62) (.64)
Realized gain on
investments--net............ (.73) (.36) (.29) (.30) (.23) (.66) (1.34) (.86)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions................. (1.43) (1.00) (1.05) (1.27) (1.10) (1.41) (1.96) (1.50)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of
period........................ $ 23.17 $ 23.31 $ 20.57 $ 18.90 $ 19.32 $ 20.03 $ 18.60 $ 20.26
========= ========= ========= ========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share..................... 5.68% 19.03% 15.08% 5.39% 1.77% 16.29% 1.90% 22.37%
========= ========= ========= ========= ========= ========= ========= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding
distribution fees............. .53% .54% .58% .59% .57% .58% .58% .59%
========= ========= ========= ========= ========= ========= ========= =========
Expenses....................... .53% .54% .58% .59% .57% .58% .58% .59%
========= ========= ========= ========= ========= ========= ========= =========
Investment income--net......... 2.76% 3.48% 3.52% 4.76% 5.05% 4.82% 4.06% 3.82%
========= ========= ========= ========= ========= ========= ========= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $2,272,983 $2,023,078 $1,670,430 $1,490,657 $1,556,257 $1,373,408 $1,079,262 $1,158,997
========= ========= ========= ========= ========= ========= ========= =========
Portfolio turnover............. 21.79% 20.85% 21.24% 20.11% 4.88% 13.44% 20.42% 23.34%
========= ========= ========= ========= ========= ========= ========= =========
<CAPTION>
CLASS B
----------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------
1986 1985 1994 1993 1992 1991 1990 1989+
-------- -------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 15.65 $ 13.23 $ 23.04 $ 20.35 $ 18.71 $ 19.12 $ 19.92 $ 18.78
-------- -------- ---------- ---------- ---------- -------- -------- --------
Investment income--net........ .62 .63 .42 .53 .50 .66 .78 .55
Realized and unrealized gain
(loss) on
investments--net............ 3.41 3.61 .62 2.96 2.00 .01 (.59) 1.30
-------- -------- ---------- ---------- ---------- -------- -------- --------
Total from investment
operations.................... 4.03 4.24 1.04 3.49 2.50 .67 .19 1.85
-------- -------- ---------- ---------- ---------- -------- -------- --------
Less dividends and
distributions:
Investment income--net........ (.59) (.69) (.48) (.44) (.57) (.78) (.76) (.36)
Realized gain on
investments--net............ (1.02) (1.13) (.73) (.36) (.29) (.30) (.23) (.35)
-------- -------- ---------- ---------- ---------- -------- -------- --------
Total dividends and
distributions................. (1.61) (1.82) (1.21) (.80) (.86) (1.08) (.99) (.71)
-------- -------- ---------- ---------- ---------- -------- -------- --------
Net asset value, end of
period........................ $ 18.07 $ 15.65 $ 22.87 $ 23.04 $ 20.35 $ 18.71 $ 19.12 $ 19.92
======== ======== ========= ========= ========= ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value
per share..................... 28.59% 35.35% 4.61% 17.81% 13.90% 4.33% .73% 10.27%
======== ======== ========= ========= ========= ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding
distribution fees............. .61% .70% .55% .56% .60% .61% .60% .62%*
======== ======== ========= ========= ========= ======== ======== ========
Expenses....................... .61% .70% 1.55% 1.56% 1.60% 1.61% 1.60% 1.62%*
======== ======== ========= ========= ========= ======== ======== ========
Investment income--net......... 4.39% 4.87% 1.75% 2.47% 2.50% 3.73% 4.03% 4.43%*
======== ======== ========= ========= ========= ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $823,664 $421,166 $1,744,704 $1,383,935 $1,064,354 $874,318 $922,126 $468,537
======== ======== ========= ========= ========= ======== ======== ========
Portfolio turnover............. 23.28% 28.62% 21.79% 20.85% 21.24% 20.11% 4.88% 13.44%
======== ======== ========= ========= ========= ======== ======== ========
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class B Shares commenced operations on October 21, 1988.
8
<PAGE> 11
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation and,
secondarily, income by investing in securities, primarily equities, that
management of the Fund believes are undervalued and therefore represent basic
investment value. The Fund seeks special opportunities in securities that are
selling at a discount, either from book value or historical price-earnings
ratios, or seem capable of recovering from temporarily out of favor
considerations. Particular emphasis is placed on securities which provide an
above-average dividend return and sell at a below-average price-earnings ratio.
There can be no assurance that the objective of the Fund will be realized.
The investment policy of the Fund is based on the belief that the pricing
mechanism of the securities market lacks total efficiency and has a tendency to
inflate prices of securities in favorable market climates and depress prices of
securities in unfavorable climates. Based on this premise, management believes
that favorable changes in market prices are more likely to begin when securities
are out of favor, earnings are depressed, price-earnings ratios are relatively
low, investment expectations are limited, and there is no real general interest
in the particular security or industry involved. On the other hand, management
believes that negative developments are more likely to occur when investment
expectations are generally high, stock prices are advancing or have advanced
rapidly, price-earnings ratios have been inflated, and the industry or issue
continues to gain new investment acceptance on an accelerated basis. In other
words, management believes that market prices of securities with relative high
price-earnings ratios are more susceptible to unexpected adverse developments
while securities with relatively low price-earnings ratios are more favorably
positioned to benefit from favorable, but generally unanticipated events. This
investment policy departs from traditional philosophy. Management of the Fund
believes that the market risk involved in this policy is moderated somewhat by
an emphasis on securities with above-average dividend returns.
The current institutionally-dominated market tends to ignore, to some
extent, the numerous secondary issues whose market capitalizations are below
those of the relatively few larger size growth companies. It is expected that
the Fund's portfolio generally will have significant representation in this
secondary segment of the market.
The Investment Adviser is responsible for the management of the Fund's
portfolio and makes portfolio decisions based on its own research information
supplemented by research information provided by other sources. The basic
orientation of the Fund's investment policies is such that at times a large
portion of its common stock holdings may carry less than favorable research
ratings from research analysts. The Investment Adviser makes extensive use of
investment research information provided by unaffiliated brokers and dealers and
of the securities research, economic research and computer applications
facilities provided by Merrill Lynch, as described below:
Securities Research. Merrill Lynch's securities research division, the
largest in the industry, employs approximately 150 professionals responsible for
fundamental and technical securities analysis. The fundamental research staff
consists of approximately 136 professionals who follow approximately 1,500
companies. The types of securities in which the Fund will invest often receive
limited research coverage and therefore the Fund will benefit from its access to
Merrill Lynch's extensive research resources. Merrill Lynch continually analyzes
the changing patterns of market forces and trends in the overall market, groups
of securities and individual securities and carefully monitors indicators of
investor psychology.
9
<PAGE> 12
Economic Research. The economic research facilities of Merrill Lynch
conduct detailed analyses of overall economic conditions, both nationally and
internationally. Merrill Lynch economists work closely with analysts of the
Investment Adviser in the continuous analysis of factors affecting the
securities markets, industry performance and short-term and long-term market
risks.
Computer Applications. The computer applications facilities of Merrill
Lynch provide, among other things, proprietary computer screening programs used
to identify securities on the basis of various characteristics, which may
include dividend return, price-earnings ratios, price trends and other factors
deemed significant in analyzing a particular segment of the securities markets.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stocks. The Fund also may invest in
preferred stocks and non-convertible debt securities and utilize covered call
options with respect to portfolio securities as described below and in the
Statement of Additional Information. It reserves the right as a defensive
measure to hold other types of securities, including Government and money market
securities, repurchase agreements or cash, in such proportions as, in the
opinion of management, prevailing market or economic conditions warrant. The
Fund may invest up to 10% of its total assets, taken at market value at the time
of acquisition, in the securities of foreign issuers. Investments in securities
of foreign issuers involve certain risks, including fluctuations in foreign
exchange rates, future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. In addition, foreign companies are not subject to accounting,
auditing and financial reporting standards and requirements comparable to those
of United States companies. The foreign markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions. Delays or problems with
settlement could affect the liquidity of the Fund's portfolio and adversely
affect the Fund's performance. To the extent such investments are subject to
withholding or other taxes or to regulations relating to repatriation of assets,
the Fund's distributable income will be reduced. The prices of securities in
different countries may be subject to different economic, financial, political
and social factors.
The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act. However, the Fund will not invest more than
5% of its net assets in illiquid investments, which includes securities for
which there is no readily available market, securities subject to contractual
restrictions on resale, certain investments in asset-backed and
receivable-backed securities and restricted securities, unless the Fund's Board
of Directors continuously determines, based on the trading markets for the
specific restricted security, that it is liquid. The Board of Directors may
adopt guidelines and delegate to the Investment Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board of
Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
The Board of Directors carefully monitors the Fund's investments in these
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. These
investments in securities purchased pursuant to Rule 144A 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
restricted securities.
10
<PAGE> 13
The investment policies of the Fund described in the preceding paragraphs
are fundamental policies of the Fund and 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").
Lending of Portfolio Securities. The Fund may from time to time lend
securities (but not in excess of 20% of its total assets) from its portfolio to
brokers, dealers and financial institutions and receive collateral in cash or
securities issued or guaranteed by the United States Government which will be
maintained at all times in amounts equal to at least 100% of the current market
value of the loaned securities. Such cash collateral will be invested in
short-term securities, which will increase the current income of the Fund.
Writing of Covered Call Options. The Fund may from time to time write,
i.e., sell, covered call options on its portfolio securities and enter into
closing purchase transactions with respect to certain of such options. A call
option is considered covered where the writer of the option owns the underlying
securities. In return for the premium income realized from the sale of covered
call options, the Fund will give up the opportunity to profit from a price
increase in the underlying security above the option exercise price and it will
not be able to sell the underlying security until the option expires or is
exercised or the Fund effects a closing purchase transaction. A closing purchase
transaction cancels out the Fund's position as the writer of an option by means
of an offsetting purchase of an identical option prior to the expiration of the
option it has written. If an option expires unexercised, the writer realizes a
gain in the amount of the premium. Such a gain, of course, may be offset by a
decline in the market price of the underlying security during the option period.
The Fund may not write options on underlying securities exceeding 15% of its
total assets, taken at market value.
Investment Restrictions. The Fund has adopted a number of restrictions and
other policies relating to the investment of its assets and its activities which
are fundamental policies and 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. Among the more significant restrictions, the Fund
may not:
-- Invest in securities of any one issuer (other than the United
States or its agencies or instrumentalities), if immediately after and as a
result of such investment more than 5% of the total assets of the Fund,
taken at market value, would be invested in the securities of such issuer,
or more than 10% of the outstanding securities, or more than 10% of the
outstanding voting securities, of such issuer would be owned by the Fund.
-- 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.
The Board of Directors of the Fund, at a meeting held on August 4, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by all of
the non-money market mutual funds advised by MLAM or FAM. The proposed uniform
investment restrictions are designed to provide each of these funds, including
the Fund, with as much investment flexibility as possible under the Investment
Company Act and applicable state securities regulations, help promote
operational efficiencies and facilitate monitoring of compliance. The investment
objectives and policies of the Fund will be unaffected by the adoption of the
proposed investment restrictions.
11
<PAGE> 14
The full text of the proposed investment restrictions is set forth under
"Investment Objective and Policies -- Proposed Uniform Investment Restrictions"
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and the
Fund's Prospectus and Statement of Additional Information will be supplemented
to reflect such change.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Directors of the Fund are responsible for the overall
supervision of the operations of the Fund and perform the various duties imposed
on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL*--President and Chief Investment Officer of the Investment
Adviser and MLAM; President and Director of Princeton Services, Inc. ("Princeton
Services"); Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") and
Merrill Lynch; Director of the Distributor.
DONALD CECIL--Special Limited Partner of Cumberland Partners (an investment
partnership).
M. COLYER CRUM--James R. Williston Professor of Investment Management,
Harvard Business School.
EDWARD H. MEYER--Chairman of the Board of Directors, President and Chief
Executive Officer of Grey Advertising Inc.
JACK B. SUNDERLAND--President and Director of American Independent Oil
Company, Inc. (an energy company).
J. THOMAS TOUCHTON--Managing Partner of The Witt-Touchton Company (a
private investment partnership).
- ---------------
*Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company, acts as the investment adviser to the Fund
and provides the Fund with management and investment advisory services. The
Investment Adviser or MLAM acts as the investment adviser to more than 100
registered investment companies. MLAM also provides investment advisory services
to individual and institutional accounts. As of August 31, 1994, the Investment
Adviser and MLAM had a total of approximately $165.7 billion in investment
company and other portfolio assets under management, including accounts of
certain affiliates of MLAM.
12
<PAGE> 15
The investment advisory agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the direction of the
Board of Directors of the Fund, the Investment Adviser is responsible for the
actual management of the Fund's portfolio and for the review of the Fund's
holdings in light of its own research analysis and analyses from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Investment Adviser, subject to review by the
Board of Directors. The Investment Adviser supplies the portfolio managers for
the Fund, who consider analyses from various sources, make the necessary
investment decisions, and place transactions accordingly. The Investment Adviser
also is obligated to perform certain administrative and management services for
the Fund and is required to provide all the office space, facilities, equipment
and personnel necessary to perform its duties under the Investment Advisory
Agreement.
The Investment Adviser has access to the total securities research,
economic research and computer applications facilities of Merrill Lynch and
makes extensive use of those facilities as described under "Investment Objective
and Policies".
The Fund pays the Investment Adviser a monthly fee based on the average
daily value of the Fund's net assets: 0.60% of that portion of average daily net
assets not exceeding $100 million; 0.50% of that portion of average daily net
assets exceeding $100 million but not exceeding $200 million; and 0.40% of that
portion of average daily net assets exceeding $200 million. For the fiscal year
ended June 30, 1994, the Investment Adviser earned a fee of $15,452,148 (based
on average net assets of approximately $3.8 billion) and the effective rate was
approximately 0.41%.
The Investment Advisory Agreement obligates the Fund to pay certain
expenses incurred in its operations including, among other things, the
investment advisory fee, legal and audit fees, unaffiliated Directors' fees and
expenses, custodian and transfer agency fees, accounting costs, the costs of
issuing and redeeming shares and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Accounting services are provided for the Fund by the Investment Adviser and the
Fund reimburses the Investment Adviser for its costs in connection with such
services. For the fiscal year ended June 30, 1994, the Fund paid the Investment
Adviser $185,215 for such accounting services. For the year ended June 30, 1994,
the ratio of total expenses to average net assets was 0.53% for the Class A
shares and 1.55% for the Class B shares; no Class C shares or Class D shares had
been issued during that year.
Paul M. Hoffmann is a Vice President and Portfolio Manager for the Fund.
Mr. Hoffmann has been a Portfolio Manager and a Vice President of MLAM since
1976.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned 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 Fund pays the Transfer
Agent a fee of $11.00 per Class A or Class D shareholder account and $14.00 per
Class B or Class C shareholder account and the Transfer Agent is entitled to
reimbursement from the Fund for out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. For the fiscal year ended June 30,
1994, the total fee paid by the Fund to the Transfer Agent pursuant to the
Transfer Agency
13
<PAGE> 16
Agreement was $3,815,082. At July 31, 1994, the Fund had 211,899 Class A
shareholder accounts, 163,646 Class B shareholder accounts, no Class C
shareholder accounts and no Class D shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $4,621,933 plus out-of-pocket expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), an affiliate of
both the Investment Adviser and Merrill Lynch, acts as the Distributor of the
shares of the Fund. Shares of the Fund are offered continuously for sale by the
Distributor and other eligible securities dealers (including Merrill Lynch).
Shares of the Fund may be purchased from securities dealers or by mailing a
purchase order directly to the Transfer Agent. The minimum initial purchase is
$1,000, and the minimum subsequent purchase is $50, except for retirement plans,
the minimum initial purchase is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select Pricing
System, as described below. The applicable offering price for purchase orders is
based upon the net asset value of the Fund next determined after receipt of the
purchase orders by the Distributor. As to purchase orders received by securities
dealers prior to 4:15 p.m., New York time, which includes orders received after
the determination of the net asset value on the previous day, the applicable
offering price will be based on the net asset value as of 4:15 p.m., New York
time, on the day the orders are placed with the Distributor, provided the orders
are received by the Distributor prior to 4:30 p.m., New York time, on that day.
If the purchase orders are not received prior to 4:30 p.m., New York time, such
orders shall be deemed received on the next business day. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a sale of shares to such customers. Purchases directly through
the Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing System, which permits each investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. Shares of Class A and Class D are sold to investors
choosing the initial sales charge alternatives and shares of Class B and Class C
are sold to investors choosing the deferred sales charge alternatives. Investors
should determine whether under their particular circumstances it is more
advantageous to incur an initial sales charge or to have the entire initial
purchase price invested in the Fund with the investment thereafter being subject
to a contingent deferred sales charge and ongoing distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing System is set
forth under "Merrill Lynch Select PricingSM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses
14
<PAGE> 17
of the ongoing distribution fees and the additional incremental transfer agency
costs resulting from the deferred sales charge arrangements. The deferred sales
charges 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, will be imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges will 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 will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing System.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(2)(3)
- ------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, at 0.25% 0.75% B shares convert to D shares
a rate of 4.0% during the automatically after
first year, decreasing 1.0% approximately eight years(4)
annually to 0.0%
- ------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- ------------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(3)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(continued on next page)
15
<PAGE> 18
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked on to the holding period for
the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS DISCOUNT TO
PERCENTAGE OF PERCENTAGE* OF SELECTED DEALERS
OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ----------------------------------------------------- ------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000.................................... 5.25% 5.54% 5.00%
$25,000 but less than $50,000........................ 4.75 4.99 4.50
$50,000 but less than $100,000....................... 4.00 4.17 3.75
$100,000 but less than $250,000...................... 3.00 3.09 2.75
$250,000 but less than $1,000,000.................... 2.00 2.04 1.80
$1,000,000 and over**................................ 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994. If the sales charge is
waived, such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A purchases made prior to
October 21, 1994 may be subject to a CDSC if the shares are redeemed within
one year of purchase at the following rates: 1.00% on purchases of $1,000,000
to $2,500,000; 0.60% on purchases of $2,500,001 to $3,500,000; 0.40% on
purchases of $3,500,001 to $5,000,000; and 0.25% on purchases of more than
$5,000,000, in lieu of paying an initial sales charge. 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. A sales charge of 0.75% will be
charged on purchases of $1 million or more of Class A or Class D shares by
certain 401(k) plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act"). During the fiscal year ended June 30, 1994,
the Fund sold 22,051,928 Class A shares for aggregate net proceeds of
$518,481,972. The gross sales charges for the sale of Class A shares of the Fund
for that year were $3,755,873, of which $216,293 and $3,539,580 were received by
the Distributor and Merrill Lynch, respectively. For the fiscal year ended June
30, 1994, the Distributor received CDSCs of approximately $26,146, all of which
were paid to Merrill Lynch, with respect to redemption within one year after
purchase of Class A shares purchased subject to front-end sales charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch Blueprint(SM)
Program, are entitled
16
<PAGE> 19
to purchase additional Class A shares in that account. Certain employer
sponsored retirement or savings plans, including eligible 401(k) plans, may
purchase Class A shares at net asset value provided such plans meet the required
minimum number of eligible employees or required amount of assets advised by
MLAM or any of its affiliates. Class A shares are available at net asset value
to corporate warranty insurance reserve fund programs provided that the program
has $3 million or more initially invested in MLAM-advised mutual funds. Also
eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMA(SM) Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services and certain
purchases made in connection with the Merrill Lynch Mutual Fund Adviser program.
In addition, Class A shares will be offered at net asset value to ML & Co. and
its subsidiaries and their directors and employees and to members of the Boards
of MLAM-advised investment companies, including the Fund. Certain persons who
acquired shares of certain MLAM-advised closed-end funds 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 or Class D shares of the Fund if
certain conditions set forth in the Statement of Additional Information are met.
For example, Class A shares of the Fund and certain other MLAM-advised mutual
funds are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock of Merrill Lynch Senior Floating Rate
Fund, Inc. in shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors".
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a financial consultant, if certain
conditions set forth in the Statement of Additional Information are met. Class D
shares may be offered at net asset value in connection with the acquisition of
assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
17
<PAGE> 20
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under "Distribution Plans". The proceeds
from the ongoing account maintenance fees are used to compensate Merrill Lynch
for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of 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 its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked on to the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services --
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
Contingent Deferred Sales Charges -- Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
18
<PAGE> 21
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------------------------------------------------------- -----------------
<S> <C>
0-1.......................................................... 4.00%
1-2.......................................................... 3.00
2-3.......................................................... 2.00
3-4.......................................................... 1.00
4 and thereafter............................................. 0.00
</TABLE>
For the fiscal year ended June 30, 1994, the Distributor received CDSCs of
$1,189,344 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in 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).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch Blueprint(SM) Program. The CDSC also is waived
for any Class B shares which are purchased by eligible 401(k) or eligible 401(a)
plans which are rolled over into a Merrill Lynch or Merrill Lynch Trust Company
custodied IRA and held in such account at the time of redemption. The Class B
CDSC also is waived for any Class B shares which are purchased by a Merrill
Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the time
of redemption. Additional information concerning the waiver of the Class B CDSC
is set forth in the Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject
19
<PAGE> 22
thereto. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. Accordingly, no
Class C CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no Class C CDSC will be assessed on shares derived
from reinvestment of dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked on to the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all
20
<PAGE> 23
MLAM-advised mutual funds held in that Class B Retirement Plan will be converted
into Class D shares of the appropriate Funds. Subsequent to such conversion,
that Class B Retirement Plan will be sold Class D shares of the appropriate
funds at net asset value.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and paid monthly, at the annual rate of 1.0% of
average daily net assets of the Class B shares of the Fund under a distribution
plan previously adopted by the Fund (the "Prior Plan") to compensate the
Distributor and Merrill Lynch for providing account maintenance and
distribution-related activities and services to Class B shareholders. The fee
rate payable and the services provided under the Prior Plan are identical to the
aggregate fee rate payable and the services provided under the Class B
Distribution Plan, the difference being that the account maintenance and
distribution services have been unbundled.
For the year ended June 30, 1994, the Fund paid the Distributor account
maintenance fees of $3,981,491 and distribution fees of $11,944,473 under the
Class B Distribution Plan. The Fund did not begin to offer shares of Class C or
Class D publicly until the date of this Prospectus. Accordingly, no payments
have been made pursuant to the Class C or Class D Distribution Plans prior to
the date of this Prospectus.
The 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
21
<PAGE> 24
respect to the distribution-related revenues and expenses is presented to the
Directors for their consideration in connection with their deliberations as to
the continuance of the Class B and Class C Distribution Plans. This information
is presented annually as of December 31 of each year on a "fully allocated
accrual" basis and quarterly on a "direct expense and revenue/cash" basis. On
the fully allocated accrual basis, revenues consist of the account maintenance
fees, distribution fees, the CDSCs and certain other related revenues, and
expenses consist of financial consultant compensation, branch office and
regional operation center selling and transaction processing expenses,
advertising, sales promotion and marketing expenses, corporate overhead and
interest expense. On the direct expense and revenue/cash basis, revenues consist
of the account maintenance fees, distribution fees and CDSCs, and the expenses
consist of financial consultant compensation. At December 31, 1993, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch with
respect to Class B shares for the period since the commencement of the offering
of Class B shares exceeded fully allocated accrual revenues for such period by
approximately $7,717,000 (0.49% of Class B net assets at that date). At December
31, 1993, direct cash revenues for the period since the commencement of the
offering of Class B shares exceeded direct cash expenses by $30,222,765 (1.90%
of Class B net assets at that date). As of June 30, 1994, direct cash revenues
for the period since commencement of the offering of Class B shares exceeded
direct cash expenses by $35,192,273 (2.0% of Class B net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice 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
22
<PAGE> 25
will be paid to the Fund rather than to the Distributor; however, the Fund will
continue to make payments of the account maintenance fee. In certain
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances payment in
excess of the amount payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund on receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which 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 value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville,
Florida 32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, 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. The notice in either event requires the signatures of
all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the redemption request must be guaranteed by an
"eligible guarantor institution" as such is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of which
may be verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents, such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payment will be mailed within seven days of receipt of a
proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares, which will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is
23
<PAGE> 26
received by the dealer prior to the close of business on the New York Stock
Exchange on the day received, and such request is received by the Fund from such
dealer not later than 4:30 P.M., New York time, on the same day. Dealers have
the responsibility to submit such repurchase requests to the Fund not later than
4:30 P.M., New York time, 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 which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Redemptions directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund, however, may redeem shares as set forth
above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time 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. 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. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to each
of such services, copies of the various plans described below and instructions
as to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund by calling the
telephone number on the cover page hereof or from the Distributor or Merrill
Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. These statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his Investment Account at any time by mailing a check directly
to the Transfer Agent. Shareholders also may maintain their accounts through
24
<PAGE> 27
Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage
account, an Investment Account in the transferring shareholder's name may be
opened at the Transfer Agent. Shareholders considering transferring their Class
A or Class D shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A or Class D
shares are to be transferred will not take delivery of shares of the Fund, a
shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment Account
at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder at the Transfer Agent. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the retirement account is to be transferred will not
take delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. There is currently no limitation
on the number of times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated in accordance with the rules of
the Commission.
Under the Merrill Lynch Select Pricing System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares
25
<PAGE> 28
of the Fund. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for the
previously owned shares of the Fund is "tacked" to the holding period of the
newly acquired shares of the other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services -- Exchange
Privilege" in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ("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 MLAM-advised mutual 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 MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without sales charge, at the net
asset value per share next determined on the ex-dividend date of such dividend
or distribution. A shareholder may at any time, by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, elect to have subsequent
dividends or both dividends and capital gains distributions paid in cash rather
than reinvested, in which event payment will be mailed on or about the payment
date. Cash payments can also be directly deposited to the shareholder's bank
account. No CDSC will be imposed on redemption of shares issued as a result of
the automatic reinvestment of dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his Investment Account in the form of payments by check or through
automatic payment by direct deposit to his bank account on either a monthly or
quarterly basis. A Class A or Class D shareholder whose shares are held within a
CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly,
26
<PAGE> 29
quarterly, semiannual or annual basis through the Systematic Redemption Program,
subject to certain conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be
made to an investor's Investment Account by pre-arranged charges of $50 or more
to his regular bank account. Investors who maintain CMA(R) accounts may arrange
to have periodic investments made in the Fund in their CMA(R) accounts or in
certain related accounts in amounts of $100 or more ($1 for retirement plans)
through the CMA(R) Automated Investment Program.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. With respect to such transactions,
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 involved and the firm's risk in positioning a
block of securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund will not necessarily be paying the lowest
commission or spread available.
The Fund has no obligation to deal with any broker or dealer in the
execution of its portfolio transactions. The Fund pays brokerage fees to Merrill
Lynch in connection with portfolio transactions executed by Merrill Lynch.
Brokers and dealers, including Merrill Lynch, who provide supplemental
investment research to the Investment Adviser may receive orders for
transactions by the Fund. Information so received is 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. Supplemental investment research received by the Investment Adviser
also may be used in connection with other investment advisory accounts of the
Investment Adviser and its affiliates. Whether or not a particular broker-dealer
sells shares of the Fund neither qualifies nor disqualifies such broker-dealer
to execute transactions for the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with a
formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the
27
<PAGE> 30
end of the specified period such as in the case of Class B and Class C shares
and the maximum sales charge in the case of Class A and Class D shares.
Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees 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 total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average total return data since
the average annual rates of return reflect compounding; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time. In
advertisements directed to investors whose purchases are subject to waiver of
the CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans) or to reduced sales charges in the case of Class A and Class D
shares, performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses may be deducted. See "Purchase of Shares". The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine and Fortune Magazine. As with other
performance data, performance comparisons should not be considered
representative of the Fund's relative performance for any future period.
28
<PAGE> 31
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid semi-annually. All
net realized long or short-term capital gains, if any, are distributed to the
Fund's shareholders at least annually. Premiums from expired call options
written by the Fund and net gains from closing purchase transactions are treated
as short-term capital gains for Federal income tax purposes. The per share
dividends and distributions on each class of shares will be reduced as a result
of any account maintenance, distribution and transfer agency fees applicable to
that class. See "Additional Information -- Determination of Net Asset Value".
Dividends and distributions may be reinvested automatically in shares of the
Fund, at net asset value without sales charge. Shareholders may elect in writing
to receive any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders as described below whether they are
reinvested in shares of the Fund or received in cash.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 4:15 P.M., New York time, on each day during which the New York
Stock Exchange is open for trading and, under certain circumstances, on other
days. Any assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation. The net asset
value per share is computed by dividing the sum of the value of the securities
held by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued expenses)
by the total number of shares outstanding at such time, rounded to the nearest
cent. Expenses, including the investment advisory fees payable to the Investment
Adviser and any account maintenance and/or distribution fees payable to the
Distributor, are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense accruals of the account maintenance fees applicable with
respect to Class D shares; moreover, the per share net asset value of Class D
shares generally will be higher than the per share net asset value of Class B
and Class C shares, reflecting the daily expense accruals of the distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the mean between closing bid and asked prices.
Securities traded in the over-the-counter market are valued at the most recent
bid prices as obtained from one or more dealers that make markets in the
securities. Securities traded in the NASDAQ National Market System are valued at
the last sale price on the day the securities are valued, or lacking any sales,
at the closing bid price. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
29
<PAGE> 32
When the Fund sells an option, an amount equal to the premium received by
the Fund is included in the Fund's Statement of Assets and Liabilities as a
deferred credit. The amount of such liability subsequently will be
marked-to-market to reflect the current market value of the option written. If
current market value exceeds the premium received there is an unrealized loss;
conversely, if the premium exceeds current market value there is an unrealized
gain. The current market value of a traded option is the last sale price or, in
the absence of a sale, the last offering price. If an option expires on its
stipulated expiration date or if the Fund enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option will be extinguished. If an option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security and the proceeds of sales are increased by the premium originally
received.
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"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming the shares are held
as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
30
<PAGE> 33
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring such shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on March 22, 1977. It has an
authorized capital of 800,000,000 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, each of which consists of 200,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common Stock represent interests in the same assets
of the Fund and
31
<PAGE> 34
are identical in all respects except that Class B, Class C and Class D shares
bear certain expenses related to the account maintenance associated with such
shares, and Class B and Class C shares bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to account maintenance and distribution expenditures, as
applicable. See "Purchase of Shares". The Fund has received an order from the
Commission permitting the issuance and sale of multiple classes of Common Stock.
The Directors of the Fund may classify and reclassify the shares of the Fund
into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive rights. Shares
have the conversion rights described in this Prospectus. Each share of Common
Stock is entitled to participate equally in dividends and distributions declared
by the Fund and in the net assets of the Fund on liquidation or dissolution
after satisfaction of outstanding liabilities except, as noted above, the Class
B, Class C and Class D shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Financial Data Services,
Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
32
<PAGE> 35
MERRILL LYNCH BASIC VALUE FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
of Merrill Lynch Basic Value Fund, Inc. and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A share, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Financial Data Services,
Inc. as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. .................................. 4. .................................
2. .................................. 5. .................................
3. .................................. 6. .................................
Name ...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address........................................................................
.................................................. Date......................
(Zip Code)
<TABLE>
<CAPTION>
<S> <C>
Occupation ........................ Name and Address of Employer...............................
.............................................................................
.............................................................................
................................................... ..........................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
[/R]
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Basic Value Fund, Inc. Authorization Form.
Specify type of account (check one): / / checking / / savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number ........................... Account Number .........................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Signature of Depositor..........................................................
Signature of Depositor ..................................Date...................
(if joint account, both must sign)
NOTE: If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany this
application.
A-1
<PAGE> 36
MERRILL LYNCH BASIC VALUE FUND, INC. -- AUTHORIZATION FORM
(PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
................................... .................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in the Statement of Additional Information)
............................., 19...........
Dear Sir/Madam: Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Basic Value Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds Distributor,
Inc. acts as distributor over the next 13 month period which will equal or
exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
</TABLE>
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Basic Value Fund,
Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Basic Value Fund, Inc. held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
- --- Branch Office, Address, Stamp
- ---
- -
- -
- -
- -
- ---
- ---
This form when completed should be mailed to:
Merrill Lynch Basic Value Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the Shareholder's signature.
...............................................................
Dealer Name and Address
By ............................................................
Authorized Signature of Dealer
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer A/C No.
A-2
<PAGE> 37
MERRILL LYNCH BASIC VALUE FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OF AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
(PLEASE PRINT) ------------------------------------
Name................................................................................ ------------------------------------
First Name Initial Last Name Social Security No.
Name of Co-Owner (if any)........................................................... or Taxpayer Identification No.
First Name Initial Last Name
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
</TABLE>
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Basic Value
Fund, Inc. at cost or current offering price. Withdrawals to be made either
(check one) / / Monthly on the 24th day of each month, or / / Quarterly on the
24th day of March, June, September and December. If the 24th falls on a weekend
or holiday, the next succeeding business day will be utilized. Begin systematic
withdrawals on___________________or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $
or / / $________ % of the current value of / / Class A or / / Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of..........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)......................................................
Address.........................................................................
.........................................................................
Signature of Owner..............................Date............................
Signature of Co-Owner (if any)..................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your Account............................................................
Bank Name
Bank Number ....................................Account Number..................
Bank Address....................................................................
....................................................................
Signature of Depositor
.................................................Date...........................
Signature of Depositor..........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
A-3
<PAGE> 38
MERRILL LYNCH BASIC VALUE FUND, INC. -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)
/ / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
of Merrill Lynch Basic Value Fund, Inc. subject to the terms set forth below. In
the event that I am not eligible to purchase Class A shares, I understand that
Class D shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Basic Value Fund, Inc., as indicated below:
Amount of each ACH debit $...................................................
Account No...................................................................
Please date and invest ACH debits on the 20th of each month
beginning____________or as soon as thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Financial Data Services, Inc. is authorized to discontinue
immediately the Automatic Investment Plan and to liquidate sufficient shares
held in my account to offset the purchase made with the dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip............................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Financial Data
Services, Inc., I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked by me in writing. Until you
receive such notice, you shall be fully protected in honoring any such debit. I
further agree that if any such debit be dishonored, whether with or without
cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
A-4
<PAGE> 39
[This page is intentionally left blank.]
<PAGE> 40
INVESTMENT ADVISER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
National Westminster Bank NJ
2 Montgomery Street
2nd Floor
Jersey City, New Jersey 07302
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 41
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table....................................... 2
Merrill Lynch Select Pricing(SM) System......... 3
Financial Highlights............................ 8
Investment Objective and Policies............... 9
Management of the Fund.......................... 12
Board of Directors............................ 12
Management and Advisory
Arrangements................................ 12
Transfer Agency Services...................... 13
Purchase of Shares.............................. 14
Initial Sales Charge Alternatives -- Class A
and Class D Shares.......................... 16
Deferred Sales Charge Alternatives -- Class B
and Class C Shares.......................... 17
Distribution Plans............................ 21
Limitations on the Payment of Deferred Sales
Charges..................................... 22
Redemption of Shares............................ 23
Redemption.................................... 23
Repurchase.................................... 24
Reinstatement Privilege -- Class A and Class D
Shares...................................... 24
Shareholder Services............................ 24
Investment Account............................ 24
Exchange Privilege............................ 25
Automatic Reinvestment of Dividends and
Capital Gains Distributions................. 26
Systematic Withdrawal Plans................... 27
Automatic Investment Plans.................... 27
Portfolio Transactions and Brokerage............ 27
Performance Data................................ 27
Additional Information.......................... 29
Dividends and Distributions................... 29
Determination of Net Asset Value.............. 29
Taxes......................................... 30
Organization of the Fund...................... 31
Shareholder Reports........................... 32
Shareholder Inquiries......................... 32
Authorization Form.............................. A-1
Code #10042-1094
</TABLE>
- ------------------------------------------------------
[LOGO]
Merrill Lynch
Basic Value Fund, Inc.
[ART]
PROSPECTUS
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE> 42
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH BASIC VALUE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
Merrill Lynch Basic Value Fund, Inc. (the "Fund") is a diversified,
open-end investment company seeking capital appreciation and, secondarily,
income by investing in securities, primarily equities, that management of the
Fund believes are undervalued and therefore represent basic investment value.
The Fund seeks special opportunities in securities that are selling at a
discount, either from book value or historical price-earnings ratios, or seem
capable of recovering from temporarily out of favor considerations. Particular
emphasis is placed on securities which provide an above-average dividend return
and sell at a below-average price-earnings ratio.
-------------------------
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 System
permits an investor to choose the method of purchasing shares that the
investor believes is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other relevant
circumstances.
-------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated October
21, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
-------------------------
INVESTMENT ADVISER:
FUND ASSET MANAGEMENT
DISTRIBUTOR:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
-------------------------
The date of this Statement of Additional Information is October 21, 1994.
<PAGE> 43
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is capital appreciation and,
secondarily, income by investing in securities, primarily equities, that
management of the Fund believes are undervalued and therefore represent basic
investment value. Reference is made to "Investment Objective and Policies" in
the Prospectus for a discussion of the investment objective and policies of the
Fund.
Writing of Covered Call Options. The Fund may from time to time write,
i.e., sell, covered call options on its portfolio securities and enter into
closing purchase transactions with respect to certain of such options. A call
option is considered covered where the writer of the option owns the underlying
securities. By writing a covered call option, the Fund, in return for the
premium income realized from the sale of the option may give up the opportunity
to profit from a price increase in the underlying security above the option
exercise price. In addition, the Fund will not be able to sell the underlying
security until the option expires, is exercised or the Fund effects a closing
purchase transaction as described below. A closing purchase transaction cancels
out the Fund's position as the writer of an option by means of an offsetting
purchase of an identical option prior to the expiration of the option it has
written. If the option expires unexercised, the Fund realizes a gain in the
amount of the premium received for the option which may be offset by a decline
in the market price of the underlying security during the option period. The use
of covered call options is not a primary investment technique of the Fund and
such options normally will be written on underlying securities as to which
management does not anticipate significant short-term capital appreciation. In
its use of options, the Fund's investment adviser has access to personnel of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") with
extensive experience in options research and strategy. The Fund may not write
covered options on underlying securities exceeding 15% of its total assets.
All options referred to herein and in the Fund's Prospectus are options
issued by The Options Clearing Corporation (the "Clearing Corporation") which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock
Exchange. An option gives the purchaser of the option the right to buy, and
obligates the writer (seller) to sell the underlying security at the exercise
price during the option period. The option period normally ranges from three to
nine months from the date the option is written. For writing an option, the Fund
receives a premium, which is the price of such option on the exchange on which
it is traded. The exercise price of the option may be below, equal to, or above
the current market value of the underlying security at the time the option is
written.
The writer may terminate his obligation prior to the expiration date of the
option by executing a closing purchase transaction which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction ordinarily will be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
call option containing different terms on such underlying security. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. An option may be closed out only on an
exchange which provides a secondary market for an option of the same series and
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option. A covered option writer unable to effect a closing
purchase transaction will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise,
2
<PAGE> 44
with the result that the writer will be subject to the risk of market decline in
the underlying security during such period. The Fund will write an option on a
particular security only if management believes that a liquid secondary market
will exist on an exchange for options of the same series which will permit the
Fund to make a closing purchase transaction in order to close out its position.
Due to the relatively short time that exchanges have been dealing with
options, options involve risks of possible unforeseen events which can be
disruptive to the option markets or could result in the institution of certain
procedures, including restriction of certain types of orders.
Portfolio Turnover. The rate of portfolio turnover is not a limiting
factor and, given the Fund's investment policies, it is anticipated that there
may be periods when high portfolio turnover will exist. The use of covered call
options at times when the underlying securities are appreciating in value may
result in higher portfolio turnover. The Fund pays brokerage commissions in
connection with writing call options and effecting closing purchase
transactions, as well as in connection with purchases and sales of portfolio
securities. Although the Fund anticipates that its annual portfolio turnover
rates should not exceed 100%, the turnover rate may vary greatly from year to
year or during periods within a year. A high rate of portfolio turnover results
in correspondingly greater brokerage commission expenses. The portfolio turnover
rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of all
securities with maturities at the time of acquisition of one year or less) by
the monthly average value of the securities in the portfolio during the year.
The rates of portfolio turnover for the years ended June 30, 1993 and 1994 were
20.85% and 21.79%, respectively.
Current Investment Restrictions. In addition to the investment
restrictions set forth in the Prospectus, the Fund has adopted the following
restrictions and policies relating to the investment of its assets and its
activities, which are fundamental policies and may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose means the lesser of (a) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved and only if immediately
thereafter not more than 10% of the Fund's total assets, taken at market
value, would be invested in such securities.
3. Purchase or sell real estate; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
4. Purchase or sell commodities or commodity contracts.
5. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities, or make short sales of securities or
maintain a short position.
6. Make loans to other persons (except as provided in (7) below);
provided that for purposes of this restriction the acquisition of a portion
of an issue of bonds, debentures, or other corporate debt securities
3
<PAGE> 45
and investment in United States Government obligations, short-term
commercial paper, certificates of deposit and bankers' acceptances shall
not be deemed to be the making of a loan (the acquisition of bonds,
debentures or other corporate debt securities which are not publicly
distributed is considered to be the making of a loan under the Investment
Company Act of 1940 (the "Investment Company Act")).
7. Lend its portfolio securities in excess of 20% of its total assets,
taken at market value; provided that such loans shall be made in accordance
with the guidelines set forth below.
8. Borrow amounts in excess of 5% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary
emergency purposes.
9. Mortgage, pledge, hypothecate or in any manner transfer (except as
provided in (7) above), as security for indebtedness, any securities owned
or held by the Fund except as may be necessary in connection with
borrowings mentioned in (8) above, and then such mortgaging, pledging or
hypothecating may not exceed 10% of the Fund's total assets, taken at
market value. (The deposit in escrow of underlying securities in connection
with the writing of call options is not deemed to be a pledge.) [In order
to comply with certain state statutes, the Fund will not, as a matter of
operating policy, mortgage, pledge or hypothecate its portfolio securities
to the extent that at any time the value of pledged securities plus the
maximum sales charge will exceed 10% of the Fund's shares at the maximum
offering price.]
10. Invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily
available market exists or in securities of issuers having a record,
together with predecessors, of less than three years of continuous
operation if, regarding all such securities, more than 5% of its total
assets, taken at market value, would be invested in such securities.
11. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
12. Write, purchase or sell puts, calls or combinations thereof,
except that the Fund may write covered call options with respect to its
portfolio securities, and enter into closing purchase transactions with
respect to such options, if at the time of the writing of such options not
more than 15% of its total assets, taken at market value, would be subject
to being purchased upon the exercise of an option.
13. Invest in securities of foreign issuers if at the time of
acquisition more than 10% of its total assets, taken at market value, would
be invested in such securities.
14. Purchase or sell interests in oil, gas or other mineral
exploration or development programs.
15. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, Merrill Lynch Asset
Management or any subsidiary thereof each owning beneficially more than
1/2 of 1% of the securities of such issuer own in the aggregate more than
5% of the securities of such issuer.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors, provide that the Fund may not:
1. Write call options with respect to underlying securities which are
not traded on a national securities exchange.
4
<PAGE> 46
2. Invest in warrants if at the time of acquisition more than 2% of
its total assets, taken at market value, would be invested in warrants. For
purposes of this restriction, warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
3. Invest in oil, gas or other mineral leases or in real estate
limited partnerships.
Lending of Portfolio Securities. Subject to investment restriction (7)
above, the Fund may from time to time lend securities from its portfolio to
brokers, dealers and financial institutions and receive collateral in cash or
securities issued or guaranteed by the United States 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. Such cash collateral will be invested in
short-term securities, which will increase the current income of the Fund. Such
loans will be terminable at any time. The Fund will have the right to regain
record ownership of loaned securities to exercise beneficial rights such as
voting rights, subscription rights and rights to dividends, interest or other
distributions. The Fund may pay reasonable fees to persons unaffiliated with the
Fund for services in arranging such loans.
Investment in Foreign Issuers. The Fund may invest up to 10% of its total
assets, taken at market value, in securities of foreign issuers. Foreign
companies may not be subject to uniform accounting and auditing and financial
reporting standards or to practices and requirements comparable to those
applicable to domestic issuers. Securities of foreign issuers may be less liquid
and more volatile than securities of United States issuers. Investment in
foreign securities also involves certain risks, including fluctuations in
foreign exchange rates, political and economic developments and the possible
imposition of exchange controls.
Proposed Uniform Investment Restrictions. As discussed in the Prospectus
under "Investment Objective and Policies -- Investment Restrictions", the Board
of Directors of the Fund has approved the replacement of the Fund's existing
investment restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have been
proposed for adoption by all of the non-money market mutual funds advised by
Fund Asset Management, L.P. (the "Investment Adviser" or "FAM") or its
affiliate, Merrill Lynch Asset Management, L.P. ("MLAM"). The investment
objective and policies of the Fund will be unaffected by the adoption of the
proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, 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 assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5
<PAGE> 47
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Fund's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
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 borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the proposed non-fundamental investment restrictions, the Fund may
not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (a "Rule 144A security") and determined to be liquid by the Fund's
Board of Directors are not subject to
6
<PAGE> 48
the limitations set forth in this investment restriction (c).
Notwithstanding the fact that the Board may determine that a Rule 144A
security is liquid and not subject to limitations set forth in this
investment restriction (c), the State of Ohio does not recognize Rule 144A
securities as securities that are free of restrictions as to resale. To the
extent required by Ohio law, the Fund will not invest more than 5% of its
total assets in securities of issuers that are restricted as to
disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Investment Adviser, the directors of such general partner or
the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 5% of its total assets, taken at market value,
and then only from banks as a temporary measure for extraordinary or
emergency purposes such as the redemption of Fund shares. In addition, the
Fund will not purchase securities while borrowings are outstanding.
---------------------
Because of the affiliation of Merrill Lynch with the Fund, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch except
pursuant to a permissive order or otherwise in compliance with the provisions of
the Investment Company Act and the rules and regulations thereunder. Included
among such restricted transactions are purchases from or sales to Merrill Lynch
of securities in transactions in which it acts as principal and purchases of
securities from underwriting syndicates of which Merrill Lynch is a member.
7
<PAGE> 49
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL -- President and Director(1)(2) -- President and Chief
Investment Officer of the Investment Adviser (which term as used herein includes
its corporate predecessors) since 1977; President of MLAM (which term as used
herein includes its corporate predecessors) since 1977 and Chief Investment
Officer since 1976; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch &
Co., Inc. ("ML & Co.") since 1990; Executive Vice President of Merrill Lynch
since 1990 and Senior Vice President thereof from 1985 to 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor").
DONALD CECIL -- Director(2) -- 1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; General Partner of Cumberland Associates (an asset
management company) from 1970 to 1982; Member of Institute of Chartered
Financial Analysts; Member and Chairman of Westchester County (N.Y.) Board of
Transportation.
M. COLYER CRUM -- Director(2) -- Soldiers Field Road, Boston, Massachusetts
02163. James R. Williston Professor of Investment Management, Harvard Business
School, since 1971; Director of Cambridge Bancorp, Copley Properties, Inc. and
Sun Life Assurance Company of Canada.
EDWARD H. MEYER -- Director(2) -- 777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc., Harman International
Industries, Inc. and Ethan Allen Interiors, Inc.
JACK B. SUNDERLAND -- Director(2) -- P.O. Box 1177, Scarsdale, New York
10583. President and Director of American Independent Oil Company, Inc. (an
energy company) since 1987; Chairman of Murexco Petroleum, Inc. (an energy
company) from 1981 to 1988; Member of Council on Foreign Relations since 1971;
President, Director and Chief Executive Officer of Coroil, Inc. (an energy
company) from 1979 to 1985.
J. THOMAS TOUCHTON -- Director(2) -- Suite 3405, One Tampa City Center,
Tampa, Florida 33602. Managing Partner of The Witt-Touchton Company and its
predecessor The Witt Co. (a private investment partnership) since 1972; Trustee
Emeritus of Washington and Lee University; Director of TECO Energy, Inc. (an
electric utility holding company).
TERRY K. GLENN -- Executive Vice President(1)(2) -- Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President and Director
of the Distributor since 1986.
NORMAN R. HARVEY -- Senior Vice President(1)(2) -- Senior Vice President of
the Investment Adviser and MLAM since 1982; Senior Vice President of Princeton
Services since 1993.
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<PAGE> 50
PAUL M. HOFFMANN -- Vice President(1) -- Vice President of MLAM since 1976.
DONALD C. BURKE -- Vice President(1)(2) -- Vice President and Director of
Taxation of the Investment Adviser since 1990; employee of Deloitte & Touche LLP
from 1981 to 1990.
GERALD M. RICHARD -- Treasurer(1)(2) -- Senior Vice President and Treasurer
of the Investment Adviser and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of the Distributor since
1984 and Vice President of the Distributor since 1981.
MARK B. GOLDFUS -- Secretary(1)(2) -- Vice President of MLAM and the
Investment Adviser since 1985.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director or officer of certain other
investment companies for which the Investment Adviser or MLAM acts as
investment adviser.
At September 30, 1994, the Directors and officers of the Fund as a group
(12 persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At that date, Mr. Zeikel, a Director of the Fund, and the officers of the
Fund owned less than 1% of the outstanding Common Stock of ML & Co.
Pursuant to the terms of the Fund's investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement"), the Investment Adviser
pays all compensation of officers and employees of the Fund as well as the fees
of all Directors of the Fund who are affiliated persons of ML & Co. or its
subsidiaries. Each unaffiliated Director is paid an annual fee of $3,500 for
serving as a Director plus a fee of $500 for each meeting of the Board attended.
The Fund also pays each member of the Audit and Nominating Committee, which
consists of the unaffiliated Directors, an annual fee of $2,500. The Fund
reimburses each unaffiliated Director for his out-of-pocket expenses relating to
attendance at Board and Committee meetings. In addition, the Chairman of the
Committee receives an annual fee of $1,000 for serving as Chairman of the
Committee. These fees and expenses aggregated $41,369 for the year ended June
30, 1994.
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
The Investment Advisory Agreement provides that, subject to the direction
of the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio and for the review of the Fund's
holdings in light of its own research analysis and analyses from other relevant
sources.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Investment Adviser, subject to review by the Board of
Directors. The Investment Adviser supplies the portfolio managers for the Fund
who consider analyses from various sources, make the necessary investment
decisions and place transactions accordingly. The Investment Adviser also is
obligated to perform certain administrative and management services for the Fund
and is required to provide all the office space, facilities, equipment and
personnel necessary to perform its duties under the Investment Advisory
Agreement.
Securities held by the Fund also may be held by or be appropriate
investments for other funds for which the Investment Adviser or MLAM acts as an
adviser or by investment advisory clients of MLAM. Because of
9
<PAGE> 51
different investment objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for the Fund or other funds for
which the Investment Adviser or MLAM acts as investment adviser or for their
advisory clients arise for consideration at or about the same time, transactions
in such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. To the extent that transactions
on behalf of more than one client of the Investment Adviser or MLAM 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.
As compensation for its services to the Fund the Investment Adviser
receives from the Fund at the end of each month a fee based on the average daily
value of the Fund's net assets at the annual rates of: 0.60% of the portion of
average net assets not exceeding $100 million; 0.50% of the portion of average
net assets exceeding $100 million but not exceeding $200 million; and 0.40% of
the portion of average net assets exceeding $200 million.
The State of California imposes limitations on the expenses of the Fund. At
the date of this Statement of Additional Information, these annual expense
limitations require that the Investment Adviser reimburse the Fund in any amount
necessary to prevent the Fund's aggregate ordinary operating expenses (excluding
interest, taxes, brokerage fees and commissions, distribution fees and
extraordinary charges such as litigation costs) from exceeding in any fiscal
year 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of
the next $70 million of average daily net assets and 1.5% of the remaining
average daily net assets. The Investment Adviser's obligation to reimburse the
Fund is limited to the amount of the investment advisory fee. No payment will be
made to the Investment Adviser during any fiscal year which will cause such
expenses to exceed the most restrictive expense limitation at the time of such
payment. For the years ended June 30, 1992, 1993 and 1994 the total advisory
fees paid by the Fund to the Investment Adviser aggregated $10,456,562,
$12,004,310 and $15,452,148, respectively. For such years, the Investment
Adviser was not required to reimburse the Fund pursuant to the applicable
expense limitation provisions.
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 ML & Co. or
any of its affiliates. 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 the Distributor); charges of the custodian and the
transfer agent; expenses of redemption of shares; Securities and Exchange
Commission fees; expenses of registering the shares under Federal and state
securities laws; fees and expenses of unaffiliated Directors; accounting and
pricing costs (including the daily calculations of net asset value); 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 and the Fund reimburses the
Investment Adviser for its costs in connection with such services. As required
by the Distribution Agreements, the Distributor will pay certain of the expenses
of the Fund incurred in connection with the offering of its shares, including
the expenses of printing the prospectuses and statements of additional
information used in connection with the continuous offering of shares by the
Fund. See "Purchase of Shares -- Distribution Plans".
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<PAGE> 52
The Investment Adviser is a limited partnership, the partners of which are
ML & Co., Fund Asset Management, Inc. and Princeton Services.
Duration and Termination. Unless earlier terminated as described herein,
the Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding shares 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 contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing System: shares of Class A and Class D are sold to investors choosing the
initial sales charge alternatives, and shares of Class B and Class C are sold to
investors choosing the deferred sales charge alternatives. Each Class A, Class
B, Class C and Class D share of the Fund represents identical interests in the
investment portfolio of the Fund and has the same rights, except that Class B,
Class C and Class D shares bear the expenses of the ongoing account maintenance
fees, and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs resulting
from the deferred sales charge arrangements. Class B, Class C and Class D shares
each have exclusive voting rights with respect to the Rule 12b-1 distribution
plan adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid. Each class has different exchange privileges.
See "Shareholder Services -- Exchange Privilege".
The Merrill Lynch Select Pricing System is used by more than 50 mutual
funds advised by MLAM or its affiliate, the Investment Adviser. Funds advised by
MLAM or the Investment Adviser are referred to herein as "MLAM-advised mutual
funds".
The Fund has entered into 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.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the year ended
June 30, 1992 were $3,154,165, of which the Distributor received $168,989 and
Merrill Lynch received $2,985,176. The gross sales charges for the sale of Class
A shares for the year ended June 30, 1993 were $2,799,895, of which the
Distributor received $149,552 and Merrill Lynch received $2,650,343. The gross
sales charges for the sale of Class A shares for the
11
<PAGE> 53
year ended June 30, 1994 were approximately $3,755,873, of which the Distributor
received approximately $216,293 and Merrill Lynch received $3,539,580.
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 spouse and their children under the
age of 21 years purchasing shares for his 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 a "company", as that
term is defined in the Investment Company Act, but does not include purchases by
any such company which 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.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares, however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intention
(minimum of $25,000), the investor will be notified and must pay, within
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<PAGE> 54
20 days of the expiration of such Letter, the difference between the sales
charge on the Class A or Class D shares purchased at the reduced rate and the
sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to five percent of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such Letter. If
a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right for accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to that further
reduced percentage sales charge but there will be no retroactive reduction of
the sales charges on any previous purchase. The value of any shares redeemed or
otherwise disposed of by the purchaser prior to termination or completion of the
Letter of Intention will be deducted from the total purchases made under such
Letter. An exchange from a MLAM-advised money market fund into the Fund that
creates a sales charge will count toward completing a new or existing Letter of
Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are
offered to participants in the Merrill Lynch BlueprintSM Program ("Blueprint").
In addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. The Blueprint
program is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions, trade associations and benefit plans.
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 or Class D shares of the Fund are being
offered at net asset value plus a sales charge of 1/2 of 1% for corporate or
group IRA programs placing orders to purchase their Class A or Class D shares
through Blueprint. Services, including the exchange privilege, available to
Class A and Class D investors through Blueprint, however, may differ from those
available to other investors in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("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
(as defined below) 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 to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
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<PAGE> 55
Employer Sponsored Retirement and Savings Plans. Class A and Class D
shares are offered at net asset value to employer sponsored retirement or
savings plans, such as tax qualified retirement plans within the meaning of
Section 401(a) of the Code, deferred compensation plans within the meaning of
Section 403(b) and 457 of the Code, other deferred compensation arrangements,
Voluntary Employee Benefits Association ("VEBA") plans, and non-qualified After
Tax Savings and Investment programs, maintained on the Merrill Lynch Group
Employee Services system, herein referred to as "Employer Sponsored Retirement
or Savings Plans", provided the plan has accumulated $20 million or more in
MLAM-advised mutual funds (in the case of Class A shares) or $5 million or more
in MLAM-advised mutual funds (in the case of Class D shares). Class D shares may
be offered at net asset value to new Employer Sponsored Retirement or Savings
Plans, provided the plan has $3 million or more initially invested in
MLAM-advised mutual funds. Assets of Employer Sponsored Retirement or Savings
Plans sponsored by the same sponsor or an affiliated sponsor may be aggregated.
Class A shares and Class D shares also are offered at net asset value to
Employer Sponsored Retirement or Savings Plans that have at least 1,000
employees eligible to participate in the plan (in the case of Class A shares) or
between 500 and 999 employees eligible to participate in the plan (in the case
of Class D shares). Employees eligible to participate in Employer Sponsored
Retirement or Savings Plans of the same sponsoring employer or its affiliates
may be aggregated. Tax qualified retirement plans within the meaning of Section
401(a) of the Code meeting any of the foregoing requirements and which are
provided specialized services (e.g., plans whose participants may direct on a
daily basis their plan allocations among a wide range of investments including
individual corporate equities and other securities in addition to mutual fund
shares) by Blueprint, are offered Class A shares at a price equal to net asset
value per share plus a reduced sales charge of 0.50%. Any Employer Sponsored
Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares at net asset value has the option of
(i) purchasing Class A shares at the initial sales charge and possible CDSC
schedule disclosed in the Prospectus if it is otherwise eligible to purchase
Class A shares, (ii) purchasing Class D shares at the initial sales charge and
possible CDSC schedule disclosed in the Prospectus, (iii) if the Employer
Sponsored Retirement or Savings Plan meets the specified requirements,
purchasing Class B shares with a waiver of the CDSC upon redemption, or if the
Employer Sponsored Retirement or Savings Plan does not qualify to purchase Class
B shares with a waiver of the CDSC upon redemption, purchasing Class C shares at
the CDSC schedule disclosed in the Prospectus. The minimum initial and
subsequent purchase requirements are waived in connection with all the above
referenced Employer Sponsored Retirement or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of ML & Co. and its subsidiaries (the term "subsidiaries", when used herein with
respect to ML & Co., includes MLAM, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.), and any trust, pension,
profit-sharing or other benefit plan for such persons, may purchase Class A
shares of the Fund at net asset value.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor also must establish that such redemption had been
made within 60 days prior to the investment in the Fund, and the proceeds from
the redemption had been maintained in the interim in cash or a money market
fund.
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<PAGE> 56
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than six months. 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.
Class D shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: First, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred basis.
Second, such purchase of Class D shares must be made within 90 days after such
notice.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or the
Investment Adviser who purchased such closed-end fund shares prior to October
21, 1994 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
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D Shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the 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. Class A
shares of the Fund are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
of Senior Floating Rate Fund in shares of the Fund. In order to exercise this
investment option, Senior Floating Rate Fund shareholders must sell their Senior
Floating Rate Fund shares to the Senior Floating Rate Fund in connection with a
tender offer conducted by the Senior Floating Rate Fund and reinvest the
proceeds immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or
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<PAGE> 57
consolidation with a personal holding company or a public or private investment
company. The value of the assets or company acquired in a tax-free transaction
may be adjusted in appropriate cases to reduce possible adverse consequences to
the Fund which might result from an acquisition of assets having net unrealized
appreciation which is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio securities
which (i) meet the investment objectives and policies of the Fund; (ii) are
acquired for investment and not for resale (subject to the understanding that
the disposition of the Fund's portfolio securities shall at all times remain
within its control); and (iii) are liquid securities, the value of which is
readily ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholder. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors or
by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of the Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
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<PAGE> 58
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("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 June 30, 1994
with respect to the Class B shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum for the period October 21, 1988 (commencement of
the public offering of Class B shares) to June 30, 1994. Since Class C shares of
the Fund had not been publicly issued prior to the date of this Statement of
Additional Information, information concerning Class C shares is not yet
provided below.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JUNE 30, 1994
(IN THOUSANDS)
---------------------------------------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY PAID AGGREGATE CURRENT NET
ELIGIBLE GROSS SALES UNPAID AMOUNT TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- ------------ ----------- ------------ --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted............. $ 1,859,334 $ 116,208 $ 24,268 $ 140,477 $ 51,114 $ 89,363 $ 13,085
Under Distributor's
Voluntary Waiver.... $ 1,859,334 $ 116,208 $ 9,297 $ 125,505 $ 51,114 $ 74,391 $ 13,085
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since October 21, 1988
(commencement of the public offering of Class B shares) other than shares
acquired through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under a prior plan at
the 1.0% rate, 0.75% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. See "Purchase of Shares-Distribution Plans" in the Prospectus.
17
<PAGE> 59
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the Commission or such
Exchange 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.
DEFERRED SALES CHARGES -- CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares", while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account ("IRA") or
other retirement plan or on redemptions of Class B shares following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan or attaining age
59 1/2 in the case of an IRA or other retirement plan, or part of a series of
equal periodic payments (not less frequently than annually) made for the life
(or life expectancy) or any redemption resulting from the tax-free return of an
excess contribution to an IRA; or (b) any partial or complete redemption
following the death or disability (as defined in the Code) of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability. For the fiscal years ended June
30, 1992, 1993 and 1994, the Distributor received CDSCs of $2,487,122,
$1,529,410 and $1,189,344, respectively, all of which was paid to Merrill Lynch.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares of the Fund are offered through Blueprint only to
members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint by members of such affinity groups.
Services, including the exchange privilege, available to Class B investors
through Blueprint, however, may differ from those available to other Class B
investors. Orders for purchases and redemptions of Class B shares of the Fund
will be grouped for execution purposes which, in some circumstances, may involve
the execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There is no minimum initial or
subsequent purchase requirement for investors who are part of a Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including
18
<PAGE> 60
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.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value has the
option of purchasing Class A or Class D shares at the sales charge schedule
disclosed in the Prospectus, or if the Retirement Plan meets the following
requirements, then it may purchase Class B shares with a waiver of the CDSC upon
redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
shares. "Eligible 401(k) Plan" is defined as a retirement plan qualified under
Section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from a
401(a) plan qualified under the Code, provided, however, that each such plan has
the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ("Eligible 401(a) Plan").
Other tax qualified retirement plans within the meaning of Section 401(a) and
403(b) of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a menu of
investments) by independent administration firms contracted through Merrill
Lynch also may purchase Class B shares with a waiver of the CDSC. The CDSC also
is waived for any Class B shares which are purchased by an Eligible 401(k) Plan
or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA, that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The minimum initial and subsequent
purchase requirements are waived in connection with all the above-referenced
Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. With respect to such transactions,
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 involved and the firm's risk in positioning a
block of securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund will not necessarily be paying the lowest
commission or spread available. Transactions with respect to the securities of
small and emerging growth companies in which the Fund may invest may involve
specialized services on the part of the broker or dealer and thereby entail
higher commissions or spreads than would be the case with transactions involving
more widely traded securities of more established companies. The Fund has no
obligation to deal with any broker in the execution of transactions for its
portfolio securities. In addition, consistent with the Rules of Fair Practice of
the NASD and policies established by the Directors of the Fund, the Investment
Adviser may consider sales of shares of the Fund as a factor in the selection of
brokers or dealers to execute portfolio transactions for the Fund.
For the fiscal year ended June 30, 1992, the Fund paid total brokerage
commissions of $1,890,396 of which $160,194 or 8.47% was paid to Merrill Lynch
for effecting 9.50% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. For the fiscal year ended June 30, 1993, the
Fund paid total brokerage commissions of $2,113,701 of which $71,016 or 3.36%
was paid to Merrill Lynch for effecting 3.96% of the aggregate dollar amount of
transactions in which the Fund paid brokerage commissions.
19
<PAGE> 61
For the fiscal year ended June 30, 1994, the Fund paid total brokerage
commissions of $2,617,266 of which $109,200 or 4.17% was paid to Merrill Lynch
for effecting 4.42% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions.
The Fund has been informed by Merrill Lynch that it will in no way, at any
time, attempt to influence or control the placing by the Investment Adviser or
by the Fund of orders for brokerage transactions. Brokers and dealers, including
Merrill Lynch, who provide supplemental investment research (such as securities
and economic research and market forecasts) to the Investment Adviser may
receive orders for transactions by the Fund. Information so received is in
addition to and not in lieu of the services required to be performed by the
Investment Adviser under the Investment Advisory Agreement with the Fund, and
the expenses of the Investment Adviser will not necessarily be reduced as a
result of the receipt of such supplemental information. Supplemental investment
research received by the Investment Adviser may also be used in connection with
other investment advisory accounts of the Investment Adviser and its affiliates.
Whether or not a particular broker-dealer sells shares of the Fund neither
qualifies nor disqualifies such broker-dealer to execute transactions for the
Fund.
The Fund also may invest in securities traded in the over-the-counter
market. Transactions in the over-the-counter market generally are principal
transactions with dealers and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to the over-the-counter
transactions the Fund, where possible, will deal directly with the dealers who
make a market in the securities involved except in those circumstances where
better prices and execution are available elsewhere. Under the Investment
Company Act, persons affiliated with the Fund are prohibited from dealing with
the Fund as a principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own account, affiliated persons of
the Fund, including Merrill Lynch, may not serve as the Fund's dealer in
connection with such transactions. See "Investment Objective and
Policies--Current Investment Restrictions". However, an affiliated person of the
Fund may serve as its broker in the over-the-counter transactions conducted on
an agency basis.
The Board of Directors of the Fund has considered the possibilities of
seeking to recapture for the benefit of the Fund brokerage commissions, dealer
spreads and other expenses of possible portfolio transactions, such as
underwriting commissions and tender offer solicitation fees, by conducting such
portfolio transactions through affiliated entities, including Merrill Lynch. For
example, brokerage commissions received by Merrill Lynch could be offset against
the advisory fee payable by the Fund to the Investment Adviser. After
considering all factors deemed relevant, the Board made a determination not to
seek such recapture. The Board will reconsider this matter from time to time.
The Investment Adviser has arranged for the Fund's custodian to receive any
tender offer solicitation fees on behalf of the Fund payable with respect to
portfolio securities of the Fund.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules the
Securities and Exchange 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
20
<PAGE> 62
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.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 4:15 P.M., New York time, on each day during which
the New York Stock Exchange is open for trading. The New York Stock Exchange is
not open on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. The Fund also will determine its
net asset value on any day in which there is sufficient trading in its portfolio
securities that the net asset value might be affected materially, but only if on
any such day the Fund is required to sell or redeem shares. The net asset value
per share is computed by dividing the sum of the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the investment advisory fees and any account maintenance
and/or distribution fees, are accrued daily. The per share net asset value of
the Class B, Class C and Class D shares generally will be lower than the per
share net asset value of the Class A shares reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the 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 its Class
D shares reflecting the daily expense accruals of the distribution fees and
higher transfer agency fees applicable with respect to the 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 immediately after the payment of
dividends or distributions, which will differ by approximately the amount of the
expense accrual differential between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the mean between closing bid and asked prices.
Securities traded in the over-the-counter market are valued at the most recent
bid prices as obtained from one or more dealers that make markets in the
securities. Securities traded in the NASDAQ National Market System are valued at
the last sale price on the day the securities are being valued, or lacking any
sales, at the closing bid price. Portfolio securities which are traded both in
the over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
Option Accounting Principles. When the Fund sells an option, an amount
equal to the premium received by the Fund is included in the Fund's Statement of
Assets and Liabilities as a deferred credit. The amount of such liability will
be subsequently marked-to-market to reflect the current market value of the
option written. If current market value exceeds the premium received there is an
unrealized loss; conversely, if the premium exceeds current market value there
is an unrealized gain. The current market value of a traded option is the last
sale price or, in the absence of a sale, the last offering price. If an option
expires on its stipulated expiration date or if the Fund enters into a closing
purchase transaction, the Fund will realize a gain
21
<PAGE> 63
(or loss if the cost of a closing purchase transaction exceeds the premium
received when the option was sold) without regard to any unrealized gain or loss
on the underlying security, and the liability related to such option will be
extinguished. If an option is exercised, the Fund will realize a gain or loss
from the sale of the underlying security and the proceeds of sale are increased
by the premium originally received.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services summarized below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch.
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, the reinvestment of ordinary income dividends
and long-term capital gain distributions. These statements will also show any
other activity in the account since the previous statement. Shareholders also
will receive separate confirmations for each purchase or sale transaction other
than automatic investment purchases, reinvestment of ordinary income dividends
and long-term capital gain distributions. A shareholder may make additions to
his Investment Account at any time by mailing a check directly to the Transfer
Agent.
Share certificates are issued only for full shares and only upon the
specific request of the 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.
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 as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through Blueprint no minimum charge to the
investor's bank account is required. Investors who maintain CMA(R) accounts may
arrange to have periodic investments made in the Fund in their CMA(R) accounts
or in certain related accounts in amounts of $100 or more ($1 for retirement
accounts) through the CMA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the ex-dividend date of the dividend or distribution. Shareholders may elect
in writing to receive either their
22
<PAGE> 64
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account in the form of payments by check or through automatic
payment by direct deposit to such shareholder's bank account on either a monthly
or quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired Class A or Class D shares of the Fund having a
value, based on cost or the current offering price, of $5,000 or more, and
monthly withdrawals are available for shareholders with Class A or Class D
shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined at the
close of business on the New York Stock Exchange (currently 4:00 P.M., New York
City time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the New York Stock Exchange is not
open for business on such date, the Class A or Class D shares will be redeemed
at the close of business on the following business day. The check for the
withdrawal payment will be mailed, or the direct deposit of the withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on all
Class A or Class D shares in the Investment Account are reinvested automatically
in Class A or Class D shares of the Fund, respectively. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Fund's transfer agent or the
Distributor. Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Fund will not knowingly accept
purchase orders for Class A or Class D shares of the Fund from investors who
maintain a Systematic Withdrawal Plan unless such purchase is equal to at least
one year's scheduled withdrawals or $1,200, whichever is greater. Periodic
investments may not be made into an Investment Account in which the shareholder
has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $25. The
proceeds of systematic redemptions will be posted to a shareholder's account
five business days after the date the shares are redeemed. Monthly systematic
redemptions will be made at net asset value on the first Monday of each month,
bimonthly systematic redemptions will be made at net asset value on the first
Monday of every other month, and quarterly, semiannual or annual redemptions are
made at net asset value on the first Monday of months selected at the
shareholder's option. If the first Monday of the month is a holiday, the
redemption will
23
<PAGE> 65
be processed at net asset value on the next business day. The Systematic
Redemption Program is not available if Fund shares are being purchased within
the account pursuant to the Automatic Investment Program. For more information
on the Systematic Redemption Program, eligible shareholders should contact their
Merrill Lynch financial consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as
in other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100, and the minimum subsequent purchase is $1.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plan. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing System, Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as a
result of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other Fund as more fully described below. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain
MLAM-advised money market funds specifically designated below as available for
exchange by holders of Class A, Class B, Class C or Class D shares. 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 15 days. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With
24
<PAGE> 66
respect to outstanding Class A or Class D shares as to which previous exchanges
have taken place, the "sales charge previously paid" shall include the aggregate
of the sales charge paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A and 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 of the Fund generally may be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A and Class D money market funds with a reduced or without a sales
charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will continue
to be subject to the Fund's CDSC schedule if such schedule is higher than the
CDSC schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through use
of the exchange privilege will be subject to 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 sales
charge that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C shares is
"tacked" on 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 Class B shares for two and a half years. The 2% sales charge that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption, since
by "tacking" the two and a half year holding period of Fund Class B shares to
the three year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the new Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired as
a result of an exchange for Class B or Class C shares of the Fund may, in turn,
be exchanged back into Class B or Class C shares, respectively, of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of the fund will be aggregated with previous holding periods for purposes
of reducing the CDSC. Thus, for example, an investor may exchange Class B shares
of the Fund for shares of Merrill Lynch Institutional Fund ("Institutional
Fund") after having held the Fund Class B shares for two and a half years and
three years later decide to redeem the shares of Institutional Fund for cash. At
the time of this redemption, the 2% CDSC that would have been due had the Class
B shares of the Fund been redeemed for cash rather than exchanged for shares of
Institutional Fund will be payable. If instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continued to hold for an additional two and a half years, any
subsequent redemption will not incur a CDSC.
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Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds issuing Class A, Class B, Class C and Class D Shares:
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC. High current income, consistent with a policy
of limiting the degree of fluctuation in net
asset value of fund shares resulting from
movements in interest rates, through investment
primarily in a portfolio of adjustable rate
securities.
MERRILL LYNCH AMERICAS INCOME
FUND, INC. A high level of current income, consistent with
prudent investment risk, by investing primarily
in debt securities denominated in a currency of
a country located in the Western Hemisphere
(i.e., North and South America and the
surrounding waters).
MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Arizona income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Arizona
Municipal Bonds.
MERRILL LYNCH ARIZONA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arizona income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH ARKANSAS
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Arkansas income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH ASSET
GROWTH FUND, INC. High total investment return, consistent with
prudent risk, from investment in United States
and foreign equity, debt and money market
securities the combination of which will be
varied both with respect to types of securities
and markets in response to changing market and
economic trends.
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MERRILL LYNCH ASSET
INCOME FUND, INC. A high level of current income through
investment primarily in United States fixed
income securities.
MERRILL LYNCH BALANCED FUND
FOR INVESTMENT AND
RETIREMENT As high a level of total investment return as
is consistent with a relatively low level of
risk through investment in common stock and
other types of securities, including fixed
income securities and convertible securities.
MERRILL LYNCH CALIFORNIA
INSURED MUNICIPAL BOND FUND A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management through investment in a
portfolio primarily of insured California
Municipal Bonds.
MERRILL LYNCH CALIFORNIA
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
California income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade California
Municipal Bonds.
MERRILL LYNCH CALIFORNIA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and California
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH CAPITAL FUND,
INC. The highest total investment return consistent
with prudent risk through a fully managed
investment policy utilizing equity, debt and
convertible securities.
MERRILL LYNCH COLORADO
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Colorado income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH CONNECTICUT
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income
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exempt from Federal and Connecticut income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH CORPORATE BOND
FUND, INC. Current income from three separate diversified
portfolios of fixed income securities.
MERRILL LYNCH DEVELOPING
CAPITAL MARKETS FUND, INC. Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.
MERRILL LYNCH DRAGON FUND,
INC. Capital appreciation primarily through
investment in equity and debt securities of
issuers domiciled in developing countries
located in Asia and the Pacific Basin.
MERRILL LYNCH EUROFUND Capital appreciation primarily through
investment in equity securities of corporations
domiciled in Europe.
MERRILL LYNCH FEDERAL
SECURITIES TRUST High current return through investments in U.S.
Government and Government agency securities,
including GNMA mortgage-backed certificates and
other mortgage-backed Government securities.
MERRILL LYNCH FLORIDA
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal
income taxes as is consistent with prudent
investment management while serving to offer
shareholders the opportunity to own securities
exempt from Florida intangible personal
property taxes through investment in a
portfolio primarily of intermediate-term
investment grade Florida Municipal Bonds.
MERRILL LYNCH FLORIDA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
while seeking to offer shareholders the
opportunity to own securities exempt from
Florida intangible personal property taxes.
MERRILL LYNCH FUND FOR
TOMORROW, INC. Long-term growth through investment in a
portfolio of good quality securities, primarily
common stock, potentially positioned to bene-
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fit from demographic and cultural changes as
they affect consumer markets.
MERRILL LYNCH FUNDAMENTAL
GROWTH FUND, INC. Long-term growth of capital through investment
in a diversified portfolio of equity securities
placing particular emphasis on companies that
have exhibited an above-average growth rate in
earnings.
MERRILL LYNCH GLOBAL
ALLOCATION FUND, INC. High total investment return, consistent with
prudent risk, through a fully managed
investment policy utilizing United States and
foreign equity, debt and money market
securities, the combination of which will be
varied from time to time both with respect to
types of securities and markets in response to
changing market and economic trends.
MERRILL LYNCH GLOBAL BOND FUND
FOR INVESTMENT AND
RETIREMENT High total investment return from investment in
government and corporate bonds denominated in
various currencies and multinational currency
units.
MERRILL LYNCH GLOBAL
CONVERTIBLE FUND, INC. High total return from investment primarily in
an internationally diversified portfolio of
convertible debt securities, convertible
preferred stock and "synthetic" convertible
securities consisting of a combination of debt
securities or preferred stock and warrants or
options.
MERRILL LYNCH GLOBAL HOLDINGS,
INC. (residents of Arizona
must meet investor
suitability
standards) The highest total investment return consistent
with prudent risk through worldwide investment
in an internationally diversified portfolio of
securities.
MERRILL LYNCH GLOBAL
RESOURCES TRUST Long-term growth and protection of capital from
investment in securities of foreign and
domestic companies that possess substantial
natural resource assets.
MERRILL LYNCH GLOBAL SMALLCAP
FUND, INC. Long-term growth of capital by investing
primarily in equity securities of companies
with relatively small market capitalizations
located in various foreign countries and in the
United States.
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MERRILL LYNCH GLOBAL UTILITY
FUND, INC. Capital appreciation and current income through
investment of at least 65% of its total assets
in equity and debt securities issued by
domestic and foreign companies primarily
engaged in the ownership or operation of
facilities used to generate, transmit or
distribute electricity, telecommunications, gas
or water.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing a principal emphasis on
those securities which management of the Fund
believes to be undervalued.
MERRILL LYNCH HEALTHCARE FUND,
INC. (residents of Wisconsin
must meet investor
suitability standards) Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in healthcare.
MERRILL LYNCH INTERNATIONAL
EQUITY FUND Capital appreciation and, secondarily, income
by investing in a diversified portfolio of
equity securities of issuers located in
countries other than the United States.
MERRILL LYNCH LATIN AMERICA
FUND, INC. Capital appreciation by investing primarily in
Latin American equity and debt securities.
MERRILL LYNCH MARYLAND
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Maryland income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MASSACHUSETTS
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Massachusetts income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income
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exempt from Federal and Massachusetts income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MICHIGAN
LIMITED MATURITY MUNICIPAL
BOND FUND, INC. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Michigan income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Michigan
Municipal Bonds.
MERRILL LYNCH MICHIGAN
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Michigan income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH MINNESOTA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Minnesota
personal income taxes as is consistent with
prudent investment management.
MERRILL LYNCH MUNICIPAL BOND
FUND, INC. Tax-exempt income from three separate
diversified portfolios of municipal bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND Currently the only portfolio of Merrill Lynch
Municipal Series Trust, a series fund, whose
objective is to provide as high a level as
possible of income exempt from Federal income
taxes by investing in investment grade
obligations with a dollar weighted average
maturity of five to twelve years.
MERRILL LYNCH NEW JERSEY
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
New Jersey income taxes as is consistent with
prudent investment management through a
portfolio primarily of intermediate-term
investment grade New Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income
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exempt from Federal and New Jersey income taxes
as is consistent with prudent investment
management.
MERRILL LYNCH NEW MEXICO
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and New Mexico
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal, New
York State and New York City income taxes as is
consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade New York
Municipal Bonds.
MERRILL LYNCH NEW YORK
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal, New York State and
New York City income taxes as is consistent
with prudent investment management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and North Carolina
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OHIO MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Ohio income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH OREGON MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Oregon income
taxes as is consistent with prudent investment
management.
MERRILL LYNCH PACIFIC FUND,
INC. Capital appreciation by investing in equity
securities of corporations domiciled in Far
Eastern and Western Pacific countries,
including Japan, Australia, Hong Kong and
Singapore.
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<PAGE> 74
MERRILL LYNCH PENNSYLVANIA
LIMITED MATURITY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, a
series fund, whose objective is to provide as
high a level of income exempt from Federal and
Pennsylvania income taxes as is consistent with
prudent investment management through
investment in a portfolio of intermediate-term
investment grade Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal and Pennsylvania
income taxes as is consistent with prudent
investment management.
MERRILL LYNCH PHOENIX
FUND, INC. Long-term growth of capital by investing in
equity and fixed income securities, including
tax-exempt securities, of issues in weak
financial condition or experiencing poor
operating results believed to be undervalued
relative to the current or prospective
condition of such issuer.
MERRILL LYNCH SHORT-TERM
GLOBAL INCOME FUND, INC. As high a level of current income as is
consistent with prudent investment management
from a global portfolio of high quality debt
securities denominated in various currencies
and multinational currency units and having
remaining maturities not exceeding three years.
MERRILL LYNCH SPECIAL VALUE
FUND, INC. Long-term growth of capital from investments in
securities, primarily common stocks, of
relatively small companies believed to have
special investment value and emerging growth
companies regardless of size.
MERRILL LYNCH STRATEGIC
DIVIDEND FUND Long-term total return from investment in
dividend paying common stocks which yield more
than Standard & Poor's 500 Composite Stock
Price Index.
MERRILL LYNCH TECHNOLOGY FUND,
INC. Capital appreciation through worldwide
investment in equity securities of companies
that derive or are expected to derive a
substantial portion of their sales from
products and services in technology.
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<PAGE> 75
MERRILL LYNCH TEXAS MUNICIPAL
BOND FUND A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide as high a level of
income exempt from Federal income taxes as is
consistent with prudent investment management
by investing primarily in a portfolio of
long-term, investment grade obligations issued
by the State of Texas, its political
subdivisions, agencies and instrumentalities.
MERRILL LYNCH UTILITY INCOME
FUND, INC. High current income through investment in
equity and debt securities issued by companies
which are primarily engaged in the ownership or
operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME
FUND, INC. High current income by investing in a global
portfolio of fixed income securities
denominated in various currencies, including
multinational currencies.
Class A Share Money Market Funds:
MERRILL LYNCH READY ASSETS
TRUST Preservation of capital, liquidity and the
highest possible current income consistent with
the foregoing objectives from the short-term
money market securities in which the Trust
invests.
MERRILL LYNCH RETIREMENT
RESERVES MONEY FUND
(available only for
exchanges within certain
retirement plans) Currently the only portfolio of Merrill Lynch
Retirement Series Trust, a series fund, whose
objectives are current income, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term money
market securities.
MERRILL LYNCH U.S.A.
GOVERNMENT RESERVES Preservation of capital, current income and
liquidity available from investing in direct
obligations of the U.S. Government and
repurchase agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY
MONEY FUND Preservation of capital, liquidity and current
income through investment exclusively in a
diversified portfolio of short-term marketable
securities which are direct obligations of the
U.S. Treasury.
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<PAGE> 76
Class B, Class C and Class D Share Money Market Funds:
MERRILL LYNCH GOVERNMENT FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in securities issued
or guaranteed by the U.S. Government, its
agencies and instrumentalities and in
repurchase agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL
FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide maximum current income
consistent with liquidity and the maintenance
of a high quality portfolio of money market
securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income exempt
from Federal income taxes, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term, high
quality municipal bonds.
MERRILL LYNCH TREASURY FUND A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund, whose
objective is to provide current income
consistent with liquidity and security of
principal from investment in direct obligations
of the U.S. Treasury and up to 10% of its total
assets in repurchase agreements secured by such
obligations.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Securities and Exchange Commission. The Fund reserves the right to limit the
number of times an investor may exercise the exchange privilege. Certain funds
may suspend the continuous offering of their shares at any time and thereafter
may resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made.
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<PAGE> 77
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such investment income are paid semiannually. All net
realized long-or short-term capital gains, if any, are distributed to the Fund's
shareholders at least annually. Premiums from expired call options written by
the Fund and net gains from closing purchase transactions are treated as
short-term capital gains for Federal income tax purposes. See "Shareholder
Services -- Automatic Reinvestment of Dividends and Capital Gains Distributions"
for information concerning the manner in which dividends and distributions may
be reinvested automatically in shares of the Fund. Shareholders may elect in
writing to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders as described below
whether they are invested in shares of the Fund or received in cash. The per
share dividends and distributions on Class B and Class C shares will be lower
than the per share dividends and distributions on Class A and Class D shares as
a result of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B and Class C shares; similarly, the
per share dividends and distributions on Class D shares will be lower than the
per share dividends and distributions on Class A shares as a result of the
account maintenance fees applicable with respect to the Class D shares. See
"Determination of Net Asset Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. 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's exemptive order 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
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<PAGE> 78
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.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid 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.
TAX TREATMENT OF OPTIONS TRANSACTIONS
The Fund may write covered options with respect to the securities that it
holds in its portfolio and enter into closing purchase transactions with respect
to certain of such options. In general, unless an election is
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<PAGE> 79
available to the Fund or an exception applies, such options that are "Section
1256 contracts" will be "marked to market" for Federal income tax purposes at
the end of each taxable year, i.e., each such option contract will be treated as
sold for its fair market value on the last day of the taxable year, and any gain
or loss attributable to Section 1256 contracts will be 60% long-term and 40%
short-term capital gain or loss. 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 rates with respect to its
investments.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in option contracts. Under Section 1092, the
Fund may be required to postpone recognition for tax purposes of losses incurred
in certain closing transactions in options.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option contract.
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 or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with a formula specified by the Securities
and Exchange 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 charges in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than
38
<PAGE> 80
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 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 and Class B
shares of the Fund for the periods indicated. Since Class C and Class D shares
have not been issued prior to the date of this Statement of Additional
Information, performance information concerning Class C and Class D shares is
not yet provided.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES*
------------------------------------ ------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL HYPOTHETICAL
EXPRESSED AS A $1,000 EXPRESSED AS A $1,000
PERCENTAGE BASED INVESTMENT PERCENTAGE BASED INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
One Year Ended June 30, 1994............ 0.13% $ 1,001.30 0.64% $ 1,006.40
Five Years Ended June 30, 1994.......... 8.03% $ 1,471.20 8.08% $ 1,475.10
Ten Years Ended June 30, 1994........... 14.02% $ 3,712.70
October 21, 1988 to June 30, 1994....... 8.92% $ 1,626.60
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
YEAR ENDED JUNE 30,
- ----------------------------------------
1994.................................... 5.68% $ 1,056.80 4.61% $ 1,046.10
1993.................................... 19.03% $ 1,190.30 17.81% $ 1,178.10
1992.................................... 15.08% $ 1,150.80 13.90% $ 1,139.00
1991.................................... 5.39% $ 1,053.90 4.33% $ 1,043.30
1990.................................... 1.77% $ 1,017.70 0.73% $ 1,007.30
1989.................................... 16.29% $ 1,162.90
1988.................................... 1.90% $ 1,019.00
1987.................................... 22.37% $ 1,223.70
1986.................................... 28.59% $ 1,285.90
1985.................................... 35.35% $ 1,353.50
1984.................................... (0.18%) $ 998.20
1983.................................... 67.64% $ 1,676.40
1982.................................... (12.09%) $ 879.10
1981.................................... 29.28% $ 1,292.80
1980.................................... 15.98% $ 1,159.80
1979.................................... 15.62% $ 1,156.20
1978.................................... 10.48% $ 1,104.80
October 21, 1988 to June 30, 1989....... 10.27% $ 1,102.70
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
Inception (July 1, 1977) to June 30,
1994.................................. 946.03% $10,460.30
October 21, 1988 to June 30, 1994....... 62.66% $ 1,626.60
</TABLE>
- ---------------
* Information as to Class B shares is presented only for the period October 21,
1988 to June 30, 1994. Prior to October 21, 1988, no Class B shares were
publicly issued.
39
<PAGE> 81
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and therefore may reflect greater total return since, due to the reduced sales
charge or the waiver of sales charges, a lower amount of expenses may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on March 22, 1977. It has an
authorized capital of 800,000,000 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 each of which consists of 200,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of the
Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The Fund has received an order from the Securities and Exchange Commission (the
"Commission") permitting the issuance and sale of multiple classes of Common
Stock. The Board of Directors of the Fund may classify and reclassify the shares
of the Fund into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Generally, under Maryland law, a meeting of shareholders
may be called for any purpose on the written request of the holders of at least
25% of the outstanding shares of the Fund. Also, the by-laws of the Fund require
that a special meeting of shareholders be held on the written request of at
least 10% of the outstanding shares of the Fund entitled to vote at the meeting.
Voting rights for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive rights. Redemption and conversion rights
are discussed elsewhere herein and in the Prospectus. Each share is entitled to
participate equally in dividends and distributions declared by the Fund and in
the net assets of the Fund on liquidation or dissolution after satisfaction of
outstanding liabilities. Stock certificates are issued by the transfer agent
only on specific request. Certificates for fractional shares are not issued in
any case.
40
<PAGE> 82
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A shares of the Fund, based on the value of
the Fund's net assets and number of shares outstanding as of June 30, 1994, is
calculated as set forth below. Information is not provided for Class C or Class
D shares since no Class C or Class D shares were publicly offered prior to the
date of this Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------- --------------
<S> <C> <C>
Net Assets................................................... $2,272,982,770 $1,744,704,080
============= =============
Number of Shares Outstanding................................. 98,095,819 76,276,115
============= =============
Net Asset Value Per Share (net assets divided by number of
shares outstanding)........................................ $23.17 $22.87
Sales Charge (for Class A shares: 5.25% of offering price
(5.54% of net amount invested))*........................... $1.28 **
------ ------
Offering Price............................................... $24.45 $22.87
====== ======
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
in the Prospectus and "Redemption of Shares -- Deferred Sales
Charges -- Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
National Westminster Bank NJ, 2 Montgomery Street, 2nd Floor, Jersey City,
New Jersey 07302, acts as Custodian of the Fund's assets. 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 32246-4484, 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 "Management of the
Fund -- Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
41
<PAGE> 83
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on June 30 of each year. The Fund will
send to its shareholders at least semiannually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act of 1933 and the Investment Company Act to which
reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on September 30, 1994.
42
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MERRILL LYNCH BASIC VALUE FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Basic Value Fund, Inc. as of June
30, 1994, the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period then
ended. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1994 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Basic
Value Fund, Inc. as of June 30, 1994, the results of its operations, the changes
in its net assets, and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
July 29, 1994
43
<PAGE> 85
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Value Percent of
Industry Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Discount from Book Value
Metals/Non-Ferrous 1,400,000 ASARCO Inc. $ 35,255,430 $ 39,375,000 1.0%
Insurance 800,000 Aetna Life & Casualty Co. 35,195,218 44,700,000 1.1
Savings & Loans 1,850,000 Ahmanson(H.F.) & Co. 32,200,305 34,918,750 0.9
Insurance 260,000 American National Insurance Co. 9,749,442 12,220,000 0.3
Insurance 600,000 CIGNA Corp. 31,341,428 43,875,000 1.1
Insurance 1,000,000 Continental Corp. 31,627,263 15,500,000 0.4
Information Processing 1,700,000 ++Data General Corp. 23,653,243 13,175,000 0.3
Information Processing 2,600,000 ++Digital Equipment Corp. 110,424,691 50,375,000 1.3
Utilities 1,000,000 Entergy Corp. 19,799,508 24,750,000 0.6
Retail 1,600,000 K mart Corp. 30,422,460 24,800,000 0.6
Retail 550,000 K mart Corp.(Pfd. P) 24,266,763 17,256,250 0.4
-------------- -------------- ------
383,935,751 320,945,000 8.0
Below-Average
Price/Earnings Ratio
Insurance 600,000 Allstate Corp. 16,316,532 14,250,000 0.4
Insurance 2,000,000 American General Corp. 34,620,231 55,250,000 1.4
Steel 1,400,000 ++Bethlehem Steel Corp. 19,927,935 26,075,000 0.6
Banking 1,570,000 Chase Manhattan Corp. 35,345,175 60,052,500 1.5
Banking 2,200,000 Citicorp, Inc. 53,771,262 87,725,000 2.2
Financial Services 800,000 Dean Witter Discover & Co. 20,456,508 30,000,000 0.8
Farm & Construction
Equipment 1,330,000 Deere & Co., Inc. 67,229,295 89,941,250 2.2
Retail 700,000 ++Federated Department Stores, Inc. 8,331,220 14,000,000 0.3
Banking 1,150,000 First Interstate Bancorp 53,035,168 88,550,000 2.2
Automotive 1,000,000 Ford Motor Co. 39,797,208 59,000,000 1.5
Automotive 1,200,000 General Motors Corp. 50,650,675 60,300,000 1.5
Conglomerates 1,500,000 ITT Corp. 73,820,738 122,437,500 3.0
Computers 1,350,000 International Business Machines Corp. 85,976,347 79,312,500 2.0
Aerospace & Defense 450,000 Lockheed Corp. 16,415,936 29,418,750 0.7
Pharmaceutical 1,800,000 Merck & Co., Inc. 57,548,710 53,550,000 1.3
Hospital Management 1,500,000 National Medical Enterprises, Inc. 15,860,263 23,437,500 0.6
Semiconductors 1,000,000 ++National Semiconductor Corp. 8,902,861 17,250,000 0.4
Banking 1,500,000 NationsBank Corp. 60,787,427 77,062,500 1.9
Banking 1,800,000 Norwest Corp. 20,939,972 47,025,000 1.2
Insurance 1,400,000 PartnerRe Holdings Ltd. 29,498,937 28,350,000 0.7
Electrical Equipment 2,800,000 Philips N.V. Corp. 50,735,011 80,500,000 2.0
Retail 3,100,000 Sears, Roebuck & Co. 114,099,842 148,800,000 3.7
Information Processing 2,200,000 Tandem Computers Inc. 26,902,529 24,750,000 0.6
Communications 1,280,000 Telefonica de Espana, S.A. (ADR)* 37,922,666 51,520,000 1.3
Insurance 1,400,000 Travelers Corp. 55,658,554 45,150,000 1.1
Steel 800,000 USX--US Steel Group, Inc. 21,961,346 27,100,000 0.7
Information Processing 3,300,000 ++Unisys Corp. 39,601,470 30,525,000 0.8
Aerospace & Defense 450,000 United Technologies Corp. 22,695,049 28,912,500 0.7
Savings & Loans 800,000 Washington Mutual Savings Bank 11,813,145 16,500,000 0.4
Chemicals 440,000 Zeneca Group PLC (ADR)* 12,980,000 14,685,000 0.4
-------------- -------------- ------
1,163,602,012 1,531,430,000 38.1
</TABLE>
44
<PAGE> 86
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value Percent of
Industry Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Above-Average Yield
Oil/Domestic 450,000 Atlantic Richfield Co. $ 44,540,126 $ 45,956,250 1.1%
Real Estate Investment
Trust 600,000 Avalon Properties, Inc. 12,413,018 12,750,000 0.3
Communications 800,000 Bell Atlantic Corp. 33,212,901 44,800,000 1.1
Pharmaceutical 1,100,000 Bristol-Myers Squibb Co. 62,776,156 58,987,500 1.5
Oil--International 1,100,000 Chevron Corp. 29,812,184 46,062,500 1.1
Banking 700,000 Citicorp, Inc.(Pfd. P) 10,325,000 13,737,500 0.3
Utilities 1,000,000 Consolidated Edison Co. of New York 21,723,966 26,500,000 0.7
Utilities 637,500 DPL Inc. 6,204,369 12,590,625 0.3
Oil--International 700,000 Exxon Corp. 32,536,013 39,637,500 1.0
Telecommunications 1,500,000 GTE Corp. 47,329,575 47,250,000 1.2
Chemicals 430,000 Imperial Chemical Industries PLC(ADR)* 27,795,155 20,425,000 0.5
Real Estate Investment
Trust 400,000 Irvine Apartment Communities, Inc. 7,075,747 8,000,000 0.2
Insurance 700,000 ++Liberty Property Trust 14,155,230 14,000,000 0.4
Real Estate 500,000 Mills Corp. 11,734,125 11,250,000 0.3
Oil--International 1,500,000 Mobil Corp. 78,457,147 122,437,500 3.0
Utilities 850,000 NIPSCO Industries, Inc. 15,883,276 25,075,000 0.6
Oil-Domestic 2,250,000 Occidental Petroleum Corp. 47,641,346 42,468,750 1.1
Utilities 1,100,000 PECO Energy Co.(a) 26,348,540 29,012,500 0.7
Tobacco 1,500,000 Philip Morris Cos. Inc. 80,845,984 77,250,000 1.9
Utilities 850,000 Public Service Enterprise Group 22,490,010 22,100,000 0.6
Aluminum 250,000 Reynolds Metals Co.(Pfd. P) 11,937,200 12,468,750 0.3
Oil--International 1,150,000 Royal Dutch Petroleum Co. 70,562,758 120,318,750 3.0
Real Estate Investment
Trust 1,130,000 Simon Property Group, Inc. 25,891,365 30,086,250 0.8
Real Estate Investment
Trust 500,000 Summit Properties Inc. 9,602,500 10,000,000 0.3
Oil--International 1,000,000 Texaco Inc. 53,689,121 60,375,000 1.5
Utilities 400,000 Texas Utilities Corp. 13,696,291 12,550,000 0.3
Communications 800,000 U.S. West Inc. 22,413,677 33,500,000 0.8
-------------- -------------- ------
841,092,780 999,589,375 24.9
Special Situations
Oil--International 700,000 British Petroleum Co. PLC (ADR)* 32,946,715 50,225,000 1.3
Information Processing 1,000,000 ++Ceridian Corp. 16,072,735 24,625,000 0.6
Oil Services & Equipment 2,500,000 Dresser Industries, Inc. 49,131,722 51,250,000 1.3
Food Merchandising 770,800 ++Foodmaker Inc. 9,587,860 4,335,750 0.1
Foods 900,000 General Mills Inc. 49,335,984 49,162,500 1.2
Chemicals 500,000 Hercules, Inc. 19,235,727 53,500,000 1.3
Machinery 675,000 Ingersoll-Rand Co. 13,619,766 23,709,375 0.6
Forest & Paper Products 1,000,000 International Paper Co. 55,866,813 66,250,000 1.7
Aluminum 350,000 Reynolds Metals Co. 13,221,321 16,800,000 0.4
Chemicals 1,850,000 Union Carbide Corp. 29,886,191 49,487,500 1.2
-------------- -------------- ------
288,904,834 389,345,125 9.7
Total Stocks 2,677,535,377 3,241,309,500 80.7
</TABLE>
45
<PAGE> 87
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Short-Term Securities
Commercial Paper** $50,000,000 ANZ(Delaware) Inc., 4.26% due 8/10/1994 $ 49,757,417 $ 49,757,417 1.2%
40,000,000 Bank One Diversified Services Corp., 4.25%
due 7/11/1994 39,948,056 39,948,056 1.0
50,000,000 Ciesco L.P., 4.23% due 7/19/1994 49,888,375 49,888,375 1.3
40,000,000 du Pont(E.I.) de Nemours and Co., 4.22%
due 7/13/1994 39,939,044 39,939,044 1.0
48,842,000 General Electric Capital Corp., 4.30% due 7/01/1994 48,836,166 48,836,166 1.2
55,000,000 Matterhorn Capital Corp., 4.23% due 7/18/1994 54,883,675 54,883,675 1.4
30,000,000 Miles Inc., 4.23% due 7/15/1994 29,947,125 29,947,125 0.8
National Australia Funding (Delaware), Inc.:
50,000,000 4.25% due 7/25/1994 49,852,431 49,852,431 1.2
50,000,000 4.20% due 7/29/1994 49,830,833 49,830,833 1.2
PHH Corp.:
50,000,000 4.23% due 7/14/1994 49,917,750 49,917,750 1.2
50,000,000 4.25% due 7/28/1994 49,834,722 49,834,722 1.2
50,000,000 Penney(J.C.) & Co., 4.21% due 7/11/1994 49,935,681 49,935,681 1.3
50,000,000 PepsiCo., Inc., 4.25% due 7/21/1994 49,876,625 49,876,625 1.2
50,000,000 Preferred Receivables Funding Corp., 4.25%
due 7/20/1994 49,881,944 49,881,944 1.3
Siemens Corp.:
40,000,000 4.25% due 7/08/1994 39,962,222 39,962,222 1.0
50,000,000 4.26% due 8/08/1994 49,769,250 49,769,250 1.2
50,000,000 UBS Finance(Delaware), Inc., 4.23% due 7/21/1994 49,876,625 49,876,625 1.2
Total Short-Term Securities 801,937,941 801,937,941 19.9
Total Investments $3,479,473,318 4,043,247,441 100.6
==============
Liabilities in Excess
of Other Assets (25,560,591) (0.6)
-------------- ------
Net Assets $4,017,686,850 100.0%
============== ======
<FN>
(a)Formerly Philadelphia Electric Co.
++Non-income producing security.
*American Depositary Receipt(ADR).
**Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
See Notes to Financial Statements.
</TABLE>
46
<PAGE> 88
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of June 30, 1994
<CAPTION>
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$3,479,473,318)(Note 1a) $4,043,247,441
Receivables:
Capital shares sold $ 13,609,181
Dividends 8,170,765 21,779,946
--------------
Prepaid registration fees and other assets(Note 1d) 73,525
--------------
Total assets 4,065,100,912
--------------
Liabilities: Payables:
Securities purchased 31,274,427
Capital shares redeemed 11,811,167
Distributor(Note 2) 1,452,545
Investment adviser(Note 2) 1,367,061 45,905,200
--------------
Accrued expenses and other liabilities 1,508,862
--------------
Total liabilities 47,414,062
--------------
Net Assets: Net assets $4,017,686,850
==============
Net Assets Class A Common Stock, $0.10 par value, 200,000,000 shares authorized $ 9,809,582
Consist of: Class B Common Stock, $0.10 par value, 200,000,000 shares authorized 7,627,611
Paid-in capital in excess of par 3,269,539,318
Undistributed investment income--net 45,703,737
Undistributed realized capital gains on investments and foreign currency
transactions--net 121,232,479
Unrealized appreciation on investments and foreign currency transactions--net 563,774,123
--------------
Net assets $4,017,686,850
==============
Net Asset Value: Class A--Based on net assets of $2,272,982,770 and 98,095,819 shares
outstanding $ 23.17
==============
Class B--Based on net assets of $1,744,704,080 and 76,276,115 shares
outstanding $ 22.87
==============
See Notes to Financial Statements.
</TABLE>
47
<PAGE> 89
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended June 30, 1994
<CAPTION>
<S> <S> <C> <C>
Investment Dividends (net of $1,615,127 foreign withholding tax) $ 98,527,728
Income Interest and discount earned 25,933,615
(Notes 1b & 1c): Other 232,965
--------------
Total income 124,694,308
--------------
Expenses: Distribution and account maintenance fees--Class B(Note 2) 15,925,964
Investment advisory fees(Note 2) 15,452,148
Transfer agent fees--Class A(Note 2) 2,044,053
Transfer agent fees--Class B(Note 2) 1,771,029
Registration fees(Note 1d) 307,224
Printing and shareholder reports 282,006
Accounting services(Note 2) 185,215
Custodian fees 146,718
Professional fees 76,833
Directors' fees and expenses 41,369
Amortization of organization expenses(Note 1d) 11,525
Other 27,131
--------------
Total expenses 36,271,215
--------------
Investment income--net 88,423,093
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net $ 163,325,790
(Loss) on Foreign currency transactions--net (4,833) 163,320,957
Investments & --------------
Foreign Currency Change in unrealized appreciation on investments--net (76,944,519)
Transactions--Net --------------
(Note 1c, 1e & 3): Net realized and unrealized gain on investments and foreign currency
transactions 86,376,438
--------------
Net Increase in Net Assets Resulting from Operations $ 174,799,531
==============
See Notes to Financial Statements.
</TABLE>
48
<PAGE> 90
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended June 30,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 88,423,093 $ 90,239,186
Realized gain on investments and foreign currency transactions--net 163,320,957 81,147,456
Change in unrealized appreciation/depreciation on investments--net (76,944,519) 340,508,739
-------------- --------------
Net increase in net assets resulting from operations 174,799,531 511,895,381
-------------- --------------
Dividends & Investment income--net:
Distributions Class A (62,663,619) (52,495,436)
To Shareholders Class B (30,680,760) (23,460,921)
(Note 1f): Realized gain on investments--net:
Class A (64,558,638) (29,779,683)
Class B (45,745,511) (19,244,373)
-------------- --------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (203,648,528) (124,980,413)
-------------- --------------
Capital Share Net increase in net assets derived from capital share transactions 639,523,156 285,314,244
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 610,674,159 672,229,212
Beginning of year 3,407,012,691 2,734,783,479
-------------- --------------
End of year* $4,017,686,850 $3,407,012,691
============== ==============
<FN>
*Undistributed investment income--net $ 45,703,737 $ 50,625,023
============== ==============
See Notes to Financial Statements.
</TABLE>
49
<PAGE> 91
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 23.31 $ 20.57 $ 18.90 $ 19.32 $ 20.03
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .62 .71 .70 .87 .95
Realized and unrealized gain(loss) on
investments--net .67 3.03 2.02 (.02) (.56)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.29 3.74 2.72 .85 .39
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.70) (.64) (.76) (.97) (.87)
Realized gain on investments--net (.73) (.36) (.29) (.30) (.23)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (1.43) (1.00) (1.05) (1.27) (1.10)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 23.17 $ 23.31 $ 20.57 $ 18.90 $ 19.32
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 5.68% 19.03% 15.08% 5.39% 1.77%
Return:* ========== ========== ========== ========== ==========
Ratios to Expenses .53% .54% .58% .59% .57%
Average Net ========== ========== ========== ========== ==========
Assets: Investment income--net 2.76% 3.48% 3.52% 4.76% 5.05%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $2,272,983 $2,023,078 $1,670,430 $1,490,657 $1,556,257
Data: ========== ========== ========== ========== ==========
Portfolio turnover 21.79% 20.85% 21.24% 20.11% 4.88%
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
50
<PAGE> 92
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended June 30,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 23.04 $ 20.35 $ 18.71 $ 19.12 $ 19.92
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .42 .53 .50 .66 .78
Realized and unrealized gain(loss) on
investments--net .62 2.96 2.00 .01 (.59)
---------- ---------- ---------- ---------- ----------
Total from investment operations 1.04 3.49 2.50 .67 .19
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.48) (.44) (.57) (.78) (.76)
Realized gain on investments--net (.73) (.36) (.29) (.30) (.23)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (1.21) (.80) (.86) (1.08) (.99)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 22.87 $ 23.04 $ 20.35 $ 18.71 $ 19.12
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 4.61% 17.81% 13.90% 4.33% 0.73%
Return:* ========== ========== ========== ========== ==========
Ratios to Expenses, excluding distribution fees .55% .56% .60% .61% .60%
Average Net ========== ========== ========== ========== ==========
Assets: Expenses 1.55% 1.56% 1.60% 1.61% 1.60%
========== ========== ========== ========== ==========
Investment income--net 1.75% 2.47% 2.50% 3.73% 4.03%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year(in thousands) $1,744,704 $1,383,935 $1,064,354 $ 874,318 $ 922,126
Data: ========== ========== ========== ========== ==========
Portfolio turnover 21.79% 20.85% 21.24% 20.11% 4.88%
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
51
<PAGE> 93
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Basic Value Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-
end management investment company. The shares of the Fund are
divided into Class A Shares and Class B Shares. Class A Shares
are sold with a front-end sales charge. Class B Shares may be
subject to a contingent deferred sales charge. Both classes of
shares have identical voting, dividend, liquidation and other
rights and the same terms and conditions, except that Class B
Shares bear certain expenses related to the distribution of such
shares and have exclusive voting rights with respect to matters
relating to such distribution expenditures. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are
traded on stock exchanges are valued at the last sale price as of
the close of business on the day the securities are being valued
or, lacking any sales, at the mean between closing bid and asked
prices. Securities traded in the over-the-counter market are valued
at the last quoted bid prices at the close of trading on each day
by brokers that make markets in the securities. Portfolio securities
which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative
market. Short-term securities with remaining maturities of sixty
days or less are valued at amortized cost, which approximates market
value. Options written by the Fund are valued at the last sale price
or, lacking any sales, the last offering price. Securities and assets
for which market quotations are not readily available are valued
at fair value as determined in good faith by or under the direction
of the Fund's Board of Directors. Written and purchased options are
non-income producing investments.
(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required. Under the applicable foreign tax law,
a withholding tax may be withheld on interest, dividends, and
capital gains at various rates.
(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are
entered into (the trade dates). Dividend income is recorded on the
ex-dividend date, except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the Fund is informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(d) Prepaid registration fees--Prepaid registration fees are
charged to expense as the related shares are issued.
(e) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing
when recognized. Assets and liabilities denominated in foreign
currencies are valued at the exchange rate at the end of the
period. Foreign currency transactions are the result of settling
(realized) or valuing (unrealized) assets or liabilities
expressed in foreign currencies into US dollars. Realized and
unrealized gains or losses from investments include the effects
of foreign exchange rates on investments.
The Fund is authorized to enter into forward foreign exchange
contracts as a hedge against either specific transactions or
portfolio positions. Such contracts are not entered on the Fund's
records. However, the effect on operations is recorded from the
date the Fund enters into such contracts. Premium or discount is
amortized over the life of the contracts.
(f) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). Effective January 1, 1994,
the investment advisory business of FAM was reorganized from a
corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of FAM
52
<PAGE> 94
was vested with Merrill Lynch and Co., Inc. ("ML & Co."). The
general partner of FAM is Princeton Services, Inc., an indirect
wholly-owned subsidiary of ML & Co. The limited partners are
ML & Co. and Fund Asset Management, Inc. ("FAMI"), which is also
an indirect wholly-owned subsidiary of ML & Co. The Fund has
also entered into a Distribution Agreement and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of Merrill Lynch
Investment Management, Inc.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund.
For such services, the Fund pays a monthly fee based upon the
average daily value of the Fund's daily net assets at the following
annual rates: 0.60% of the Fund's average daily net assets not
exceeding $100 million; 0.50% of average daily net assets
exceeding $100 million but not exceeding $200 million; and 0.40%
of average daily net assets in excess of $200 million. The
Investment Advisory Agreement obligates FAM to reimburse the Fund
to the extent the Fund's expenses (excluding interest, taxes,
distribution fees, brokerage fees and commissions, and
extraordinary items) exceed 2.5% of the Fund's first $30 million
of average daily net assets, 2.0% of the Fund's next $70 million
of average daily net assets, and 1.5% of the average daily net
assets in excess thereof. No fee payment will be made to the
Investment Adviser during any fiscal year which will cause such
expenses to exceed the pro rata expense limitation at the time of
such payment.
The Fund has adopted a Plan of Distribution (the "Plan") in
accordance with Rule 12b-1 under the Investment Company Act of
1940 pursuant to which the Fund pays the Distributor an ongoing
account maintenance fee and distribution fee, which are accrued
daily and paid monthly, at the annual rates of 0.25% and 0.75%,
respectively, of the average daily net assets of the Class B
Shares of the Fund. This fee is to compensate the Distributor for
services it provides and the expense borne by the Distributor
under the Distribution Agreement. As authorized by the Plan, the
Distributor has entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S") which provides for the
compensation of MLPF&S for providing distribution-related services
to the Fund.
During the year ended June 30, 1994, MLFD earned underwriting
discounts of $216,022, and MLPF&S earned dealer concessions of
$3,539,580 on sales of the Fund's Class A Shares. MLPF&S also
received contingent deferred sales charges of $1,189,344 relating
to transactions in Class B Shares and $109,200 in commissions on
the execution of portfolio security transactions for the Fund
during the year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary
of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAMI, FAM, MLPF&S, FDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended June 30, 1994 were $1,012,717,840
and $656,985,312, respectively.
Net realized and unrealized gains (losses) as of
June 30, 1994 were as follows:
Realized
Gain Unrealized
(Losses) Gains
Long-term investments $163,325,790 $563,774,123
Foreign currency
transactions (4,833) --
------------ ------------
Total $163,320,957 $563,774,123
============ ============
As of June 30, 1994, net unrealized appreciation for
Federal income tax purposes aggregated $561,183,340,
of which $723,695,304 related to appreciated securities
and $162,511,964 related to depreciated securities.
At June 30, 1994, the aggregate cost of investments
for Federal income tax purposes was $3,482,064,101.
53
<PAGE> 95
4. Capital Share Transactions:
Net increase in net assets derived from capital share
transactions was $639,523,156 and $285,314,244 for the years
ended June 30, 1994 and June 30, 1993, respectively.
Transactions in capital shares for Class A and Class B Shares
were as follows:
Class A Shares for the Year
Ended June 30, 1994 Shares Dollar Amount
Shares sold 22,051,928 $518,481,972
Shares issued to shareholders
in reinvestment of dividends
and distributions to
shareholders 4,979,090 114,208,364
------------ ------------
Total issued 27,031,018 632,690,336
Shares redeemed (15,739,255) (370,180,112)
------------ ------------
Net increase 11,291,763 $262,510,224
============ ============
Class A Shares for the Year
Ended June 30, 1993 Shares Dollar Amount
Shares sold 15,789,908 $338,060,653
Shares issued to shareholders
in reinvestment of dividends
and distributions to
shareholders. 3,634,557 73,353,178
------------ ------------
Total issued 19,424,465 411,413,831
Shares redeemed (13,832,732) (293,122,519)
------------ ------------
Net increase 5,591,733 $118,291,312
============ ============
Class B Shares for the Year
Ended June 30, 1994 Shares Dollar Amount
Shares sold 25,498,592 $594,651,037
Shares issued to shareholders
in reinvestment of dividends
and distributions to
shareholders 2,969,021 67,552,341
------------ ------------
Total issued 28,467,613 662,203,378
Shares redeemed (12,261,811) (285,190,446)
------------ ------------
Net increase 16,205,802 $377,012,932
============ ============
Class B Shares for the Year
Ended June 30, 1993 Shares Dollar Amount
Shares sold 17,381,247 $368,588,150
Shares issued to shareholders
in reinvestment of dividends
and distributions to
shareholders. 1,878,067 37,667,375
------------ ------------
Total issued 19,259,314 406,255,525
Shares redeemed (11,495,277) (239,232,593)
------------ ------------
Net increase 7,764,037 $167,022,932
============ ============
54
<PAGE> 96
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies..... 2
Management of the Fund................ 8
Directors and Officers.............. 8
Management and Advisory
Arrangements...................... 9
Purchase of Shares.................... 11
Initial Sales Charge Alternatives --
Class A and Class D Shares....... 11
Reduced Initial Sales Charges....... 12
Distribution Plans.................. 16
Limitations on the Payment of
Deferred Sales Charges........... 17
Redemption of Shares.................. 18
Deferred Sales Charges --
Class B Shares................... 18
Portfolio Transactions and
Brokerage........................... 19
Determination of Net Asset Value...... 21
Shareholder Services.................. 22
Investment Account.................. 22
Automatic Investment Plans.......... 22
Automatic Reinvestment of Dividends
and Capital Gains
Distributions.................... 22
Systematic Withdrawal Plans --
Class A and Class D Shares....... 23
Retirement Plans.................... 24
Exchange Privilege.................. 24
Dividends, Distributions and Taxes.... 36
Dividends and Distributions......... 36
Taxes............................... 36
Tax Treatment of Options
Transactions..................... 37
Performance Data...................... 38
General Information................... 40
Description of Shares............... 40
Computation of Offering Price
per Share........................ 41
Independent Auditors................ 41
Custodian........................... 41
Transfer Agent...................... 41
Legal Counsel....................... 41
Reports to Shareholders............. 42
Additional Information.............. 42
Independent Auditors' Report.......... 43
Financial Statements.................. 44
</TABLE>
Code #10124-1094
- ------------------------------------------------------
[LOGO]
Merrill Lynch
Basic Value Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL INFORMATION
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 97
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission file due to ASCII-incompatibility and cross-references
this material to the location of each occurence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE> 98
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the periods in the ten-year period ended
June 30, 1994.
Contained in Part B:
Schedule of Investments as of June 30, 1994.
Statement of Assets and Liabilities as of June 30, 1994.
Statement of Operations for the year ended June 30, 1994.
Statements of Changes in Net Assets for the years ended June 30, 1994 and
1993.
Financial Highlights for each of the years in the five-year period ended
June 30, 1994.
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------------
<S> <C> <C>
1(a) -- Articles of Incorporation of Registrant.(a)
(b) -- Articles of Amendment to Articles of Incorporation of Registrant.(f)
2 -- By-Laws of Registrant.(j)
3 -- None.
4(a) -- Portions of the Articles of Incorporation and By-Laws of Registrant defining the
rights of holders of shares of common stock of Registrant.(g)
(b) -- Specimen certificate for shares of Class A common stock of Registrant.(f)
(c) -- Specimen certificate for shares of Class B common stock of Registrant.(f)
5(a) -- Investment Advisory Agreement between Registrant and Fund Asset Management.(b)
(b) -- Supplement to Investment Advisory Agreement between Registrant and Fund Asset
Management, L.P.(j)
6(a)(1) -- Class A Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(c)
(a)(2) -- Form of Revised Class A Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc. (including Form of Selected Dealers Agreement).
(b) -- Class B Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (including Form of Selected Dealers Agreement).(c)
(c) -- Form of Class C Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including Form of Selected Dealers Agreement).(j)
(d) -- Form of Class D Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including Form of Selected Dealers Agreement).(j)
(e) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor,
Inc. with respect to the Merrill Lynch Mutual Fund Adviser Program.(h)
7 -- None.
8 -- Custodian Agreement between Registrant and National Westminster Bank NJ.(d)
9 -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Financial Data Services, Inc.(e)
</TABLE>
C-1
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------------
<S> <C> <C>
10 -- None
11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
12 -- None.
13 -- None.
14 -- None.
15(a) -- Amended and Restated Class B Distribution Plan and Class B Distribution Plan
Sub-Agreement of Registrant.(h)
(b) -- Form of Class C Distribution Plan and Class C Distribution Plan Sub-Agreement of
Registrant.(j)
(c) -- Form of Class D Distribution Plan and Class D Distribution Plan Sub-Agreement of
Registrant.(j)
16(a) -- Schedule for computation of each performance quotation for Class A shares
provided in the Registration Statement in response to Item 22.(f)
(b) -- Schedule for computation of each performance quotation for Class B shares
provided in the Registration Statement in response to Item 22.(i)
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
</TABLE>
- ---------------
(a) Filed as Exhibit 1 to Registrant's Registration Statement on Form S-5, filed
March 29, 1977.
(b) Filed as Exhibit 5 to Amendment No. 3 to Registrant's Registration Statement
on Form S-5, filed May 27, 1977.
(c) Filed as Exhibit 6 to Amendment No. 3 to Registrant's Registration Statement
on Form S-5, filed May 27, 1977.
(d) Filed as an exhibit to Amendment No. 3 to Registrant's Registration
Statement on Form S-5, filed May 27, 1977.
(e) Filed as an exhibit to Post-Effective Amendment No. 14 to Registrant's
Registration Statement on Form N-1A, filed October 30, 1987.
(f) Filed as an exhibit to Post-Effective Amendment No. 15 to Registrant's
Registration Statement on Form N-1A, filed October 11, 1988.
(g) Reference is made to Article III, Article V, Article VI (sections 2, 3, 4
and 5), Article VII, Article VIII, and Article X of the Registrant's
Articles of Incorporation, previously filed as Exhibit (1), to the
Registration Statement; and to Article II, Article III (sections 1, 3, 5, 6
and 17), Article VI, Article VII, Article XII, Article XIII, Article XIV
and Article XV of the Registrant's By-Laws filed as Exhibit (2) to the
Registration Statement.
(h) Filed on October 28, 1993 as an Exhibit to Post-Effective Amendment No. 21
to Registrant's Registration Statement on Form N-1A (File No. 2-58521)
under the Securities Act of 1933.
(i) Filed as an exhibit to Post-Effective Amendment No. 16 to Registrant's
Registration Statement on Form N-1A, filed October 27, 1990.
(j) Filed as an exhibit to Post-Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-1A, filed September 7, 1994.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
C-2
<PAGE> 100
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
TITLE OF CLASS AT SEPTEMBER 30, 1994
- -------------------------------------------------------------------------- ----------------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per share................. 12,318
Class B Shares of Common Stock, par value $0.10 per share................. 6,065
Class C Shares of Common Stock, par value $0.10 per share................. 0
Class D Shares of Common Stock, par value $0.10 per share................. 0
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A, Class B, Class C and Class D
Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may be
concerned, Article VI of the Registrant's By-Laws provides that such payments
will be made only on the following conditions: (i) advances may be made only on
receipt of a written affirmation of such person's good faith belief that the
standard of conduct necessary for indemnification has been met and a written
undertaking to repay any such advance if it is ultimately determined that the
standard of conduct has not been met; and (ii) (a) such promise must be secured
by a security for the undertaking in form and amount acceptable to the
Registrant, (b) the Registrant is insured against losses arising by receipt by
the advance, or (c) a majority of a quorum of the Registrant's disinterested
non-party Directors, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that at the time the
advance is proposed to be made, there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled to
indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933 (the "Act"),
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Fund Asset Management, L.P. (the "Manager") acts as the investment adviser
for the following investment companies: Apex Municipal Fund, Inc., CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial Institutions Series
Trust, Income Opportunities
C-3
<PAGE> 101
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch
Funds for Institutions Series, Merrill Lynch Multi-State Municipal Series Trust,
Merrill Lynch Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., MuniAssets
Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program,
Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida
Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc.,
MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc. Merrill Lynch Asset
Management, L.P. ("MLAM"), an affiliate of the Manager, acts as investment
adviser for the following registered investment companies: Convertible Holdings,
Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital
Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund
for Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc.,
Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust,
Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund,
Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Institutional Intermediate Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate
Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global
Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill
Lynch Variable Series Funds, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager, MLAM, Princeton Services, Inc. ("Princeton Services"), Merrill
Lynch Funds Distributor, Inc. ("MLFD") and Princeton Administrators, L.P. is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch &
Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey Street,
New York, New York 10281. The address of Financial Data Services, Inc. ("FDS")
is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
C-4
<PAGE> 102
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
July 1, 1992, for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraph, and Messrs.
Durnin, Giordano, Harvey, Kirstein, Monagle and Ms. Griffin are directors,
trustees or officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH PROFESSION, VOCATION
NAME THE MANAGER OR EMPLOYMENT
- ------------------------------ ------------------------- -------------------------------------
<S> <C> <C>
ML & Co. ..................... Limited Partner Financial Services Holding Company
Fund Asset Management,
Inc. ....................... Limited Partner Investment Advisory Services
Princeton Services............ General Partner General Partner of MLAM
Arthur Zeikel................. President and Chief President and Chief Investment
Investment Officer Officer of MLAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.; Executive
Vice President of Merrill Lynch
Terry K. Glenn................ Executive Vice President Executive Vice President of MLAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
President of Princeton
Administrators, L.P.
Bernard J. Durnin............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Vincent R. Giordano........... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Elizabeth Griffin............. Senior Vice President Senior Vice President of MLAM
Norman R. Harvey.............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
N. John Hewitt................ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Philip L. Kirstein............ Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of MLAM; Senior
Secretary Vice President, General Counsel,
Director and Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss............... Senior Vice President and Senior Vice President and Controller
Controller of MLAM; Senior Vice President and
Controller of Princeton Services
Stephen M. M. Miller.......... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle, Jr. ....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Gerald M. Richard............. Senior Vice President and Senior Vice President and Treasurer
Treasurer of MLAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
</TABLE>
C-5
<PAGE> 103
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH PROFESSION, VOCATION
NAME THE MANAGER OR EMPLOYMENT
- ------------------------------ ------------------------- -------------------------------------
<S> <C> <C>
Richard L. Rufener............ Senior Vice President Senior Vice President of MLAM; Vice
President of MLFD; Senior Vice
President of Princeton Services
Ronald L. Welburn............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
Anthony Wiseman............... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton
Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the investment companies referred to in the first paragraph of Item 28 except
Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities Fund, CMA
Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, Convertible Holdings, Inc., The Corporate Fund Accumulation
Program, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund,
Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc.,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
California Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured
Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund,
Inc., MuniVest Pennsylvania Fund, MuniYield Arizona Fund, Inc., MuniYield
Arizona Fund II, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Insured Fund II,
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Crook,
Aldrich, Breen, Graczyk, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(3)
(2) POSITIONS(S) AND
(1) POSITIONS(S) AND OFFICE(S) OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
- ---------------------------------------- ----------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn.......................... President and Director Executive Vice President
Arthur Zeikel........................... Director President and Director
Philip L. Kirstein...................... Director None
William E. Aldrich...................... Senior Vice President None
Robert W. Crook......................... Senior Vice President None
Kevin P. Boman.......................... Vice President None
Michael J. Brady........................ Vice President None
William M. Breen........................ Vice President None
Sharon Creveling........................ Vice President and
Assistant Treasurer None
Mark A. DeSario......................... Vice President None
James T. Fatseas........................ Vice President None
Stanley Graczyk......................... Vice President None
Michelle T. Lau......................... Vice President None
Debra W. Landsman-Yaros................. Vice President None
</TABLE>
C-6
<PAGE> 104
<TABLE>
<CAPTION>
(3)
(2) POSITIONS(S) AND
(1) POSITIONS(S) AND OFFICE(S) OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
- ---------------------------------------- ----------------------------- -------------------------
<S> <C> <C>
Gerald M. Richard....................... Vice President and Treasurer Treasurer
Richard L. Rufener...................... Vice President None
Salvatore Venezia....................... Vice President None
William Wasel........................... Vice President None
Robert Harris........................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management of the
Fund -- Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, the Registrant is
not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not Applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-7
<PAGE> 105
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Township of Plainsboro, and
the State of New Jersey, on the 10th day of October, 1994.
MERRILL LYNCH BASIC VALUE FUND, INC.
(Registrant)
By: /s/ ARTHUR ZEIKEL
------------------------------------
(Arthur Zeikel, President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE(S)
- ----------------------------------- --------------------------------- --------------------
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Director October 10, 1994
- ----------------------------------- (Principal Executive Officer)
(Arthur Zeikel)
/s/ GERALD M. RICHARD Treasurer (Principal Financial October 10, 1994
- ----------------------------------- and Accounting Officer)
(Gerald M. Richard)
DONALD CECIL* Director
- -----------------------------------
(Donald Cecil)
M. COLYER CRUM* Director
- -----------------------------------
(M. Colyer Crum)
EDWARD H. MEYER* Director
- -----------------------------------
(Edward H. Meyer)
JACK B. SUNDERLAND* Director
- -----------------------------------
(Jack B. Sunderland)
J. THOMAS TOUCHTON* Director
- -----------------------------------
(J. Thomas Touchton)
*By: /s/ ARTHUR ZEIKEL October 10, 1994
------------------------------
(Arthur Zeikel,
Attorney-in-Fact)
</TABLE>
C-8
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<S> <C> <C>
6(a)(2) -- Form of Revised Class A Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement)
11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant
17(a) -- Financial Data Schedule for Class A Shares
17(b) -- Financial Data Schedule for Class B Shares
</TABLE>
<PAGE> 1
EXHIBIT 6(A)(2)
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October 1994 between
MERRILL LYNCH BASIC VALUE FUND, INC., a Maryland corporation (the
"Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a Delaware
corporation (the "Distributor").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), as an
open-end investment company, and it is affirmatively in the
interest of the Fund to offer its shares for sale continuously;
and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Class A shares of common stock in the Fund.
NOW, THEREFORE, the parties agree as follows:
<PAGE> 2
Section 1. Appointment of the Distributor. The Fund hereby
appoints the Distributor as the principal underwriter and
distributor of the Fund to sell Class A shares of common stock in
the Fund (sometimes herein referred to as "Class A shares") to
eligible investors (as defined below) and hereby agrees during
the term of this Agreement to sell Class A shares of the Fund to
the Distributor upon the terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Fund to act as
principal underwriter and distributor, except that:
(a) The Fund may, upon written notice to the Distributor,
from time to time designate other principal underwriters and
distributors of Class A shares with respect to areas other than
the United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class A shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
(b) The exclusive right granted to the Distributor to
purchase Class A shares from the Fund shall not apply to Class A
shares issued in connection with the merger or consolidation of
any other investment company or personal holding company with the
Fund or the acquisition by purchase or otherwise of all (or sub-
2
<PAGE> 3
stantially all) the assets or the outstanding Class A shares of
any such company by the Fund.
(c) Such exclusive right also shall not apply to Class A
shares issued by the Fund pursuant to reinvestment of dividends
or capital gains distributions.
(d) Such exclusive right also shall not apply to Class A
shares issued by the Fund pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class A shares as shall be agreed between the Fund and the
Distributor from time to time.
Section 3. Purchase of Class A shares from the Fund.
(a) The Distributor shall have the right to buy from the
Fund the Class A shares needed, but not more than the Class A
shares needed (except for clerical errors in transmission) to
fill unconditional orders for Class A shares of the Fund placed
with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class A shares shall be those
persons so identified in the currently effective prospectus and
statement of additional information of the Fund (the "prospectus"
and "statement of additional information", respectively) under
the Securities Act of 1933, as amended (the "Securities Act"),
relating to such Class A shares ("eligible investors"). The
price which the Distributor shall pay for the Class A shares so
purchased from the Fund shall be the net asset value, determined
as set forth in Section 3(d) hereof, used in determining the
public offering price on which such orders were based.
3
<PAGE> 4
(b) The Class A shares are to be resold by the Distributor
to eligible investors at the public offering price, as set forth
in Section 3(c) hereof, or to securities dealers having
agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.
(c) The public offering price(s) of the Class A shares,
i.e., the price per share at which the Distributor or selected
dealers may sell Class A shares to eligible investors, shall be
the public offering price as set forth in the prospectus and
statement of additional information relating to such Class A
shares, but not to exceed the net asset value at which the
Distributor is to purchase the Class A shares, plus a sales
charge not to exceed 5.25% of the public offering price (5.54% of
the net amount invested), subject to reductions for volume
purchases. Class A shares may be sold to certain Directors,
officers and employees of the Fund, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and to certain
other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the
prospectus and statement of additional information. If the
public offering price does not equal an even cent, the public
offering price may be adjusted to the nearest cent. All payments
to the Fund hereunder shall be made in the manner set forth in
Section 3(f).
4
<PAGE> 5
(d) The net asset value of Class A shares shall be
determined by the Fund or any agent of the Fund in accordance
with the method set forth in the prospectus and statement of
additional information of the Fund and guidelines established by
the Directors.
(e) The Fund shall have the right to suspend the sale of
its Class A shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Fund
shall also have the right to suspend the sale of its Class A
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Fund, makes it
impracticable or inadvisable to sell the Class A shares.
(f) The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Class A shares received by the Distributor. Any order
may be rejected by the Fund; provided, however, that the Fund
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class A shares from
eligible investors. The Fund (or its agent) will confirm orders
upon their receipt, will make appropriate book entries and, upon
receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class A shares
pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds. The
5
<PAGE> 6
Distributor agrees to cause such payment and such instructions to
be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class A shares by
the Fund.
(a) Any of the outstanding Class A shares may be tendered
for redemption at any time, and the Fund agrees to repurchase or
redeem the Class A shares so tendered in accordance with its
obligations as set forth in Article VII of its Articles of
Incorporation, as amended from time to time, and in accordance
with the applicable provisions set forth in the prospectus and
statement of additional information. The price to be paid to
redeem or repurchase the Class A shares shall be equal to the net
asset value calculated in accordance with the provisions of
Section 3(d) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in
the prospectus and statement of additional information of the
Fund. All payments by the Fund hereunder shall be made in the
manner set forth below. The redemption or repurchase by the Fund
of any of the Class A shares purchased by or through the
Distributor will not affect the sales charge secured by the
Distributor or any selected dealer in the course of the original
sale, except that if any Class A shares are tendered for
redemption or repurchase within seven business days after the
date of the confirmation of the original purchase, the right to
the sales charge shall be forfeited by the Distributor and the
selected dealer which sold such Class A shares.
6
<PAGE> 7
The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor in New York Clearing House funds on or before the
seventh business day subsequent to its having received the notice
of redemption in proper form. The proceeds of any redemption of
shares shall be paid by the Fund as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall
be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class A shares or payment may be
suspended at times when the New York Stock Exchange is closed,
when trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the
Distributor may reasonably request for use in connection with the
distribution of Class A shares of the Fund, and this shall
include, upon request by the Distributor, one certified copy of
all financial statements prepared for the Fund by independent
public
7
<PAGE> 8
accountants. The Fund shall make available to the Distributor
such number of copies of the prospectus and statement of
additional information as the Distributor shall reasonably
request.
(b) The Fund shall take, from time to time, but subject to
any necessary approval of the Class A shareholders, all necessary
action to fix the number of authorized Class A shares and such
steps as may be necessary to register the same under the
Securities Act, to the end that there will be available for sale
such number of Class A shares as the Distributor may reasonably
be expected to sell.
(c) The Fund shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
A shares for sale under the securities laws of such states as the
Distributor and the Fund may approve. Any such qualification may
be withheld, terminated or withdrawn by the Fund at any time in
its discretion. As provided in Section 8(c) hereof, the expense
of qualification and maintenance of qualification shall be borne
by the Fund. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be
required by the Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
8
<PAGE> 9
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class A shares of the Fund but shall not be
obligated to sell any specific number of Class A shares. The
services of the Distributor to the Fund hereunder are not to be
deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other
investment companies so long as the performance of its
obligations hereunder is not impaired thereby.
(b) In selling the Class A shares of the Fund, the
Distributor shall use its best efforts in all respects duly to
conform with the requirements of all Federal and state laws
relating to the sale of such securities. Neither the Distributor
nor any selected dealer, as defined in Section 7 hereof, nor any
other person is authorized by the Fund to give any information or
to make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Fund, for the confirmation of
sales to eligible investors and selected dealers, the collection
of amounts payable by eligible investors and selected dealers on
such sales, and the cancellation of unsettled transactions, as
may be necessary to comply with the requirements of the National
9
<PAGE> 10
Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice
("selected dealers") for the sale of Class A shares and fix
therein the portion of the sales charge which may be allocated to
the selected dealers; provided that the Fund shall approve the
forms of agreements with dealers and the dealer compensation set
forth therein. Class A shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s)
set forth in the prospectus and statement of additional
information. The form of agreement with selected dealers to be
used during the continuous offering of the Class A shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class A shares only to such selected dealers as are
members in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required
registration statements and/or prospectuses and statements of
additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
10
<PAGE> 11
materials to Class A shareholders (including but not limited to
the expense of setting in type any such registration statements,
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial
consultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class A
shares to selected dealers or eligible investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class A shares for sale to
eligible investors and any expenses of advertising incurred by
the Distributor in connection with such offering.
(c) The Fund shall bear the cost and expenses of
qualification of the Class A shares for sale pursuant to this
Agreement and, if necessary or advisable in connection therewith,
of qualifying the Fund as a broker or dealer in such states of
the United States or other jurisdictions as shall be selected by
the Fund and the Distributor pursuant to Section 5(c) hereof and
the cost and expenses payable to each such state for continuing
11
<PAGE> 12
qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the
Distributor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class A shares, which may be
based upon the Securities Act, or on any other statute or at
common law, on the ground that the registration statement or
related prospectus and statement of additional information, as
from time to time amended and supplemented, or an annual or
interim report to shareholders of the Fund, includes an untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with,
information furnished to the Fund in connection therewith by or
on behalf of the Distributor; provided, however, that in no case
(i) is the indemnity of the Fund in favor of the Distributor and
any such controlling persons to be deemed to protect such
Distributor or any such controlling persons thereof against any
liability to the Fund or its security holders to which the
Distributor or any such controlling persons would otherwise be
subject by reason of
12
<PAGE> 13
willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of the reckless
disregard of their obligations and duties under this Agreement;
or (ii) is the Fund to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made
against the Distributor or any such controlling persons, unless
the Distributor or such controlling persons, as the case may be,
shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Fund will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
the Fund elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Fund elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses of any
13
<PAGE> 14
additional counsel retained by them, but in case the Fund does
not elect to assume the defense of any such suit, it will
reimburse the Distributor or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund shall
promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or
Directors in connection with the issuance or sale of any of the
Class A shares.
(b) The Distributor shall indemnify and hold harmless the
Fund and each of its Directors and officers and each person, if
any, who controls the Fund against any loss, liability, claim,
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on
behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to Class A shareholders. In case any
action shall be brought against the Fund or any person so
indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties
given to the Fund, and the Fund and each person so indemnified
shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
14
<PAGE> 15
Section 10. Merrill Lynch Mutual Fund Adviser Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1995 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Directors or
by the vote of a majority of the outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Directors
who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose
of voting on such approval.
This Agreement may be terminated at any time, without the
payment of any penalty, by the Directors or by vote of a majority
of the outstanding voting securities of the Fund, or by the
Distributor, on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
15
<PAGE> 16
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is
specifically approved by (i) the Directors or by the vote of a
majority of outstanding voting securities of the Fund and (ii) by
the vote of a majority of those Directors of the Fund who are not
parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on
such approval.
Section 13. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. This Agreement supersedes the prior
Distribution Agreement entered into by the parties hereto with
respect to the Class A shares of the Fund.
16
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH BASIC VALUE FUND, INC.
By
------------------------------------
Title: Executive Vice President
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
------------------------------------
Title: Vice President
17
<PAGE> 18
EXHIBIT A
MERRILL LYNCH BASIC VALUE FUND, INC.
CLASS A SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Basic Value Fund, Inc., a
Maryland corporation (the "Fund"), pursuant to which it acts as
the distributor for the sale of Class A shares of common stock,
par value $0.10 per share (herein referred to as "Class A
shares"), of the Fund and as such has the right to distribute
Class A shares of the Fund for resale. The Fund is an open-end
investment company registered under the Investment Company Act of
1940, as amended, and its Class A shares are registered under the
Securities Act of 1933, as amended. You have received a copy of
the Class A shares Distribution Agreement (the "Distribution
Agreement") between ourself and the Fund and reference is made
herein to certain provisions of such Distribution Agreement. The
terms "Prospectus" and "Statement of Additional Information" used
herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and
Exchange Commission which is part of the most recent effective
registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class A shares of the Fund for resale to investors
identified in the Prospectus and Statement of Additional
Information as eligible to purchase Class A shares ("eligible
investors") upon the following terms and conditions:
1. In all sales of these Class A shares to eligible
investors, you shall act as dealer for your own account and in no
transaction shall you have any authority to act as agent for the
Fund, for us or for any other member of the Selected Dealers
Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time
to time agree, in which case you shall have authority to offer
and sell shares, as agent for the Fund, to participants in such
program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
1
<PAGE> 19
of orders shall be subject to Section 5 hereof and instructions
which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor
or the Fund in the sole discretion of either. The minimum
initial and subsequent purchase requirements are as set forth in
the current Prospectus and Statement of Additional Information of
the Fund.
3. The sales charges for sales to eligible investors,
computed as percentages of the public offering price and the
amount invested, and the related discount to Selected Dealers are
as follows:
<TABLE>
<CAPTION>
Discount to
Sales Charge Selected
Sales Charge as Percentage* Dealers as
as Percentage of the Net Percentage
of the Amount of the
Amount of Purchase Offering Price Invested Offering Price
------------------ -------------- ---------- -----------
<S> <C> <C> <C>
Less than $25,000......... 5.25% 5.54% 5.00%
$25,000 but less
than $50,000............. 4.75% 4.99% 4.50%
$50,000 but less
than $100,000............ 4.00% 4.17% 3.75%
$100,000 but less
than $250,000............ 3.00% 3.09% 2.75%
$250,000 but less
than $1,000,000.......... 2.00% 2.04% 1.80%
$1,000,000 and over**..... 0.00% 0.00% 0.00%
</TABLE>
-------------------
* Rounded to the nearest one-hundredth percent.
** Initial sales charges may be waived for certain classes of offerees
as set forth in the current Prospectus and Statement of Additional
Information of the Fund. Such purchases may be subject to a contingent
deferred sales charge as set forth in the current Prospectus and
Statement of Additional Information.
2
<PAGE> 20
The term "purchase" 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 spouse and their children under the
age of 21 years purchasing Class A shares for his or their own account and to
single purchases by a trustee or other fiduciary purchasing Class A 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 of 1940, as
amended, but does not include purchases by any such company which has not been
in existence for at least six months or which has no purpose other than the
purchase of Class A shares of the Fund or Class A 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.
The reduced sales charges are applicable through a right of
accumulation underwhich certain eligible investors are permitted to purchase
Class A shares of the Fund 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 Class A, Class B, Class C and Class D
shares of the Fund and of any other investment company with an initial sales
charge for which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or you, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation.
The reduced sales charges are applicable to purchases aggregating
$25,000 or more of Class A shares or of Class D shares of any other investment
company with an initial sales charge for which the Distributor acts as the
distributor made through you within a thirteen-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. A purchase not originally made pursuant to a Letter of Intention
may be included under a subsequent letter executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. If the intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be made pursuant
to the terms of the Letter of Intention.
3
<PAGE> 21
You agree to advise us promptly at our request as to amounts of any
sales made by you to eligible investors qualifying for reduced sales charges.
Further information as to the reduced sales charges pursuant to the right of
accumulation or a Letter of Intention is set forth in the Prospectus and
Statement of Additional Information.
4. You shall not place orders for any of the Class A shares unless
you have already received purchase orders for such Class A shares at the
applicable public offering prices and subject to the terms hereof and of the
Distribution Agreement. You agree that you will not offer or sell any of the
Class A shares except under circumstances that will result in compliance with
the applicable Federal and state securities laws and that in connection with
sales and offers to sell Class A shares you will furnish to each person to
whom any such sale or offer is made a copy of the Prospectus and, if
requested, the Statement of Additional Information (as then amended or
supplemented) and will not furnish to any person any information relating to
the Class A shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of Additional
Information (as then amended or supplemented) or cause any advertisement to
be published in any newspaper or posted in any public place without our
consent and the consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Fund for Class A shares of the Fund to be resold by
us to you subject to the applicable terms and conditions governing the
placement of orders by us set forth in Section 3 of the Distribution Agreement
and subject to the compensation provisions of Section 3 hereof and (ii) to
tender Class A shares directly to the Fund or its agent for redemption subject
to the applicable terms and conditions set forth in Section 4 of the
Distribution Agreement.
6. You shall not withhold placing orders received from your customers
so as to profit yourself as a result of such withholding: e.g., by a change
in the "net asset value" from that used in determining the offering price to
your customers.
7. If any Class A shares sold to you under the terms of this
Agreement are repurchased by the Fund or by us for the account of the Fund or
are tendered for redemption within seven business days after the date of the
confirmation of the original purchase by you, it is agreed that you shall
forfeit your right to, and refund to us, any discount received by you on such
Class A shares.
4
<PAGE> 22
8. No person is authorized to make any representations concerning Class
A shares of the Fund except those contained in the current Prospectus and
Statement of Additional Information of the Fund and in such printed
information subsequently issued by us or the Fund as information supplemental
to such Prospectus and Statement of Additional Information. In purchasing
Class A shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional Information and
supplemental information above mentioned. Any printed information which we
furnish you other than the Fund's Prospectus, Statement of Additional
Information, periodic reports and proxy solicitation material is our sole
responsibility and not the responsibility of the Fund, and you agree that the
Fund shall have no liability or responsibility to you in these respects unless
expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making purchases
from you a copy of the then current Prospectus and, if requested, the
Statement of Additional Information at or prior to the time of offering or
sale and you agree thereafter to deliver to such purchasers copies of the
annual and interim reports and proxy solicitation materials of the Fund. You
further agree to endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information, annual or
interim reports and proxy solicitation materials of the Fund will be supplied
to you in reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to suspend
sales or withdraw the offering of Class A shares entirely or to certain
persons or entities in a class or classes specified by us. Each party hereto
has the right to cancel this agreement upon notice to the other party.
11. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering. We
shall be under no liability to you except for lack of good faith and for
obligations expressly assumed by us herein. Nothing contained in this
paragraph is intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of compliance with
any provision of the Securities Act of 1933, as amended, or of the rules and
regulations of the Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National Association of
Securities Dealers, Inc. and, with respect to any sales in the United States,
we both hereby agree to abide by the Rules of Fair Practice of such
Association.
5
<PAGE> 23
13. Upon application to us, we will inform you as to the states in
which we believe the Class A shares have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such
states, but we assume no responsibility or obligation as to your right to sell
Class A shares in any jurisdiction. We will file with the Department of State
in New York a Further State Notice with respect to the Class A shares, if
necessary.
14. All communications to us should be sent to the address below. Any
notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
15. Your first order placed pursuant to this Agreement for the purchase
of Class A shares of the Fund will represent your acceptance of this
Agreement.
16. This Agreement supersedes any prior Selected Dealers Agreement
entered into by the parties hereto with respect to the Class A shares of the
Fund.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
---------------------------------
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name:
--------------------------------------------
By:
---------------------------------------------------
Address:
----------------------------------------------
------------------------------------------------------
Date:
-------------------------------------------------
6
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Basic Value Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 23 to Registration
Statement No. 2-58521 of our report dated July 29, 1994 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 10, 1994
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000216557
<NAME> MERRILL LYNCH BASIC VALUE FUND, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-START> JUL-01-1993
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> $3,479,473,318
<INVESTMENTS-AT-VALUE> $4,043,247,441
<RECEIVABLES> $21,779,946
<ASSETS-OTHER> $73,525
<OTHER-ITEMS-ASSETS> 0
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<PAYABLE-FOR-SECURITIES> $31,274,427
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> $16,139,635
<TOTAL-LIABILITIES> $47,414,062
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> $3,286,976,511
<SHARES-COMMON-STOCK> 98,095,819
<SHARES-COMMON-PRIOR> 86,804,056
<ACCUMULATED-NII-CURRENT> $45,703,737
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> $121,232,479
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> $563,774,123
<NET-ASSETS> $2,272,982,770
<DIVIDEND-INCOME> $98,527,728
<INTEREST-INCOME> $25,933,615
<OTHER-INCOME> $232,965
<EXPENSES-NET> $36,271,215
<NET-INVESTMENT-INCOME> $88,423,093
<REALIZED-GAINS-CURRENT> $163,320,957
<APPREC-INCREASE-CURRENT> ($76,944,519)
<NET-CHANGE-FROM-OPS> $174,799,531
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> $62,663,619
<DISTRIBUTIONS-OF-GAINS> $64,558,638
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22,051,928
<NUMBER-OF-SHARES-REDEEMED> 15,739,255
<SHARES-REINVESTED> 4,979,090
<NET-CHANGE-IN-ASSETS> $610,674,159
<ACCUMULATED-NII-PRIOR> $50,625,023
<ACCUMULATED-GAINS-PRIOR> $68,215,671
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> $15,452,148
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> $36,271,215
<AVERAGE-NET-ASSETS> $2,195,440,555
<PER-SHARE-NAV-BEGIN> $23.31
<PER-SHARE-NII> $0.62
<PER-SHARE-GAIN-APPREC> $0.67
<PER-SHARE-DIVIDEND> $0.70
<PER-SHARE-DISTRIBUTIONS> $0.73
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> $23.17
<EXPENSE-RATIO> 0.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000216557
<NAME> MERRILL LYNCH BASIC VALUE FUND, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1994
<PERIOD-START> JUL-01-1993
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> $3,479,473,318
<INVESTMENTS-AT-VALUE> $4,043,247,441
<RECEIVABLES> $21,779,946
<ASSETS-OTHER> $73,525
<OTHER-ITEMS-ASSETS> 0
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<PAID-IN-CAPITAL-COMMON> $3,286,976,511
<SHARES-COMMON-STOCK> 76,276,115
<SHARES-COMMON-PRIOR> 60,070,313
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<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> $1,744,704,080
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<INTEREST-INCOME> $25,933,615
<OTHER-INCOME> $232,965
<EXPENSES-NET> $36,271,215
<NET-INVESTMENT-INCOME> $88,423,093
<REALIZED-GAINS-CURRENT> $163,320,957
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<NET-CHANGE-FROM-OPS> $174,799,531
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> $30,680,760
<DISTRIBUTIONS-OF-GAINS> $45,745,511
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25,498,592
<NUMBER-OF-SHARES-REDEEMED> 12,261,811
<SHARES-REINVESTED> 2,969,021
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<ACCUMULATED-NII-PRIOR> $50,625,023
<ACCUMULATED-GAINS-PRIOR> $68,215,671
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