<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1996
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. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 25
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 22
(Check appropriate box or boxes)
----------------
MERRILL LYNCH BASIC VALUE FUND, INC.
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (Zip Code)
(Address of Principal Executive
Offices)
(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, ESQ. MARK B. GOLDFUS, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER MANAGEMENT P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 P.O. BOX 9011 PRINCETON, NEW JERSEY
ATTENTION: THOMAS R. SMITH, JR., ESQ. PRINCETON, NEW JERSEY 08543-9011
08543-9011
</TABLE>
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
----------------
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 ON AUGUST 26, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH BASIC VALUE FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
PART A
Item 1. Cover Page................ Cover Page
Item 2. Synopsis.................. Fee Table
Condensed Financial
Item 3. Information.............. Financial Highlights; Performance Data
Item 4. General Description of
Registrant............... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund.... Fee Table; Management of the Fund;
Portfolio Transactions and Brokerage;
Inside Back Cover Page
Item 5A. Management's Discussion of
Fund Performance......... Not Applicable
Item 6. Capital Stock and Other
Securities............... Cover Page; Purchase of Shares;
Redemption of Shares; Shareholder
Services; Additional Information
Item 7. Purchase of Securities
Being Offered............ Cover Page; Fee Table; Merrill Lynch
Select PricingSM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase.. Fee Table; Merrill Lynch Select
PricingSM 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
General Information and
Item 12. History.................. Not Applicable
Investment Objective and
Item 13. Policies................. Investment Objective and Policies
Item 14. Management of the Fund.... Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities............... Management of the Fund; General
Information--Additional Information
Item 16. Investment Advisory and
Other Services........... Management of the Fund; Purchase of
Shares; General Information
Brokerage Allocation and
Item 17. Other Practices.......... Portfolio Transactions and Brokerage
Capital Stock and Other
Item 18. 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
Calculation of Performance
Item 22. 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>
PROSPECTUS
OCTOBER 28, 1996
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. For more information on the Fund's
investment objective and policies, please see "Investment Objective and
Policies" on page 11.
----------------
Pursuant to the Merrill Lynch Select PricingSM 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 PricingSM 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 PricingSM System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from other securities dealers 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 28, 1996 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge Im-
posed on Pur-
chases (as a
percentage of
offering
price)....... 5.25%(c) None None 5.25%(c)
Sales Charge
Imposed on
Dividend
Reinvestments. None None None None
Deferred Sales
Charge (as a
percentage of None(d) 1.0% for one year(f) None(d)
original pur-
chase price 4.0% during the first
or redemption year, decreasing 1.0%
proceeds, annually thereafter
whichever is to 0.0% after the
lower)....... fourth year(e)
Exchange Fee.. None None None None
ANNUAL FUND
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Investment
Advisory
Fees(g)...... 0.40% 0.40% 0.40% 0.40%
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)..... 0.13% 0.15% 0.16% 0.13%
Other......... 0.02% 0.02% 0.02% 0.02%
----- ----- ----- -----
Total Other 0.16% 0.18% 0.19% 0.16%
Expenses.... ----- ----- ----- -----
Total Fund
Operating 0.56% 1.58% 1.59% 0.81%
Expenses..... ===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 18 and "Shareholder
Services--Fee-Based Programs"--page 30.
(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 20.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of $1,000,000
or more may not be subject to an initial sales charge. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares"--
page 18.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with redemptions to fund participation in
certain fee-based programs. See "Shareholder Services--Fee-Based
Programs"--page 30.
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder Services--
Fee-Based Programs"--page 30.
(f) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs"--page 30.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
14.
(h) See "Purchase of Shares--Distribution Plans"--page 23.
(i) See "Management of the Fund--Transfer Agency Services"--page 15.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE
PERIOD OF:
---------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment
including the maximum $52.50
initial sales charge (Class A and
Class D shares only) and assuming
(1) the Total Fund Operating
Expenses for each class set forth
on page 2; (2) a 5% annual return
throughout the period and
(3) redemption at the end of the
period:
Class A........................... $58 $70 $82 $119
Class B........................... $56 $70 $86 $168*
Class C........................... $26 $50 $87 $189
Class D........................... $60 $77 $95 $147
An investor would pay the following
expenses on the same $1,000 invest-
ment assuming no redemption at the
end of the period:
Class A........................... $58 $70 $82 $119
Class B........................... $16 $50 $86 $168*
Class C........................... $16 $50 $87 $189
Class D........................... $60 $77 $95 $147
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$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".
3
<PAGE>
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System. The shares of each class may be purchased at a price equal to
the next determined net asset value per share subject to the sales charges and
ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing SM System is used by more than
50 registered investment companies advised by Merrill Lynch Asset Management,
L.P. ("MLAM") or its affiliate, Fund Asset Management, L.P. ("FAM" or the
"Investment Adviser"). Funds advised by MLAM or FAM which use the Merrill Lynch
Select Pricing SM System are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on the Class D shares, are imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges
do not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares are calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services--Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the 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 SM System, followed
by a more detailed description of each class and a discussion of the factors
that investors should consider in determining the method of purchasing shares
under the Merrill Lynch Select Pricing SM System that the investor believes is
most beneficial under his or her particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
4
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- -------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with redemptions to fund participation in
certain fee-based programs. A 0.75% sales charge for 401(k) purchases over
$1,000,000 will apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans and fee-based programs may be 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.
(6) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs.
Class A. Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares of the Fund. Investors who currently own Class A
shares of the Fund in a shareholder account are entitled to purchase
additional Class A shares of the Fund in that account. Other eligible
investors include certain retirement plans and participants in
certain fee-based programs. In addition, Class A shares will be
offered at net asset value to Merrill Lynch & Co., Inc. ("ML & Co.")
and its subsidiaries (the term "subsidiaries", when used herein with
respect to ML & Co., includes MLAM, FAM and certain other entities
directly or indirectly wholly-owned and controlled by ML & Co.) and
their directors and employees, and to members of the Boards of MLAM-
advised mutual funds. The maximum initial sales charge is 5.25%,
which is reduced for purchases of $25,000 and over and waived for
purchases by certain retirement plans and participants in connection
with certain fee-based programs. Purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales
charge is waived such purchases may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with redemptions to fund participation in
certain fee-based programs. 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".
5
<PAGE>
Class B. Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to the Class B shares, and a CDSC if they are
redeemed within four years of purchase. Such CDSC may be modified in
connection with redemptions to fund certain fee-based programs.
Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an
account maintenance fee but no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be
made convert into Class D shares automatically after approximately ten
years. If Class B shares of the Fund are exchanged for Class B shares
of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the
holding period for the shares exchanged will be tacked 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
the conversion and holding periods for certain retirement plans are
modified as described under "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares".
Class C. Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a CDSC if they are redeemed within one year of purchase. Such CDSC
may be waived in connection with redemptions to fund participation in
certain fee-based programs. 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 who 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 may be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with redemptions to fund participation in certain fee-based
programs. The schedule of initial sales charges and reductions for
Class D shares is the same as the schedule for Class A shares, except
that there is no waiver for purchases in connection with certain fee-
based programs. Class D shares also will be issued upon conversion of
Class B shares as described above under "Class B". See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his or her
particular circumstances.
6
<PAGE>
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the 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 who
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.
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 of their funds invested initially and
intend to hold their shares for an extended period of time. Investors in Class
B shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all of their assets invested
initially and they are uncertain as to the length of time they intend to hold
their assets in MLAM-advised mutual funds. Although Class C shareholders are
subject to a shorter CDSC period at a lower rate, they forgo the Class B
conversion feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges".
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in connection
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year
ended June 30, 1996 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. 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,
-------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSET
VALUE:
PER SHARE OPER-
ATING PERFOR-
MANCE:
Net asset value,
beginning of
year............ $ 26.44 $ 23.17 $ 23.31 $ 20.57 $ 18.90 $ 19.32 $ 20.03 $ 18.60 $ 20.26
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in-
come--net....... .80 .74 .62 .71 .70 .87 .95 .85 .74
Realized and
unrealized gain
(loss) on in-
vestments and
foreign currency
transactions--
net............. 4.31 4.01 .67 3.03 2.02 (.02) (.56) 1.99 (.44)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from in-
vestment opera-
tions........... 5.11 4.75 1.29 3.74 2.72 .85 .39 2.84 .30
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.76) (.69) (.70) (.64) (.76) (.97) (.87) (.75) (.62)
Realized gain on
investments--
net............. (.57) (.79) (.73) (.36) (.29) (.30) (.23) (.66) (1.34)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total dividends
and distribu-
tions........... (1.33) (1.48) (1.43) (1.00) (1.05) (1.27) (1.10) (1.41) (1.96)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of year..... $ 30.22 $ 26.44 $ 23.17 $ 23.31 $ 20.57 $ 18.90 $ 19.32 $ 20.03 $ 18.60
========== ========== ========== ========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT
RETURN:**
Based on net as-
set value per
share........... 19.92% 21.67% 5.68% 19.03% 15.08% 5.39% 1.77% 16.29% 1.90%
========== ========== ========== ========== ========== ========== ========== ========== ==========
RATIOS TO AVER-
AGE NET ASSETS:
Expenses........ .56% .59% .53% .54% .58% .59% .57% .58% .58%
========== ========== ========== ========== ========== ========== ========== ========== ==========
Investment in-
come--net....... 2.88% 3.19% 2.76% 3.48% 3.52% 4.76% 5.05% 4.82% 4.06%
========== ========== ========== ========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DA-
TA:
Net assets, end
of year (in
thousands)...... $3,587,558 $2,834,652 $2,272,983 $2,023,078 $1,670,430 $1,490,657 $1,556,257 $1,373,408 $1,079,262
========== ========== ========== ========== ========== ========== ========== ========== ==========
Portfolio turn-
over............ 13.94% 11.69% 21.79% 20.85% 21.24% 20.11% 4.88% 13.44% 20.42%
========== ========== ========== ========== ========== ========== ========== ========== ==========
Average commis-
sion rate paid
##.............. $ .0491 -- -- -- -- -- -- -- --
========== ========== ========== ========== ========== ========== ========== ========== ==========
CLASS A
---------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
---------------------------------------------------------------------------------------------------------------
1987
----------
<S> <C>
INCREASE (DE-
CREASE) IN NET
ASSET
VALUE:
PER SHARE OPER-
ATING PERFOR-
MANCE:
Net asset value,
beginning of
year............ $ 18.07
----------
Investment in-
come--net....... .65
Realized and
unrealized gain
(loss) on in-
vestments and
foreign currency
transactions--
net............. 3.04
----------
Total from in-
vestment opera-
tions........... 3.69
----------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.64)
Realized gain on
investments--
net............. (.86)
----------
Total dividends
and distribu-
tions........... (1.50)
----------
Net asset value,
end of year..... $ 20.26
==========
TOTAL INVESTMENT
RETURN:**
Based on net as-
set value per
share........... 22.37%
==========
RATIOS TO AVER-
AGE NET ASSETS:
Expenses........ .59%
==========
Investment in-
come--net....... 3.82%
==========
SUPPLEMENTAL DA-
TA:
Net assets, end
of year (in
thousands)...... $1,158,997
==========
Portfolio turn-
over............ 23.34%
==========
Average commis-
sion rate paid
##.............. --
==========
</TABLE>
- ----
** Total investment returns exclude the effects of sales loads.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989+
---------- ---------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 26.08 $ 22.87 $ 23.04 $ 20.35 $ 18.71 $ 19.12 $ 19.92 $ 18.78
---------- ---------- ---------- ---------- ---------- -------- -------- --------
Investment income--net.. .53 .53 .42 .53 .50 .66 .78 .55
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency transactions--
net.................... 4.23 3.93 .62 2.96 2.00 .01 (.59) 1.30
---------- ---------- ---------- ---------- ---------- -------- -------- --------
Total from investment
operations............. 4.76 4.46 1.04 3.49 2.50 .67 .19 1.85
---------- ---------- ---------- ---------- ---------- -------- -------- --------
Less dividends and dis-
tributions:
Investment income--net.. (.51) (.46) (.48) (.44) (.57) (.78) (.76) (.36)
Realized gain on invest-
ments--net............. (.57) (.79) (.73) (.36) (.29) (.30) (.23) (.35)
---------- ---------- ---------- ---------- ---------- -------- -------- --------
Total dividends and dis-
tributions............. (1.08) (1.25) (1.21) (.80) (.86) (1.08) (.99) (.71)
---------- ---------- ---------- ---------- ---------- -------- -------- --------
Net asset value, end of
period................. $ 29.76 $26.08 $ 22.87 $ 23.04 $ 20.35 $ 18.71 $ 19.12 $ 19.92
========== ========== ========== ========== ========== ======== ======== ========
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 18.71% 20.45% 4.61% 17.81% 13.90% 4.33% .73% 10.33%#
========== ========== ========== ========== ========== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.58% 1.61% 1.55% 1.56% 1.60% 1.61% 1.60% 1.62%*
========== ========== ========== ========== ========== ======== ======== ========
Investment income--net.. 1.86% 2.16% 1.75% 2.47% 2.50% 3.73% 4.03% 4.43%*
========== ========== ========== ========== ========== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $3,288,963 $2,464,248 $1,744,704 $1,383,935 $1,064,354 $874,318 $922,126 $468,537
========== ========== ========== ========== ========== ======== ======== ========
Portfolio turnover...... 13.94% 11.69% 21.79% 20.85% 21.24% 20.11% 4.88% 13.44%
========== ========== ========== ========== ========== ======== ======== ========
Average commission rate
paid ##................ $ .0491 -- -- -- -- -- -- --
========== ========== ========== ========== ========== ======== ======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class B Shares commenced operations on October 21, 1988.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
9
<PAGE>
<TABLE>
<CAPTION>
CLASS C CLASS C CLASS D CLASS D
------- ------- ------- -------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR OCTOBER 21, FOR THE YEAR OCTOBER 21,
ENDED JUNE 30, 1994++ TO JUNE 30, ENDED JUNE 30, 1994++ TO JUNE 30,
1996 1995 1996 1995
-------------- ------------------ -------------- ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $25.98 $ 22.92 $ 26.41 $ 23.19
-------- ------- -------- --------
Investment income--net.. .55 .44 .76 .50
Realized and unrealized
gain (loss) on invest-
ments and foreign cur-
rency
transactions--net...... 4.18 3.05 4.27 3.17
-------- ------- -------- --------
Total from investment
operations............. 4.73 3.49 5.03 3.67
-------- ------- -------- --------
Less dividends and dis-
tributions:
Investment income--net.. (.58) (.33) (.71) (.35)
Realized gain on invest-
ments--net............. (.57) (.10) (.57) (.10)
-------- ------- -------- --------
Total dividends and dis-
tributions............. (1.15) (.43) (1.28) (.45)
-------- ------- -------- --------
Net asset value, end of
period................. $ 29.56 $ 25.98 $ 30.16 $ 26.41
======== ======= ======== ========
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share.............. 18.69% 15.59%# 19.61% 16.23%#
======== ======= ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.59% 1.66%* .81% .87%*
======== ======= ======== ========
Investment income--net.. 1.83% 2.09%* 2.61% 2.88%*
======== ======= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (in thousands).... $211,787 $74,334 $434,396 $203,033
======== ======= ======== ========
Portfolio turnover...... 13.94% 11.69% 13.94% 11.69%
======== ======= ======== ========
Average commission rate
paid ##................ $ .0491 -- $ .0491 --
======== ======= ======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
++ Commencement of operations.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
10
<PAGE>
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 objective of the Fund is a fundamental policy 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").
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.
11
<PAGE>
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 25% 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.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies that are fundamental policies
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (a) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(b) more than 50% of the outstanding shares). Among its fundamental policies,
the Fund may not invest more than 25% of its total assets, taken at market
value at the time of each investment, in the securities of issuers in any
particular industry (excluding the U.S. Government and its agencies and
instrumentalities). In addition, as a fundamental restriction the Fund may not
borrow money or pledge its assets, 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. (However, at
the present time, applicable law prohibits the Fund from purchasing securities
on margin.) (The deposit or payment by the Fund of initial or variation margin
in connection with financial futures contracts or options transactions is not
considered to be the purchase of a security on margin.) Notwithstanding the
above-referenced fundamental restrictions on borrowing money, as a non-
fundamental restriction the Fund may not borrow
12
<PAGE>
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.
The purchase of securities while borrowings are outstanding will have the
effect of leveraging the Fund. Such leveraging or borrowing increases the
Fund's exposure to capital risk, and borrowed funds are subject to interest
costs which will reduce net income.
Investment restrictions and policies that are non-fundamental policies may be
changed by the Board of Directors without shareholder approval. As a non-
fundamental policy, the Fund will not invest in securities which cannot readily
be resold because of legal or contractual restrictions or for which there is no
readily available market, including repurchase agreements and purchase and sale
contracts maturing in more than seven days, if, regarding all such securities,
more than 15% of its total assets taken at market value would be invested in
such securities. Notwithstanding the foregoing, the Fund may purchase without
regard to this limitation securities that are not registered under the
Securities Act, but that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act, provided that the Fund's
Board of Directors continuously determines, based on the trading markets for
the specific Rule 144A security, including such factors as valuation, liquidity
and the availability of information, that it is liquid. These investments 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. The Board has determined that
securities which are freely tradeable in their primary market offshore should
be deemed 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, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
Investment in Foreign Issuers. It is anticipated that in the immediate
future, the Fund will invest not more than 25% of its total assets in the
securities of foreign issuers. Nevertheless, investors should note that
investment in securities of foreign issuers involves risks not typically
involved in domestic investment, including fluctuations in foreign exchange
rates, future political and economic development and the possible imposition of
exchange controls or other foreign or U.S. governmental laws or restrictions
applicable to such investments.
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.
13
<PAGE>
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 of the Investment Adviser and its affiliate, MLAM;
President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and 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
Emeritus, Harvard Business School.
Edward H. Meyer--Chairman of the Board of Directors, President and Chief
Executive Officer of Grey Advertising Inc.
Jack B. Sunderland--President and Director of American Independent Oil
Company, Inc. (an energy company).
J. Thomas Touchton--Managing Partner of The Witt-Touchton Company (a private
investment partnership).
- --------
* 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 130
registered investment companies. MLAM also provides investment advisory
services to individual and institutional accounts. As of September 30, 1996,
the Investment Adviser and MLAM had a total of approximately $214.1 billion in
investment company and other portfolio assets under management, including
accounts of certain affiliates of MLAM.
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.
14
<PAGE>
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, 1996, the Investment Adviser earned a fee of $26,704,376 (based
on average net assets of approximately $6.6 billion) and the effective rate was
approximately 0.40%.
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, 1996, the Fund paid the Investment
Adviser $394,536 for such accounting services. For the fiscal year ended June
30, 1996, the ratio of total expenses to average net assets was 0.56% for Class
A shares, 1.58% for Class B shares, 1.59% for Class C shares and 0.81% for
Class D shares.
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.
Mr. Hoffmann has been primarily responsible for the management of the Fund's
portfolio since 1977.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act which incorporates the Code of
Ethics of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of
the Investment Adviser and, as described below, impose additional, more
onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch 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
15
<PAGE>
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, 1996, the total
fee paid by the Fund to the Transfer Agent pursuant to the Transfer Agency
Agreement was $9,154,713. At September 30, 1996, the Fund had 230,278 Class A
shareholder accounts, 241,198 Class B shareholder accounts, 26,266 Class C
shareholder accounts and 35,220 Class D shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $6.7 million plus out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, an affiliate of the Investment Adviser, MLAM 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 that for retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1.
The Fund offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis depending upon the class
of shares selected by the investor under the Merrill Lynch Select Pricing SM
System, as described below. The applicable offering price for purchase orders
is based 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 the close of business on the New York Stock
Exchange (the "NYSE") (generally, 4:00 P.M., New York time), which includes
orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value determined as
of 15 minutes after the close of business on the NYSE on the day the orders
are placed with the Distributor, provided the orders are received by the
Distributor prior to 30 minutes after the close of business on the NYSE on
that day. If the purchase orders are not received by the Distributor prior to
30 minutes after the close of business on the NYSE on that day, such orders
shall be deemed received on the next business day. The Fund or the Distributor
may suspend the continuous offering of the Fund's shares of any class at any
time in response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may be rejected
by the Distributor or the Fund. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently $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 SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a CDSC and ongoing distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing System is
set forth under "Merrill Lynch Select PricingSM System" on page 4.
16
<PAGE>
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges do not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares are calculated in the same manner at the same time and 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 four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the shares
being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to
17
<PAGE>
an initial sales charge but instead may be subject to a 1.0% CDSC if redeemed
within one year. Such CDSC may be waived in connection with redemptions to
fund participation in certain fee-based programs. A 0.75% sales charge for
401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans and fee-based programs may be 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.
(6) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD SALES LOAD DISCOUNT TO
AS PERCENTAGE AS PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------ ------------- --------------- --------------------
<S> <C> <C> <C>
Less than $25,000........... 5.25% 5.54% 5.00%
$25,000 but less than
$50,000.................... 4.75 4.99 4.50
$50,000 but less than
$100,000................... 4.00 4.17 3.75
$100,000 but less than
$250,000................... 3.00 3.09 2.75
$250,000 but less than
$1,000,000................. 2.00 2.04 1.80
$1,000,000 and over**....... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D share
purchases of $1,000,000 or more, and on Class A share purchases in
connection with certain fee-based programs. If the sales charge is waived in
connection with a purchase of $1,000,000 or more, such purchase may be
subject to a CDSC of 1.0% if the shares are redeemed within one year after
purchase. Such CDSC may be waived in connection with redemptions to fund
participation in certain fee-based programs. A sales charge of 0.75% will be
charged on purchases of $1,000,000 or more of Class A or Class D shares by
certain employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act"). For the fiscal year ended June 30, 1996, the
Fund sold 23,070,207 Class A shares for aggregate net proceeds of $665,661,352.
The gross sales charges for the sale of Class A shares of the Fund for that
year were $948,582, of which $67,810 (includes direct commissions received by
MLFD with respect to the sale of Class A shares totalling $8,013) and $880,772
were received by the Distributor and Merrill Lynch, respectively. For the
fiscal year ended June 30, 1996, the Distributor received no CDSCs with respect
to redemption within one year after purchase of Class A shares purchased
subject to a front-end sales charge waiver. For the fiscal year
18
<PAGE>
ended June 30, 1996, the Fund sold 7,412,646 Class D shares for aggregate net
proceeds of $212,175,625. The gross sales charges for the sale of Class D
shares of the Fund for that year were $2,377,323, of which $155,038 (includes
direct commissions received by MLFD with respect to the sale of Class D shares
totalling $2,078) and $2,222,285 were received by the Distributor and Merrill
Lynch, respectively. For the fiscal year ended June 30, 1996, the Distributor
received CDSCs of $1,179 with respect to redemption within one year after
purchase of Class D shares purchased subject to a front-end sales charge
waiver.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the Fund in a
shareholder account, including participants in the Merrill Lynch BlueprintSM
Program, are entitled to purchase additional Class A shares of the Fund in that
account. Certain employer sponsored retirement or savings plans, including
eligible 401(k) plans, may purchase Class A shares of the Fund at net asset
value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by 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 TMASM Managed Trusts to which Merrill Lynch Trust
Company provides discretionary trustee services, collective investment trusts
for which Merrill Lynch Trust Company serves as trustee and purchases made in
connection with certain fee-based programs. In addition, Class A shares 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 in their initial offerings who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A or Class D shares of the Fund if
certain conditions set forth in the Statement of Additional Information are met
(for closed-end funds that commenced operations prior to October 21, 1994). 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. and, if certain conditions set forth in the Statement of
Additional Information are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such funds in shares of
the Fund and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services--Fee-Based Programs."
Class A and Class D shares are offered at net asset value to Employee Access
AccountsSM available through qualified employers which provide employer-
sponsored retirement and savings plans that are eligible to purchase such
shares at net asset value. Class A and Class D shares are offered at net asset
value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock, pursuant to tender offers conducted by those funds.
19
<PAGE>
Class D shares are offered at net asset value without a sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
BlueprintSM 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.
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 the dealer's own funds. The combination
of the CDSC and the ongoing distribution fee facilitates the ability of the
Fund to sell the Class B and Class C shares without a sales charge being
deducted at the time of purchase. 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.
20
<PAGE>
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 after 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.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE 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, 1996, the Distributor received CDSCs of
$2,785,815 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) for shares
purchased on or after October 21, 1994.
21
<PAGE>
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. 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 and for any Class B
shares that were acquired and held at the time of the redemption in an
Employee Access Account SM available through employers providing eligible
401(k) plans. 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. The terms of the CDSC may be modified in connection with
redemptions to fund participation in certain fee-based programs. See
"Shareholder Services--Fee-Based Programs".
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 thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. No Class C CDSC will be assessed
in connection with redemptions to fund participation in certain fee-based
programs. See "Shareholder Services--Fee-Based Programs".
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.
For the fiscal year ended June 30, 1996, the Distributor received CDSCs of
$84,568 with respect to redemptions of Class C shares, all of which were paid
to Merrill Lynch.
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.
22
<PAGE>
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 MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate Funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value per share.
The Conversion Period also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs".
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
23
<PAGE>
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended June 30, 1996, the Fund paid the Distributor
$28,997,218 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $2.9
billion), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended June 30, 1996, the Fund paid the
Distributor $1,396,921 pursuant to the Class C Distribution Plan (based on
average net assets subject to such Class C Distribution Plan of approximately
$140.5 million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended June 30, 1996, the Fund paid the
Distributor $813,530 pursuant to the Class D Distribution Plan (based on
average net assets subject to such Class D Distribution Plan of approximately
$327.2 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares. At September 30,
1996, the net assets of the Fund subject to the Class B Distribution Plan
aggregated approximately $3.4 billion. At this asset level, the annual fee
payable pursuant to such Class B Distribution Plan would aggregate
approximately $33.9 million. At September 30, 1996, the net assets of the Fund
subject to the Class C Distribution Plan aggregated approximately $239.3
million. At this asset level, the annual fee payable pursuant to such Class C
Distribution Plan would aggregate approximately $2.4 million. At September 30,
1996, the net assets of the Fund subject to the Class D Distribution Plan
aggregated approximately $466.5 million. At this asset level, the annual fee
payable pursuant to such Class D Distribution Plan would aggregate
approximately $1.2 million.
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 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
24
<PAGE>
allocated accrual" basis and quarterly on a "direct expense and revenue/cash"
basis. On the fully allocated accrual basis, revenues consist of the account
maintenance fees, distribution fees, the CDSCs and certain other related
revenues, and expenses consist of financial consultant compensation, branch
office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation.
As of December 31, 1995, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues by
approximately $9,856,000 (0.34% of Class B net assets at that date). As of June
30, 1996, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $68,965,795
(2.10% of Class B net assets at that date). Similar fully allocated accrual
data for Class C shares is not presented because such revenues and expenses for
the period from October 21, 1994 (commencement of operations) to December 31,
1995 are de minimis. As of June 30, 1996, direct cash revenues for the period
since the commencement of operations of Class C shares exceeded direct cash
expenses by $743,651 (0.35% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will
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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.
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, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption
requests delivered other than by mail should be delivered to Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484. Proper notice of redemption in the case of shares deposited with
the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be redeemed. The redemption
request requires the signatures of all persons in whose names the shares are
registered, signed exactly as their names appear on the Transfer Agent's
register or on the certificate, as the case may be. The signature(s) on the
redemption request must be guaranteed by an "eligible guarantor institution"
(including, for example, Merrill Lynch branch offices and certain other
financial institutions) as such 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 a
certified check drawn on a United States bank) has been collected for the
purchase of such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request
for repurchase is
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received by the dealer prior to the close of business on the NYSE (generally,
4:00 P.M., New York time) on the day received, and such request is received by
the Fund from such dealer not later than 30 minutes after the close of business
on the NYSE on the same day. Dealers have the responsibility to submit such
repurchase requests to the Fund not later than 30 minutes after the close of
business on the NYSE in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC).
Securities firms 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. Repurchases 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. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem shares as set
forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will
be made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or how to change options with respect thereto, can be
obtained from the Fund by calling the telephone number on the cover page hereof
or from the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors. Included in the Fund's shareholder services
are the following:
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. 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
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<PAGE>
sale transaction other than automatic investment purchases and the reinvestment
of ordinary income dividends and long-term capital gain distributions.
Shareholders may make additions to their Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders also may maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically, without charge, at the Transfer
Agent. Shareholders considering transferring their Class A or Class D shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for his or her shares and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take
delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to
the account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his or her account in which the exchange is made at the time of the exchange or
is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund.
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
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<PAGE>
previously paid on the Class A or Class D shares being exchanged and the sales
charge payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period for the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds specifically designated as available
for exchange by holders of Class A, Class B, Class C or Class D shares. The
period of time that Class A, Class B, Class C or Class D shares are held in a
money market fund, however, will not count toward satisfaction of the holding
period requirement for reduction of any CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically in
full and fractional shares of the Fund, without a sales charge, at the net
asset value per share next determined after the close of the NYSE 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 or her Investment Account in the form of payments by check or
through automatic payment by direct deposit to his or her bank account on
either a monthly or quarterly basis. A 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, subject to certain conditions.
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<PAGE>
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 or her regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more ($1 for retirement plans) through the CMA(R)/CBA(R) Automated Investment
Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND (637-3863).
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. In addition, consistent with the
Conduct Rules of the NASD and policies established by the Directors of the
Fund, the Investment Adviser may consider sales of shares of the Fund as a
factor in the selection of brokers or dealers to execute portfolio transactions
for the Fund.
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PERFORMANCE DATA
From time to time, the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B
and Class C shares and the maximum sales charge in the case of Class A and
Class D shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the
same time on the same day and will be in the same amount, except that account
maintenance fees 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.
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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 or other
industry publications. As with other performance data, performance comparisons
should not be considered indicative of the Fund's relative performance for any
future period. In addition, from time to time the Fund may include its risk-
adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income are paid semi-annually. All net
realized 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 "Determination of Net Asset Value" below.
Dividends and distributions may be reinvested automatically in shares of the
Fund, at net asset value without a 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. From
time to time, the Fund may declare a special distribution at or about the end
of the calendar year in order to comply with a Federal income tax requirement
that certain percentages of its ordinary income and capital gains be
distributed during the calendar year.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily, 15 minutes after the close of business on the NYSE (generally, 4:00
P.M., New York time) on each day during which the NYSE is open for trading. Any
assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation. The net asset
value per share is computed by dividing the sum of the value of the securities
held by the Fund plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the investment advisory fees
payable to the Investment Adviser and any account maintenance and/or
distribution fees payable to the Distributor, are accrued daily. The Fund
employs Merrill Lynch Securities Pricing SM Service ("MLSPS"), an affiliate of
the Investment Adviser, to provide certain securities prices for the Fund.
During the fiscal year ended June 30, 1996, the Fund did not pay MLSPS a fee
for such service.
The per share net asset value of Class A shares generally will be higher than
the per share net asset value of shares of the other classes, reflecting the
daily expense accruals of the account maintenance,
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distribution and higher transfer agency fees applicable with respect to Class B
and Class C shares and the daily expense accruals of the account maintenance
fees applicable with respect to Class D shares; in addition, the per share net
asset value of Class D shares generally will be higher than the per share net
asset value of Class B and 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 (although not
necessarily meet) immediately after the payment of dividends or distributions
which will differ by approximately the amount of the expense accrual
differentials between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter ("OTC") market
are valued at the last available bid price in the OTC market prior to the time
of valuation. When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last asked price. Options purchased by the Fund are valued at
their last sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last bid price. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith under the direction of the Board of Directors of the
Fund.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). 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 or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, 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
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Fund's ordinary income dividends may be eligible for the dividends received
deduction allowed to corporations under the Code, if certain requirements are
met. If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
such shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge paid to the
Fund 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.
34
<PAGE>
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, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on United States Government obligations. State law
varies as to whether dividend income attributable to United States Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on March 22, 1977. It has an
authorized capital of 1,200,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock. Class A and Class B each consists of 400,000,000 shares,
and Class C and Class D each consists of 200,000,000 shares. Shares of Class A,
Class B, Class C and Class D Common Stock represent interests in the same
assets of the Fund and are identical in all respects except that Class B, Class
C and Class D shares bear certain expenses related to the account maintenance
associated with such shares, and Class B and Class C shares bear certain
expenses related to the distribution of such shares. Each class has exclusive
voting rights with respect to matters relating to account maintenance and
distribution expenditures, as applicable. See "Purchase of Shares". The
Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive rights. Shares
have the conversion rights described in 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.
35
<PAGE>
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
36
<PAGE>
MERRILL LYNCH BASIC VALUE FUND, INC. -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASE 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 shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of
paper if necessary.)
1. .................................. 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)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] Check
or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch 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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
37
<PAGE>
MERRILL LYNCH BASIC VALUE FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
[ ]
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND 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
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.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
- - - We hereby authorize Merrill Lynch
Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
- - - Shareholder's signature.
This form when completed, should .....................................
be mailed to: Dealer Name and Address
Merrill Lynch Basic Value Fund, Inc. By: .................................
c/o Merrill Lynch Financial Data Authorized Signature of Dealer
Services, Inc.
P.O. Box 45289 [ ][ ][ ] [ ][ ][ ][ ]
Jacksonville, FL 32232-5289 Branch Code F/C No.
...............
F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer A/C No.
38
<PAGE>
MERRILL LYNCH BASIC VALUE FUND, INC. -- AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL PLAN OR THE
AUTOMATIC INVESTMENT PLAN ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(Please Print)
[ ]
Name........................................... Social Security No. or
First Name Initial Last Name Taxpayer Identification
Number
Name of Co-Owner (if any)......................
First Name Initial Last Name
Address........................................ Account Number ..............
(if existing account)
...............................................
(Zip Code)
- -------------------------------------------------------------------------------
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
withdrawal 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 MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
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 SHOULD ACCOMPANY THIS APPLICATION.
39
<PAGE>
MERRILL LYNCH BASIC VALUE FUND, INC. -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch 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.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
DRAWN BY MERRILL LYNCH FINANCIAL
You are hereby authorized to draw an DATA SERVICES, INC.
ACH debit each month on my bank
account for investment in Merrill
Lynch Basic Value Fund, Inc., as To...............................Bank
indicated below: (Investor's Bank)
Amount of each ACH debit $........ Bank Address.........................
Account No. ...................... City....... State........ Zip.......
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month request and authorize you to pay and
beginning _____ or as soon as possible charge to my account ACH debits
(month) drawn on my account by and payable
thereafter. to Merrill Lynch Financial Data
Services, Inc., I agree that your
I agree that you are drawing these rights in respect to each such debit
ACH debits voluntarily at my request shall be the same as if it were a
and that you shall not be liable for check drawn on you and signed
any loss arising from any delay in personally by me. This authority is
preparing or failure to prepare any to remain in effect until revoked by
such debit. If I change banks or me in writing. Until you receive
desire to terminate or suspend this such notice, you shall be fully
program, I agree to notify you protected in honoring any such
promptly in writing. I hereby debit. I further agree that if any
authorize you to take any action to such debit be dishonored, whether
correct erroneous ACH debits of my with or without cause and whether
bank account or purchases of fund intentionally or inadvertently, you
shares including liquidating shares shall be under no liability.
of the Fund and crediting my bank
account. I further agree that if a ............ .....................
debit is not honored upon Date Signature of
presentation, Merrill Lynch Financial Depositor
Data Services, Inc. is authorized to
discontinue immediately the Automatic ............ .....................
Investment Plan and to liquidate Bank Signature of Depositor
sufficient shares held in my account Account (If joint account,
to offset the purchase made with the Number both must sign)
dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
40
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
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 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
The Bank of New York
90 Washington Street
12th Floor
New York, New York 10286
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select Pricing(SM) System.................................... 4
Financial Highlights....................................................... 8
Investment Objective and Policies.......................................... 11
Management of the Fund..................................................... 14
Board of Directors........................................................ 14
Management and Advisory Arrangements...................................... 14
Code of Ethics............................................................ 15
Transfer Agency Services.................................................. 15
Purchase of Shares......................................................... 16
Initial Sales Charge Alternatives--Class A and Class D Shares............. 18
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 20
Distribution Plans........................................................ 23
Limitations on the Payment of Deferred Sales Charges...................... 25
Redemption of Shares....................................................... 26
Redemption................................................................ 26
Repurchase................................................................ 26
Reinstatement Privilege--Class A and
Class D Shares........................................................... 27
Shareholder Services....................................................... 27
Investment Account........................................................ 27
Exchange Privilege........................................................ 28
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 29
Systematic Withdrawal Plans............................................... 29
Automatic Investment Plans................................................ 29
Fee-Based Programs........................................................ 30
Portfolio Transactions and Brokerage....................................... 30
Performance Data........................................................... 31
Additional Information..................................................... 32
Dividends and Distributions............................................... 32
Determination of Net Asset Value.......................................... 32
Taxes..................................................................... 33
Organization of the Fund.................................................. 35
Shareholder Reports....................................................... 36
Shareholder Inquiries..................................................... 36
Authorization Form......................................................... 37
</TABLE>
Code #10042-1096
[LOGO] MERRILL LYNCH
Merrill Lynch
Basic Value Fund, Inc.
[ART]
PROSPECTUS
October 28, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
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 PricingSM 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
28, 1996 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is October 28, 1996
<PAGE>
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. 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 Prospectus are options issued by
The Options Clearing Corporation (the "Clearing Corporation") which are
currently traded on the Chicago Board Options Exchange, the American Stock
Exchange, the Philadelphia Stock Exchange, the Pacific Stock Exchange or the
New York Stock Exchange (the "NYSE"). 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 or her 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
2
<PAGE>
able to sell the underlying security until the option expires or the underlying
security is delivered upon exercise, with the result that the writer will be
subject to the risk of market decline in the underlying security during such
period. The Fund will write an option on a particular security only if
management believes that a 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 fiscal years ended June 30, 1996 and
1995 were 13.94% and 11.69%, respectively.
Investment Restrictions. In addition to the investment restrictions set forth
in the Prospectus, the Fund has adopted a number of fundamental and non-
fundamental investment policies and restrictions. The fundamental policies and
restrictions set forth below may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting 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). Unless otherwise provided, all references
to the assets of the Fund below are in terms of current market value. The Fund
may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as amended
(the "Investment Company Act").
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or management.
4. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not
3
<PAGE>
be deemed to be the making of a loan, and except further that the Fund may
lend its portfolio securities, provided that the lending of portfolio
securities may be made only in accordance with applicable law and the
guidelines set forth in the Prospectus and this Statement of Additional
Information, as they may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes, (iii) the Fund may obtain such short-
term credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) the Fund may purchase securities on margin to
the extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in the Prospectus and this
Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Prospectus and this Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors. Under the 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. Securities purchased in
accordance with Rule 144A under the Securities Act and determined to be
liquid by the Fund's Board of Directors are not subject to the limitations
set forth in this investment restriction.
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 NYSE
or the
4
<PAGE>
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
Fund Asset Management, L.P., the investment adviser of the Fund (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 Prospectus and
this 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.
Lending of Portfolio Securities. Subject to investment restriction (5) 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 25% of its total
assets in securities of foreign issuers. Investments in securities of foreign
issuers involve certain risks, including fluctuations in foreign exchange
rates, future political and economic developments, and the possible imposition
of exchange controls or other foreign governmental laws or restrictions. In
addition, foreign companies are not subject to accounting, auditing and
financial reporting standards and requirements comparable to those of U.S.
companies. The foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result
5
<PAGE>
either in losses to the Fund due to subsequent declines in value of such
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. To the extent
such investments are subject to withholding or other taxes or to regulations
relating to repatriation of assets, the Fund's distributable income will be
reduced. The prices of securities in different countries may be subject to
different economic, financial, political and social factors.
----------------
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.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund, including
their ages and their principal occupations for at least the last five years is
set forth below. Unless otherwise noted, the address of each executive officer
and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (64)--President and Director(1)(2)--President 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; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch &
Co., Inc. ("ML & Co.") since 1990; Director of Merrill Lynch Funds Distributor,
Inc. (the "Distributor") since 1977.
Donald Cecil (69)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
M. Colyer Crum (64)--Director(2)--Soldiers Field Road, Boston, Massachusetts
02163. James R. Williston Professor of Investment Management Emeritus, Harvard
Business School, from 1971 to 1996; Director of Cambridge Bancorp, and Sun Life
Assurance Company of Canada.
Edward H. Meyer (69)--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. (financial printers), Harman
International Industries, Inc. and Ethan Allen Interiors, Inc.
Jack B. Sunderland (68)--Director(2)--P.O. Box 7, West Cornwall, Connecticut
06796. President and Director of American Independent Oil Company, Inc. (an
energy company) since 1987; Member of Council on Foreign Relations since 1971.
6
<PAGE>
J. Thomas Touchton (57)--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 (56)--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 of the
Distributor since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
Norman R. Harvey (63)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and MLAM since 1982; Senior Vice President of Princeton
Services since 1993.
Paul M. Hoffmann (66)--Vice President(1)--Vice President of MLAM since 1976.
Donald C. Burke (36)--Vice President(1)(2)--Vice President and Director of
Taxation of the Investment Adviser since 1990; employee of Deloitte & Touche
LLP from 1982 to 1990.
Gerald M. Richard (47)--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 (50)--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, 1996, 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, an officer and Director of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding Common Stock
of ML & Co.
COMPENSATION OF DIRECTORS
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 by the Fund 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
Committee of the Board of Directors, which consists of all of the unaffiliated
Directors, an annual fee of $2,500. The Chairman of the Audit Committee
receives an additional $1,000 annually. The Fund reimburses
7
<PAGE>
each unaffiliated Director for his or her out-of-pocket expenses relating to
attendance at Board and Committee meetings. Fees and expenses paid to the
Directors aggregated $41,250 for the fiscal year ended June 30, 1996.
The following table sets forth, for the fiscal year ended June 30, 1996,
compensation paid by the Fund to the non-interested Directors and, for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
registered investment companies (including the Fund) advised by the Investment
Adviser and its affiliate, MLAM ("MLAM/FAM-Advised Funds") to the non-
interested Directors:
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
BENEFITS ACCRUED MLAM/FAM-ADVISED
COMPENSATION AS PART OF FUNDS PAID TO
DIRECTOR FROM THE FUND FUND EXPENSE TRUSTEE/DIRECTOR(1)
- -------- ------------- ---------------- -------------------
<S> <C> <C> <C>
Donald Cecil................. $9,000 None $271,850
M. Colyer Crum............... $8,000 None $126,600
Edward H. Meyer.............. $8,000 None $239,225
Jack B. Sunderland........... $8,000 None $134,600
J. Thomas Touchton........... $8,000 None $134,600
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows:
Mr. Cecil (36 registered investment companies consisting of 36
portfolios); Mr. Crum (18 registered investment companies consisting of 18
portfolios); Mr. Meyer (36 registered investment companies consisting of
36 portfolios); Mr. Sunderland (20 registered investment companies
consisting of 29 portfolios) and Mr. Touchton (20 registered investment
companies consisting of 29 portfolios).
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 of 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 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
8
<PAGE>
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.
The Fund has entered into the Investment Advisory Agreement with the
Investment Adviser. As discussed in the Prospectus, the Fund will pay the
Investment Adviser a fee for its services 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. For the
fiscal years ended June 30, 1996, 1995 and 1994, the advisory fees paid by the
Fund to the Investment Adviser totalled $26,704,376, $18,443,250 and
$15,452,148, respectively.
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; 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".
The Investment Adviser is a limited partnership, the partners of which are ML
& Co. and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Investment Adviser (as defined under the Investment Company
Act) because of their ownership of its voting securities or their power to
exercise a controlling influence over its management or policies.
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.
9
<PAGE>
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid. Each
class has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
The Merrill Lynch Select Pricing SM System is used by more than 50 registered
investment companies advised by MLAM or its affiliate, the Investment Adviser.
Funds advised by MLAM or the Investment Adviser which use the Merrill Lynch
Select Pricing SM System are referred to herein as "MLAM-advised mutual funds".
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
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 fiscal year
ended June 30, 1996 were $948,582, of which the Distributor received $67,810
and Merrill Lynch received $880,772 as a selected dealer of such shares. The
gross sales charges for the sale of Class A shares for the fiscal year ended
June 30, 1995 were $1,586,058, of which the Distributor received $86,913 and
Merrill Lynch received $1,499,145 as a selected dealer of such shares. The
gross sales charges for the sale of Class A shares for the fiscal year ended
June 30, 1994 were $3,755,873, of which the Distributor received $216,293 and
Merrill Lynch received $3,539,580 as a selected dealer of such shares. For the
fiscal year ended June 30, 1996, the gross sales charges for the sale of Class
D shares were $2,377,323, of which the Distributor received $155,038 and
Merrill Lynch received $2,222,285 as a selected dealer of such shares. For the
period October 21, 1994 (commencement of operations) to June 30, 1995, the
gross sales charges for the sale of Class D shares were $1,239,289, of which
the Distributor received $73,637 and Merrill Lynch received $1,165,652 as a
selected dealer of such shares. For information as to brokerage commissions
received by Merrill Lynch, see "Portfolio Transactions and Brokerage".
10
<PAGE>
The term "purchase", as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his or her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by 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 20 days of the expiration of such Letter, the difference
between the sales charge on the
11
<PAGE>
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 BlueprintSM 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 (the "IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer sponsored retirement and savings plans
(as defined below) whose trustee and/or plan sponsor has entered into the IRA
Rollover Program.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of
an automatic investment plan. Additional information concerning purchases
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employee Access AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access AccountsSM available through qualified
employers that provide employer-sponsored retirement or
12
<PAGE>
savings plans that are eligible to purchase such shares at net asset value. The
initial minimum for such accounts is $500, except that the initial minimum for
shares purchased for such accounts pursuant to the Automatic Investment Program
is $50.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in specified
investments and/or the services provided by Merrill Lynch to the plan. Certain
other plans may purchase Class B shares with a waiver of the contingent
deferred sales charge ("CDSC") upon redemption, based on similar criteria. Such
Class B shares will convert into Class D shares approximately ten years after
the plan purchases the first share of any MLAM-advised mutual fund. Minimum
purchase requirements may be waived or varied for such plans. Additional
information regarding purchases by employer-sponsored retirement or savings
plans and certain other arrangements is available toll-free from Merrill Lynch
Business Financial Services at (800) 237-7777.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries", when used herein with respect to ML &
Co., includes MLAM, the Investment Adviser and certain other entities directly
or indirectly wholly-owned and controlled by ML & Co.) and their directors and
employees and any trust, pension, profit-sharing or other benefit plan for such
persons, may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that he
or she will purchase Class D shares of the Fund with proceeds from a redemption
of a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in cash
or a money market fund.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
other mutual funds and that such shares have been outstanding for a period of
no less than six months; and second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer
13
<PAGE>
and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such other fund were subject to a sales charge either at the time of
purchase or on a deferred basis; and second, such purchase of Class D shares
must be made within 90 days after such notice.
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
(the date the Merrill Lynch Select Pricing SM System commenced operations) and
wish to reinvest the net proceeds from a sale of their closed-end fund shares
of common stock in Eligible Class A or Class D Shares, if the conditions set
forth below are satisfied. Alternatively, closed-end fund shareholders who
purchased such shares on or after October 21, 1994 and wish to reinvest the net
proceeds from a sale of their closed-end fund shares are offered Class A shares
(if eligible to buy Class A shares) or Class D shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met: first, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A Shares; second, the closed-end fund shares must
either have been acquired in the initial public offering or be shares
representing dividends from shares of common stock acquired in such offering;
third, the closed-end fund shares must have been continuously maintained in a
Merrill Lynch securities account; fourth, there must be a minimum purchase of
$250 to be eligible for the investment option. Shareholders of certain MLAM-
advised continuously offered closed-end funds may reinvest at net asset value
the net proceeds from a sale of certain shares of common stock of such funds in
shares of the Fund. Upon exercise of this investment option, shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class A shares of
the Fund and shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. will receive Class D shares
of the Fund, except that shareholders already owning Class A shares of the Fund
will be eligible to purchase additional Class A shares pursuant to this option,
if such additional Class A shares will be held in the same account as the
existing Class A shares and other requirements pertaining to the reinvestment
privilege are met. In order to exercise this investment option, a shareholder
of one of the above-referenced continuously offered closed-end funds (an
"eligible fund") must sell his or her shares of common stock of the eligible
fund (the "eligible shares") back to the eligible fund in connection with a
tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus)
is applicable. Purchase orders from eligible fund shareholders wishing to
exercise this investment option will be accepted only on the day that the
related tender offer terminates and will be effected at the net asset value of
the designated class of the Fund on such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse 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
14
<PAGE>
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 shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is 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.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum
15
<PAGE>
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, 1996
with respect to the Class B and Class C shares of the Fund, indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule, and with respect to Class B shares, the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JUNE 30, 1996
(IN THOUSANDS)
-----------------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
ELIGIBLE GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- --------- ----------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD OCTOBER 21, 1988
(COMMENCEMENT OF OPERA-
TIONS) TO JUNE 30,
1996:
Under NASD Rule as
Adopted................ $3,021,563 $188,847 $45,207 $234,054 $92,509 $141,545 $24,667
Under Distributor's
Voluntary Waiver....... $3,021,563 $188,847 $15,107 $203,954 $92,509 $111,445 $24,667
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF OPERA-
TIONS) TO JUNE 30,
1996:
Under NASD Rule as
Adopted................ $ 208,156 $ 13,010 $ 866 $ 13,876 $ 1,304 $ 12,572 $ 1,588
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since October 21, 1988
(commencement of operations) and all eligible Class C shares sold since
October 21, 1994 (commencement of operations) 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
maximum sales charge rule.
16
<PAGE>
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to
July 6, 1993 under the distribution plan in effect at that time, at a 1.0%
rate, 0.75% of average daily net assets has been treated as a distribution
fee and 0.25% of average daily net assets has been deemed to have been a
service fee and not subject to the NASD maximum sales charge rule. See
"Purchase of Shares-Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the NASD maximum or, with respect to
the Class B shares, the voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the
NYSE is restricted as determined by the Commission or the NYSE is closed
(other than customary weekend and holiday closings), for any period during
which an emergency exists as defined by the Commission as a result of which
disposal of portfolio securities or determination of the net asset value of
the Fund is not reasonably practicable, and for such other periods as the
Commission may by order permit for the protection of shareholders of the Fund.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares", while Class B shares
redeemed within four years 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, 1996, 1995
and 1994, the Distributor received CDSCs of $2,785,815, $1,951,585 and
$1,189,344, respectively, with respect to redemptions of Class B shares, all
of which were paid to Merrill Lynch. For the fiscal year ended June 30, 1996,
and for the period October 21, 1994 (commencement of operations) to June 30,
1995, the Distributor received CDSCs of $84,568 and $13,126, respectively,
with respect to redemptions of Class C shares, all of which were paid to
Merrill Lynch.
Merrill Lynch BlueprintSM 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
17
<PAGE>
through Blueprint, however, may differ from those available to other Class B
investors. Orders for purchases and redemptions of Class B shares of the Fund
will be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There is no minimum initial
or subsequent purchase requirement for investors who are part of a Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM 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 of the
above-referenced Retirement Plans. The CDSC is also waived for any Class B
shares that were acquired and held at the time of the redemption in an Employee
Access Account SM available through employers that provide Eligible 401(k)
Plans. The initial minimum for such accounts is $500, except that the initial
minimum for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
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
placing 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
18
<PAGE>
has no obligation to deal with any broker in the execution of transactions for
its portfolio securities. In addition, consistent with the Conduct Rules of the
NASD and policies established by the Directors of the Fund, the Investment
Adviser may consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions for the Fund.
For the fiscal year ended June 30, 1996, the Fund paid total brokerage
commissions of $3,092,682 of which $117,800 or 3.8% was paid to Merrill Lynch
for effecting 3.5% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. For the fiscal year ended June 30, 1995, the
Fund paid total brokerage commissions of $2,515,001 of which $81,150 or 3.23%
was paid to Merrill Lynch for effecting 3.44% of the aggregate dollar amount of
transactions in which the Fund paid brokerage commissions. 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 ("OTC")
market. Transactions in the OTC market generally are principal transactions
with dealers and the costs of such transactions involve dealer spreads rather
than brokerage commissions. With respect to the OTC 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 OTC 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-- Investment Restrictions". However, an
affiliated person of the Fund may serve as its broker in the OTC 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
19
<PAGE>
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 Commission has prescribed with respect to the requirements of clauses (i)
and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily, Monday through Friday, as of 15 minutes after the close of business
on the NYSE (generally, 4:00 P.M., New York time), on each day during which the
NYSE is open for trading. The NYSE is not open on New Year's Day, 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 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 (although not necessarily meet) 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 (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the
20
<PAGE>
Board of Directors as the primary market. Securities traded in the OTC market
are valued at the last available bid price in the OTC market prior to the time
of valuation. When the Fund writes a call option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange traded options or, in the case of options traded in the
OTC market, the last asked price. Options purchased by the Fund are valued at
their last sale price in the case of exchange traded options or, in the case of
options traded in the OTC market, the last bid price. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith under the direction of the Board of Directors of the
Fund.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services 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 Merrill Lynch Financial Data
Services, Inc. (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 capital gain
distributions. These statements also will show any other activity in the
account since the previous statement. Shareholders also will receive separate
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gain distributions. A shareholder may make additions to his
or her Investment Account at any time by mailing a check directly to the
Transfer Agent.
Share certificates are issued only for full shares and only 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.
Shareholders considering transferring their Class A shares from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A or
Class D shares (paying any applicable CDSC) so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he or she be issued certificates for
his or her shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders
considering transferring a tax-deferred retirement account such as an
individual retirement account from Merrill Lynch to another brokerage firm
21
<PAGE>
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.
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) or CBA (R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA (R) accounts or in certain related accounts in amounts of $100 or
more ($1 for retirement accounts) through the CMA(R) or CBA (R) Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the ex-dividend date of the dividend or distribution. Shareholders
may elect in writing to receive either their 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.
22
<PAGE>
At the time of each withdrawal payment, sufficient Class A or Class D shares
are redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his or her Class A or
Class D shares. Redemptions will be made at net asset value as determined as of
15 minutes after the close of business on the NYSE (generally, 4:00 P.M., New
York 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 NYSE is not open for business
on such date, the Class A or Class D shares will be redeemed at the close of
business on the 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 a charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the Distributor. Withdrawal
payments should not be considered as dividends, yield or income. Each
withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional Class A or Class D shares concurrent
with withdrawals are ordinarily disadvantageous to the shareholder because of
sales charges and tax liabilities. The Fund will not knowingly accept purchase
orders for Class A or Class D shares of the Fund from investors who maintain a
Systematic Withdrawal Plan unless such purchase is equal to at least one year's
scheduled withdrawals or $1,200, whichever is greater. Periodic investments may
not be made into an Investment Account in which the shareholder has elected to
make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R)/CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to a shareholder's
account five business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bimonthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
CMA(R)/CBA(R) Systematic Redemption Program is not available if Fund shares are
being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R)/CBA(R) 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.
23
<PAGE>
Capital gains and ordinary 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. Under the Merrill Lynch Select
Pricing SM System, Class A shareholders may exchange Class A shares of the Fund
for Class A shares of a second MLAM-advised mutual fund if the shareholder
holds any Class A shares of the second fund in his or her account in which the
exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his or her account at the
time of the exchange and is not otherwise eligible to acquire Class A shares of
the second fund, the shareholder will receive Class D shares of the second fund
as a result of the exchange. Class D shares also may be exchanged for Class A
shares of a second MLAM-advised mutual fund at any time as long as, at the time
of the exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund. Class B, Class C and Class D shares are
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of
the shares acquired in the exchange, the holding period for the previously
owned shares of the Fund is "tacked" to the holding period 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 are exchangeable for shares of certain MLAM-
advised money market funds as follows: Class A shares may be exchanged for
shares of Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves
Money Fund (available only for exchanges within certain retirement plans),
Merrill Lynch U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money
Fund; Class B, Class C and Class D shares may be exchanged for shares of
Merrill Lynch Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch
Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a
net asset value of at least $100 are required to qualify for the exchange
privilege, and any shares utilized in an exchange must have been held by the
shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend
24
<PAGE>
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 or
without a reduced 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% CDSC that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption,
since by "tacking" the two and a half year holding period of Fund Class B
shares to the three year holding period for the Special Value Fund Class B
shares, the investor will be deemed to have held the new 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 would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
25
<PAGE>
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.
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 or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as long-
term capital loss to the extent of any capital gain dividends
26
<PAGE>
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 rule permitting the issuance and
sale of multiple classes of stock) that is based on the gross income allocable
to Class A, Class B, Class C and Class D shareholders during the taxable year,
or such other method as the Internal Revenue Service may prescribe. If the Fund
pays a dividend in January that was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by its shareholders on December 31 of the year in which
such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period of the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
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.
27
<PAGE>
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
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 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. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of distributions
to shareholders. The mark-to-market rules outlined above, however, will not
apply to certain transactions entered into by the Fund solely to reduce the
risk of changes in price or interest rates with respect to its investments.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in option
contracts. Under Section 1092, the Fund may be required to postpone recognition
for tax purposes of losses incurred in certain sales of securities and 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.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
28
<PAGE>
Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than such
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and the mark-to-market rules described above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs 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
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
29
<PAGE>
the redeemable value of such investment at the end of each period. Average
annual total return is computed assuming all dividends and distributions are
reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class
C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charge, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return since the aggregate
rates of return reflect compounding over a longer period of time.
30
<PAGE>
Set forth below is total return information for the Class A, Class B, Class
C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES* CLASS C SHARES** CLASS D SHARES**
-------------------------- -------------------------- -------------------------- --------------------------
REDEEMABLE REDEEMABLE REDEEMABLE REDEEMABLE
EXPRESSED AS VALUE OF A EXPRESSED AS VALUE OF A EXPRESSED AS VALUE OF A EXPRESSED AS VALUE OF A
A PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT
$1,000 AT THE END OF $1,000 AT THE END OF $1,000 AT THE END OF $1,000 AT THE END OF
PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
June 30, 1996... 13.62% $ 1,136.20 14.71% $1,147.10 17.69% $1,176.90 13.33% $1,133.30
Five Years Ended
June 30, 1996... 14.88% $ 2,001.30 14.95% $2,007.00
Ten Years Ended
June 30, 1996... 12.02% $ 3,112.30
Inception
(October 21,
1988) to June
30, 1996........ 11.60% $2,327.00
Inception
(October 21,
1994) to June
30, 1996........ 20.53% $1,371.90 17.67% $1,317.20
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June
30, 1996........ 19.92% $ 1,199.20 18.71% $1,187.10 18.69% $1,186.90 19.61% $1,196.10
Year Ended June
30, 1995........ 21.67% $ 1,216.70 20.45% $1,204.50
Year Ended June
30, 1994........ 5.68% $ 1,056.80 4.61% $1,046.10
Year Ended June
30, 1993........ 19.03% $ 1,190.30 17.81% $1,178.10
Year Ended June
30, 1992........ 15.08% $ 1,150.80 13.90% $1,139.00
Year Ended June
30, 1991........ 5.39% $ 1,053.90 4.33% $1,043.30
Year Ended June
30, 1990........ 1.77% $ 1,017.70 0.73% $1,007.30
Year Ended June
30, 1989........ 16.29% $ 1,162.90
Year Ended June
30, 1988........ 1.90% $ 1,019.00
Year Ended June
30, 1987........ 22.37% $ 1,223.70
Year Ended June
30, 1986........ 28.59% $ 1,285.90
Year Ended June
30, 1985........ 35.35% $ 1,353.50
Year Ended June
30, 1984........ (0.18%) $ 998.20
Year Ended June
30, 1983........ 67.64% $ 1,676.40
Year Ended June
30, 1982........ (12.09%) $ 879.10
Year Ended June
30, 1981........ 29.28% $ 1,292.80
Year Ended June
30, 1980........ 15.98% $ 1,159.80
Year Ended June
30, 1979........ 15.62% $ 1,156.20
Year Ended June
30, 1978........ 10.48% $ 1,104.80
Inception
(October 21,
1988) to June
30, 1989........ 10.33% $1,103.30
Inception
(October 21,
1994) to June
30, 1995........ 15.59% $1,155.90 16.23% $1,162.30
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception (July
1, 1977) to June
30, 1996........ 1,426.15% $15,261.50
Inception
(October 21,
1988) to June
30, 1996........ 132.70% $2,327.00
Inception
(October 21,
1994) to June
30, 1996** ..... 37.19% $1,371.90 31.72% $1,317.20
</TABLE>
- ----
* Information as to Class B shares is presented only for the period October
21, 1988 to June 30, 1996. Prior to October 21, 1988, no Class B shares
were publicly issued.
** Information as to Class C and Class D shares is presented only for the
period October 21, 1994 to June 30, 1996. Prior to October 21, 1994, no
Class C or Class D shares were publicly issued.
31
<PAGE>
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 1,200,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock. Class A and Class B each consists of 400,000,000 shares
of Common Stock and Class C and Class D each consists of 200,000,000 shares of
Common Stock. Class A, Class B, Class C and Class D Common Stock represent an
interest in the same assets of the Fund and are identical in all respects
except that the Class B, Class C and Class D shares bear certain expenses
related to the account maintenance and/or distribution of such shares and have
exclusive voting rights with respect to matters relating to such account
maintenance and/or distribution expenditures. The Board of Directors of the
Fund may classify and reclassify the shares of the Fund into additional classes
of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not 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. In addition, 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, if such request is in compliance with applicable Maryland law. 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.
32
<PAGE>
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A, Class B, Class C and Class D shares of the
Fund, based on the value of the Fund's net assets and number of shares
outstanding as of June 30, 1996, is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets.............. $3,587,557,556 $3,288,963,029 $211,786,930 $434,396,082
============== ============== ============ ============
Number of Shares
Outstanding............ 118,712,320 110,522,222 7,164,737 14,402,376
============== ============== ============ ============
Net Asset Value Per
Share (net assets
divided by number of
shares outstanding).... $ 30.22 $ 29.76 $ 29.56 $ 30.16
Sales Charge (for Class
A and Class D shares:
5.25% of offering price
(5.54% of net asset
value per share))*..... 1.67 ** ** 1.67
============== ============== ============ ============
Offering Price.......... $ 31.89 $ 29.76 $ 29.56 $ 31.83
============== ============== ============ ============
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes the maximum sales
charge is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC upon redemption. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus and
"Redemption of Shares--Deferred Sales Charges--Class B and Class C Shares"
herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the
Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286 (the "Custodian"), 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
The Transfer Agent, Merrill Lynch 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 LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
33
<PAGE>
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 of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the Investment Company Act to which
reference is hereby made.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Fund, only one person or entity owned beneficially 5%
or more of the Fund's shares on October 1, 1996. At October 1, 1996, the Cira
Omnibus Account (an account composed of investments for Merrill Lynch employee
retirement plans and 401(k) contributions), 400 Atrium Drive, 4th Floor,
Somerset, New Jersey 08873, owned 11,783,637, or approximately 5.3%, of the
Fund's outstanding shares.
34
<PAGE>
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, 1996, 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, 1996 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, 1996, 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 31, 1996
35
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Value Percent of
Industry Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Low Price to Book Value
Metals/Non-Ferrous 1,600,000 ASARCO Inc. $ 40,877,630 $ 44,200,000 0.6%
Savings & Loans 1,900,000 Ahmanson (H.F.) & Co. 35,849,422 51,300,000 0.7
Insurance 3,100,000 The Allstate Corp. 67,424,755 141,437,500 1.9
Insurance 2,600,000 American General Corp. 56,042,709 94,575,000 1.3
Insurance 260,000 American National Insurance Co. 9,749,442 16,770,000 0.2
Steel 4,000,000 ++Bethlehem Steel Corp. 58,791,345 47,500,000 0.6
Restaurants 2,000,000 Darden Restaurants, Inc. 20,441,741 21,500,000 0.3
Information Processing 1,570,000 ++Data General Corp. 21,268,247 20,410,000 0.3
Utilities--Electric 2,300,000 Entergy Corp. 51,247,248 65,262,500 0.9
Retail 2,200,000 ++Federated Deptartment Stores,
Inc. 57,329,146 75,075,000 1.0
Conglomerates 4,500,000 Hanson PLC Sponsored (ADR)* 65,930,510 64,125,000 0.8
Insurance 1,250,000 ITT Hartford Group Inc.(a) 31,155,644 66,562,500 0.9
Chemicals 400,000 Imperial Chemical Industries
PLC (ADR)* 25,771,805 19,650,000 0.3
Paper & Forest Products 2,900,000 International Paper Co. 93,252,865 106,937,500 1.4
Insurance 1,400,000 PartnerRe Holdings Ltd. 29,498,937 41,825,000 0.6
Trucking 1,000,000 Scania AB (Class A)(ADR)* 28,093,817 27,750,000 0.4
Trucking 500,000 Scania AB (Class B)(ADR)* 13,565,869 13,812,500 0.2
Information Processing 3,400,000 ++Tandem Computers Inc. 42,086,495 42,075,000 0.6
Electronics 1,278,500 Tektronix, Inc. 50,051,965 57,212,875 0.8
Insurance 2,550,000 Travelers Inc. 65,201,903 116,343,750 1.5
Steel 2,400,000 USX--US Steel Group 73,819,785 68,100,000 0.9
Savings & Loans 1,200,000 Washington Mutual Savings Bank 21,615,463 35,850,000 0.5
-------------- -------------- ------
959,066,743 1,238,274,125 16.7
Below-Average Price/Earnings Ratio
Banking 2,500,000 Citicorp 73,009,932 206,562,500 2.7
Financial Services 400,000 Dean Witter, Discover & Co. 10,659,960 22,900,000 0.3
Farm & Construction
Equipment 5,000,000 Deere & Co. 104,072,898 200,000,000 2.7
Capital Goods 1,300,000 Eaton Corp. 66,591,554 76,212,500 1.0
Automotive 3,800,000 Ford Motor Co. 95,253,535 123,025,000 1.6
Automotive 2,600,000 General Motors Corp. 114,470,463 136,175,000 1.8
Machinery 1,650,000 ITT Industries Inc.(a) 25,098,330 41,456,250 0.5
Information Processing 2,050,000 International Business Machines
Corp. 151,753,994 202,950,000 2.7
Banking 1,600,000 NationsBank Corp. 66,516,217 132,200,000 1.8
Banking 2,800,000 Norwest Corp. 50,295,872 97,650,000 1.3
Tobacco 1,200,000 Philip Morris Cos. Inc. 68,248,115 124,800,000 1.7
Electrical Equipment 3,500,000 Philips Electronics N.V. (ADR)* 84,649,762 114,187,500 1.5
Financial Services 360,000 Student Loan Marketing
Association 13,274,390 26,640,000 0.3
Telecommunications 1,250,000 Telefonica de Espana S.A. (ADR)* 38,741,080 68,906,250 0.9
Chemicals 2,700,000 Union Carbide Corp. 76,107,766 107,325,000 1.4
Information Processing 5,600,000 ++Unisys Corp. 60,913,547 39,900,000 0.5
Banking 320,000 Wells Fargo & Company (b) 23,708,277 76,440,000 1.0
-------------- -------------- ------
1,123,365,692 1,797,330,000 23.7
</TABLE>
36
<PAGE>
<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 859,000 Atlantic Richfield Co. $ 88,316,091 $ 101,791,500 1.4%
Real Estate Investment
Trust 700,000 Avalon Properties, Inc. 14,323,870 15,225,000 0.2
Telecommunications 1,400,000 Bell Atlantic Corp. 66,463,875 89,250,000 1.2
Pharmaceuticals 1,150,000 Bristol-Myers Squibb Co. 65,372,906 103,500,000 1.4
Oil--International 885,028 The British Petroleum Co.
PLC (ADR)* 49,872,121 94,587,368 1.3
Utilities--Electric 1,230,000 CINergy Corp. 30,925,895 39,360,000 0.5
Oil--International 2,050,000 Chevron Corp. 76,068,224 120,950,000 1.6
Utilities--Electric 1,550,000 Consolidated Edison Co. of
New York, Inc. 37,135,210 45,337,500 0.6
Utilities--Electric 637,500 DPL Inc. 6,204,369 15,539,062 0.2
Oil--International 1,850,000 Exxon Corp. 113,555,755 160,718,750 2.1
Telecommunications 3,000,000 GTE Corp. 95,026,435 134,250,000 1.8
Foods/Food Processing 1,350,000 General Mills, Inc. 62,379,617 73,575,000 1.0
Real Estate Investment
Trust 440,000 Irvine Apartment Communities,
Inc. 7,299,447 8,855,000 0.1
Real Estate Investment
Trust 820,000 Liberty Property Trust 16,038,839 16,297,500 0.2
Real Estate Investment
Trust 500,000 The Mills Corp. 11,119,875 8,750,000 0.1
Oil--International 1,800,000 Mobil Corp. 109,741,282 201,825,000 2.7
Utilities--Electric 1,200,000 NIPSCO Industries, Inc. 27,387,777 48,300,000 0.6
Oil--Domestic 3,400,000 Occidental Petroleum Corp. 72,508,904 84,150,000 1.1
Utilities--Electric 1,900,000 PECO Energy Co. 47,700,965 49,400,000 0.7
Utilities--Electric 1,800,000 Public Service Enterprise
Group Inc. 48,476,636 49,275,000 0.7
Oil--International 1,150,000 Royal Dutch Petroleum Co. (ADR)* 82,945,123 176,812,500 2.3
Real Estate Investment
Trust 1,600,000 Simon Property Group, Inc. 35,365,609 39,200,000 0.5
Real Estate Investment
Trust 500,000 Summit Properties Inc. 9,407,600 9,812,500 0.1
Oil--International 1,600,000 Texaco Inc. 99,704,520 134,200,000 1.8
Utilities--Electric 1,500,000 Texas Utilities Co. 51,841,315 64,125,000 0.8
Telecommunications 2,600,000 US West Communications Group (c) 64,638,416 82,875,000 1.1
-------------- -------------- ------
1,389,820,676 1,967,961,680 26.1
</TABLE>
37
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Value Percent of
Industry Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Special Situations
Information Processing 750,000 ++Ceridian Corp. $ 10,996,412 $ 37,875,000 0.5%
Information Processing 2,900,000 ++Digital Equipment Corp. 115,168,287 130,500,000 1.7
Oil Services &
Equipment 2,350,000 Dresser Industries, Inc. 47,775,442 69,325,000 0.9
Chemicals 1,500,000 Hercules Inc. 19,235,727 82,875,000 1.1
Entertainment 1,250,000 ++ITT Corp. (a) 31,402,179 82,812,500 1.1
Machinery 1,750,000 Ingersoll-Rand Co. 54,798,460 76,562,500 1.0
Pharmaceutical 1,800,000 Merck & Co., Inc. 57,303,897 116,325,000 1.6
Semiconductors 2,300,000 Micron Technology, Inc. 75,483,875 59,512,500 0.8
Beverages 2,000,000 The Seagram Company Ltd. 67,248,996 67,250,000 0.9
Retail 3,100,000 Sears, Roebuck & Co. 61,630,328 150,737,500 2.0
Semiconductors 1,700,000 Texas Instruments, Inc. 86,093,780 84,787,500 1.1
Telecommunications 1,700,000 ++US West Media Group (c) 24,221,802 31,025,000 0.4
Retail Apparel 4,250,000 ++Woolworth Corp. 59,770,846 95,625,000 1.3
Pharmaceuticals 440,000 Zeneca Group PLC (ADR)* 12,980,000 29,590,000 0.4
-------------- -------------- ------
724,110,031 1,114,802,500 14.8
Total Stocks 4,196,363,142 6,118,368,305 81.3
Face
Amount Issue
Short-Term Securities
Commercial Paper** American Brands, Inc.:
$ 20,000,000 5.36% due 8/07/1996 19,880,889 19,880,889 0.3
20,000,000 5.36% due 8/15/1996 19,857,067 19,857,067 0.3
50,000,000 Asset Securitization
Cooperative Corp.,5.30% due
7/02/1996 49,970,556 49,970,556 0.7
Ciesco, L.P.:
20,000,000 5.37% due 8/15/1996 19,856,800 19,856,800 0.3
40,000,000 5.37% due 8/16/1996 39,707,633 39,707,633 0.5
50,000,000 Corporate Receivables Corp.,
5.35% due 7/08/1996 49,925,694 49,925,694 0.7
Eureka Securitization Corp.:
50,000,000 5.38% due 8/01/1996 49,745,944 49,745,944 0.6
50,000,000 5.39% due 8/12/1996 49,663,125 49,663,125 0.6
106,382,000 Gannett Co., Inc., 5.33% due
7/18/1996 106,066,991 106,066,991 1.4
81,037,000 General Electric Capital Corp.,
5.56% due 7/01/1996 80,999,453 80,999,453 1.1
Goldman Sachs Group, L.P.:
100,000,000 5.33% due 7/08/1996 99,851,944 99,851,944 1.3
50,000,000 5.32% due 7/09/1996 49,918,722 49,918,722 0.7
50,000,000 5.34% due 8/09/1996 49,688,500 49,688,500 0.6
International Securitization
Corporation:
50,185,000 5.32% due 7/02/1996 50,155,335 50,155,335 0.7
50,000,000 5.38% due 7/24/1996 49,805,722 49,805,722 0.6
29,800,000 Knight-Ridder, Inc., 5.35%
due 8/09/1996 29,613,998 29,613,998 0.4
25,000,000 Lucent Technologies, Inc.,
5.34% due 7/29/1996 24,885,042 24,885,042 0.3
</TABLE>
38
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Industry Amount Issue Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Short-Term Securities (concluded)
Commercial Paper** McKenna Triangle National Corp.:
(concluded) $ 50,000,000 5.36% due 7/24/1996 $ 49,806,444 $ 49,806,444 0.7%
50,000,000 5.35% due 8/09/1996 49,687,917 49,687,917 0.6
40,000,000 MetLife Funding Corp., 5.37%
due 7/30/1996 39,809,067 39,809,067 0.5
50,000,000 National Australia Funding
(Delaware), Inc., 5.28% due
7/02/1996 49,970,667 49,970,667 0.7
50,000,000 National Fleet Funding Corp.,
5.30% due 7/01/1996 49,977,917 49,977,917 0.7
30,000,000 PHH Corporation, 5.36% due
7/24/1996 29,883,867 29,883,867 0.4
Preferred Receivables Funding
Corp.:
48,000,000 5.37% due 7/16/1996 47,871,120 47,871,120 0.6
19,050,000 5.35% due 7/22/1996 18,982,055 18,982,055 0.2
22,000,000 Transamerica Corporation,
5.33% due 7/11/1996 21,957,656 21,957,656 0.3
Xerox Credit Corp.:
50,000,000 5.30% due 7/08/1996 49,926,389 49,926,389 0.7
50,000,000 5.27% due 7/10/1996 49,912,167 49,912,167 0.7
44,000,000 5.34% due 8/09/1996 43,725,880 43,725,880 0.6
48,000,000 5.35% due 8/09/1996 47,700,400 47,700,400 0.6
-------------- -------------- ------
1,388,804,961 1,388,804,961 18.4
US Government & Agency 19,000,000 Federal Home Loan Mortgage
Obligations** Corp., 5.29% due 7/18/1996 18,944,161 18,944,161 0.3
Total Short-Term Securities 1,407,749,122 1,407,749,122 18.7
Total Investments $5,604,112,264 7,526,117,427 100.0
==============
Liabilities in Excess of Other Assets (3,413,830) (0.0)
-------------- ------
Net Assets $7,522,703,597 100.0%
============== ======
<FN>
*American Depositary Receipts (ADR).
**Commercial Paper and certain US Government & Agency Obligations
are traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
(a)On December 20, 1995, ITT Corp. split into three separate
entities: ITT Corp., ITT Industries, Inc. and ITT Hartford Group, Inc.
(b)On April 1, 1996, First Interstate Bancorp merged with Wells
Fargo & Company.
(c)On November 1, 1995, US West Inc. spun off US West Media Group,
and changed its name to US West Communications Group.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
39
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of June 30, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$5,604,112,264) (Note 1a) $7,526,117,427
Cash 182,816
Receivables:
Capital shares sold $ 16,493,798
Dividends 10,829,062 27,322,860
--------------
Prepaid registration fees and other assets (Note 1d) 116,604
--------------
Total assets 7,553,739,707
--------------
Liabilities: Payables:
Securities purchased 15,669,255
Capital shares redeemed 8,630,065
Distributor (Note 2) 2,752,562
Investment adviser (Note 2) 2,321,146 29,373,028
--------------
Accrued expenses and other liabilities 1,663,082
--------------
Total liabilities 31,036,110
--------------
Net Assets: Net assets $7,522,703,597
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 300,000,000 shares
Consist of: authorized $ 11,871,232
Class B Shares of Common Stock, $0.10 par value, 300,000,000 shares
authorized 11,052,222
Class C Shares of Common Stock, $0.10 par value, 200,000,000 shares
authorized 716,474
Class D Shares of Common Stock, $0.10 par value, 200,000,000 shares
authorized 1,440,238
Paid-in capital in excess of par 5,248,520,660
Undistributed investment income--net 82,449,679
Undistributed realized capital gains on investments--net 244,647,929
Unrealized appreciation on investments--net 1,922,005,163
--------------
Net assets $7,522,703,597
==============
Net Asset Value: Class A--Based on net assets of $3,587,557,556 and 118,712,320 shares
outstanding $ 30.22
==============
Class B--Based on net assets of $3,288,963,029 and 110,522,222 shares
outstanding $ 29.76
==============
Class C--Based on net assets of $211,786,930 and 7,164,737 shares
outstanding $ 29.56
==============
Class D--Based on net assets of $434,396,082 and 14,402,376 shares
outstanding $ 30.16
==============
See Notes to Financial Statements.
</TABLE>
40
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended June 30, 1996
<S> <S> <C> <C>
Investment Dividends (net of $2,831,877 foreign withholding tax) $ 162,522,456
Income Interest and discount earned 64,932,173
(Notes 1b & 1c): Other 96,759
--------------
Total income 227,551,388
--------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 28,997,218
Investment advisory fees (Note 2) 26,704,376
Transfer agent fees--Class B (Note 2) 4,358,779
Transfer agent fees--Class A (Note 2) 4,146,337
Account maintenance and distribution fees--Class C (Note 2) 1,396,921
Account maintenance fees--Class D (Note 2) 813,530
Registration fees (Note 1d) 554,438
Printing and shareholder reports 443,251
Transfer agent fees--Class D (Note 2) 421,688
Accounting services (Note 2) 394,536
Custodian fees 246,022
Transfer agent fees--Class C (Note 2) 227,909
Professional fees 105,727
Directors' fees and expenses 41,250
Pricing fees 233
Other 71,129
--------------
Total expenses 68,923,344
--------------
Investment income--net 158,628,044
--------------
Realized & Realized gain on investments--net 327,014,797
Unrealized Gain on Change in unrealized appreciation on investments--net 639,253,232
Investments--Net --------------
(Notes 1c, 1e & 3): Net Increase in Net Assets Resulting from Operations $1,124,896,073
==============
See Notes to Financial Statements.
</TABLE>
41
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended June 30,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 158,628,044 $ 123,636,446
Realized gain on investments--net 327,014,797 66,820,215
Change in unrealized appreciation on investments--net 639,253,232 718,977,808
-------------- --------------
Net increase in net assets resulting from operations 1,124,896,073 909,434,469
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (83,171,240) (68,596,425)
Shareholders Class B (50,150,559) (36,272,122)
(Note 1g): Class C (2,265,975) (125,803)
Class D (6,929,391) (1,039,403)
Realized gain on investments--net:
Class A (63,214,864) (77,560,878)
Class B (56,947,014) (61,276,834)
Class C (2,332,735) (37,759)
Class D (5,725,774) (291,335)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (270,737,552) (245,200,559)
-------------- --------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 1,092,277,977 894,346,339
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 1,946,436,498 1,558,580,249
Beginning of year 5,576,267,099 4,017,686,850
-------------- --------------
End of year* $7,522,703,597 $5,576,267,099
============== ==============
<FN>
*Undistributed investment income--net (Note 1h) $ 82,449,679 $ 63,306,430
============== ==============
See Notes to Financial Statements.
</TABLE>
42
<PAGE>
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: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 26.44 $ 23.17 $ 23.31 $ 20.57 $ 18.90
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .80 .74 .62 .71 .70
Realized and unrealized gain on
investments and foreign currency
transactions--net 4.31 4.01 .67 3.03 2.02
---------- ---------- ---------- ---------- ----------
Total from investment operations 5.11 4.75 1.29 3.74 2.72
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.76) (.69) (.70) (.64) (.76)
Realized gain on investments--net (.57) (.79) (.73) (.36) (.29)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (1.33) (1.48) (1.43) (1.00) (1.05)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 30.22 $ 26.44 $ 23.17 $ 23.31 $ 20.57
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 19.92% 21.67% 5.68% 19.03% 15.08%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses .56% .59% .53% .54% .58%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 2.88% 3.19% 2.76% 3.48% 3.52%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $3,587,558 $2,834,652 $2,272,983 $2,023,078 $1,670,430
========== ========== ========== ========== ==========
Portfolio turnover 13.94% 11.69% 21.79% 20.85% 21.24%
========== ========== ========== ========== ==========
Average commission rate paid+++ $ .0491 -- -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
+++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
See Notes to Financial Statements.
</TABLE>
43
<PAGE>
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
Financial Highlights
<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: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 26.08 $ 22.87 $ 23.04 $ 20.35 $ 18.71
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment loss--net .53 .53 .42 .53 .50
Realized and unrealized gain on
investments and foreign currency
transactions--net 4.23 3.93 .62 2.96 2.00
---------- ---------- ---------- ---------- ----------
Total from investment operations 4.76 4.46 1.04 3.49 2.50
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.51) (.46) (.48) (.44) (.57)
Realized gain on investments--net (.57) (.79) (.73) (.36) (.29)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (1.08) (1.25) (1.21) (.80) (.86)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 29.76 $ 26.08 $ 22.87 $ 23.04 $ 20.35
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 18.71% 20.45% 4.61% 17.81% 13.90%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.58% 1.61% 1.55% 1.56% 1.60%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 1.86% 2.16% 1.75% 2.47% 2.50%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $3,288,963 $2,464,248 $1,744,704 $1,383,935 $1,064,354
========== ========== ========== ========== ==========
Portfolio turnover 13.94% 11.69% 21.79% 20.85% 21.24%
========== ========== ========== ========== ==========
Average commission rate paid+++ $ .0491 -- -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
+++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
See Notes to Financial Statements.
</TABLE>
44
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
June 30, June 30, June 30, June 30,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 25.98 $ 22.92 $ 26.41 $ 23.19
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .55 .44 .76 .50
Realized and unrealized gain on investments
and foreign currency transactions--net 4.18 3.05 4.27 3.17
---------- ---------- ---------- ----------
Total from investment operations 4.73 3.49 5.03 3.67
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.58) (.33) (.71) (.35)
Realized gain on investments--net (.57) (.10) (.57) (.10)
---------- ---------- ---------- ----------
Total dividends and distributions (1.15) (.43) (1.28) (.45)
---------- ---------- ---------- ----------
Net asset value, end of period $ 29.56 $ 25.98 $ 30.16 $ 26.41
========== ========== ========== ==========
Total Investment Based on net asset value per share 18.69% 15.59%+++ 19.61% 16.23%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses 1.59% 1.66%* .81% .87%*
Net Assets: ========== ========== ========== ==========
Investment income--net 1.83% 2.09%* 2.61% 2.88%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 211,787 $ 74,334 $ 434,396 $ 203,033
Data: ========== ========== ========== ==========
Portfolio turnover 13.94% 11.69% 13.94% 11.69%
========== ========== ========== ==========
Average commission rate paid+++++ $ .0491 -- $ .0491 --
========== ========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
+++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities.
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
45
<PAGE>
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 Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by the Board of Directors as the primary market.
Securities which are traded both in the over-the-counter market and
on a stock exchange are valued according to the broadest and most
representative market. Options written are valued at the last sale
price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last asked price.
Short-term securities are valued at amortized cost, which
approximates market value. Other investments are stated at market
value. Securities and assets for which market value quotations are
not available are valued at their fair value as determined in good
faith by or under the direction of the Fund's Board of Directors.
(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 exdividend 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) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity markets. Losses
may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Options--The Fund is authorized to write covered call options. When
the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. When a
security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the
Fund enters into a closing transaction) the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid
(or gain or loss to the extent the cost of the closing transaction
exceeds the premium paid or received).
Written options are non-income producing investments.
(f) 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
46
<PAGE>
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.
NOTES TO FINANCIAL STATEMENTS (continued)
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $3,032,370 have been reclassified from undistributed net realized
capital gains to undistributed net investment income. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, 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 the Fund's average daily net assets in excess of
$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 FAM during any fiscal year which will cause such expenses
to exceed the pro rata expense limitation at the time of such
payment.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees, which are accrued
daily and paid monthly at annual rates based upon the average daily
net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended June 30, 1996, MLFD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales
of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 67,810 $ 880,772
Class D $155,038 $2,222,285
For the year ended June 30, 1996, MLPF&S received contingent
deferred sales charges of $2,785,815 and $84,568 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $117,800 in commissions on the
execution of portfolio security transactions for the Fund for the
year ended June 30, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
47
<PAGE>
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended June 30, 1996 were $1,317,972,322 and
$761,195,681, respectively.
Net realized and unrealized gains as of June 30, 1996 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $327,014,797 $1,922,005,163
------------ --------------
Total $327,014,797 $1,922,005,163
============ ==============
As of June 30, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $1,919,040,757 of which $1,986,112,499
related to appreciated securities and $67,071,742 related to
depreciated securities. At June 30, 1996, the aggregate cost of
investments for Federal income tax purposes was $5,607,076,670.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $1,092,277,977 and $894,346,339 for the years ended June 30,
1996 and June 30, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
Shares sold 23,070,207 $665,661,352
Shares issued to shareholders
in reinvestment of dividends
and distributions 4,785,871 131,186,394
------------ ------------
Total issued 27,856,078 796,847,746
Shares redeemed (16,341,658) (469,020,925)
------------ ------------
Net increase 11,514,420 $327,826,821
============ ============
Class A Shares for the Year Dollar
Ended June 30, 1995 Shares Amount
Shares sold 19,425,436 $466,205,455
Shares issued to shareholders
in reinvestment of dividends
and distributions 5,782,037 130,723,601
------------ ------------
Total issued 25,207,473 596,929,056
Shares redeemed (16,105,392) (384,011,079)
------------ ------------
Net increase 9,102,081 $212,917,977
============ ============
Class B Shares for the
Year Ended Dollar
June 30, 1996 Shares Amount
Shares sold 34,258,281 $968,992,372
Shares issued to shareholders
in reinvestment of dividends
and distributions 3,511,955 95,303,902
------------ ------------
Total issued 37,770,236 1,064,296,274
Automatic conversion of
shares (1,370,936) (38,128,704)
Shares redeemed (20,359,611) (573,975,897)
------------ ------------
Net increase 16,039,689 $452,191,673
============ ============
Class B Shares for the
Year Ended Dollar
June 30, 1995 Shares Amount
Shares sold 34,461,582 $815,962,756
Shares issued to shareholders
in reinvestment of dividends
and distributions 3,848,516 86,346,162
------------ ------------
Total issued 38,310,098 902,308,918
Automatic conversion of
shares (4,721,916) (109,837,782)
Shares redeemed (15,381,764) (361,976,739)
------------ ------------
Net increase 18,206,418 $430,494,397
============ ============
Class C Shares for the
Year Ended Dollar
June 30, 1996 Shares Amount
Shares sold 6,142,278 $173,460,878
Shares issued to shareholders
in reinvestment of dividends
and distributions 153,247 4,142,044
------------ ------------
Total issued 6,295,525 177,602,922
Shares redeemed (1,991,553) (56,032,695)
------------ ------------
Net increase 4,303,972 $121,570,227
============ ============
Class C Shares for the Period
October 21, 1994++ to Dollar
June 30, 1995 Shares Amount
Shares sold 3,236,903 $ 77,339,209
Shares issued to shareholders
in reinvestment of dividends
and distributions 6,576 142,631
------------ ------------
Total issued 3,243,479 77,481,840
Shares redeemed (382,714) (9,161,923)
------------ ------------
Net increase 2,860,765 $ 68,319,917
============ ============
[FN]
++Commencement of Operations.
48
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Class D Shares for the Year Dollar
Ended June 30, 1996 Shares Amount
Shares sold 7,412,646 $212,175,625
Automatic conversion of
shares 1,355,250 38,128,704
Shares issued to shareholders
in reinvestment of dividends
and distributions 412,739 11,332,508
------------ ------------
Total issued 9,180,635 261,636,837
Shares redeemed (2,466,089) (70,947,581)
------------ ------------
Net increase 6,714,546 $190,689,256
============ ============
Class D Shares for the Period
October 21 1994++ to Dollar
June 30, 1995 Shares Amount
Shares sold 3,673,107 $ 88,800,325
Automatic conversion of
shares 4,666,859 109,837,782
Shares issued to shareholders
in reinvestment of dividends
and distributions 55,369 1,215,335
------------ ------------
Total issued 8,395,335 199,853,442
Shares redeemed (707,505) (17,239,394)
------------ ------------
Net increase 7,687,830 $182,614,048
============ ============
[FN]
++Commencement of Operations.
49
<PAGE>
[This page is intentionally left blank.]
50
<PAGE>
[This page is intentionally left blank.]
51
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Management of the Fund..................................................... 6
Directors and Officers.................................................... 6
Compensation of Directors................................................. 7
Management and Advisory Arrangements...................................... 8
Purchase of Shares......................................................... 10
Initial Sales Charge Alternatives--Class A and Class D Shares............. 10
Reduced Initial Sales Charges............................................. 11
Distribution Plans........................................................ 15
Limitations on the Payment of Deferred Sales Charges...................... 15
Redemption of Shares....................................................... 17
Deferred Sales Charges--Class B and Class C Shares........................ 17
Portfolio Transactions and Brokerage....................................... 18
Determination of Net Asset Value........................................... 20
Shareholder Services....................................................... 21
Investment Account........................................................ 21
Automatic Investment Plans................................................ 22
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 22
Systematic Withdrawal Plans--Class A and
Class D Shares........................................................... 22
Retirement Plans.......................................................... 23
Exchange Privilege........................................................ 24
Dividends, Distributions and Taxes......................................... 26
Dividends and Distributions............................................... 26
Taxes..................................................................... 26
Tax Treatment of Options Transactions..................................... 28
Special Rules for Certain Foreign Currency Transactions................... 28
Performance Data........................................................... 29
General Information........................................................ 32
Description of Shares..................................................... 32
Computation of Offering Price per Share................................... 33
Independent Auditors...................................................... 33
Custodian................................................................. 33
Transfer Agent............................................................ 33
Legal Counsel............................................................. 33
Reports to Shareholders................................................... 34
Additional Information.................................................... 34
Security Ownership of Certain Beneficial Owners........................... 34
Independent Auditors' Report............................................... 35
Financial Statements....................................................... 36
</TABLE>
Code #10124-1096
[LOGO] MERRILL LYNCH
Merrill Lynch
Basic Value Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
October 28, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the ten-year period
ended June 30, 1996.
Contained in Part B:
Schedule of Investments as of June 30, 1996.
Statement of Assets and Liabilities as of June 30, 1996.
Statement of Operations for the year ended June 30, 1996.
Statements of Changes in Net Assets for the years ended June 30, 1996
and 1995.
Financial Highlights for each of the years in the five-year period
ended June 30, 1996.
(B)EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Articles of Incorporation of Registrant, dated March 22, 1977.(a)
--Articles of Amendment, dated October 3, 1988, to Articles of
(b) Incorporation of Registrant.(a)
--Articles of Amendment, dated October 17, 1994, to Articles of
(c) Incorporation of Registrant.(a)
--Articles Supplementary, dated October 17, 1994, to Articles of
(d) Incorporation of Registrant.(a)
--Articles Supplementary, dated March 17, 1995, to Articles of
(e) Incorporation of Registrant.(a)
--Articles Supplementary, dated September 17, 1996, to Articles of
(f) Incorporation of Registrant.
2 --By-Laws of Registrant.(c)
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.(b)
5(a) --Investment Advisory Agreement between Registrant and Fund Asset
Management L.P.(a)
(b) --Supplement to Investment Advisory Agreement between Registrant and
Fund Asset Management, L.P.(c)
6(a) --Form of Revised Class A Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(d)
(b) --Class B Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(a)
(c) --Form of Class C Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(c)
(d) --Form of Class D Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(c)
(e) --Letter Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. with respect to the Merrill Lynch Mutual Fund
Adviser Program.(e)
7 --None.
8 --Custodian Agreement between Registrant and National Westminster Bank
NJ.(a)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.(a)
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.(e)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
(b) --Form of Class C Distribution Plan and Class C Distribution Plan Sub-
Agreement of Registrant.(c)
(c) --Form of Class D Distribution Plan and Class D Distribution Plan Sub-
Agreement of Registrant.(c)
16(a) --Schedule for computation of each performance quotation for Class A
shares provided in the Registration Statement in response to Item
22.(a)
(b) --Schedule for computation of each performance quotation for Class B
shares provided in the Registration Statement in response to Item
22.(a)
(c) --Schedule for computation of each performance quotation for Class C
shares provided in the Registration Statement in response to Item
22.(a)
(d) --Schedule for computation of each performance quotation for Class D
shares provided in the Registration Statement in response to Item 22
relating to Class D shares.(a)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
3.(f)
</TABLE>
- --------
(a) Filed pursuant to the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") as an Exhibit to Post-Effective Amendment No. 24 to Registrant's
Registration Statement on Form N-1A, filed October 27, 1995.
(b) 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.
(c) Filed on EDGAR as an exhibit to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A, filed September 7, 1994.
(d) Filed on EDGAR as an exhibit to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, filed October 11, 1994.
(e) Filed on EDGAR as an exhibit to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A, filed October 28, 1993.
(f) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Merrill Lynch New York Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust (File No. 2-
99473), filed on January 25, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1996*
-------------- -------------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per
share................................................. 230,278
Class B Shares of Common Stock, par value $0.10 per
share................................................. 241,198
Class C Shares of Common Stock, par value $0.10 per
share................................................. 26,266
Class D Shares of Common Stock, par value $0.10 per
share................................................. 35,220
</TABLE>
- --------
* The number of holders shown above includes holders of record plus beneficial
owners whose shares are held of record by Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
C-2
<PAGE>
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 Shares Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933 (the "1933 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 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, 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 1933 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. ("FAM" or the "Investment Adviser") acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc., and The
Municipal Fund Accumulation Program, Inc.; and for the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
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
C-3
<PAGE>
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield 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., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc.
and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Investment
Adviser, acts as investment adviser for the following open-end investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch 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 Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Institutional Intermediate Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income
Fund, Inc. and Merrill Lynch Variable Series Funds, Inc., and the following
closed-end investment companies: Convertible Holdings, Inc., Merrill Lynch High
Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund, 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 Investment Adviser, 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 the
Fund's transfer agent, Merrill Lynch Financial Data Services, Inc. ("MLFDS"),
is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since October 1, 1994, for his or her 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
paragraphs, and Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are
directors, trustees or officers of one or more of such companies.
C-4
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH THE PROFESSION, VOCATION
NAME INVESTMENT ADVISER OR EMPLOYMENT
---- -------------------- ---------------------------
<C> <C> <S>
ML & Co................. Limited Partner Financial Services Holding
Company; Limited Partner of
MLAM
Princeton Services, Inc.
("Princeton Services"). General Partner General Partner of MLAM
Arthur Zeikel........... President President of MLAM; President
and Director of Princeton
Services; Director of MLFD;
Executive Vice President of ML
& Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of
President MLAM; Executive Vice President
and Director of Princeton
Services; President and
Director of MLFD; Director of
MLFDS; President of Princeton
Administrators, L.P.
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
Michael J. Hennewinkel.. 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 Senior Vice President, General
President, General Counsel and Secretary of MLAM;
Counsel and Senior Vice President, General
Secretary Counsel, Director and
Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and
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.; Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Michael L. Quinn........ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services; Managing
Director and First Vice
President of Merrill Lynch
from 1989 to 1995.
Richard L. Reller....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and
and Treasurer Treasurer of MLAM; Senior Vice
President and Treasurer of
Princeton Services; Vice
President and Treasurer of
MLFD
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>
C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant. MLFD acts as
the principal underwriter for each of the open-end investment companies
referred to in the first two paragraphs of Item 28 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The
Corporate Fund Accumulation Program, Inc., MuniAssets Fund, Inc. and The
Municipal Fund Accumulation Program, Inc.; and MLFD also acts as the principal
underwriter for the following closed-end investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate
Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Crook,
Aldrich, Brady, Breen, Fatseas, and Wasel is One Financial Center, Boston,
Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND 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
Mark A. DeSario......... Vice President None
James T. Fatseas........ Vice President None
Michelle T. Lau......... Vice President None
Debra W. Landsman-Yaros. Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act, and the rules thereunder are maintained at the offices
of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and
MLFDS, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "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 to each person to whom a prospectus is
delivered a copy of the Registrant's latest annual report to shareholders, upon
request and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the 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 28th day of
October, 1996.
Merrill Lynch Basic Value Fund, Inc.
(Registrant)
/s/ Gerald M. Richard
By: _________________________________
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date(s) indicated.
SIGNATURE TITLE DATE
Arthur Zeikel* President and
- ------------------------------------- Director
(ARTHUR ZEIKEL) (Principal Executive Officer)
Gerald M. Richard* Treasurer (Principal Financial
- ------------------------------------- and Accounting
(GERALD M. RICHARD) Officer)
Donald Cecil* Director
- -------------------------------------
(DONALD CECIL)
M. Colyer Crum* Director
- -------------------------------------
(M. COLYER CRUM)
Edward H. Meyer* Director
- -------------------------------------
(EDWARD H. MEYER)
Jack B. Sunderland* Director
- -------------------------------------
(JACK B. SUNDERLAND)
J. Thomas Touchton* Director
- -------------------------------------
(J. THOMAS TOUCHTON)
/s/ Gerald M. Richard October 28,
*By: ________________________________ 1996
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1(f) --Articles Supplementary, dated September 17, 1996, to Articles
of Incorporation of Registrant.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE>
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 occurrence 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH BASIC VALUE FUND -- CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 5604112264
<INVESTMENTS-AT-VALUE> 7526117427
<RECEIVABLES> 27322860
<ASSETS-OTHER> 299420
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7553739707
<PAYABLE-FOR-SECURITIES> 15669255
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15366855
<TOTAL-LIABILITIES> 31036110
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5273600826
<SHARES-COMMON-STOCK> 118712320
<SHARES-COMMON-PRIOR> 107197900
<ACCUMULATED-NII-CURRENT> 82449679
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 244647929
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1922005163
<NET-ASSETS> 3587557556
<DIVIDEND-INCOME> 162522456
<INTEREST-INCOME> 64932173
<OTHER-INCOME> 96759
<EXPENSES-NET> (68923344)
<NET-INVESTMENT-INCOME> 158628044
<REALIZED-GAINS-CURRENT> 327014797
<APPREC-INCREASE-CURRENT> 639253232
<NET-CHANGE-FROM-OPS> 1124896073
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (83171240)
<DISTRIBUTIONS-OF-GAINS> (63214864)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23070207
<NUMBER-OF-SHARES-REDEEMED> (16341658)
<SHARES-REINVESTED> 4785871
<NET-CHANGE-IN-ASSETS> 1946436498
<ACCUMULATED-NII-PRIOR> 63306430
<ACCUMULATED-GAINS-PRIOR> 48885889
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 26704376
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 68923344
<AVERAGE-NET-ASSETS> 3254461890
<PER-SHARE-NAV-BEGIN> 26.44
<PER-SHARE-NII> .80
<PER-SHARE-GAIN-APPREC> 4.31
<PER-SHARE-DIVIDEND> (.76)
<PER-SHARE-DISTRIBUTIONS> (.57)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 30.22
<EXPENSE-RATIO> .56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH BASIC VALUE FUND -- CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 5604112264
<INVESTMENTS-AT-VALUE> 7526117427
<RECEIVABLES> 27322860
<ASSETS-OTHER> 299420
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7553739707
<PAYABLE-FOR-SECURITIES> 15669255
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15366855
<TOTAL-LIABILITIES> 31036110
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5273600826
<SHARES-COMMON-STOCK> 110522222
<SHARES-COMMON-PRIOR> 94482533
<ACCUMULATED-NII-CURRENT> 82449679
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 244647929
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1922005163
<NET-ASSETS> 3288963029
<DIVIDEND-INCOME> 162522456
<INTEREST-INCOME> 64932173
<OTHER-INCOME> 96759
<EXPENSES-NET> (68923344)
<NET-INVESTMENT-INCOME> 158628044
<REALIZED-GAINS-CURRENT> 327014797
<APPREC-INCREASE-CURRENT> 639253232
<NET-CHANGE-FROM-OPS> 1124896073
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (50150559)
<DISTRIBUTIONS-OF-GAINS> (56947014)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34258281
<NUMBER-OF-SHARES-REDEEMED> (21730547)
<SHARES-REINVESTED> 3511955
<NET-CHANGE-IN-ASSETS> 1946436498
<ACCUMULATED-NII-PRIOR> 63306430
<ACCUMULATED-GAINS-PRIOR> 48885889
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 26704376
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 68923344
<AVERAGE-NET-ASSETS> 2915654342
<PER-SHARE-NAV-BEGIN> 26.08
<PER-SHARE-NII> .53
<PER-SHARE-GAIN-APPREC> 4.23
<PER-SHARE-DIVIDEND> (.51)
<PER-SHARE-DISTRIBUTIONS> (.57)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 29.76
<EXPENSE-RATIO> 1.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH BASIC VALUE FUND -- CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 5604112264
<INVESTMENTS-AT-VALUE> 7526117427
<RECEIVABLES> 27322860
<ASSETS-OTHER> 299420
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7553739707
<PAYABLE-FOR-SECURITIES> 15669255
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15366855
<TOTAL-LIABILITIES> 31036110
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5273600826
<SHARES-COMMON-STOCK> 7164737
<SHARES-COMMON-PRIOR> 2860765
<ACCUMULATED-NII-CURRENT> 82449679
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 244647929
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1922005163
<NET-ASSETS> 211786930
<DIVIDEND-INCOME> 162522456
<INTEREST-INCOME> 64932173
<OTHER-INCOME> 96759
<EXPENSES-NET> (68923344)
<NET-INVESTMENT-INCOME> 158628044
<REALIZED-GAINS-CURRENT> 327014797
<APPREC-INCREASE-CURRENT> 639253232
<NET-CHANGE-FROM-OPS> 1124896073
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2265975)
<DISTRIBUTIONS-OF-GAINS> (2332735)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6142278
<NUMBER-OF-SHARES-REDEEMED> (1991553)
<SHARES-REINVESTED> 153247
<NET-CHANGE-IN-ASSETS> 1946436498
<ACCUMULATED-NII-PRIOR> 63306430
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<NAME> MERRILL LYNCH BASIC VALUE FUND -- CLASS D
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<PAGE>
EXHIBIT 99.1(f)
MERRILL LYNCH BASIC VALUE FUND, INC.
ARTICLES SUPPLEMENTARY TO ARTICLES OF INCORPORATION
INCREASING THE AUTHORIZED CAPITAL STOCK
OF THE CORPORATION
MERRILL LYNCH BASIC VALUE FUND, INC., a Maryland corporation having its
principal Maryland office c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202 (the "Corporation"), hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940, as amended, with authority to issue ONE BILLION
(1,000,000,000) shares of capital stock. The Corporation has four classes of
capital stock consisting of THREE HUNDRED MILLION (300,000,000) shares of Class
A Common Stock, THREE HUNDRED MILLION (300,000,000) shares of Class B Common
Stock, TWO HUNDRED MILLION (200,000,000) shares of Class C Common Stock and TWO
HUNDRED MILLION (200,000,000) shares of Class D Common Stock. All shares of all
classes and series of the Corporation's capital stock have a par value of Ten
Cents ($.10) per share and an aggregate par value of ONE HUNDRED MILLION Dollars
($100,000,000).
SECOND: The Board of Directors of the Corporation, acting in accordance
with Section 2-105(c) of the Maryland Corporations and Associations Code, hereby
increases the total number of authorized shares of Class A Common Stock of the
Corporation by ONE HUNDRED MILLION (100,000,000) shares and increases the total
number of authorized shares of Class B Common Stock of the Corporation by ONE
HUNDRED MILLION (100,000,000) shares.
THIRD: After this increase in the number of authorized shares of capital
stock of the Corporation, the Corporation will have authority to issue ONE
BILLION TWO HUNDRED MILLION (1,200,000,000) shares of capital stock and the
capital stock will consist of FOUR HUNDRED MILLION (400,000,000) shares of Class
A Common Stock, FOUR HUNDRED MILLION (400,000,000) shares of Class B Common
Stock, TWO HUNDRED MILLION (200,000,000) shares of Class C Common Stock and TWO
HUNDRED MILLION (200,000,000) shares of Class D Common Stock.
FOURTH: After this increase in the number of authorized shares of capital
stock of the Corporation, all shares of all classes and series of the
Corporation's capital stock will have a par value of Ten Cents ($.10) per share
and an aggregate par value of ONE HUNDRED TWENTY MILLION Dollars ($120,000,000).
<PAGE>
IN WITNESS WHEREOF, MERRILL LYNCH BASIC VALUE FUND, INC. has caused these
Articles Supplementary to be signed in its name and on its behalf by a duly
authorized officer and attested by its Secretary on September 17, 1996.
MERRILL LYNCH BASIC VALUE FUND, INC.
By: /s/ TERRY K. GLENN
-------------------------------
Name: Terry K. Glenn
Title: Executive Vice President
Attest:
/s/ MARK B. GOLDFUS
- --------------------------
Mark B. Goldfus, Secretary
THE UNDERSIGNED officer of MERRILL LYNCH BASIC VALUE FUND, INC., who
executed on behalf of said Corporation the foregoing Articles Supplementary, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said Corporation, the foregoing Articles Supplementary to be the
corporate act of said Corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects, and that this statement is made under the penalties for perjury.
/s/ TERRY K. GLENN
-------------------------------
Name: Terry K. Glenn
Title: Executive Vice President
2
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Basic Value Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 25 to Registration
Statement No. 2-58521 of our report dated July 31, 1996 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 25, 1996
