<PAGE>
PROSPECTUS
SEPTEMBER 26, 1997
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 that seeks 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 conditions. Particular emphasis is
placed on securities that 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 that 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
and for participants in certain fee-based programs the minimum initial purchase
is $500 and the minimum subsequent purchase is $50. Merrill Lynch may charge
its customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made 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 NOR HAS THE 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 September 26, 1997 (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 Commission maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information regarding
the Fund. 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
original pur-
chase price
or redemption
proceeds,
whichever is
lower)....... None(d) 4.0% during the first 1.0% for one year(f) None(d)
year, decreasing 1.0%
annually thereafter
to 0.0% after the
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:
Shareholder
Servicing
Costs(i)..... 0.13% 0.15% 0.16% 0.13%
Other......... 0.02% 0.02% 0.02% 0.02%
----- ----- ----- -----
Total Other 0.15% 0.17% 0.18% 0.15%
Expenses.... ----- ----- ----- -----
Total Fund
Operating 0.55% 1.57% 1.58% 0.80%
Expenses..... ===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and participants in certain
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 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 that
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 certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 30.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 30.
(f) The CDSC may be waived in connection with 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 24.
(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 (including any applicable
CDSC for Class B and Class C
shares):
Class A........................... $58 $69 $82 $118
Class B........................... $56 $70 $86 $166*
Class C........................... $26 $50 $86 $188
Class D........................... $60 $77 $95 $146
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 $69 $82 $118
Class B........................... $16 $50 $86 $166*
Class C........................... $16 $50 $86 $188
Class D........................... $60 $77 $95 $146
</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
$5.35) for confirming purchases and repurchases. Purchases and redemptions made
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 that 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 CDSCs, 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 CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The 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 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 certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans and fee-based programs was 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 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 of 5.25%, 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 certain fee-based
programs. Sales charges also are reduced under a right of accumulation
that 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 Class B shares, and a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with 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 1% CDSC if they are redeemed within one year of purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a 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. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived, such purchases 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 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 by certain retirement plans and participants 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."
6
<PAGE>
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.
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 that 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 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 ongoing 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, 1997 and the independent auditors' report thereon are included
in the Statement of Additional Information. 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,
-----------------------------------------------------------------------------------------------------------
1997+ 1996 1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<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............ $ 30.22 $ 26.44 $ 23.17 $ 23.31 $ 20.57 $ 18.90 $ 19.32 $ 20.03 $ 18.60
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in-
come--net....... .81 .80 .74 .62 .71 .70 .87 .95 .85
Realized and
unrealized gain
(loss) on in-
vestments and
foreign currency
transactions--
net............. 7.66 4.31 4.01 .67 3.03 2.02 (.02) (.56) 1.99
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from in-
vestment opera-
tions........... 8.47 5.11 4.75 1.29 3.74 2.72 .85 .39 2.84
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.80) (.76) (.69) (.70) (.64) (.76) (.97) (.87) (.75)
Realized gain on
investments--
net............. (1.39) (.57) (.79) (.73) (.36) (.29) (.30) (.23) (.66)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total dividends
and distribu-
tions........... (2.19) (1.33) (1.48) (1.43) (1.00) (1.05) (1.27) (1.10) (1.41)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value,
end of year..... $ 36.50 $ 30.22 $ 26.44 $ 23.17 $ 23.31 $ 20.57 $ 18.90 $ 19.32 $ 20.03
========== ========== ========== ========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT
RETURN:*
Based on net as-
set value per
share........... 29.95% 19.92% 21.67% 5.68% 19.03% 15.08% 5.39% 1.77% 16.29%
========== ========== ========== ========== ========== ========== ========== ========== ==========
RATIOS TO AVER-
AGE NET ASSETS:
Expenses........ .55% .56% .59% .53% .54% .58% .59% .57% .58%
========== ========== ========== ========== ========== ========== ========== ========== ==========
Investment in-
come--net....... 2.54% 2.88% 3.19% 2.76% 3.48% 3.52% 4.76% 5.05% 4.82%
========== ========== ========== ========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DA-
TA:
Net assets, end
of year (in
thousands)...... $4,921,834 $3,587,558 $2,834,652 $2,272,983 $2,023,078 $1,670,430 $1,490,657 $1,556,257 $1,373,408
========== ========== ========== ========== ========== ========== ========== ========== ==========
Portfolio turn-
over............ 13.00% 13.94% 11.69% 21.79% 20.85% 21.24% 20.11% 4.88% 13.44%
========== ========== ========== ========== ========== ========== ========== ========== ==========
Average commis-
sion rate
paid++.......... $ .0582 $ .0491 -- -- -- -- -- -- --
========== ========== ========== ========== ========== ========== ========== ========== ==========
<CAPTION>
CLASS A
--------------------------
FOR THE YEAR ENDED JUNE 30,
--------------------------
1988
----------
<S> <C>
Increase (De-
crease) in Net
Asset
Value:
PER SHARE OPER-
ATING PERFOR-
MANCE:
Net asset value,
beginning of
year............ $ 20.26
----------
Investment in-
come--net....... .74
Realized and
unrealized gain
(loss) on in-
vestments and
foreign currency
transactions--
net............. (.44)
----------
Total from in-
vestment opera-
tions........... .30
----------
Less dividends
and distribu-
tions:
Investment in-
come--net....... (.62)
Realized gain on
investments--
net............. (1.34)
----------
Total dividends
and distribu-
tions........... (1.96)
----------
Net asset value,
end of year..... $ 18.60
==========
TOTAL INVESTMENT
RETURN:*
Based on net as-
set value per
share........... 1.90%
==========
RATIOS TO AVER-
AGE NET ASSETS:
Expenses........ .58%
==========
Investment in-
come--net....... 4.06%
==========
SUPPLEMENTAL DA-
TA:
Net assets, end
of year (in
thousands)...... $1,079,262
==========
Portfolio turn-
over............ 20.42%
==========
Average commis-
sion rate
paid++.......... --
==========
</TABLE>
- ----
* Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding during the year.
++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,
-------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
OCTOBER 21, 1988+
1997++ 1996 1995 1994 1993 1992 1991 1990 TO JUNE 30, 1989
---------- ---------- ---------- ---------- ---------- ---------- -------- -------- -----------------
<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
period......... $ 29.76 $ 26.08 $ 22.87 $ 23.04 $ 20.35 $ 18.71 $ 19.12 $ 19.92 $ 18.78
---------- ---------- ---------- ---------- ---------- ---------- -------- -------- --------
Investment in-
come--net...... .48 .53 .53 .42 .53 .50 .66 .78 .55
Realized and
unrealized gain
(loss) on in-
vestments and
foreign cur-
rency transac-
tions--net..... 7.55 4.23 3.93 .62 2.96 2.00 .01 (.59) 1.30
---------- ---------- ---------- ---------- ---------- ---------- -------- -------- --------
Total from in-
vestment opera-
tions.......... 8.03 4.76 4.46 1.04 3.49 2.50 .67 .19 1.85
---------- ---------- ---------- ---------- ---------- ---------- -------- -------- --------
Less dividends
and distribu-
tions:
Investment in-
come--net...... (.51) (.51) (.46) (.48) (.44) (.57) (.78) (.76) (.36)
Realized gain on
investments--
net............ (1.39) (.57) (.79) (.73) (.36) (.29) (.30) (.23) (.35)
---------- ---------- ---------- ---------- ---------- ---------- -------- -------- --------
Total dividends
and distribu-
tions.......... (1.90) (1.08) (1.25) (1.21) (.80) (.86) (1.08) (.99) (.71)
---------- ---------- ---------- ---------- ---------- ---------- -------- -------- --------
Net asset value,
end of period.. $ 35.89 $ 29.76 $26.08 $ 22.87 $ 23.04 $ 20.35 $ 18.71 $ 19.12 $ 19.92
========== ========== ========== ========== ========== ========== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net as-
set value per
share.......... 28.61% 18.71% 20.45% 4.61% 17.81% 13.90% 4.33% .73% 10.33%#
========== ========== ========== ========== ========== ========== ======== ======== ========
RATIOS TO AVER-
AGE NET ASSETS:
Expenses........ 1.57% 1.58% 1.61% 1.55% 1.56% 1.60% 1.61% 1.60% 1.62%*
========== ========== ========== ========== ========== ========== ======== ======== ========
Investment in-
come--net...... 1.53% 1.86% 2.16% 1.75% 2.47% 2.50% 3.73% 4.03% 4.43%*
========== ========== ========== ========== ========== ========== ======== ======== ========
SUPPLEMENTAL DA-
TA:
Net assets, end
of period (in
thousands)..... $4,088,755 $3,288,963 $2,464,248 $1,744,704 $1,383,935 $1,064,354 $874,318 $922,126 $468,537
========== ========== ========== ========== ========== ========== ======== ======== ========
Portfolio turn-
over........... 13.00% 13.94% 11.69% 21.79% 20.85% 21.24% 20.11% 4.88% 13.44%
========== ========== ========== ========== ========== ========== ======== ======== ========
Average commis-
sion rate paid
##............. $ .0582 $ .0491 -- -- -- -- -- -- --
========== ========== ========== ========== ========== ========== ======== ======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++Based on average shares outstanding during the year.
# 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 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,
------------------ 1995 ------------------ 1995
1997+ 1996 1997+ 1996
-------- -------- ------------------ -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
Per Share Operating
Performance:
Net asset value,
beginning of period.... $29.56 $25.98 $ 22.92 $ 30.16 $ 26.41 $ 23.19
-------- -------- ------- -------- -------- --------
Investment income--net.. .47 .55 .44 .73 .76 .50
Realized and unrealized
gain on investments and
foreign currency
transactions--net...... 7.49 4.18 3.05 7.66 4.27 3.17
-------- -------- ------- -------- -------- --------
Total from investment
operations............. 7.96 4.73 3.49 8.39 5.03 3.67
-------- -------- ------- -------- -------- --------
Less dividends and
distributions:
Investment income--net.. (.54) (.58) (.33) (.74) (.71) (.35)
Realized gain on
investments--net....... (1.39) (.57) (.10) (1.39) (.57) (.10)
-------- -------- ------- -------- -------- --------
Total dividends and
distributions.......... (1.93) (1.15) (.43) (2.13) (1.28) (.45)
-------- -------- ------- -------- -------- --------
Net asset value, end of
period................. $ 35.59 $ 29.56 $ 25.98 $ 36.42 $ 30.16 $ 26.41
======== ======== ======= ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 28.60% 18.69% 15.59%# 29.65% 19.61% 16.23%#
======== ======== ======= ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.58% 1.59% 1.66%* .80% .81% .87%*
======== ======== ======= ======== ======== ========
Investment income--net.. 1.51% 1.83% 2.09%* 2.28% 2.61% 2.88%*
======== ======== ======= ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $337,828 $211,787 $74,334 $886,391 $434,396 $203,033
======== ======== ======= ======== ======== ========
Portfolio turnover...... 13.00% 13.94% 11.69% 13.00% 13.94% 11.69%
======== ======== ======= ======== ======== ========
Average commission rate
paid ##................ $ .0582 $ .0491 -- $ .0582 $ .0491 --
======== ======== ======= ======== ======== ========
</TABLE>
- --------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding during the year.
++ 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 conditions.
Particular emphasis is placed on securities that 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 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:
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stock. 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 U.S. 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.
11
<PAGE>
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 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 that 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 of 1933 (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 that 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.
12
<PAGE>
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 developments 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 that 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.
Suitability. The economic benefit from an investment in the Fund depends upon
many factors beyond the control of the Fund, the Investment Adviser and its
affiliates. Because of its emphasis on equity securities which the Fund
believes are undervalued, the Fund should be considered a vehicle for
diversification and not as a balanced investment program. The suitability for
any particular investor of a purchase of shares in the Fund will depned upon,
among other things, such investor's investment objectives and such investor's
ability to accept the risks associated with investing in undervalued equity
securities, including the risk of loss of principal.
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.
13
<PAGE>
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 140
registered investment companies. The Investment Adviser or MLAM also provides
investment advisory services to individual and institutional accounts. As of
August 31, 1997, the Investment Adviser and MLAM had a total of approximately
$267.7 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.
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, 1997, the Investment Adviser earned a fee of $35,001,183 (based
on average net assets of approximately $8.6 billion) and the effective rate was
approximately 0.41%.
Also, the Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly owned subsidiary of ML & Co. and an
affiliate of the Investment Adviser, pursuant to which the Investment Adviser
pays MLAM U.K. a fee for providing services to the Investment Adviser with
respect to the Fund in an amount to be determined from time to time by the
Investment Adviser and MLAM U.K. but in no event in excess of the amount the
Investment Adviser actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement. MLAM U.K. has offices at Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England.
14
<PAGE>
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, 1997, the Fund paid the Investment
Adviser $436,837 for such accounting services. For the fiscal year ended June
30, 1997, the ratio of total expenses to average net assets was 0.55% for Class
A shares, 1.57% for Class B shares, 1.58% for Class C shares and 0.80% for
Class D shares.
Paul M. Hoffmann is a Vice President and Portfolio Manager for the Fund. Mr.
Hoffmann has been a First Vice President of MLAM since 1997 and a Portfolio
Manager of MLAM since 1976. From 1976 to 1997, Mr. Hoffmann was a Vice
President of MLAM and the Investment Adviser. 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 that incorporates the Code of
Ethics of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of
the Investment Adviser and, as described below, impose additional, more
onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser 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 that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
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 and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Fund pays
the Transfer Agent an annual fee of up to $11.00 per Class A or Class D account
and up to $14.00 per Class B or Class C account and is entitled to
reimbursement for certain transaction charges and out-of-pocket expenses
incurred by it under the Transfer Agency Agreement. Additionally, a $0.20
monthly closed account charge will be assessed on all accounts which close
during the calendar year. Application of this fee will commence the month
following the month the account is closed. At the end of the calendar year, no
further fees will be due. For purposes of the Transfer Agency Agreement, the
term "account" includes a shareholder account maintained directly by the
Transfer Agent and any other account representing the
15
<PAGE>
beneficial interest of a person in the relevant share class or a record
keeping system, provided the record keeping system is maintained by a wholly
owned subsidiary of ML & Co. For the fiscal year ended June 30, 1997, the
total fee paid by the Fund to the Transfer Agent pursuant to the Transfer
Agency Agreement was $11,967,405.
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 and for
participants in certain fee-based programs, the minimum initial purchase is
$500 and the minimum subsequent purchase is $50.
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 include
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 from the securities dealer 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 $5.35) to confirm a sale of shares to such
customers. Purchases made directly through the Transfer Agent are not subject
to the processing fee.
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 CDSCs, 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 (except that Class B shareholders may vote upon any material changes
to expenses charged under the Class D Distribution Plan). 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 CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
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.
17
<PAGE>
(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 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 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 certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans and fee-based programs was 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 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 by certain
retirement plan investors and participants 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 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be waived
in connection with certain fee-based programs. The charge is assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. A sales charge of 0.75% will be charged on purchases
of $1,000,000 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"). The proceeds from the account
maintenance fees are used to compensate Merrill Lynch for providing continuing
account maintenance activities.
18
<PAGE>
For the fiscal year ended June 30, 1997, the Fund sold 37,081,337 Class A
shares for aggregate net proceeds of $1,162,009,521. The gross sales charges
for the sale of Class A shares of the Fund for that year were $610,352, of
which $42,785 and $567,567 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended June 30, 1997, 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 ended June 30, 1997, the Fund sold 7,052,734 Class D shares for aggregate
net proceeds of $223,824,582. The gross sales charges for the sale of Class D
shares of the Fund for that year were $1,836,372, of which $116,447 and
$1,719,925 were received by the Distributor and Merrill Lynch, respectively.
For the fiscal year ended June 30, 1997, the Distributor received no CDSCs 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 and U.S. branches of foreign banking
institutions provided that the program or branch 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). In
addition, 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."
19
<PAGE>
Provided applicable threshold requirements are met, either Class A or Class D
shares are offered at net asset value to Employee AccessSM Accounts available
through authorized employers. Class A shares are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, subject to
certain conditions, 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.
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,
which declines each year, 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 from the dealers' own funds of compensation to
financial consultants for selling Class B and Class C shares. 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.
20
<PAGE>
Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked on
to the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services--
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares that 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, 1997, the Distributor received CDSCs of
$3,245,099 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the Distributor may have
been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
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.
21
<PAGE>
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).
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 that are purchased by eligible 401(k) or eligible 401(a) plans that are
rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA
and held in such account at the time of redemption 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 that are purchased by a
Merrill Lynch rollover IRA that was funded by a rollover from a terminated
401(k) plan managed by the MLAM Private Portfolio Group and held in such
account at the time of redemption. The Class B CDSC also is waived for any
Class B shares that are purchased within qualifying Employee Access SM
Accounts. 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 certain fee-based programs. See
"Shareholder Services--Fee-Based Programs".
Contingent Deferred Sales Charges--Class C Shares. Class C shares that 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. The Class C CDSC may be waived in
connection with 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, 1997, the Distributor received CDSCs of
$103,976 with respect to redemptions of Class C shares, all of which were paid
to Merrill Lynch.
22
<PAGE>
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked on
to the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that 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."
23
<PAGE>
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 in connection with such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the CDSCs and distribution fees provide for the
financing of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended June 30, 1997, the Fund paid the Distributor
$36,276,531 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $3.6
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, 1997, the Fund paid the
Distributor $2,697,544 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $268.3 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, 1997, the
Fund paid the Distributor $1,458,562 pursuant to the Class D Distribution Plan
(based on average daily net assets subject to such Class D Distribution Plan of
approximately $580.2 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.
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
24
<PAGE>
Distribution Plans. This information is presented annually as of December 31 of
each year on a "fully allocated accrual" basis and quarterly on a "direct
expense and revenue/cash" basis. On the fully allocated accrual basis, revenues
consist of the account maintenance fees, distribution fees, the CDSCs and
certain other related revenues, and expenses consist of financial consultant
compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs, and the expenses consist of financial consultant
compensation.
As of December 31, 1996, 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 $3,399,000 (0.09% of Class B net assets at that date). As of June
30, 1997, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $99,168,001
(2.43% of Class B net assets at that date). As of December 31, 1996, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for
the period since the commencement of operations of Class C shares exceeded
fully allocated accrual revenues by approximately $955,000 (0.35% of Class C
net assets at that date). As of June 30, 1997, direct cash revenues for the
period since the commencement of operations of Class C shares exceeded direct
cash expenses by $2,872,094 (0.85% 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
25
<PAGE>
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.
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 that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The 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. Redemption
requests should not be sent to the Fund. The redemption request in either event
requires the signatures of all persons in whose names the shares are
registered, signed exactly as their names appear on the Transfer Agent's
register or on the certificate, as the case may be. The signature(s) on the
redemption request must be guaranteed by an "eligible guarantor institution"
(including, for example, Merrill Lynch branch offices and certain other
financial institutions) as such term 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,
Federal Funds 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.
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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 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 that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares.
Repurchases made 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:
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INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. These statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. 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 such 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 the account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
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
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<PAGE>
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any
time as long as, at the time of the exchange, the shareholder holds Class A
shares of the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund that 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 to Merrill Lynch if the shareholder's account is
maintained with Merrill Lynch or by written notification or telephone call (1-
800-MER-FUND) to the Transfer Agent if the shareholder's account is maintained
with the Transfer Agent, elect to have subsequent dividends or capital gains
distributions, or both,
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<PAGE>
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 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 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) or CBA(R) Systematic
Redemption Program, subject to certain conditions. With respect to redemptions
of Class B and Class C shares pursuant to a systematic withdrawal plan, the
maximum number of Class B or Class C shares that can be redeemed from an
account annually shall not exceed 10% of the value of shares of such class in
that account at the time the election to join the systematic withdrawal plan
was made. Any CDSC that otherwise might be due on such redemption of Class B or
Class C shares will be waived. Shares redeemed pursuant to a systematic
withdrawal plan will be redeemed in the same order as Class B or Class C shares
are otherwise redeemed. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Contingent Deferred Sales Charges--
Class B Shares" and "--Contingent Deferred Sales Charges--Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will automatically be applied thereafter to Class D
shares. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares."
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) or 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 the Transfer Agent at
(800) MER-FUND (637-3863).
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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.
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, 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
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<PAGE>
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 distributed to investors whose
purchases are subject to waiver of the CDSC in the case of Class B and Class C
shares (such as investors in certain retirement plans) or to reduced sales
charges in the case of Class A and Class D shares, performance data may take
into account the reduced, and not the maximum, sales charge or may not take
into account the CDSC and therefore may reflect greater total return since, due
to the reduced sales charges or waiver of the CDSC, a lower amount of expenses
may be deducted. See "Purchase of Shares." The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
the effect of such total return on a hypothetical $1,000 investment in the Fund
at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 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 capital gains, if any, are distributed to the Fund's shareholders at
least annually. 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 will be reinvested automatically in
shares of the Fund, at net asset value without a sales charge. However, a
shareholder whose account is maintained at the Transfer Agent or whose account
is maintained through Merrill Lynch may elect in writing to receive any such
dividends or distributions, or both, in cash. See "Shareholder Services--
Automatic Reinvestment of Dividends and Distributions" for information as to
how to elect either dividend reinvestment or cash payments. Dividends and
distributions are taxable to shareholders as described below whether they
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<PAGE>
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 Federal tax requirements 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, 1997, 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, 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 the 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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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. Any assets or
liabilities expressed in terms of foreign currencies are translated into U.S.
dollars at the prevailing market rates as obtained from one or more dealers.
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.
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<PAGE>
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains 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. Recent legislation creates
additional categories of capital gains taxable at different rates. Although the
legislation does not explain how gain in these categories will be taxed to
shareholders of RICs, it authorizes the issuance of regulations applying the
new categories of gain and the new rates to sales of securities by RICs. In the
absence of guidance, there is some uncertainty as to the manner in which the
categories of gain and related rates will be passed through to shareholders in
capital gain dividends. 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. It is anticipated that IRS guidance permitting categories of gain
and related rates to be passed through to shareholders would also require this
written notice to designate the amounts of various categories of capital gain
income included in capital gain dividends. A portion of the Fund's ordinary
income dividends may be eligible for the dividends received deduction allowed
to corporations under the Code, if certain requirements are met. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by its shareholders on December 31 of the year in which
such dividend was declared.
Ordinary income dividends paid 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.
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<PAGE>
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.
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.
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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
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 (except that Class B shareholders have certain voting
rights with respect to the Class D Distribution Plan), 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.
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.
A-1
<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 .....................................
Services, Inc. Authorized Signature of Dealer
P.O. Box 45289
Jacksonville, FL 32232-5289
[ ][ ][ ] [ ][ ][ ][ ] ...............
Branch Code F/C No. F/C Last Name
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer A/C No.
A-2
<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-- (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A, [_] Class B*, Class C* 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 THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE):
[_] $ of [_] Class A, [_] Class B*, Class C* 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.
- -------
* Annual withdrawal cannot exceed 10% of the value of shares of such class
held in the account at the time the election to join the systematic witdrawal
plan is made.
A-3
<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.
A-4
<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..................................................... 13
Board of Directors........................................................ 13
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........................................................ 24
Limitations on the Payment of Deferred Sales Charges...................... 25
Redemption of Shares....................................................... 26
Redemption................................................................ 26
Repurchase................................................................ 27
Reinstatement Privilege--Class A and
Class D Shares........................................................... 27
Shareholder Services....................................................... 27
Investment Account........................................................ 28
Exchange Privilege........................................................ 28
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 29
Systematic Withdrawal Plans............................................... 30
Automatic Investment Plans................................................ 30
Fee-Based Programs........................................................ 30
Portfolio Transactions and Brokerage....................................... 31
Performance Data........................................................... 31
Additional Information..................................................... 32
Dividends and Distributions............................................... 32
Determination of Net Asset Value.......................................... 33
Taxes..................................................................... 34
Organization of the Fund.................................................. 36
Shareholder Reports....................................................... 36
Shareholder Inquiries..................................................... 36
Authorization Form......................................................... A-1
</TABLE>
Code #10042-0997
[LOGO] MERRILL LYNCH
Merrill Lynch
Basic Value Fund, Inc.
[ART]
PROSPECTUS
September 26, 1997
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 that seeks 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 conditions. Particular emphasis is
placed on securities that 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 September
26, 1997 (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 September 26, 1997
<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 that 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 Fund will, however, comply
with the Federal tax requirement that less than 30% of its gross income be
derived from gains from the sale or other disposition of securities held for
less than three months. Under recent legislation, this requirement will no
longer apply to the Fund after its fiscal year ending June 30, 1998. 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, 1997 and
1996 were 13.00% and 13.94%, 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.
3
<PAGE>
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the 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 permitted by applicable law. As a matter of policy, however, the
Fund will not purchase shares of any registered open-end investment company
or registered unit investment trust, in reliance on Section 12(d)(1)(F) or
(G) (the "fund of funds" provision) of the Investment Company Act, at any
time its shares are owned by another investment company that is part of the
same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund 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
4
<PAGE>
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. 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 that 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 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.
5
<PAGE>
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 (65)--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; and Director of Merrill Lynch Funds
Distributor, Inc. (the "Distributor") since 1977.
Donald Cecil (70)--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 (65)--Director(2)--Soldiers Field Road, Boston, Massachusetts
02163. Currently James R. Williston Professor of Investment Management
Emeritus, Harvard Business School; James R. Williston Professor of Investment
Management, Harvard Business School, from 1971 to 1996; Director of Cambridge
Bancorp, Copley Properties, Inc. and Sun Life Assurance Company of Canada.
Edward H. Meyer (70)--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 (69)--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.
J. Thomas Touchton (58)--Director(2)--Suite 3405, One Tampa City Center, 201
North Franklin Street, 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 (57)--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 (64)--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 (67)--Vice President(1)--First Vice President of MLAM since
1997; Vice President of MLAM from 1976 to 1997.
Donald C. Burke (37)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Director of Taxation of MLAM since 1990; and Vice President of MLAM
from 1990 to 1997.
6
<PAGE>
Gerald M. Richard (48)--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; Vice President of the Distributor
since 1981 and Treasurer thereof since 1984.
Thomas D. Jones, III (32)--Secretary(1)(2)--Attorney with MLAM and the
Investment Adviser since 1992.
- --------
(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 August 31, 1997, 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 (each a "non-interested
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 and Nominating Committee of the Board of
Directors (the "Committee"), which consists of all of the unaffiliated
Directors, an annual fee of $2,500. The Chairman of the Committee receives an
additional $1,000 annually. The Fund reimburses each unaffiliated Director for
his actual out-of-pocket expenses relating to attendance at Board and
Committee meetings. Fees and expenses paid to the Directors aggregated $41,233
for the fiscal year ended June 30, 1997.
The following table sets forth, for the fiscal year ended June 30, 1997,
compensation paid by the Fund to the non-interested Directors and, for the
calendar year ended December 31, 1996, 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 $268,933
M. Colyer Crum............... $8,000 None $117,600
Edward H. Meyer.............. $8,000 None $227,933
Jack B. Sunderland........... $8,000 None $128,100
J. Thomas Touchton........... $8,000 None $128,100
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows:
Mr. Cecil (32 registered investment companies consisting of 32
portfolios); Mr. Crum (14 registered investment companies consisting of 14
portfolios); Mr. Meyer (32 registered investment companies consisting of
32 portfolios); Mr. Sunderland (17 registered investment companies
consisting of 29 portfolios) and Mr. Touchton (17 registered investment
companies consisting of 29 portfolios).
7
<PAGE>
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 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, 1997, 1996 and 1995, the advisory fees paid by the
Fund to the Investment Adviser totalled $35,001,183, $26,704,376 and
$18,443,250, 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
8
<PAGE>
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".
As described in the Prospectus, the Investment Adviser has also entered into
a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K.") pursuant to which MLAM U.K. provides investment advisory
services to the Investment Adviser with respect to the Fund.
The Investment Adviser 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. Similarly, the following entities may be considered "controlling
persons" of MLAM U.K.: Merrill Lynch Europe Limited (MLAM U.K.'s parent), a
subsidiary of ML International Holdings, a subsidiary of Merrill Lynch
International, Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein, the
Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority
of the outstanding shares of the Fund and (b) by a majority of the Directors
who are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing 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 that 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
9
<PAGE>
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, 1997 were $610,352, of which the Distributor received $42,785
and Merrill Lynch received $567,567 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, 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. For the fiscal
year ended June 30, 1997, the gross sales charges for the sale of Class D
shares were $1,836,372, of which the Distributor received $116,447 and Merrill
Lynch received $1,719,925 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."
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 that has not been in existence for at
least six months or that 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
10
<PAGE>
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 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
11
<PAGE>
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 .50 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. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access AccountsSM available through authorized employers. 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 eight 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
12
<PAGE>
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 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
13
<PAGE>
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 that might result from an acquisition of assets having net unrealized
appreciation which is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities that (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, that 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
14
<PAGE>
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 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.
15
<PAGE>
The following table sets forth comparative information as of June 30, 1997
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, 1997
(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,
1997:
Under NASD Rule as
Adopted................ $3,646,067 $227,879 $59,332 $287,211 $124,428 $162,783 $30,665
Under Distributor's
Voluntary Waiver....... $3,646,067 $227,879 $18,230 $246,109 $124,428 $121,681 $30,665
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF OPERA-
TIONS) TO JUNE 30,
1997:
Under NASD Rule as
Adopted................ $ 322,661 $ 20,166 $ 2,341 $ 22,507 $ 3,431 $ 19,076 $ 2,533
</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.
(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. This figure may
include CDSDs that were deferred when a shareholder redeemed shares prior
to the expiration of the applicable CDSC period and invested the proceeds,
without the imposition of a sales charge, in Class A shares in conjunction
with the shareholder's participation in the Merrill Lynch Mutual Funds
Advisor ("MFA") program. The CDSC is booked as a contingent obligation
that may be payable if the shareholder terminates participation in the MFA
program.
(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
16
<PAGE>
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 certain instances,
including 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 in the case of such
withdrawals 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 and 1995, the Distributor received CDSCs of $2,785,815 and
$1,951,585, respectively, with respect to redemptions of Class B shares, all of
which were paid to Merrill Lynch. For the fiscal year ended June 30, 1997, with
respect to the redemption of Class B shares, the Distributor received CDSCs of
$3,245,099. Additional CDSCs payable to the Distributor may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs. For the fiscal years ended June
30, 1997 and 1996 and for the period October 21, 1994 (commencement of
operations) to June 30, 1995, the Distributor received CDSCs of $103,976,
$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
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.
17
<PAGE>
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 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, 1997, the Fund paid total brokerage
commissions of $3,140,326 of which $73,423 or 2.3% was paid to Merrill Lynch
for effecting 2.9% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. 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.
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
18
<PAGE>
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 possibility of seeking
to recapture for the benefit of the Fund brokerage commissions, dealer spreads
and other expenses of possible portfolio transactions, such as underwriting
commissions and tender offer solicitation fees, by conducting such portfolio
transactions through affiliated entities, including Merrill Lynch. For example,
brokerage commissions received by Merrill Lynch could be offset against the
advisory fee payable by the Fund to the Investment Adviser. After considering
all factors deemed relevant, the Board made a determination not to seek such
recapture. The Board will reconsider this matter from time to time. The
Investment Adviser has arranged for the Fund's custodian to receive any tender
offer solicitation fees on behalf of the Fund payable with respect to portfolio
securities of the Fund.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage unless the member (i) has obtained prior express authorization from
the account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules
the 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), each day on which the NYSE
is open for trading. The NYSE is not open on New Year's Day, Presidents' Day,
Martin Luther King, Jr. 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
19
<PAGE>
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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. 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 OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation.
Securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes 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, that 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.
20
<PAGE>
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 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 NYSE on the ex-dividend date of such 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.
21
<PAGE>
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
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares 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 shares
of the Fund having a value, based on cost or the current offering price, of
$5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. 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 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 shares in the
Investment Account are reinvested automatically in shares of the Fund. 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 shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for shares of
the Fund from investors 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.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the value
of shares of such class in that account at the time the election to join the
systematic withdrawal plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
Charges--Class C Shares" in the Prospectus. Where the systematic withdrawal
plan is applied to Class B shares, upon conversion of the last Class B shares
in an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and C Shares--Conversion of
Class B Shares to Class D Shares" in the Prospectus; if an investor wishes to
change the amount being withdrawn in a systematic withdrawal plan the investor
should contact his or her Financial Consultant.
Alternatively, a 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
22
<PAGE>
CMA(R) or CBA(R) Systematic Redemption Program. The minimum fixed dollar
amount redeemable is $50. The proceeds of systematic redemptions will be
posted to a shareholder's account five business days after the date the shares
are redeemed. All redemptions are made at net asset value. A shareholder may
elect to have his or her shares redeemed on the first, second, third or fourth
Monday of each month, in the case of monthly redemptions, or of every other
month, in the case of bimonthly redemptions. For quarterly, semiannual or
annual redemptions, the shareholder may select the month in which the shares
are to be redeemed and may designate whether the redemption is to be made on
the first, second, third or fourth Monday of the month. If the Monday selected
is not a business day, the redemption will be processed at net asset value on
the next business day. The CMA(R) or CBA(R) Systematic Redemption Program is
not available if Fund shares are being purchased within the account pursuant
to the Automatic Investment Program. For more information on the CMA(R) or
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.
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
U.S. 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 the account in
which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second 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
23
<PAGE>
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 made 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 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.
24
<PAGE>
Shareholders also may exchange shares of the Fund into shares of certain
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
that 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 newly acquired 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 that 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.
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 MLAM-advised funds,
with shares for which certificates have not been issued may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
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
25
<PAGE>
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"). As long as it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains 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. Recent legislation creates
additional categories of capital gains taxable at different rates. Although the
legislation does not explain how gain in these categories will be taxed to
shareholders of RICs, it authorizes regulations applying the new categories of
gain and the new rates to sales of securities by RICs. In the absence of
guidance, there is some uncertainty as to the manner in which the categories of
gain and related rates will be passed through to shareholders in capital gain
dividends. 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. It is anticipated that IRS guidance permitting categories of gain
and related rates to be passed through to shareholders would also require this
written notice to designate the amounts of various categories of capital gain
income included in 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.
26
<PAGE>
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.
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
27
<PAGE>
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. Under recently enacted legislation,
this requirement will no longer apply to the Fund after its fiscal year ending
June 30, 1998.
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.
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.
28
<PAGE>
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 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.
29
<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, 1997... 23.13% $ 1,231.30 24.61% $1,246.10 27.60% $1,276.00 22.84% $1,228.40
Five Years Ended
June 30, 1997... 17.71% $ 2,259.80 17.78% $2,266.30
Ten Years Ended
June 30, 1997... 12.70% $ 3,305.10
Inception
(October 21,
1988) to June
30, 1997........ 13.44% $2,992.90
Inception
(October 21,
1994) to June
30, 1997........ 23.50% $1,764.30 22.01% $1,707.70
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June
30, 1997........ 29.95% $ 1,299.50 28.61% $1,286.10 28.60% $1,286.00 29.65% $1,296.50
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, 1997........ 1,883.23% $19,832.30
Inception
(October 21,
1988) to June
30, 1997........ 199.29% $2,992.90
Inception
(October 21,
1994) to June
30, 1997** ..... 76.43% $1,764.30 70.77% $1,707.70
</TABLE>
- ----
* Information as to Class B shares is presented only for the period October
21, 1988 to June 30, 1997. 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, 1997. Prior to October 21, 1994, no
Class C or Class D shares were publicly issued.
30
<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. 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.
31
<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, 1997, is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets.............. $4,921,834,270 $4,088,755,251 $337,827,530 $886,391,211
============== ============== ============ ============
Number of Shares
Outstanding............ 134,834,035 113,914,903 9,491,071 24,339,379
============== ============== ============ ============
Net Asset Value Per
Share (net assets
divided by number of
shares outstanding).... $ 36.50 $ 35.89 $ 35.59 $ 36.42
Sales Charge (for Class
A and Class D shares:
5.25% of offering price
(5.54% of net asset
value per share))*..... 2.02 ** ** 2.02
============== ============== ============ ============
Offering Price.......... $ 38.52 $ 35.89 $ 35.59 $ 38.44
============== ============== ============ ============
</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.
32
<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. It is anticipated that IRS
guidance permitting categories of gain and related rates to be passed through
to shareholders would also require this Federal income tax information to
designate the amounts of various categories of capital gain income included in
capital gain dividends.
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, no person or entity owned beneficially 5% or
more of the Fund's shares on September 1, 1997.
33
<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, 1997, 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, 1997 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, 1997, 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
August 4, 1997
34
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<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 1,400,000 ASARCO Inc. $ 36,667,971 $ 42,875,000 0.4%
Savings & Loans 1,900,000 Ahmanson (H.F.) & Co. 41,425,084 81,700,000 0.8
Insurance 2,500,000 American General Corp. 54,530,936 119,375,000 1.2
Insurance 260,000 American National
Insurance Co. 9,749,442 22,685,000 0.2
Steel 4,900,000 ++Bethlehem Steel Corp. 66,610,783 51,143,750 0.5
Restaurants 3,900,000 Darden Restaurants, Inc. 36,505,673 35,343,750 0.3
Information Processing 4,200,000 ++Digital Equipment Corp. 160,300,507 148,837,500 1.5
Utilities--Electric 2,700,000 Entergy Corp. 62,093,373 73,912,500 0.7
Retail 3,300,000 ++Federated Department Stores, Inc. 93,481,549 114,675,000 1.1
Entertainment 1,250,000 The Hartford Financial
Services Group Inc. 31,155,644 103,437,500 1.0
Insurance 2,100,000 ++ITT Corp. 76,665,244 128,231,250 1.3
Chemicals 800,000 Imperial Chemical Industries
PLC (ADR)* 45,969,824 45,500,000 0.4
Paper & Forest Products 3,400,000 International Paper Co. 115,795,809 165,112,500 1.6
Retail 4,400,000 ++Kmart Corporation 53,717,379 53,900,000 0.5
Insurance 1,400,000 PartnerRe Holdings Ltd. 29,498,937 53,375,000 0.5
Trucking 1,000,000 Scania AB (Class A) (ADR)* 28,093,817 29,625,000 0.3
Trucking 500,000 Scania AB (Class B) (ADR)* 13,565,869 14,875,000 0.1
Beverages 2,200,000 The Seagram Company Ltd. 73,951,621 88,550,000 0.9
Information Processing 2,800,000 ++Tandem Computers Inc. 34,929,327 56,700,000 0.6
Telecommunications 1,600,000 Telefonica de Espana
S.A. (ADR)* 63,336,735 138,000,000 1.3
Telecommunications 2,000,000 ++U S West Media Group, Inc. 29,542,902 40,500,000 0.4
Steel 3,150,000 USX--US Steel Group, Inc. 94,976,906 110,446,875 1.1
Banking 400,000 Wells Fargo & Company 69,745,372 107,800,000 1.1
-------------- --------------- ------
1,322,310,704 1,826,600,625 17.8
Below-Average Price/Earnings Ratio
Insurance 3,000,000 The Allstate Corp. 65,873,114 219,000,000 2.1
Banking 2,500,000 Citicorp 99,909,139 301,406,250 3.0
Farm & Construction
Equipment 4,500,000 Deere & Company 103,532,247 246,937,500 2.4
Capital Goods 1,400,000 Eaton Corp. 72,067,416 122,237,500 1.2
Automotive 5,600,000 Ford Motor Co. 162,471,869 211,400,000 2.1
Automotive 2,900,000 General Motors Corp. 133,442,048 161,493,750 1.6
Conglomerates 650,000 Hanson PLC (ADR)* 27,719,944 16,250,000 0.2
Chemicals 2,300,000 Hercules Inc. 55,427,706 110,112,500 1.1
Machinery 3,650,000 ITT Industries Inc. 71,862,095 93,987,500 0.9
Information Processing 4,000,000 International Business
Machines Corp. 157,901,659 360,750,000 3.5
Semiconductors 1,000,000 Micron Technology, Inc. 26,042,512 39,937,500 0.4
Banking 2,400,000 NationsBank Corp. 55,256,525 154,800,000 1.5
Banking 3,700,000 Norwest Corp. 87,114,122 208,125,000 2.0
Tobacco 2,100,000 Philip Morris Companies Inc. 52,019,250 93,187,500 0.9
Electrical Equipment 3,150,000 Philips Electronics N.V.
(ADR)* 79,068,977 226,406,250 2.2
Retail 3,450,000 Sears, Roebuck & Co. 84,545,051 185,437,500 1.8
Electronics 1,500,000 Tektronix, Inc. 58,632,719 90,000,000 0.9
Insurance 3,000,000 Travelers Inc. 53,675,700 189,187,500 1.9
Chemicals 2,400,000 Union Carbide Corp. 75,165,781 112,950,000 1.1
Information Processing 5,600,000 ++Unisys Corp. 60,913,547 42,700,000 0.4
Retail Apparel 4,000,000 ++Woolworth Corp. 55,901,671 96,000,000 0.9
-------------- --------------- ------
1,638,543,092 3,282,306,250 32.1
</TABLE>
35
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Industry Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Above-Average Yield
Telecommunications 1,600,000 Ameritech Corporation 97,056,262 108,700,000 1.1
Telecommunications 3,500,000 AT&T Corp. 126,232,242 122,718,750 1.2
Oil--Domestic 2,200,000 Atlantic Richfield Co. 118,680,060 155,100,000 1.5
Real Estate Investment
Trust 700,000 Avalon Properties, Inc. 14,156,990 20,037,500 0.2
Telecommunications 1,550,000 Bell Atlantic Corp. 80,362,277 117,606,250 1.2
Oil--International 1,936,476 The British Petroleum Co.
PLC (ADR)* (a) 60,259,699 144,993,640 1.4
Utilities--Electric 1,550,000 CINergy Corp. 41,274,637 53,959,375 0.5
Oil--International 2,580,000 Chevron Corp. 110,551,043 190,758,750 1.9
Utilities--Electric 1,650,000 Consolidated Edison Co. of
New York, Inc. 39,941,210 48,571,875 0.5
Utilities--Electric 637,500 DPL Inc. 6,204,369 15,698,437 0.2
Telecommunications 3,500,000 GTE Corp. 115,931,380 153,562,500 1.5
Foods/Food Processing 1,450,000 General Mills, Inc. 67,972,787 94,431,250 0.9
Real Estate Investment
Trust 440,000 Irvine Apartment Communities,
Inc. 7,185,399 12,980,000 0.1
Real Estate Investment
Trust 900,000 Liberty Property Trust 17,601,647 22,387,500 0.2
Real Estate Investment
Trust 500,000 The Mills Corp. 10,505,625 13,843,750 0.1
Oil--International 4,000,000 Mobil Corp. 133,447,548 279,500,000 2.7
Utilities--Electric 1,200,000 NIPSCO Industries, Inc. 27,387,777 49,575,000 0.5
Oil--Domestic 4,100,000 Occidental Petroleum Corp. 89,048,665 102,756,250 1.0
Utilities--Electric 2,300,000 PECO Energy Co. 56,524,092 48,300,000 0.5
Utilities--Electric 1,800,000 Public Service Enterprise
Group Inc. 48,476,636 45,000,000 0.4
Real Estate Investment
Trust 1,600,000 Simon DeBartolo Group, Inc. 33,364,089 51,200,000 0.5
Real Estate Investment
Trust 500,000 Summit Properties Inc. 9,245,900 10,312,500 0.1
Oil--International 1,800,000 Texaco Inc. 127,207,623 195,750,000 1.9
Utilities--Electric 2,150,000 Texas Utilities Co. 74,186,490 74,040,625 0.7
Telecommunications 3,000,000 U S West Communications
Group 77,072,442 113,062,500 1.1
-------------- --------------- ------
1,589,876,889 2,244,846,452 21.9
Special Situations
Pharmaceuticals 2,000,000 Bristol-Myers Squibb Co. 57,174,206 162,000,000 1.6
Information Processing 1,400,000 ++Data General Corp. 18,155,547 36,400,000 0.4
Oil Services & Equipment 3,400,000 Dresser Industries, Inc. 79,584,474 126,650,000 1.2
Chemicals 3,500,000 duPont (E.I.) de Nemours & Co. 146,745,137 220,062,500 2.2
Oil--International 4,600,000 Exxon Corp. 156,573,580 282,900,000 2.8
Machinery 2,400,000 Ingersoll-Rand Co. 83,867,995 148,200,000 1.4
Pharmaceuticals 1,625,000 Merck & Co., Inc. 54,465,787 168,187,500 1.6
Oil--International 5,000,000 Royal Dutch Petroleum
Co. (ADR)* 101,368,943 271,875,000 2.7
Semiconductors 750,000 Texas Instruments, Inc. 35,731,664 63,046,875 0.6
Pharmaceuticals 440,000 Zeneca Group PLC (ADR)* 12,980,000 43,615,000 0.4
-------------- --------------- ------
746,647,333 1,522,936,875 14.9
Total Stocks 5,297,378,018 8,876,690,202 86.7
</TABLE>
36
<PAGE>
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Short-Term Securities
Commercial Paper** ARCO British Ltd.:
$ 20,000,000 5.56% due 7/14/1997 $ 19,956,756 $ 19,956,756 0.2%
30,000,000 5.56% due 7/23/1997 29,893,433 29,893,433 0.3
28,000,000 Atlantic Asset Securitization
Corporation, 5.56% due 7/11/1997 27,952,431 27,952,431 0.2
60,000,000 CXC Inc., 5.55% due 7/22/1997 59,796,500 59,796,500 0.6
40,000,000 Ciesco L.P., 5.50% due 7/17/1997 39,896,111 39,896,111 0.4
39,200,000 Clipper Receivables Corp.,
5.55% due 7/02/1997 39,187,913 39,187,913 0.4
50,000,000 Corporate Receivables Corp.,
5.55% due 7/15/1997 49,884,375 49,884,375 0.5
50,000,000 Countrywide Home Loans,
5.56% due 7/21/1997 49,837,833 49,837,833 0.5
50,000,000 Eureka Securitization PLC,
5.58% due 8/01/1997 49,752,000 49,752,000 0.5
20,000,000 Exxon Imperial US, Inc.,
5.50% due 7/17/1997 19,948,056 19,948,056 0.2
Falcon Asset Securitization
Corp.:
53,450,000 5.55% due 7/17/1997 53,309,916 53,309,916 0.5
30,000,000 5.55% due 7/25/1997 29,884,375 29,884,375 0.3
40,000,000 GTE Corporation, 5.59% due
7/09/1997 39,944,100 39,944,100 0.4
General Motors Acceptance Corp.:
69,166,000 6.25% due 7/01/1997 69,153,992 69,153,992 0.7
60,000,000 5.53% due 7/09/1997 59,917,050 59,917,050 0.6
84,000,000 5.56% due 7/22/1997 83,714,587 83,714,587 0.8
100,000,000 Goldman Sachs Group, 5.57% due
7/02/1997 99,969,056 99,969,056 1.0
75,000,000 International Securitization
Corp., 5.61% due 7/14/1997 74,836,375 74,836,375 0.7
Lehman Brothers Holdings, Inc.:
50,000,000 5.67% due 7/11/1997 49,913,375 49,913,375 0.5
50,000,000 5.63% due 8/08/1997 49,695,042 49,695,042 0.5
41,015,000 Lexington Parker, Inc., 5.58%
due 8/19/1997 40,697,134 40,697,134 0.4
45,424,000 MetLife Funding Corp., 5.55% due
7/01/1997 45,416,997 45,416,997 0.4
25,000,000 Morgan Stanley Group Inc.,
5.58% due 8/08/1997 24,848,875 24,848,875 0.2
20,000,000 NYNEX Corporation, 5.535% due
7/18/1997 19,944,650 19,944,650 0.2
Preferred Receivable Funding
Corp.:
50,000,000 5.54% due 7/17/1997 49,869,194 49,869,194 0.5
50,000,000 5.56% due 7/23/1997 49,822,389 49,822,389 0.5
29,300,000 5.55% due 7/24/1997 29,191,590 29,191,590 0.3
35,000,000 5.57% due 7/30/1997 34,837,542 34,837,542 0.3
17,200,000 Southwestern Bell Capital Corp.,
5.51% due 7/23/1997 17,139,451 17,139,451 0.2
-------------- --------------- ------
1,308,211,098 1,308,211,098 12.8
</TABLE>
37
<PAGE>
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Short-Term Securities (concluded)
US Government & Agency $20,000,000 Federal Home Loan Banks,
Obligations** 5.42% due 8/08/1997 $ 19,882,567 $ 19,882,567 0.2%
33,000,000 Federal Home Loan Mortgage
Corp., 5.41% due 7/15/1997 32,925,613 32,925,613 0.3
6,000,000 Federal National Mortgage
Association, 5.43% due 7/25/1997 5,977,375 5,977,375 0.1
-------------- --------------- ------
58,785,555 58,785,555 0.6
Total Short-Term Securities 1,366,996,653 1,366,996,653 13.4
Total Investments $6,664,374,671 10,243,686,855 100.1
==============
Liabilities in Excess of Other Assets (8,878,593) (0.1)
--------------- ------
Net Assets $10,234,808,262 100.0%
=============== ======
<FN>
++Non-income producing security.
*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)Investments in companies 5% or more of whose outstanding
securities are held by the Fund (such companies are defined as
"Affiliated Companies" in section 2(a)(3) of the Investment Company
Act of 1940) are as follows:
Net Share Net Dividend
Industry Affiliate Activity Cost Income
Oil-- The British Petroleum
International Co. PLC (ADR) 1,051,448 $10,387,578 $4,277,982
See Notes to Financial Statements.
</TABLE>
38
<PAGE>
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of June 30, 1997
<S> <S> <C> <C>
Assets: Investments, at value
(identified cost--$6,664,374,671) (Note 1a) $10,243,686,855
Cash 593,210
Receivables:
Capital shares sold $ 17,428,136
Dividends 13,290,322
Securities sold 4,106,363 34,824,821
---------------
Prepaid registration fees and other assets (Note 1d) 118,956
---------------
Total assets 10,279,223,842
---------------
Liabilities: Payables:
Securities purchased 21,191,229
Capital shares redeemed 12,786,909
Distributor (Note 2) 3,891,677
Investment adviser (Note 2) 3,447,783 41,317,598
---------------
Accrued expenses and other liabilities 3,097,982
---------------
Total liabilities 44,415,580
---------------
Net Assets: Net assets $10,234,808,262
===============
Net Assets Class A Shares of Common Stock, $0.10 par value, 400,000,000
Consist of: shares authorized $ 13,483,404
Class B Shares of Common Stock, $0.10 par value, 400,000,000
shares authorized 11,391,490
Class C Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized 949,107
Class D Shares of Common Stock, $0.10 par value, 200,000,000
shares authorized 2,433,938
Paid-in capital in excess of par 6,190,633,026
Undistributed investment income--net 85,980,268
Undistributed realized capital gains on investments--net 350,624,845
Unrealized appreciation on investments--net 3,579,312,184
---------------
Net assets $10,234,808,262
===============
Net Asset Value: Class A--Based on net assets of $4,921,834,270 and 134,834,035
shares outstanding $ 36.50
===============
Class B--Based on net assets of $4,088,755,251 and 113,914,903
shares outstanding $ 35.89
===============
Class C--Based on net assets of $337,827,530 and 9,491,071
shares outstanding $ 35.59
===============
Class D--Based on net assets of $886,391,211 and 24,339,379
shares outstanding $ 36.42
===============
</TABLE>
See Notes to Financial Statements.
39
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended June 30, 1997
<S> <S> <C> <C>
Investment Dividends (net of $3,051,207 foreign withholding tax) $ 196,265,642
Income Interest and discount earned 72,207,262
(Notes 1b & 1c): Other 311,318
---------------
Total income 268,784,222
---------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 36,276,531
Investment advisory fees (Note 2) 35,001,183
Transfer agent fees--Class A (Note 2) 5,401,325
Transfer agent fees--Class B (Note 2) 5,385,563
Account maintenance and distribution fees--Class C (Note 2) 2,697,544
Account maintenance fees--Class D (Note 2) 1,458,562
Transfer agent fees--Class D (Note 2) 751,328
Registration fees (Note 1d) 583,079
Accounting services (Note 2) 436,837
Transfer agent fees--Class C (Note 2) 429,189
Printing and shareholder reports 360,393
Custodian fees 301,347
Professional fees 88,016
Directors' fees and expenses 41,233
Pricing fees 439
Other 78,078
---------------
Total expenses 89,290,647
---------------
Investment income--net 179,493,575
---------------
Realized & Realized gain on investments--net 465,029,995
Unrealized Gain on Change in unrealized appreciation on investments--net 1,657,307,021
Investments--Net ---------------
(Notes 1c, 1e & 3): Net Increase in Net Assets Resulting from Operations $ 2,301,830,591
===============
</TABLE>
See Notes to Financial Statements.
40
<PAGE>
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year
Ended June 30,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 179,493,575 $ 158,628,044
Realized gain on investments--net 465,029,995 327,014,797
Change in unrealized appreciation on investments--net 1,657,307,021 639,253,232
--------------- ---------------
Net increase in net assets resulting from operations 2,301,830,591 1,124,896,073
--------------- ---------------
Dividends & Investment income--net:
Distributions to Class A (100,659,426) (83,171,240)
Shareholders Class B (58,137,865) (50,150,559)
(Note 1g): Class C (4,393,794) (2,265,975)
Class D (11,669,904) (6,929,391)
Realized gain on investments--net:
Class A (170,767,565) (63,214,864)
Class B (157,008,366) (56,947,014)
Class C (10,983,674) (2,332,735)
Class D (21,395,471) (5,725,774)
--------------- ---------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (535,016,065) (270,737,552)
--------------- ---------------
Capital Share Net increase in net assets derived from capital
Transactions share transactions 945,290,139 1,092,277,977
(Note 4): --------------- ---------------
Net Assets: Total increase in net assets 2,712,104,665 1,946,436,498
Beginning of year 7,522,703,597 5,576,267,099
--------------- ---------------
End of year* $10,234,808,262 $ 7,522,703,597
=============== ===============
<FN>
*Undistributed investment income--net (Note 1h) $ 85,980,268 $ 82,449,679
=============== ===============
</TABLE>
See Notes to Financial Statements.
41
<PAGE>
FINANCIAL INFORMATION (continued)
Financial Highlights
<TABLE>
<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: 1997++ 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 30.22 $ 26.44 $ 23.17 $ 23.31 $ 20.57
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .81 .80 .74 .62 .71
Realized and unrealized gain
on investments and foreign
currency transactions--net 7.66 4.31 4.01 .67 3.03
---------- ---------- ---------- ---------- ----------
Total from investment
operations 8.47 5.11 4.75 1.29 3.74
---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net (.80) (.76) (.69) (.70) (.64)
Realized gain on
investments--net (1.39) (.57) (.79) (.73) (.36)
---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (2.19) (1.33) (1.48) (1.43) (1.00)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 36.50 $ 30.22 $ 26.44 $ 23.17 $ 23.31
========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:* value per share 29.95% 19.92% 21.67% 5.68% 19.03%
========== ========== ========== ========== ==========
Ratios to Average Expenses .55% .56% .59% .53% .54%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 2.54% 2.88% 3.19% 2.76% 3.48%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $4,921,834 $3,587,558 $2,834,652 $2,272,983 $2,023,078
========== ========== ========== ========== ==========
Portfolio turnover 13.00% 13.94% 11.69% 21.79% 20.85%
========== ========== ========== ========== ==========
Average commission
rate paid+++ $ .0582 $ .0491 -- -- --
========== ========== ========== ========== ==========
</TABLE>
[FN]
*Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the year.
+++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate
per share for purchase and sales of equity securities.
See Notes to Financial Statements.
42
<PAGE>
FINANCIAL INFORMATION (continued)
Financial Highlights (continued)
<TABLE>
<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: 1997++ 1996 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 29.76 $ 26.08 $ 22.87 $ 23.04 $ 20.35
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .48 .53 .53 .42 .53
Realized and unrealized gain
on investments and foreign
currency transactions--net 7.55 4.23 3.93 .62 2.96
---------- ---------- ---------- ---------- ----------
Total from investment
operations 8.03 4.76 4.46 1.04 3.49
---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net (.51) (.51) (.46) (.48) (.44)
Realized gain on
investments--net (1.39) (.57) (.79) (.73) (.36)
---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (1.90) (1.08) (1.25) (1.21) (.80)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 35.89 $ 29.76 $ 26.08 $ 22.87 $ 23.04
========== ========== ========== ========== ==========
Total Investment Based on net asset value
Return:* per share 28.61% 18.71% 20.45% 4.61% 17.81%
========== ========== ========== ========== ==========
Ratios to Average Expenses 1.57% 1.58% 1.61% 1.55% 1.56%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net 1.53% 1.86% 2.16% 1.75% 2.47%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $4,088,755 $3,288,963 $2,464,248 $1,744,704 $1,383,935
========== ========== ========== ========== ==========
Portfolio turnover 13.00% 13.94% 11.69% 21.79% 20.85%
========== ========== ========== ========== ==========
Average commission
rate paid+++ $ .0582 $ .0491 -- -- --
========== ========== ========== ========== ==========
</TABLE>
[FN]
*Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the year.
+++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.
43
<PAGE>
FINANCIAL INFORMATION (concluded)
Financial Highlights (concluded)
<TABLE>
<CAPTION>
Class C Class D
For the For the
The following per share data and ratios Period Period
have been derived from information provided For the Year Oct. 21, For the Year Oct. 21,
in the financial statements. Ended 1994++++ to Ended 1994++++ to
June 30, June 30, June 30, June 30,
Increase (Decrease) in Net Asset Value: 1997++ 1996 1995 1997++ 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 29.56 $ 25.98 $ 22.92 $ 30.16 $ 26.41 $ 23.19
Performance: -------- -------- -------- -------- -------- --------
Investment income--net .47 .55 .44 .73 .76 .50
Realized and unrealized
gain on investments and
foreign currency
transactions--net 7.49 4.18 3.05 7.66 4.27 3.17
-------- -------- -------- -------- -------- --------
Total from investment
operations 7.96 4.73 3.49 8.39 5.03 3.67
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net (.54) (.58) (.33) (.74) (.71) (.35)
Realized gain on
investments--net (1.39) (.57) (.10) (1.39) (.57) (.10)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (1.93) (1.15) (.43) (2.13) (1.28) (.45)
-------- -------- -------- -------- -------- --------
Net asset value,
end of period $ 35.59 $ 29.56 $ 25.98 $ 36.42 $ 30.16 $ 26.41
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return: ** per share 28.60% 18.69% 15.59%+++ 29.65% 19.61% 16.23%+++
======== ======== ======== ======== ======== ========
Ratios to Average Expenses 1.58% 1.59% 1.66%* .80% .81% .87%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income--net 1.51% 1.83% 2.09%* 2.28% 2.61% 2.88%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $337,828 $211,787 $ 74,334 $886,391 $434,396 $203,033
======== ======== ======== ======== ======== ========
Portfolio turnover 13.00% 13.94% 11.69% 13.00% 13.94% 11.69%
======== ======== ======== ======== ======== ========
Average commission
rate paid+++++ $ .0582 $ .0491 -- $ .0582 $ .0491 --
======== ======== ======== ======== ======== ========
</TABLE>
[FN]
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Based on average shares outstanding during the year.
++++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.
See Notes to Financial Statements.
44
<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 dates. 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
45
<PAGE>
period. Foreign currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(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 $1,101,997 have been reclassified from undistributed net
investment income to undistributed net realized capital gains. 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 $100
million but not exceeding $200 million; and 0.40% of average daily
net assets in excess of $200 million.
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, 1997, 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 $ 42,785 $ 567,567
Class D $116,447 $1,719,925
For the year ended June 30, 1997, MLPF&S received contingent
deferred sales charges of $4,711,398 and $94,100 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $73,432 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
June 30, 1997.
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.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLFDS, MLFD, and/or ML & Co.
46
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended June 30, 1997 were $1,589,248,795
and $949,631,024, respectively.
Net realized and unrealized gains as of June 30, 1997 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $465,029,995 $3,579,312,184
------------ --------------
Total $465,029,995 $3,579,312,184
============ ==============
As of June 30, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $3,576,286,295, of which $3,650,447,585
related to appreciated securities and $74,161,290 related to
depreciated securities. At June 30, 1997, the aggregate cost of
investments for Federal income tax purposes was $6,667,400,560.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $945,290,139 and $1,092,277,977 for the years ended June 30,
1997 and June 30, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
Shares sold 37,081,337 $1,162,009,521
Shares issued to shareholders
in reinvestment of dividends
and distributions 8,257,275 243,407,144
----------- --------------
Total issued 45,338,612 1,405,416,665
Shares redeemed (29,216,897) (932,986,327)
----------- --------------
Net increase 16,121,715 $ 472,430,338
=========== ==============
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 B Shares for the
Year Ended Dollar
June 30, 1997 Shares Amount
Shares sold 26,759,273 $ 836,475,969
Shares issued to shareholders
in reinvestment of dividends
and distributions 6,603,697 191,804,853
----------- --------------
Total issued 33,362,970 1,028,280,822
Automatic conversion of
shares (5,951,632) (194,812,554)
Shares redeemed (24,018,657) (750,923,397)
----------- --------------
Net increase 3,392,681 $ 82,544,871
=========== ==============
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 C Shares for the
Year Ended Dollar
June 30, 1997 Shares Amount
Shares sold 4,511,986 $ 139,349,120
Shares issued to shareholders
in reinvestment of dividends
and distributions 485,970 14,024,176
----------- --------------
Total issued 4,997,956 153,373,296
Shares redeemed (2,671,622) (83,360,975)
----------- --------------
Net increase 2,326,334 $ 70,012,321
=========== ==============
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
=========== ==============
47
<PAGE>
Class D Shares for the Year Dollar
Ended June 30, 1997 Shares Amount
Shares sold 7,052,734 $223,824,582
Automatic conversion of
shares 5,871,627 194,812,554
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,008,878 29,701,013
----------- ------------
Total issued 13,933,239 448,338,149
Shares redeemed (3,996,236) (128,035,540)
----------- ------------
Net increase 9,937,003 $320,302,609
=========== ============
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
=========== ============
48
<PAGE>
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49
<PAGE>
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50
<PAGE>
[This page 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......................................................... 9
Initial Sales Charge Alternatives--Class A and Class D Shares............. 10
Reduced Initial Sales Charges............................................. 10
Distribution Plans........................................................ 14
Limitations on the Payment of Deferred Sales Charges...................... 15
Redemption of Shares....................................................... 16
Deferred Sales Charges--Class B and Class C Shares........................ 17
Portfolio Transactions and Brokerage....................................... 18
Determination of Net Asset Value........................................... 19
Shareholder Services....................................................... 20
Investment Account........................................................ 20
Automatic Investment Plans................................................ 21
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 21
Systematic Withdrawal Plans .............................................. 22
Retirement Plans.......................................................... 23
Exchange Privilege........................................................ 23
Dividends, Distributions and Taxes......................................... 25
Dividends and Distributions............................................... 25
Taxes..................................................................... 26
Tax Treatment of Options Transactions..................................... 27
Special Rules for Certain Foreign Currency Transactions................... 28
Performance Data........................................................... 29
General Information........................................................ 31
Description of Shares..................................................... 31
Computation of Offering Price per Share................................... 32
Independent Auditors...................................................... 32
Custodian................................................................. 32
Transfer Agent............................................................ 32
Legal Counsel............................................................. 32
Reports to Shareholders................................................... 33
Additional Information.................................................... 33
Security Ownership of Certain Beneficial Owners........................... 33
Independent Auditors' Report............................................... 34
Financial Statements....................................................... 35
</TABLE>
Code #10124-0997
[LOGO] MERRILL LYNCH
Merrill Lynch
Basic Value Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
September 26, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<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
