<PAGE>
As filed with the Securities and Exchange Commission on October 19, 1999
Securities Act File No. 2-58521
Investment Company Act File No. 811-2739
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [_]
[X]
Post-Effective Amendment No. 28
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
[X]
Amendment No. 25
(Check appropriate box or boxes)
----------------
MERRILL LYNCH BASIC VALUE FUND, INC.
(Exact Name of Registrant as Specified in Charter)
800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
Registrant's telephone number, including Area Code: (609) 282-2800
TERRY K. GLENN
Merrill Lynch Basic Value Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
Copies to:
Counsel for the Fund:
BROWN & WOOD LLP Michael J. Hennewinkel, Esq.
One World Trade Center MERRILL LYNCH ASSET MANAGEMENT
New York, New York 10048-0557 P.O. Box 9011
Attention: Thomas R. Smith, Jr., Princeton, New Jersey 08543-9011
Esq.
Thomas D. Jones, III, Esq.
FUND ASSET MANAGEMENT
P.O. Box 9011
Princeton, New Jersey 08543-9011
----------------
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
----------------
Title of Securities Being Registered: Shares of Common Stock, par value $.10
per share.
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- --------------------------------------------------------------------------------
<PAGE>
Prospectus
[LOGO] Merrill Lynch
Merrill Lynch Basic Value Fund, Inc.
October 19, 1999
This Prospectus contains information you should know
before investing, including information about risks.
Please read it before you invest and keep it for
future reference.
The Securities and Exchange Commission has not
approved or disapproved these securities or passed
upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
PAGE
[LOGO]
KEY FACTS
- -------------------------------------------------------------------------------
The Merrill Lynch Basic Value Fund at a Glance............................... 3
Risk/Return Bar Chart........................................................ 4
Fees and Expenses............................................................ 5
[LOGO]
DETAILS ABOUT THE FUND
- -------------------------------------------------------------------------------
How the Fund Invests......................................................... 7
Investment Risks............................................................. 8
[LOGO]
YOUR ACCOUNT
- -------------------------------------------------------------------------------
Statement of Additional Information..........................................11
Merrill Lynch Select PricingSM System....................................... 12
How to Buy, Sell, Transfer and Exchange Shares.............................. 17
How Shares are Priced........................................................21
Participation in Merrill Lynch Fee-Based Programs........................... 21
Dividends and Taxes..........................................................22
[LOGO]
MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------
Fund Asset Management....................................................... 23
Financial Highlights........................................................ 24
[LOGO]
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Shareholder Reports................................................. Back Cover
Statement of Additional Information................................. Back Cover
MERRILL LYNCH BASIC VALUE FUND, INC.
<PAGE>
[LOGO] Key Facts
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined the highlighted terms in this
prospectus in the sidebar.
Common Stock -- shares of ownership of a corporation.
THE MERRILL LYNCH BASIC VALUE FUND AT A GLANCE
- --------------------------------------------------------------------------------
What is the Fund's investment objective?
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.
What are the Fund's main investment strategies?
The Fund invests primarily in stocks that its management believes are
undervalued, which means that their prices are less than Fund management
believes they are worth. Fund management places particular emphasis on
companies with below average price/earnings ratios that may pay above average
dividends. The Fund purchases primarily common stocks of U.S. companies in
trying to meet its goals. The Fund may also invest in securities issued by
foreign companies.
We cannot guarantee that the Fund will achieve its objective.
What are the main risks of investing in the Fund?
As with any mutual fund, the value of the Fund's investments -- and therefore
the value of your Fund shares -- may go up or down. These changes may occur
because a particular stock market is rising or falling. At other times, there
are specific factors that may affect the value of a particular investment.
Since foreign markets may differ significantly from U.S. markets in terms of
both economic conditions and government regulation, investments in foreign
securities involve special risks. If the value of the Fund's investments goes
down, you may lose money.
Who should invest?
The Fund may be an appropriate investment for you if you:
. Are investing with long-term
goals, such as retirement or
funding a child's education
. Want a professionally managed and
diversified portfolio
. Are willing to accept the risk
that the value of your investment
may decline in order to seek
capital appreciation
. Are not looking for a significant
amount of current income
MERRILL LYNCH BASIC VALUE FUND, INC.
3
<PAGE>
[LOGO] Key Facts
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class B shares for each of the past ten calendar years. Sales charges are
not reflected in the bar chart. If these amounts were reflected, returns would
be less than those shown. The table compares the average annual total returns
for each class of the Fund's shares for the periods shown with those of the S&P
500 Index. How the Fund performed in the past is not necessarily an indication
of how the Fund will perform in the future.
[BAR CHART]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
16.33% (13.92%) 25.91% 9.24% 20.93% 0.88% 31.60% 16.58% 28.20% 10.51%
During the 10-year period shown in the bar chart, the highest return for a
quarter was 15.87% (quarter ended March 31, 1991) and the lowest return for a
quarter was -14.32% (quarter ended September 30, 1990). The Fund's year-to-date
return as of June 30, 1999 was 14.39%.
<TABLE>
<CAPTION>
Average Annual Total
Returns (for the
calendar year ended Past Past Past Ten Years/
December 31, 1998) One Year Five Years Since Inception
- --------------------------------------------------------------------
<S> <C> <C> <C>
Basic Value Fund* -- Class A 5.80% 16.94% 14.38%
S&P 500 Index** 28.58% 24.05% 19.20%
- --------------------------------------------------------------------
Basic Value Fund* -- Class B 6.51% 17.00% 13.83%
S&P 500 Index** 28.58% 24.05% 19.20%
- --------------------------------------------------------------------
Basic Value Fund* -- Class C 9.48% N/A 19.79%+
S&P 500 Index** 28.58% 28.70%
- --------------------------------------------------------------------
Basic Value Fund* -- Class D 5.49% N/A 19.19%+
S&P 500 Index** 28.58% 28.70%
- --------------------------------------------------------------------
</TABLE>
* Includes sales charge.
** The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past performance
is not predictive of future performance.
+ Inception date is October 21, 1994.
MERRILL LYNCH BASIC VALUE FUND, INC.
4
<PAGE>
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid directly by the shareholder:
Shareholder fees -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.
Management Fee -- a fee paid to the Investment Adviser for managing the Fund.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants.
Account Maintenance Fees --fees used to compensate securities dealers for
account maintenance activities.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy
and hold the different classes of shares of the Fund. Future expenses may be
greater or less than those indicated below.
<TABLE>
<CAPTION>
Shareholder Fees (fees
paid directly from your
investment)(a): Class A Class B(b) Class C Class D
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge
(Load) imposed on
purchases (as a percentage
of offering price) 5.25%(c) None None 5.25%(c)
- ------------------------------------------------------------------
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d)
- ------------------------------------------------------------------
Maximum Sales Charge
(Load) imposed on
Dividend Reinvestments None None None None
- ------------------------------------------------------------------
Redemption Fee None None None None
- ------------------------------------------------------------------
Exchange Fee None None None None
- ------------------------------------------------------------------
Maximum Account Fee None None None None
- ------------------------------------------------------------------
Annual Fund Operating Expenses:
- ------------------------------------------------------------------
Management Fee(e) 0.40% 0.40% 0.40% 0.40%
- ------------------------------------------------------------------
Distribution and/or
Account Maintenance (12b-
1) Fees(f) None 1.00% 1.00% 0.25%
- ------------------------------------------------------------------
Other Expenses (including
transfer agency fees)(g) 0.15% 0.17% 0.18% 0.15%
- ------------------------------------------------------------------
Total Annual Fund
Operating Expenses 0.55% 1.57% 1.58% 0.80%
- ------------------------------------------------------------------
</TABLE>
(a) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
(b) Class B shares automatically convert to Class D shares about eight years
after you buy them and will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e) The Fund pays the Investment Adviser a fee at the annual rate of 0.60% of
the average daily net assets of the Fund for the first $100 million; 0.50%
of net assets from $100 million to $200 million; and 0.40% of net assets
above $200 million. For the fiscal year ended June 30, 1999, the Investment
Adviser received a fee equal to 0.40% of the Fund's average daily net
assets.
(f) If you hold Class B or Class C shares for a long time, it may cost you more
in distribution (12b-1) fees than the maximum sales charge that you would
have paid if you had bought one of the other classes.
(g) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the fiscal year
ended June 30, 1999, the Fund paid the Transfer Agent fees totaling
$17,441,962. The Investment Adviser provides accounting services to the
Fund at its cost. For the fiscal year ended June 30, 1999, the Fund
reimbursed the Investment Adviser $522,101 for these services.
MERRILL LYNCH BASIC VALUE FUND, INC.
5
<PAGE>
[LOGO] Key Facts
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------
<S> <C> <C> <C> <C>
Class A $578 $692 $816 $1,178
- -------------------------------------------
Class B $560 $696 $855 $1,666*
- -------------------------------------------
Class C $261 $499 $860 $1,878
- -------------------------------------------
Class D $602 $767 $946 $1,463
- -------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -------------------------------------------
<S> <C> <C> <C> <C>
Class A $578 $692 $816 $1,178
- -------------------------------------------
Class B $160 $496 $855 $1,666*
- -------------------------------------------
Class C $161 $499 $860 $1,878
- -------------------------------------------
Class D $602 $767 $946 $1,463
- -------------------------------------------
</TABLE>
* Assumes conversion to Class D shares approximately eight years after
purchase. See note (b) to the Fees and Expenses table above.
MERRILL LYNCH BASIC VALUE FUND, INC.
6
<PAGE>
[LOGO] Details About the Fund
ABOUT THE
PORTFOLIO MANAGERS
Paul M. Hoffmann and Kevin Rendino are co-portfolio managers and Senior Vice
Presidents of the Fund. Mr. Hoffmann has been a First Vice President of Merrill
Lynch Asset Management since 1997 and was a Vice President from 1976 to 1997.
He has been a portfolio manager of the Fund since 1977 and was responsible for
management of the Fund from 1977 until 1999. Mr. Hoffmann and Mr. Rendino are
jointly managing the Fund
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund's main goal is growth of capital. The Fund also seeks income, but its
investments emphasize growth of capital more than income. The Fund tries to
achieve its goals by investing in a diversified portfolio consisting primarily
of common stocks. In selecting securities, Fund management emphasizes stocks
that it believes are undervalued. Fund management places particular emphasis on
companies with below-average price/earnings ratios that may pay above-average
dividends. Fund management may also determine a company is undervalued if its
stock price is down because of temporary factors that Fund management believes
the company will recover from.
The Fund follows a basic contrary opinion, out-of-favor investment style. Fund
management believes that favorable changes in market prices are more likely to
occur when:
. Stocks are out of favor
. Company earnings are depressed
. Price/earnings ratios are
relatively low
. Investment expectations are
limited
. There is no general interest in a
security or industry
On the other hand, Fund 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
. An industry or security continues
to become popular among investors
In other words, Fund management believes that stocks with relatively high
price/earnings ratios are more vulnerable to price declines from unexpected
adverse developments. At the same time, stocks with relatively low
price/earnings ratios are more likely to benefit from favorable but generally
unanticipated events. Thus, the Fund may invest a large part of its net assets
in stocks that have weak research ratings.
The Fund may also invest up to 25% of its total assets in the securities of
foreign companies. The Fund may also lend its securities and may buy securities
that are convertible into common stock. The Fund will normally invest a portion
of its assets in short-term debt securities, such as commercial paper. As a
temporary measure for defensive purposes, the Fund may invest
MERRILL LYNCH BASIC VALUE FUND, INC.
7
<PAGE>
[LOGO] Details About the Fund
during a transition period prior to Mr. Hoffmann's anticipated retirement,
after which Mr. Rendino will assume sole responsibility for management of the
Fund. Mr. Rendino has been a First Vice President of Merrill Lynch Asset
Management since 1997 and a Vice President from 1993 to 1997.
ABOUT THE INVESTMENT ADVISER
The Fund is managed by Fund Asset Management.
more heavily in these securities, without limitation. The Fund may also
increase its investment in these securities when Fund management is unable to
find enough attractive long-term investments, to reduce exposure to equities
when management believes it is advisable to do so, or to meet redemptions.
Investments in short-term debt securities can be sold easily and have limited
risk of loss but earn only limited returns.
The Fund may use many different investment strategies and it has certain
investment restrictions, all of which are explained in the Fund's Statement of
Additional Information.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals or that the Fund's performance will be positive for any period
of time.
Market and Selection Risk -- Market risk is the risk that the stock market in
one or more countries in which the Fund invests will go down in value,
including the possibility that one or more markets will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the stock markets or other funds with
similar investment objectives and investment strategies.
Foreign Market Risk -- Since the Fund may invest in foreign securities, it
offers the potential for more diversification than an investment only in the
United States. This is because stocks traded on foreign markets have often
(though not always) performed differently than stocks in the United States.
However, such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular,
investment in foreign securities involves the following risks, which are
generally greater for investments in emerging markets.
. The economies of some foreign
markets often do not compare
favorably with that of the United
States in areas such as growth of
gross domestic product,
reinvestment of capital,
resources and balance of
payments. Some of these economies
may rely heavily on particular
industries or
MERRILL LYNCH BASIC VALUE FUND, INC.
8
<PAGE>
foreign capital. They may be more
vulnerable to adverse diplomatic
developments, the imposition of
economic sanctions against a
particular country or countries,
changes in international trading
patterns, trade barriers and other
protectionist or retaliatory
measures.
. Investments in foreign markets
may be adversely affected by
governmental actions such as the
imposition of capital controls,
nationalization of companies or
industries, expropriation of
assets or the imposition of
punitive taxes.
. The governments of certain
countries may prohibit or impose
substantial restrictions on
foreign investing in their
capital markets or in certain
industries. Any of these actions
could severely affect security
prices. They could also impair
the Fund's ability to purchase or
sell foreign securities or
transfer its assets or income
back into the United States, or
otherwise adversely affect the
Fund's operations.
. Other foreign market risks
include foreign exchange
controls, difficulties in pricing
securities, defaults on foreign
government securities,
difficulties in enforcing
favorable legal judgments in
foreign courts and political and
social instability. Legal
remedies available to investors
in some foreign countries may be
less extensive than those
available to investors in the
United States.
. Because there are generally fewer
investors on foreign exchanges
and a smaller number of shares
traded each day, it may be
difficult for the Fund to buy and
sell securities on those
exchanges. In addition, prices of
foreign securities may go up and
down more than prices of
securities traded in the United
States.
. Foreign markets may have
different clearance and
settlement procedures. In certain
markets, settlements may be
unable to keep pace with the
volume of securities
transactions. If this occurs,
settlement may be delayed and the
Fund's assets may be uninvested
and not earning returns. The Fund
may miss investment opportunities
or be unable to sell an
investment because of these
delays.
MERRILL LYNCH BASIC VALUE FUND, INC.
9
<PAGE>
[LOGO] Details About the Fund
Certain Risks of Holding Fund Assets Outside the United States --The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents,
goes bankrupt. In addition, it is often more expensive for the Fund to buy,
sell and hold securities in certain foreign markets than in the U.S. The
increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the U.S.
European Economic and Monetary Union ("EMU") -- A number of European countries
have entered into EMU in an effort to reduce trade barriers between themselves
and eliminate fluctuations in their currencies. EMU establishes a single
European currency (the euro), which was introduced on January 1, 1999 and is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities (beginning with government and
corporate bonds) were redenominated in the euro. These securities trade and
make dividend and other payments only in euros. Like other investment companies
and business organizations, including the companies in which the Fund invests,
the Fund could be adversely affected:
. If the transition to euro, or EMU
as a whole, does not proceed as
planned.
. If a participating country
withdraws from EMU.
. If the computing, accounting and
trading systems used by the
Fund's service providers, or by
other entities with which the
Fund or its service providers do
business, are not capable of
recognizing the euro as a
distinct currency.
MERRILL LYNCH BASIC VALUE FUND, INC.
10
<PAGE>
Borrowing and Leverage -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expense and other fees. The cost of borrowing may
reduce the Fund's return. Certain securities that the Fund buys may create
leverage including, for example, options.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH BASIC VALUE FUND, INC.
11
<PAGE>
[LOGO] Your Account
MERRILL LYNCH SELECT PRICING SM SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.25%. You may be eligible for a sales
charge waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B
or C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
MERRILL LYNCH BASIC VALUE FUND, INC.
12
<PAGE>
The table below summarizes key features of the Merrill Lynch Select Pricing SM
System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill through Merrill through Merrill Lynch.
. Current Class A Lynch. Limited Lynch. Limited Limited availability
shareholders availability availability through other
. Certain Retirement through other through other securities dealers.
Plans securities dealers. securities dealers.
. Participants in
certain Merrill Lynch-
sponsored programs
. Certain affiliates of
Merrill Lynch.
- ----------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time of No. Entire purchase No. Entire purchase Yes. Payable at time of
Charge? purchase. Lower sales price is invested price is invested purchase. Lower sales
charges available in shares of the in shares of the charges available
for larger investments. Fund. Fund. for larger investments.
- ----------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged for Yes. Payable if you Yes. Payable if you No. (May be charged for
Charge? purchases over redeem within four redeem within one purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
- ----------------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.25% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.75% Distribution 0.75% Distribution No Distribution Fee.
Fee. Fee.
- ----------------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
eight years.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH BASIC VALUE FUND, INC.
13
<PAGE>
[LOGO] Your Account
Right of Accumulation -- permits you to pay the sales charge that would apply
to the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
Letter of Intent -- permits you to pay the sales charge that would be
applicable if you add up all shares of Merrill Lynch Select Pricing SM System
funds that you agree to buy within a 13 month period. Certain restrictions
apply.
Class A and Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the
time of purchase.
<TABLE>
<CAPTION>
Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* 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.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or
your redemption proceeds. A sales charge of 0.75% will be charged on
purchases of $1,000,000 or more of Class A or Class D shares by certain
employer- sponsored retirement or savings plans.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
. Purchases under a Right of
Accumulation or Letter of Intent
. Merrill Lynch Blueprint SM
Program participants
. TMA SM Managed Trusts
. Certain Merrill Lynch investment
or central asset accounts
. Certain employer-sponsored
retirement or savings plans
. Purchases using proceeds from the
sale of certain Merrill Lynch
closed-end funds under certain
circumstances
MERRILL LYNCH BASIC VALUE FUND, INC.
14
<PAGE>
. Certain investors, including
directors or trustees of Merrill
Lynch mutual funds and Merrill
Lynch employees
. Certain Merrill Lynch fee-based
programs
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to a 0.25% account maintenance fee, while
Class A shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of
the same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.75% and account maintenance fees of 0.25% each year under
distribution plans that the Fund has adopted under Rule 12b-1. Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these
fees increase the cost of your investment and may cost you more than paying an
initial sales charge. The Distributor uses the money that it receives from the
deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Consultant
or other securities dealer who assists you in purchasing Fund shares.
Class B Shares
If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually
MERRILL LYNCH BASIC VALUE FUND, INC.
15
<PAGE>
[LOGO] Your Account
decreases as you hold your shares over time, according to the following
schedule:
<TABLE>
<CAPTION>
Years Since
Purchase Sales 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>
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales
charge. Not all Merrill Lynch funds have identical deferred sales charge
schedules. If you exchange your shares for shares of another fund, the
higher charge will apply.
The deferred sales charge relating to Class B shares may be reduced or waived
in certain circumstances, such as:
. Certain post-retirement
withdrawals from an IRA or other
retirement plan if you are over
59 1/2 years old.
. Redemption by certain eligible
401(a) and 401(k) plans, certain
related accounts, group plans
participating in the Merrill
Lynch Blueprint SM Program and
certain retirement plan
rollovers.
. Redemption in connection with
participation in certain Merrill
Lynch fee-based programs.
. Withdrawals resulting from
shareholder death or disability
as long as the waiver request is
made within one year of death or
disability or, if later,
reasonably promptly following
completion of probate, or in
connection with involuntary
termination of an account in
which Fund shares are held.
. Withdrawal through the Merrill
Lynch Systematic Withdrawal Plan
of up to 10% per year of your
Class B account value at the time
the plan is established.
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class D
MERRILL LYNCH BASIC VALUE FUND, INC.
16
<PAGE>
shares are subject to lower annual expenses than Class B shares. The conversion
of Class B to Class D shares is not a taxable event for federal income tax
purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years
for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's eight year
conversion schedule will apply. If you exchange your Class B shares in the Fund
for Class B shares of a fund with a longer conversion schedule, the other
fund's conversion schedule will apply. The length of time that you hold both
the original and exchanged Class B shares in both funds will count toward the
conversion schedule. The conversion schedule may be modified in certain other
cases as well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relative to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH BASIC VALUE FUND, INC.
17
<PAGE>
[LOGO] Your Account
<TABLE>
<CAPTION>
Information Important for You to
If You Want To Your Choices Know
- -------------------------------------------------------------------------------
<C> <C> <S>
Buy Shares First, select the share Refer to the Merrill Lynch Select
class appropriate for Pricing table on page 13. Be sure to
you read this prospectus carefully.
--------------------------------------------------------------------
Next, determine the The minimum initial investment for
amount of your the Fund is $1,000 for all accounts
investment except:
.$250 for certain Merrill Lynch fee-
based programs
.$100 for retirement plans
(The minimums for initial
investments may be waived under
certain circumstances.)
--------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on
Financial Consultant or the next calculation of net asset
securities dealer submit value after your order is placed.
your purchase order Any purchase orders placed prior to
the close of business on the New
York Stock Exchange (generally 4:00
p.m. Eastern time) will be priced at
the net asset value determined that
day.
Purchase orders placed after that
time will be priced at the net asset
value determined on the next
business day. The Fund may reject
any order to buy shares and may
suspend the sale of shares at any
time. Merrill Lynch may charge a
processing fee to confirm a
purchase. This fee is currently
$5.35.
--------------------------------------------------------------------
Or contact the Transfer To purchase shares directly, call
Agent the Transfer Agent at 1-800-MER-FUND
and request a purchase application.
Mail the completed purchase
application to the Transfer Agent at
the address on the inside back cover
of this prospectus.
- -------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for
Investment shares additional purchases is $50 for all
accounts except that retirement
plans have a minimum additional
purchase of $1 and certain programs,
such as automatic investment plans,
may have higher minimums.
(The minimums for additional
purchases may be waived under
certain circumstances.)
--------------------------------------------------------------------
Acquire additional All dividends and capital gains
shares through the distributions are automatically
automatic dividend reinvested without a sales charge.
reinvestment plan
--------------------------------------------------------------------
Participate in the You may invest a specific amount on
automatic investment a periodic basis through certain
plan Merrill Lynch investment or central
asset accounts.
</TABLE>
- --------------------------------------------------------------------------------
MERRILL LYNCH BASIC VALUE FUND, INC.
18
<PAGE>
<TABLE>
<CAPTION>
If You Want To Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------
<C> <C> <S>
Transfer Shares Transfer to a You may transfer your Fund shares only to another
to Another participating securities securities dealer that has entered into an agreement
Securities dealer with Merrill Lynch. Certain shareholder services may be
Dealer available for the transferred shares. You may only
purchase additional shares of funds previously owned
before the transfer. All future trading of these assets
must be coordinated by the receiving firm.
- ---------------------------------------------------------------------------------------------------
Transfer to a non- You must either:
participating securities .Transfer your shares to an account with the Transfer
dealer Agent; or
.Sell your shares, paying any applicable CDSC.
- ---------------------------------------------------------------------------------------------------
Sell Your Have your Merrill Lynch The price of your shares is based on the next
Shares Financial Consultant or calculation of net asset value after your order is
securities dealer submit placed. For your redemption request to be priced at the
your sales order net asset value on the day of your request, you must
submit your request to your dealer prior to that day's
close of business on the New York Stock Exchange
(generally 4:00 p.m. Eastern time). Any redemption
request placed after that time will be priced at the net
asset value at the close of business on the next
business day. Dealers must submit redemption requests to
the Fund not more than thirty minutes after the close of
business on the New York Stock Exchange on the day the
request was received.
Securities dealers, including Merrill Lynch, may charge
a fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No processing fee is
charged if you redeem shares directly through the
Transfer Agent.
The Fund may reject an order to sell shares under
certain circumstances.
----------------------------------------------------------------------------------------
Sell through the You may sell shares held at the Transfer Agent by
Transfer Agent writing to the Transfer Agent at the address on the
inside back cover of this prospectus. All shareholders
on the account must sign the letter. A signature
guarantee will generally be required but may be waived
in limited circumstance. You can obtain a signature
guarantee from a bank, securities dealer, securities
broker, credit union, savings and loan association,
national securities exchange and registered securities
association. A notary public seal will not be
acceptable.. If you hold stock certificates, return the
certificates with the letter. The Transfer Agent will
normally mail redemption proceeds within seven days
following receipt of a properly completed request. If
you make a redemption request before the Fund has
collected payment for the purchase of shares, the Fund
or the Transfer Agent may delay mailing your proceeds.
This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered
to the Transfer Agent before they can be converted.
Check with the Transfer Agent or your Merrill Lynch
Financial Consultant for details.
</TABLE>
- --------------------------------------------------------------------------------
MERRILL LYNCH BASIC VALUE FUND, INC.
19
<PAGE>
[LOGO] Your Account
<TABLE>
<CAPTION>
Information Important for You to
If You Want To Your Choices Know
- -------------------------------------------------------------------------------
<C> <C> <S>
Sell Shares Participate in the You can choose to receive systematic
Systematically Fund's Systematic payments from your Fund account
Withdrawal Plan either by check or through direct
deposit to your bank account on a
monthly or quarterly basis. If you
hold your Fund shares in a Merrill
Lynch CMA(R), CBA(R) or Retirement
Account you can arrange for
systematic redemptions of a fixed
dollar amount on a monthly,
bi-monthly, quarterly, semi-annual
or annual basis, subject to certain
conditions. Under either method you
must have dividends and other
distributions automatically
reinvested. For Class B and C shares
your total annual withdrawals cannot
be more than 10% per year of the
value of your shares at the time
your plan is established. The
deferred sales charge is waived for
systematic redemptions. Ask your
Merrill Lynch Financial Consultant
for details.
- -------------------------------------------------------------------------------
Exchange Your Select the fund into You can exchange your shares of the
Shares which you want to Fund for shares of many other
exchange. Be sure to Merrill Lynch mutual funds. You must
read that fund's have held the shares used in the
prospectus exchange for at least 15 calendar
days before you can exchange to
another fund.
Each class of Fund shares is
generally exchangeable for shares of
the same class of another fund. If
you own Class A shares and wish to
exchange into a fund in which you
have no Class A shares (and are not
eligible to purchase Class A
shares), you will exchange into
Class D shares.
Some of the Merrill Lynch mutual
funds impose a different initial or
deferred sales charge schedule. If
you exchange Class A or D shares for
shares of a fund with a higher
initial sales charge than you
originally paid, you will be charged
the difference at the time of
exchange. If you exchange Class B
shares for shares of a fund with a
different deferred sales charge
schedule, the higher schedule will
apply. The time you hold Class B or
C shares in both funds will count
when determining your holding period
for calculating a deferred sales
charge at redemption. If you
exchange Class A or D shares for
money market fund shares, you will
receive Class A shares of Summit
Cash Reserves Fund. Class B or C
shares of the Fund will be exchanged
for Class B shares of Summit.
Although there is currently no limit
on the number of exchanges that you
can make, the exchange privilege may
be modified or terminated at any
time in the future.
</TABLE>
- --------------------------------------------------------------------------------
MERRILL LYNCH BASIC VALUE FUND, INC.
20
<PAGE>
Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, after the close of business on the Exchange (the Exchange
generally closes at 4:00 p.m. Eastern time). The net asset value used in
determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result,
the Fund's net asset value may change on days when you will not be able to
purchase or redeem the Fund's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class
D shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money
market fund. The class you receive may be the class you originally owned when
you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.
MERRILL LYNCH BASIC VALUE FUND, INC.
21
<PAGE>
[LOGO] Your Account
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute at least annually any net investment income and any
net realized long-term capital gains. The Fund may also pay a special
distribution at the end of the calendar year to comply with Federal tax
requirements. If your account is with Merrill Lynch and you would like to
receive dividends in cash, contact your Merrill Lynch Financial Consultant. If
your account is with the Transfer Agent and you would like to receive dividends
in cash, contact the Transfer Agent.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. Capital gain
dividends are generally taxed at different rates than ordinary income
dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number or
if the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
Dividends -- Ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed income or capital
gains, you will pay the full price for the shares and then receive a portion of
the price back in the form of a taxable dividend. Before investing you may want
to consult your tax adviser.
MERRILL LYNCH BASIC VALUE FUND, INC.
22
<PAGE>
[LOGO] Management of the Fund
FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Fund Asset Management, the Fund's Investment Adviser, manages the Fund's
investments and its business operations under the overall supervision of the
Fund's Board of Directors. The Investment Adviser has the responsibility for
making all investment decisions for the Fund. The Investment Adviser has a sub-
advisory agreement with Merrill Lynch Asset Management U.K. Limited, an
affiliate, under which the Investment Adviser may pay a fee for services it
receives. The Fund pays the Investment Adviser a fee at the annual rate of
0.60% of the average daily net assets of the Fund for the first $100 million;
0.50% of net assets from $100 million to $200 million; and 0.40% of net assets
above $200 million. For the fiscal year ended June 30, 1999 the Investment
Adviser received a fee equal to 0.40% of the Fund's average daily net assets.
Fund Asset Management is part of the Merrill Lynch Asset Management Group,
which had approximately $520 billion in investment company and other portfolio
assets under management as of August 1999. This amount includes assets managed
for Merrill Lynch affiliates.
A Note About Year 2000
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Fund invests. This negative impact may be greater for smaller
companies and companies in foreign markets, particularly emerging markets,
since they may be less prepared for the Year 2000 Problem than larger domestic
companies and markets. If the companies in which the Fund invests have Year
2000 Problems, the Fund's return could be adversely affected.
MERRILL LYNCH BASIC VALUE FUND, INC.
23
<PAGE>
[LOGO] Management of the Fund
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects fi-
nancial results for a single Fund share. The total returns in the table repre-
sent the rate an investor would have earned on an investment in the Fund (as-
suming reinvestment of all dividends). This information has been audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial state-
ments, are included in the Fund's annual report to shareholders, which is
available upon request.
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
For the Year Ended June 30,
Increase (Decrease) in ----------------------------------------------------------
Net Asset Value: 1999+ 1998+ 1997+ 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share
Operating
Performance:
- -----------------------------------------------------------------------------------
Net asset value,
beginning of year $ 41.55 $36.50 $30.22 $26.44 $23.17
- -----------------------------------------------------------------------------------
Investment income --
net .76 .83 .81 .80 .74
- -----------------------------------------------------------------------------------
Realized and
unrealized gain
on investments
and foreign
currency
transactions --
net 4.61 7.23 7.66 4.31 4.01
- -----------------------------------------------------------------------------------
Total from
investment
operations 5.37 8.06 8.47 5.11 4.75
- -----------------------------------------------------------------------------------
Less dividends and
distributions:
Investment
income --
net (.81) (.78) (.80) (.76) (.69)
Realized gain
on
investments --
net (2.41) (2.23) (1.39) (.57) (.79)
- -----------------------------------------------------------------------------------
Total dividends
and
distributions (3.22) (3.01) (2.19) (1.33) (1.48)
- -----------------------------------------------------------------------------------
Net asset value,
end of year $ 43.70 $41.55 $36.50 $30.22 $26.44
- -----------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------
Based on net
asset value
per share 14.54% 23.23% 29.95% 19.92% 21.67%
- -----------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------
Expenses .55% .54% .55% .56% .59%
- -----------------------------------------------------------------------------------
Investment income --
net 1.95% 2.14% 2.54% 2.88% 3.19%
- -----------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------
Net assets, end
of year
(in thousands) $5,521,623 $5,888,853 $4,921,834 $3,587,558 $2,834,652
- -----------------------------------------------------------------------------------
Portfolio
turnover 15.52% 17.79% 13.00% 13.94% 11.69%
<CAPTION>
Class B
-----------------------------------------------------------
For the Year Ended June 30,
Increase (Decrease) in -----------------------------------------------------------
Net Asset Value: 1999+ 1998+ 1997+ 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share
Operating
Performance:
- -----------------------------------------------------------------------------------
Net asset value,
beginning of year $ 40.78 $35.89 $29.76 $26.08 $22.87
- -----------------------------------------------------------------------------------
Investment income --
net .36 .43 .48 .53 .53
- -----------------------------------------------------------------------------------
Realized and
unrealized gain
on investments
and foreign
currency
transactions --
net 4,53 7.11 7.55 4.23 3.93
- -----------------------------------------------------------------------------------
Total from
investment
operations 4.89 7.54 8.03 4.76 4.46
- -----------------------------------------------------------------------------------
Less dividends and
distributions:
Investment
income --
net (.42) (.42) (.51) (.51) (.46)
Realized gain
on
investments --
net (2.41) (2.23) (1.39) (.57) (.79)
- -----------------------------------------------------------------------------------
Total dividends
and
distributions (2.83) (2.65) (1.90) (1.08) (1.25)
- -----------------------------------------------------------------------------------
Net asset value,
end of year $42.84 $40.78 $35.89 $29.76 $26.08
- -----------------------------------------------------------------------------------
Total Investment Return:*
- -----------------------------------------------------------------------------------
Based on net
asset value
per share 13.40% 21.97% 28.61% 18.71% 20.45%
- -----------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------
Expenses 1.57% 1.56% 1.57% 1.58% 1.61%
- -----------------------------------------------------------------------------------
Investment income --
net 0.93% 1.13% 1.53% 1.86% 2.16%
- -----------------------------------------------------------------------------------
Supplemental Data:
- -----------------------------------------------------------------------------------
Net assets, end
of year
(in thousands) $4,846,702 $4,976,004 $4,088,755 $3,288,963 $2,464,248
- -----------------------------------------------------------------------------------
Portfolio
turnover 15.52% 17.79% 13.00% 13.94% 11.69%
</TABLE>
* Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
24
MERRILL LYNCH BASIC VALUE FUND, INC.
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------
For the Year Ended June 30, For the
-------------------------------------- Period
Increase Oct. 21, 1994++
(Decrease) in Net to June 30,
Asset Value: 1999+ 1998+ 1997+ 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share
Operating
Performance:
- ------------------------------------------------------------------------------
Net asset value,
beginning of
period $40.39 $35.59 $29.56 $25.98 $22.92
- ------------------------------------------------------------------------------
Investment
income -- net .35 .43 .47 .55 .44
- ------------------------------------------------------------------------------
Realized and
unrealized gain
on
investments and
foreign currency
transactions --
net 4.48 7.04 7.49 4.18 3.05
- ------------------------------------------------------------------------------
Total from
investment
operations 4.83 7.47 7.96 4.73 3.49
- ------------------------------------------------------------------------------
Less dividends
and
distributions:
Investment
income -- net (.44) (.44) (.54) (.58) (.33)
Realized gain on
investments --
net (2.41) (2.23) (1.39) (.57) (.10)
- ------------------------------------------------------------------------------
Total dividends
and distributions (2.85) (2.67) (1.93) (1.15) (.43)
- ------------------------------------------------------------------------------
Net asset value,
end of period $42.37 $40.39 $35.59 $29.56 $25.98
- ------------------------------------------------------------------------------
Total Investment Return:**
- ------------------------------------------------------------------------------
Based on net
asset value per
share 13.36% 21.98% 28.60% 18.69% 15.59%#
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------
Expenses 1.58% 1.57% 1.58% 1.59% 1.66%*
- ------------------------------------------------------------------------------
Investment
income -- net .92% 1.12% 1.51% 1.83% 2.09%*
- ------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------
Net assets, end
of period
(in thousands) $535,132 $538,104 $337,828 $211,787 $74,334
- ------------------------------------------------------------------------------
Portfolio
turnover 15.52% 17.79% 13.00% 13.94% 11.69%
- ------------------------------------------------------------------------------
<CAPTION>
Class D
-----------------------------------------------------------
For the Year Ended June 30, For the
------------------------------------------- Period
Increase Oct. 21, 1994++
(Decrease) in Net to June 30,
Asset Value: 1999+ 1998+ 1997+ 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share
Operating
Performance:
- ------------------------------------------------------------------------------
Net asset value,
beginning of
period $41.42 $36.42 $30.16 $26.41 $23.19
- ------------------------------------------------------------------------------
Investment
income -- net .65 .74 .73 .76 .50
- ------------------------------------------------------------------------------
Realized and
unrealized gain
on
investments and
foreign currency
transactions --
net 4.61 7.19 7.66 4.27 3.17
- ------------------------------------------------------------------------------
Total from
investment
operations 5.26 7.93 8.39 5.03 3.67
- ------------------------------------------------------------------------------
Less dividends
and
distributions:
Investment
income -- net (.72) (.70) (.74) (.71) (.35)
Realized gain on
investments --
net (2.41) (2.23) (1.39) (.57) (.10)
- ------------------------------------------------------------------------------
Total dividends
and distributions (3.13) (2.93) (2.13) (1.28) (.45)
- ------------------------------------------------------------------------------
Net asset value,
end of period $43.55 $41.42 $36.42 $30.16 $26.41
- ------------------------------------------------------------------------------
Total Investment Return:**
- ------------------------------------------------------------------------------
Based on net
asset value per
share 14.25% 22.89% 29.65% 19.61% 16.23%#
- ------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------
Expenses .80% .79% .80% .81% .87%*
- ------------------------------------------------------------------------------
Investment
income -- net 1.69% 1.89% 2.28% 2.61% 2.88%*
- ------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------
Net assets, end
of period
(in thousands) $1,980,153 $1,734,702 $886,391 $434,396 $203,033
- ------------------------------------------------------------------------------
Portfolio
turnover 15.52% 17.79% 13.00% 13.94% 11.69%
- ------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
25
MERRILL LYNCH BASIC VALUE FUND, INC.
<PAGE>
(This page intentionally left blank)
MERRILL LYNCH BASIC VALUE FUND, INC.
<PAGE>
[FLOW CHART]
POTENTIAL
INVESTORS
Open an account (two options)
1 2
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
ON SECURITIES DEALER Financial Data Services, Inc.
P.O. Box 45289
Advises shareholders on Jacksonville, Florida 32232-5289
their Fund investments.
Performs recordkeeping and reporting services.
DISTRIBUTOR
Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
THE FUND
The Board of Directors
oversees the Fund.
COUNSEL CUSTODIAN
Brown & Wood LLP The Bank of New York
One World Trade Center 90 Washington Street
New York, New York 10048-0557 12th Floor
New York, New York 10286
Provides legal advice to the Fund. Holds the Fund's assets for safekeeping.
INDEPENDENT AUDITORS INVESTMENT ADVISER
Deloitte & Touche LLP Fund Asset Management, L.P.
202 Carnegie Center
Princeton, New Jersey 08543 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Audits the financial
statements of the Fund on behalf of MAILING ADDRESS
the shareholders. P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's
day-to-day activities.
MERRILL LYNCH BASIC VALUE FUND, INC.
<PAGE>
For More Information [LOGO]
Shareholder Reports
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
You may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive sepa-
rate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289
or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated above, if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public refer-
ence room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-
6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from the informa-
tion contained in this Prospectus.
Investment Company Act file #811-2739
Code #10042-10-99
(C)Fund Asset Management, L.P.
[LOGO] For More Information
Prospectus
[LOGO] Merrill Lynch
Merrill Lynch Basic
Value Fund, Inc. October 19, 1999
<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. For more information on the Fund's
investment objectives and policies, see "Investment Objective and Policies."
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
"Purchase of Shares."
----------------
This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated October
19, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) 637-3863 or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1999 annual report to shareholders. You may request a copy of the annual
report at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and
8:00 p.m. on any business day.
----------------
Fund Asset Management -- Investment Adviser
Merrill Lynch Funds Distributor -- Distributor
----------------
The date of this Statement of Additional Information is October 19, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objective and Policies.......................................... 2
Convertible Securities.................................................... 2
Foreign Investment Risks.................................................. 3
Other Investment Policies Practices and Risk Factors...................... 5
Investment Restrictions................................................... 6
Portfolio Turnover........................................................ 8
Management of the Fund..................................................... 8
Directors and Officers.................................................... 8
Compensation of Directors................................................. 10
Management and Advisory Arrangements...................................... 10
Code of Ethics............................................................ 12
Purchase of Shares......................................................... 12
Initial Sales Charge Alternatives -- Class A and Class D Shares........... 13
Deferred Sales Charge Alternatives -- Class B and Class C Shares.......... 17
Distribution Plans........................................................ 20
Limitations on the Payment of Deferred Sales Charges...................... 22
Redemption of Shares....................................................... 23
Redemption................................................................ 23
Repurchase................................................................ 23
Reinstatement Privilege -- Class A and Class D Shares..................... 24
Pricing of Shares.......................................................... 24
Determination of Net Asset Value.......................................... 24
Computation of Offering Price Per Share................................... 25
Portfolio Transactions..................................................... 25
Shareholder Services....................................................... 27
Investment Account........................................................ 27
Exchange Privilege........................................................ 28
Fee-Based Programs........................................................ 30
Retirement and Education Savings Plans.................................... 30
Automated Investment Plans................................................ 30
Automatic Dividend Reinvestment Plan...................................... 31
Systematic Withdrawal Plan................................................ 31
Dividends and Taxes........................................................ 32
Dividends................................................................. 32
Taxes..................................................................... 32
Tax Treatment of Options Transactions..................................... 34
Special Rules for Certain Foreign Currency Transactions................... 34
Performance Data........................................................... 35
General Information........................................................ 37
Description of Shares..................................................... 37
Independent Auditors...................................................... 38
Custodian................................................................. 38
Transfer Agent............................................................ 38
Legal Counsel............................................................. 38
Reports to Shareholders................................................... 38
Shareholder Inquiries..................................................... 39
Additional Information.................................................... 39
Financial Statements....................................................... 39
</TABLE>
<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"). Reference is made to "How the
Fund Invests" and "Investment Risks" in the Prospectus.
The investment strategy 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 relatively 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.
Investment emphasis is on equities, primarily common stocks 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. 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.
Fund Asset Management, L.P. (the "Investment Adviser" or "FAM"), the Fund's
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, Pierce, Fenner & Smith Incorporated
("Merrill Lynch").
Convertible Securities
Convertible securities entitle the holder to receive interest payments paid
on corporate debt securities or the dividend preference on a preferred stock
until such time as the convertible security matures or is redeemed or until
the holder elects to exercise the conversion privilege.
The characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases,
the relatively high yield received from dividend or interest payments as
compared to common stock dividends and decreased risks of decline in value
relative to the underlying common stock due to their fixed-income nature. As a
result of the conversion feature, however, the interest rate or dividend
preference on a convertible security is generally less than would be the case
if the securities were issued in nonconvertible form.
2
<PAGE>
In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible
securities held by the Fund are denominated in United States dollars, the
underlying equity securities may be quoted in the currency of the country
where the issuer is domiciled. With respect to convertible securities
denominated in a currency different from that of the underlying equity
securities, the conversion price may be based on a fixed exchange rate
established at the time the security is issued. As a result, fluctuations in
the exchange rate between the currency in which the debt security is
denominated and the currency in which the share price is quoted will affect
the value of the convertible security.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable
issuers and by the value of the underlying common stock. The value of a
convertible security viewed without regard to its conversion feature (i.e.,
strictly on the basis of its yield) is sometimes referred to as its
"investment value." To the extent interest rates change, the investment value
of the convertible security typically will fluctuate. However, at the same
time, the value of the convertible security will be influenced by its
"conversion value," which is the market value of the underlying common stock
that would be obtained if the convertible security were converted. Conversion
value fluctuates directly with the price of the underlying common stock. If,
because of a low price of the common stock the conversion value is
substantially below the investment value of the convertible security, the
price of the convertible security is governed principally by its investment
value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common
stock while holding a fixed-income security.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security,
convert it into the underlying common stock or sell it to a third party.
Certain convertible debt securities may provide a put option to the holder
which entitles the holder to cause the security to be redeemed by the issuer
at a premium over the stated principal amount of the debt security under
certain circumstances.
Foreign Investment Risks
Foreign Market Risk. Since the Fund may invest in foreign securities, it
offers the potential for more diversification than an investment only in the
United States. This is because securities traded on foreign markets have often
(though not always) performed differently than securities in the United
States. However, such investments involve special risks not present in U.S.
investments that can increase the chances that the Fund will lose money. In
particular, the Fund is subject to the risk that because there are generally
fewer investors on foreign exchanges and a smaller number of shares traded
each day, it may make it difficult for the Fund to buy and sell securities on
those exchanges. In addition, prices of foreign securities may fluctuate more
than prices of securities traded in the United States.
Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues
as growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular
country or countries, changes in international trading patterns, trade
barriers, and other protectionist or retaliatory measures. Investments in
foreign markets may also be adversely affected by governmental actions such as
the imposition of capital controls, nationalization of companies or
industries, expropriation of assets, or the imposition of punitive taxes. In
addition, the governments of certain countries may prohibit or impose
substantial
3
<PAGE>
restrictions on foreign investing in their capital markets or in certain
industries. Any of these actions could severely affect security prices, impair
the Fund's ability to purchase or sell foreign securities or transfer the
Fund's assets or income back into the United States, or otherwise adversely
affect the Fund's operations. Other foreign market risks include foreign
exchange controls, difficulties in pricing securities, defaults on foreign
government securities, difficulties in enforcing favorable legal judgments in
foreign courts, and political and social instability. Legal remedies available
to investors in certain foreign countries may be less extensive than those
available to investors in the United States or other foreign countries.
Currency Risk and Exchange Risk. Securities in which the Fund invests may be
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the Fund's portfolio.
Generally, when the U.S. dollar rises in value against a foreign currency, a
security denominated in that currency loses value because the currency is
worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value
against a foreign currency, a security denominated in that currency gains
value because the currency is worth more U.S. dollars. This risk, generally
known as "currency risk," means that a stronger U.S. dollar will reduce
returns for U.S. investors while a weak U.S. dollar will increase those
returns.
European Economic and Monetary Union ("EMU"). For a number of years, certain
European countries have been seeking economic unification that would, among
other things, reduce barriers between countries, increase competition among
companies, reduce government subsidies in certain industries, and reduce or
eliminate currency fluctuations among these European countries. The Treaty on
European Union (the "Maastricht Treaty") set out a framework for the European
Economic and Monetary Union ("EMU") among the countries that comprise the
European Union ("EU"). EMU established a single common European currency (the
"euro") that was introduced on January 1, 1999 and is expected to replace the
existing national currencies of all EMU participants by July 1, 2002. EMU took
effect for the initial EMU participants on January 1, 1999. Certain securities
issued in participating EU countries (beginning with government and corporate
bonds) will be redenominated in the euro, and are listed, traded, and make
dividend and other payments only in euros.
No assurance can be given that EMU will take effect, that the changes
planned for the EU can be successfully implemented, or that these changes will
result in the economic and monetary unity and stability intended. There is a
possibility that EMU will not be completed, or will be completed but then
partially or completely unwound. Because any participating country may opt out
of EMU within the first three years, it is also possible that a significant
participant could choose to abandon EMU, which would diminish its credibility
and influence. Any of these occurrences could have adverse effects on the
markets of both participating and non-participating countries, including sharp
appreciation or depreciation of the participants' national currencies and a
significant increase in exchange rate volatility, a resurgence in economic
protectionism, an undermining of confidence in the European markets, an
undermining of European economic stability, the collapse or slowdown of the
drive toward European economic unity, and/or reversion of the attempts to
lower government debt and inflation rates that were introduced in anticipation
of EMU. Also, withdrawal from EMU by an initial participant could cause
disruption of the financial markets as securities redenominated in euros are
transferred back into that country's national currency, particularly if the
withdrawing country is a major economic power. Such developments could have an
adverse impact on the Fund's investments in Europe generally or in specific
countries participating in EMU. Gains or losses resulting from the euro
conversion may be taxable to Fund shareholders under foreign or, in certain
limited circumstances, U.S. tax laws.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws
to protect investors the way that the U.S. securities laws do. For example,
some foreign countries may have no laws or rules against insider trading.
Insider trading occurs when a person buys or sells a Company's Securities
based on non public information about that compay. Accounting standards in
other countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and
accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying or selling securities often are higher
in foreign countries than they are in the United States. This reduces the
amount the Fund can earn on its investments.
4
<PAGE>
Certain Risks of Holding Fund Assets Outside the United States. The Fund
generally holds its foreign securities and cash in foreign banks and
securities depositories. Some foreign banks and securities depositories may be
recently organized or new to the foreign custody business. In addition, there
may be limited or no regulatory oversight over their operations. Also, the
laws of certain countries may put limits on the Fund's ability to recover its
assets if a foreign bank or depository or issuer of a security or any of their
agents goes bankrupt. In addition, it is often more expensive for the Fund to
buy, sell and hold securities in certain foreign markets than it is in the
U.S. The increased expense of investing in foreign markets reduces the amount
the Fund can earn on its investments and typically results in a higher
operating expense ratio for the Fund than investment companies invested only
in the U.S..
Settlement Risk. Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign
settlement procedures and trade regulations also may involve certain risks
(such as delays in payment for or delivery of securities) not typically
generated by the settlement of U.S. investments. Communications between the
United States and emerging market countries may be unreliable, increasing the
risk of delayed settlements or losses of security certificates. Settlements in
certain foreign countries at times have not kept pace with the number of
securities transactions; these problems may make it difficult for the Fund to
carry out transactions. If the Fund cannot settle or is delayed in settling a
purchase of securities, it may miss attractive investment opportunities and
certain of its assets may be uninvested with no return earned thereon for some
period. If the Fund cannot settle or is delayed in settling a sale of
securities, it may lose money if the value of the security then declines or,
if it has contracted to sell the security to another party, the Fund could be
liable to that party for any losses incurred.
Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes.
Other Investment Policies, Practices and Risk Factors
Securities Lending. The Fund may lend securities with a value not exceeding
20% of its total assets (subject to investment restriction (5) below). In
return, the Fund receives collateral in an amount equal to at least 100% of
the current market value of the loaned securities in cash or securities issued
or guaranteed by the U.S. Government. The Fund receives securities as
collateral for the loaned securities and the Fund and the borrower negotiate a
rate for the loan premium to be received by the Fund for the loaned
securities, which increases the Fund's yield. The Fund may receive a flat fee
for its loans. The loans are terminable at any time and the borrower, after
notice, is required to return borrowed securities within five business days.
The Fund may pay reasonable finder's, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any
other reason, the Fund could experience delays and costs in gaining access to
the collateral and could suffer a loss to the extent the value of the
collateral falls below the market value of the borrowed securities.
Writing Options. The Fund may write (i.e., sell) call options on securities
held in its portfolio and may enter into closing purchase transactions with
respect to such options. A call option will be considered covered if the Fund
owns the securities it would be required to deliver upon exercise of the
option or owns a call option, warrant or convertible instrument which is
immediately exercisable for, or convertible into, such security. When the Fund
writes a call option, in return for an option premium the Fund gives another
party the right to buy specified securities owned by the Fund at the exercise
price on or before the expiration date. The Fund may write call options to
earn income through the receipt of option premiums. In the event the party to
which the Fund has written an option fails to exercise its rights under the
option because the value of the underlying securities is less than the
exercise price, the Fund will partially offset any decline in the value of the
underlying securities through the receipt of the option premium. By writing a
call option, however, the Fund limits its ability to sell the underlying
securities, and gives up the opportunity to profit from any increase in the
value of the underlying securities beyond the exercise price while the option
remains outstanding. Writing a call option may involve correlation risk, which
is the risk that changes in the value of a call option the Fund has written
may experience a gain or loss which will not be completely offset by movements
in the value of the portfolio securities underlying the call option, in which
case any losses on the holdings being hedged may not be reduced.
5
<PAGE>
The Fund may not write covered options on underlying securities exceeding
15% of its total assets, taken at market value.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its net
assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are "restricted securities."
Restricted securities have contractual or legal restrictions on their resale
and include "private placement" securities that the Fund may buy directly from
the issuer. Restricted securities may be sold in private placement
transactions between issuers and their purchasers and may be neither listed on
an exchange nor traded in other established markets. In many cases, privately
placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities
may be less liquid and more difficult to value than publicly traded
securities. To the extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their securities were
publically traded. In addition, issuers whose securities are not publicly
traded may not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded.
If any privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration. Certain
of the Fund's investments in private placements may consist of direct
investments and may include investments in smaller, less-seasoned issuers,
which may involve greater risks. These issuers may have limited product lines,
markets or financial resources, or they may be dependent on a limited
management group. In making investments in such securities, the Fund may
obtain access to material nonpublic information which may restrict the Fund's
ability to conduct portfolio transactions in such securities.
144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either freely tradable in their primary markets
offshore or have been determined to be liquid in accordance with the policies
and procedures adopted by the Fund's Board. The Board of Directors has adopted
guidelines and delegated to the Investment Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board of
Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to predict with
assurance exactly how this market for restricted securities sold and offered
under Rule 144A will assume to develop, the Board of Directors will carefully
monitor the Funds investments in these securities. This investment practice
could have the effect of increasing the level of illiquidity in the Fund to
the extent that qualified institutional buyers become for a time uninterested
in purchasing these securities.
Suitability. The economic benefit of an investment in the Fund depends upon
many factors beyond the control of the Fund, the Investment Adviser and its
affiliates. Because of its emphasis on 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 depend 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.
Investment Restrictions
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed
without
6
<PAGE>
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 (i) 67% of the Fund's shares present at a meeting at which more
than 50% of the outstanding shares of the Fund are represented or (ii) more
than 50% of the Fund's outstanding shares). The Fund may not:
(1) Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
(2) Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
(3) Make investments for the purpose of exercising control or management.
(4) Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein.
(5) Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not 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 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 investment restrictions
that may be changed by the Board of Directors without a vote of the Fund's
shareholders. 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" provisions) of the Investment Company Act at any
time the Fund's shares are owned by another investment company that is part
of the same group of investment companies as the Fund.
(b) Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales "against the box."
7
<PAGE>
(c) Invest in securities that cannot be readily resold because of legal
or contractual restrictions or that cannot otherwise be marketed, redeemed
or put to the issuer or 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 that mature within seven days or
securities, that the Board of Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Securities purchased in
accordance with Rule 144A under the Securities Act and determined to be
liquid by the 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.
Because of the affiliation of Merrill Lynch with the Investment Adviser, the
Fund is prohibited from engaging in certain transactions involving Merrill
Lynch or its affiliates except for brokerage transactions permitted under the
Investment Company Act involving only usual and customary commissions or
transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage." Without such an exemptive order
the Fund would be prohibited from engaging in portfolio transactions with
Merrill Lynch or any of its affiliates acting as principal.
Portfolio Turnover
The rate of portfolio turnover is not a limiting factor and, given the
Fund's investment policies, it is anticipated that there may be periods when
high portfolio turnover will exist. The use of covered call options at times
when the underlying securities are appreciating in value may result in higher
portfolio turnover. The Fund pays brokerage commissions in connection with
writing call options and effecting closing purchase transactions, as well as
in connection with purchases and sales of portfolio securities. High portfolio
turnover may also result in negative tax consequences, such as an increase in
capital gains dividends. See "Distributions and Taxes--Taxes." 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.
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.
MANAGEMENT OF THE FUND
Directors and Officers
The Directors of the Fund consist of eight individuals, six of whom are not
"interested persons" of the Fund as defined in the Investment Company Act (the
"non-interested Directors"). The Directors are responsible for the overall
supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the Investment Company
Act.
Information about the Directors, executive officers and the portfolio
manager of the Fund, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of each Director, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
Terry K. Glenn (59)--President and Director(1)(2)--Executive Vice President
of the Investment Adviser and Merrill Lynch Asset Management ("MLAM") (which
terms as used herein include their corporate predecessors) since 1983;
Executive Vice President and Director of Princeton Services, Inc. ("Princeton
Services") since 1993; President of Princeton Funds Distributor, Inc. ("PFD")
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
8
<PAGE>
Donald Cecil (72)--Director(2)(3)--1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Associates (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 (67)--Director(2)(3)--104 Westcliff Road, Weston,
Massachusetts 02193. 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 (72)--Director(2)(3)--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 (71)--Director(2)(3)--P.O. Box 7, West Cornwall,
Connecticut 06796. President and Director of American Independent Oil Company,
Inc. (an energy company) since 1987; Member of Council on Foreign Relations
since 1971.
J. Thomas Touchton (60)--Director(2)(3)--Suite 3405, One Tampa City Center,
201 North Franklin Street, Tampa, Florida 33062. Managing Partner of The Witt
Touchton Company and its predecessor, The Witt Co. (a private investment
partnership), since 1972; Trustee Emeritus of Washington and Lee University;
Director of TECO Energy, Inc. (an electric utility holding company).
Fred G. Weiss (58)--Director(2)(3)--16410 Maddalena Place, Delray Beach,
Florida 33446. Managing Director of FGW Associates since 1997; Vice President,
Planning Investment, and Development of Warner Lambert Co. from 1979 to 1997.
Arthur Zeikel (67)--Director(1)(2)--300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Investment Adviser and MLAM from 1997 to 1999
and President thereof from 1977 to 1997; Chairman of Princeton Services, Inc.
from 1997 to 1999, Director thereof from 1993 to 1999 and President thereof
from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML
& Co.") from 1990 to 1999.
Paul M. Hoffmann (69)--Senior Vice President and Co-Portfolio Manager(1)--
First Vice President of MLAM since 1997; Vice President of MLAM from 1976 to
1997; and Portfolio Manager of MLAM since 1977.
Kevin Rendino (33)--Senior Vice President and Portfolio Manager(1)--First
Vice President of MLAM since 1997; Vice President from 1993 to 1997; and
Portfolio Manager of MLAM since 1999.
Donald C. Burke (39)--Vice President and Treasurer(1)(2)--Senior Vice
President and Treasurer of the Investment Adviser and MLAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; First Vice
President of MLAM from 1997 to 1999; Vice President of MLAM from 1990 to 1997;
Director of Taxation of MLAM since 1990.
Robert C. Doll (45)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM; Senior Vice President of Princeton Services;
Chief Investment Officer of Oppenheimer Funds, Inc. in 1999 and Executive Vice
President thereof from 1991 to 1999.
Thomas D. Jones, III (34)--Secretary(1)(2)--Vice President of MLAM since
1998; attorney with the Investment Adviser and MLAM since 1992.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of certain
other investment companies for which FAM or MLAM acts as the investment
adviser or manager.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Directors.
As of October 1, 1999, the Directors and officers of the Fund as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, Mr. Glenn, a Director
and officer of the Fund, and the other officers of the Fund owned an aggregate
of less than 1% of the outstanding shares of common stock of ML & Co.
9
<PAGE>
Compensation of Directors
The Fund pays each non-interested Director a fee of $3,500 per year plus
$500 per Board meeting attended. The Fund also compensates each member of the
Audit and Nominating Committee (the "Committee"), which consists of the non-
interested Directors at a rate of $2,500 per year. The Fund pays the Chairman
of the Committee an additional fee of $1,000 per year. The Fund reimburses
each non-interested Director for his out-of-pocket expenses relating to
attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Directors for the fiscal year ended June 30, 1999 and the aggregate
compensation paid to them from all registered investment companies advised by
the Investment Adviser and its affiliate, MLAM ("MLAM/FAM-advised funds"), for
the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregate
Pension or Estimated Compensation From
Retirement Benefits Annual Fund And Other
Position with Compensation Accrued as Part of Benefits upon MLAM/FAM- Advised
Name Fund From Fund Fund Expense Retirement Funds(1)
- ---- ------------- ------------ ------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Donald Cecil............ Director $9,000 None None $ 277,808
M. Colyer Crum.......... Director $8,000 None None $ 116,600
Edward H. Meyer......... Director $8,000 None None $ 214,558
Jack B. Sunderland...... Director $8,000 None None $ 133,600
J. Thomas Touchton...... Director $8,000 None None $ 133,600
Fred G. Weiss........... Director $8,000 None None $ 140,842
</TABLE>
- ----------
(1) The Directors serve on the boards of MLAM/FAM-advised funds as follows:
Mr. Cecil (36 registered investment companies consisting of 36
portfolios); Mr. Crum (16 registered investment companies consisting of 16
portfolios); Mr. Meyer (36 registered investment companies consisting of
36 portfolios); Mr. Sunderland (19 registered investment companies
consisting of 31 portfolios); Mr. Touchton (19 registered investment
companies consisting of 31 portfolios); and Mr. Weiss (16 registered
investment companies consisting of 16 portfolios).
Directors of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares--Reduced Initial Sales Charges--Purchase Privilege of Certain
Persons."
Management and Advisory Arrangements
Management Services. The Investment Adviser provides the Fund with
investment advisory and management services. Subject to the supervision of the
Directors, the Investment Adviser is responsible for the actual management of
the Fund's portfolio and constantly reviews the Fund's holdings in light of
its own research analysis and that from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. The Investment Adviser performs certain of
the other administrative services and provides all the office space,
facilities, equipment and necessary personnel for management of the Fund.
Management Fee. The Fund has entered into an investment advisory agreement
with the Investment Adviser (the "Investment Advisory Agreement"), pursuant to
which the Investment Adviser receives for its services to the Fund monthly
compensation at the annual rate of 0.60% of the average daily net assets of
the Fund for the first $100 million; 0.50% of average daily net assets from
$100 million to $200 million; and 0.40% of average daily net assets above $200
million. The table below sets forth information about the total investment
advisory fees paid by the Fund to the Investment Adviser for the periods
indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended
June 30, Investment Advisory Fee
----------------- -----------------------
<S> <C>
1999................. $49,616,814
1998................. $47,100,812
1997................. $35,001,183
</TABLE>
Payment of Fund Expenses. The Investment Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and
10
<PAGE>
employees of the Fund connected with investment and economic research, trading
and investment management of the Fund, as well as the fees of all Directors of
the Fund who are affiliated persons of the Investment Adviser. The Fund pays
all other expenses incurred in the operation of the Fund, including among
other things: taxes, expenses for legal and auditing services, costs of
printing proxies, stock certificates, shareholder reports, prospectuses and
statements of additional information, except to the extent paid by Merrill
Lynch Funds Distributor, a division of PFD (the "Distributor"); charges of the
custodian and sub-custodian, and the transfer agent; expenses of redemption of
shares; SEC fees; expenses of registering the shares under Federal, state or
foreign laws; fees and expenses of non-interested Directors; accounting and
pricing costs (including the daily calculations of net asset value);
insurance; interest; brokerage costs; litigation and other extraordinary or
non-recurring expenses; and other expenses properly payable by the Fund.
Accounting services are provided for the Fund by the Investment Adviser and
the Fund reimburses the Investment Adviser for its costs in connection with
such services. The Distributor will pay certain promotional expenses of the
Fund incurred in connection with the offering of shares of the Fund. Certain
expenses will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Act. See "Purchase of Shares--
Distribution Plans."
Organization of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are ML & Co., a financial services holding
company and the parent of Merrill Lynch, and Princeton Services. ML & Co. and
Princeton Services are "controlling persons" of the Investment Adviser as
defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.
The following entities may be considered "controlling persons" of MLAM U.K.:
Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch
International Holdings, Inc., a subsidiary of Merrill Lynch International,
Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein,
the Investment Advisory Agreement and Sub-Advisory Agreement will continue in
effect from year to year if approved annually (a) by the Directors of the Fund
or by a majority of the 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 contracts
are not assignable and may be terminated without penalty on 60 days' written
notice at the option of either party or by vote of the shareholders of the
Fund.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant
to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent
receives a fee of $11.00 per Class A or Class D account and $14.00 per Class B
or Class C account and is entitled to reimbursement for certain transaction
charges and out-of-pocket expenses incurred by the Transfer Agent under the
Transfer Agency Agreement. Additionally, a $.20 monthly closed account charge
will be assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the month the
account is closed. At the end of the calendar year, no further fees will be
due. For purposes of the Transfer Agency Agreement, the term "account"
includes a shareholder account maintained directly by the Transfer Agent and
any other account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the recordkeeping
system is maintained by a subsidiary of ML & Co.
Distribution Expenses. The Fund has entered into four separate distribution
agreements with the Distributor in connection with the continuous offering of
each class of shares of the Fund (the "Distribution Agreements"). The
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays
for the printing and distribution of copies thereof used in connection with
the offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreement described above.
11
<PAGE>
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.
The Codes require that all employees of the Investment Adviser pre-clear any
personal securities investment (with limited exceptions, such as government
securities). The pre-clearance 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).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C or Class D share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights,
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees (also known as service fees) and Class B and
Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. The contingent deferred sales charges ("CDSCs"),
distribution fees and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and differ only to the extent
that account maintenance and distribution fees and any incremental transfer
agency costs relating to a particular class are borne exclusively by that
class. Each class has different exchange privileges. See "Shareholder
Services -- Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The Merrill Lynch Select Pricing SM System is used by more than 50
registered investment companies advised by MLAM or FAM. Funds advised by MLAM
or FAM that utilize the Merrill Lynch Select Pricing SM System are referred to
herein as "Select Pricing Funds."
The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Fund or the Distributor.
Neither the Distributor nor the dealers 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.
12
<PAGE>
Initial Sales Charge Alternatives -- Class A and Class D Shares
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase
Class A shares should purchase Class A shares rather than Class D shares
because there is an account maintenance fee imposed on Class D shares.
Investors qualifying for significantly reduced initial sales charges may find
the initial sales charge alternative particularly attractive because similar
sales charge reductions are not available with respect to the deferred sales
charges imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charges, and, in the case of Class D shares, the
account maintenance fee. Although some investors who previously purchased
Class A shares may no longer be eligible to purchase Class A shares of other
Select Pricing Funds, those previously purchased Class A shares, together with
Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for a reduced initial sales charge
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class
C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for
a single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment
adviser.
Eligible Class A Investors
Class A shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares. Investors
who currently own Class A shares in a shareholder account, including
participants in the Merrill Lynch Blueprint SM Program, are entitled to
purchase additional Class A shares of the Fund in that account. Certain
employer-sponsored retirement or savings plans, including eligible 401(k)
plans, may purchase Class A shares at net asset value provided such plans meet
the required minimum number of eligible employees or required amount of assets
advised by MLAM or any of its affiliates. Class A shares are available at net
asset value to corporate warranty insurance reserve fund programs provided and
U.S. branches of foreign banking institutions that the program has $3 million
or more initially invested in Select Pricing Funds. Also eligible to purchase
Class A shares at net asset value are participants in certain investment
programs including TMA SM Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services, collective investment trusts for
which Merrill Lynch Trust Company serves as trustee and certain purchases made
in connection with certain fee-based programs. In addition, Class A shares are
offered at net asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the Boards of MLAM-advised
investment companies. 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 shares of the Fund if certain
conditions are met. In addition, Class A shares of the Fund and certain other
Select Pricing Funds are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. and, if certain conditions are met, to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest
13
<PAGE>
the net proceeds from a sale of certain of their shares of common stock
pursuant to a tender offer conducted by such funds in shares of the Fund and
certain other Select Pricing Funds.
Class A and Class D Sales Charge Information
<TABLE>
<CAPTION>
Class A Shares
- ------------------------------------------------------------------------------------
Gross Sales Sales Charges Sales Charges CDSCs Received on
For the Fiscal Year Charges Retained by Paid to Redemption of
Ended June 30, Collected Distributor Merrill Lynch Load-Waived Shares
------------------- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1999 $ 346,322 $ 25,518 $ 320,804 0
1998 $ 690,640 $ 50,429 $ 640,211 0
1997 $ 610,352 $ 42,785 $ 567,567 0
<CAPTION>
Class D Shares
- ------------------------------------------------------------------------------------
Gross Sales Sales Charges Sales Charges CDSCs Received on
For the Fiscal Year Charges Retained by Paid to Redemption of
Ended June 30, Collected Distributor Merrill Lynch Load-Waived Shares
------------------- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1999 $1,022,708 $ 66,060 $ 956,648 4,174
1998 $2,320,585 $152,493 $2,168,092 0
1997 $1,836,372 $116,447 $1,719,925 0
</TABLE>
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.
Reduced Initial Sales Charges
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
Reinvested Dividends. No initial sales charges are imposed upon Class A and
Class D shares issued as a result of the automatic reinvestment of dividends.
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of any other Select Pricing Funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or
any Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available
only to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit
plans for which Merrill Lynch provides plan participant recordkeeping
services. The Letter of Intent is not a binding obligation to purchase any
amount of Class A or Class D shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intent may be
included under a subsequent Letter of Intent executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. The value of Class A and Class D shares of the Fund and of
other Select Pricing Funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intent, may be included as a credit toward the completion of such
14
<PAGE>
Letter, but the reduced sales charge applicable to the amount covered by such
Letter will be applied only to new purchases. If the total amount of shares
does not equal the amount stated in the Letter of Intent (minimum of $25,000),
the investor will be notified and must pay, within 20 days of the expiration
of such Letter, the difference between the sales charge on the Class A or
Class D shares purchased at the reduced rate and the sales charge applicable
to the shares actually purchased through the Letter. Class A or Class D shares
equal to at least 5.0% of the intended amount will be held in escrow during
the 13-month period (while remaining registered in the name of the purchaser)
for this purpose. The first purchase under the Letter of Intent must be at
least 5.0% of the dollar amount of such Letter. If a purchase during the term
of such Letter would otherwise be subject to a further reduced sales charge
based on the right of accumulation, the purchaser will be entitled on that
purchase and subsequent purchases to the further reduced percentage sales
charge that would be applicable to a single purchase equal to the total dollar
value of the Class A or Class D shares then being purchased under such Letter,
but there will be no retroactive reduction of the sales charge on any previous
purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intent will be deducted
from the total purchases made under such Letter. An exchange from the Summit
Cash Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
Merrill Lynch Blueprint SM Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch 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. Blueprint is
directed to small investors, group IRAs and participants in certain affinity
groups such as credit unions, trade associations and benefit plans. Investors
placing orders to purchase Class A or Class D shares of the Fund through
Blueprint will acquire the Class A or Class D shares at net asset value plus a
sales charge calculated in accordance with the Blueprint sales charge schedule
(i.e., up to $300 at 4.25%, $300.01 up to $5,000 at 3.25% plus $3, 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 0.50% 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 participants in
Blueprint through the Merrill Lynch Directed IRA Rollover Program (the "IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer-sponsored retirement and savings plans
whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed
IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of
an automatic investment plan. Additional information concerning purchases
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMASM Managed Trusts. Class A shares are offered at net asset value to TMASM
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services.
Employee AccessSM Accounts. 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. The initial
minimum investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the
15
<PAGE>
aggregate amount invested by the plan in specified investments and/or the
services provided by Merrill Lynch to the plan. Additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements is available toll-free from Merrill Lynch Business
Financial Services at (800) 237-7777.
Purchase Privilege of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM/FAM-advised investment companies, 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 any trust, pension, profit-sharing or other benefit plan for such persons,
may purchase Class A shares of the Fund at net asset value. The Fund realizes
economies of scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Fund. Employees and directors or
trustees wishing to purchase shares of the Fund must satisfy the Fund's
suitability standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the Financial Consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis; and, second, the investor must establish that such
redemption had been made within 60 days prior to the investment in the Fund
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice") if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such other fund were subject to a sales charge either at the time of
purchase or on a deferred basis; and, second, such purchase of Class D shares
must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of
no less than six months; and, second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net
asset value to shareholders of certain closed-end funds advised by FAM or MLAM
who purchased such closed-end fund shares prior to October 21, 1994 (the date
the Merrill Lynch Select PricingSM System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other Select Pricing
Funds ("Eligible Class D Shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch, and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible Class D Shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering. Third, the
closed-end fund shares must have been continuously maintained in a Merrill
Lynch securities account. Fourth, there must be a minimum purchase of $250 to
be eligible for the investment option.
16
<PAGE>
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. and Merrill Lynch Senior Floating Rate II, Inc. will receive Class A
shares of the Fund and shareholders of Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. will receive
Class D shares of the Fund, except that shareholders already owning Class A
shares of the Fund will be eligible to purchase additional Class A shares
pursuant to this option, if such additional Class A shares will be held in the
same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the
Fund. This investment option is available only with respect to eligible shares
as to which no Early Withdrawal Charge or CDSC (each as defined in the
eligible fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only
on the day that the related tender offer terminates and will be effected at
the net asset value of the designated class of the Fund on such day.
Acquisition of Certain Investment Companies. Class D shares may be offered
at net asset value in connection with the acquisition of the assets of or
merger or consolidation with a personal holding company or a public or private
investment company.
Deferred Sales Charge Alternatives -- Class B and Class C Shares
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in Select Pricing Funds.
Because no initial sales charges are deducted at the time of the purchase,
Class B and Class C shares provide the benefit of putting all of the
investor's dollars to work from the time the investment is made. The deferred
sales charge alternatives may be particularly appealing to investors that do
not qualify for the reduction in initial sales charges. Both Class B and Class
C shares are subject to ongoing account maintenance fees and distribution
fees; however, the ongoing account maintenance and distribution fees
potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will
be subject to lower ongoing fees.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.
Contingent Deferred Sales Charges -- Class B Shares
Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest applicable rate being charged. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no CDSC will be imposed on increases in
net asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends. It will be assumed
that the redemption is first of shares held for over four years or shares
acquired pursuant to reinvestment of dividends and then of shares held longest
during the four-year period. A transfer of shares from a shareholder's account
to another account will be assumed to be made in the same order as a
redemption.
17
<PAGE>
The following table sets forth the Class B CDSC:
<TABLE>
<CAPTION>
CDSC as a Percentage
of Dollar Amount
Year Since Purchase Payment Made Subject to Charge
-------------------------------- --------------------
<S> <C>
0-1................................................. 4.0%
1-2................................................. 3.0%
2-3................................................. 2.0%
3-4................................................. 1.0%
4 and thereafter.................................... None
</TABLE>
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the charge is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).
The Class B CDSC may be waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder
(including one who owns the Class B shares as joint tenant with his or her
spouse), provided the redemption is requested within one year of the death or
initial determination of disability or, if later, reasonably promptly
following completion of probate. The Class B CDSC also may be waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans.
The CDSC may also be waived for any Class B shares that are purchased by
eligible 401(k) or eligible 401(a) plans that are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. The Class B CDSC may also be waived for any Class B
shares that are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. The Class B CDSC may
also be waived or its terms may be modified in connection with certain fee-
based programs. The Class B CDSC may also be waived in connection with
involuntary termination of an account in which Fund shares are held or for
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services--Fee-Based Programs" and "Systematic Withdrawal Plan."
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the
CDSC upon redemption, based on the number of employees or number of employees
eligible to participate in the plan, the aggregate amount invested by the plan
in specified investments and/or the services provided by Merrill Lynch to the
plan. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing Fund.
Minimum purchase requirements may be waived or varied for such plans.
Additional information regarding purchases by employer-sponsored retirement or
savings plans and certain other arrangements is available toll-free from
Merrill Lynch Business Financial Services at (800) 237-7777.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group
IRAs and participants in certain affinity groups such as trade associations
and credit unions. Class B shares of the Fund are offered through Blueprint
only to members of certain affinity groups. The CDSC is waived in connection
with purchase orders placed through Blueprint. 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
18
<PAGE>
Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box
30441, New Brunswick, New Jersey 08989-0441.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject to
an ongoing account maintenance fee of 0.25% of average daily net assets but
are not subject to the distribution fee that is borne by Class B shares.
Automatic conversion of Class B shares into Class D shares will occur at least
once each month (on the "Conversion Date") on the basis of the relative net
asset value of the shares of the two classes on the Conversion Date, without
the imposition of any sales load, fee or other charge. Conversion of Class B
shares to Class D shares will not be deemed a purchase or sale of the shares
for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at the Conversion Date the conversion of Class B shares to
Class D shares of the Fund in a single account will result in less than $50
worth of Class B shares being left in the account, all of the Class B shares
of the Fund held in the account on the Conversion Date will be converted to
Class D shares of the Fund.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply and the holding period for the shares exchanged will be tacked on
to the holding period for the shares acquired. The Conversion Period also may
be modified for investors that participate in certain fee-based programs. See
"Shareholder Services--Fee-Based Programs."
Class B shareholders of the Fund exercising the exchange privilege described
under "Shareholder Services --Exchange Privilege" will continue to be subject
to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares acquired as a result of the exchange.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no Class C CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no Class C CDSC
will be assessed on shares derived from reinvestment of dividends. It will be
assumed that the redemption is first of shares held for over one year or
shares acquired pursuant to reinvestment of dividends and then of shares held
longest during the one-year period. A transfer of shares from a shareholder's
account to another account will be assumed to be made in the same order as a
redemption. The Class C CDSC may be waived in connection with involuntary
termination of an account in which Fund shares are held and withdrawals
through the Merrill Lynch Systematic Withdrawal Plans. See "Shareholder
Services -- Systematic Withdrawal Plan." The Class C CDSC of the Fund and
certain other MLAM-advised mutual funds may be waived with respect to Class C
shares purchased by an investor with the net proceeds of a tender offer made
by certain MLAM-advised closed-end funds, including Merrill Lynch Senior
Floating Rate II, Inc. Such waiver is subject to the requirement that the
tendered shares shall have been held by the investor for a
19
<PAGE>
minimum of one year and to such other conditions as are set forth in the
prospectus for the related closed end fund.
Class B and Class C Sales Charge Information
<TABLE>
<CAPTION>
Class B Shares*
----------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended June 30, by Distributor Merrill Lynch
------------------- -------------- -------------
<S> <C> <C>
1999 $6,107,531 $6,107,531
1998 $3,035,154 $3,035,154
1997 $3,245,099 $3,245,099
* Additional Class B CDSCs payable to the Distributor
may have been waived or converted to a contingent
obligation in connection with a shareholder's
participation in certain fee-based programs.
<CAPTION>
Class C Shares
----------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended June 30, by Distributor Merrill Lynch
------------------- -------------- -------------
<S> <C> <C>
1999 $ 193,976 $ 193,976
1998 $ 111,981 $ 111,981
1997 $ 103,976 $ 103,976
</TABLE>
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and are used in
whole or in part by the Distributor to defray the expenses of dealers
(including Merrill Lynch) related to providing distribution-related services
to the Fund in connection with the sale of the Class B and Class C shares,
such as the payment of compensation to financial consultants for selling Class
B and Class C shares from the dealer's own funds. The combination of the CDSC
and the ongoing distribution fee facilitates the ability of the Fund to sell
the Class B and Class C shares without a sales charge being deducted at the
time of purchase. See "Distribution Plans" below. Imposition of the CDSC and
the distribution fee on Class B and Class C shares is limited by the NASD
asset-based sales charge rule. See "Limitations on the Payment of Deferred
Sales Charges" below.
Distribution Plans
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans for Class B, Class
C and Class D shares pursuant to Rule 12b-1 under the Investment Company Act
(each a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
The Distribution Plans for Class B, Class C and Class D shares each provides
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) in connection with account
maintenance activities with respect to Class B, Class C and Class D shares.
Each of those classes has exclusive voting rights with respect to the
Distribution Plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan).
The Distribution Plans for Class B and Class C shares each provides that the
Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rate of
0.75% of the average daily net assets of the Fund attributable to the shares
of the relevant class in order to compensate the Distributor and 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
20
<PAGE>
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.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that,
so long as the Distribution Plan remains in effect, the selection and
nomination of non-interested Directors shall be committed to the discretion of
the non-interested Directors then in office. In approving each Distribution
Plan in accordance with Rule 12b-1, the non-interested Directors concluded
that there is reasonable likelihood that each Distribution Plan will benefit
the Fund and its related class of shareholders. Each Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the non-
interested Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution
Plan cannot be amended to increase materially the amount to be spent by the
Fund without the approval of the related class of shareholders and all
material amendments are required to be approved by the vote of Directors,
including a majority of the non-interested Directors who have no direct or
indirect financial interest in the Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of the Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of the Distribution
Plan or such report, the first two years in an easily accessible place.
Among other things, each Distribution Plan provides that the Distributor
shall provide and the Directors shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on a percentage
of average daily net assets attributable to the shares regardless of the
amount of expenses incurred and, accordingly, distribution-related revenues
from the Distribution Plans may be more or less than distribution-related
expenses. Information with respect to the distribution-related revenues and
expenses is presented to the Directors for their consideration in connection
with their deliberations as to the continuance of the Class B and Class C
Distribution Plans annually, as of December 31 of each year, on a "fully
allocated accrual" basis and quarterly on a "direct expense and revenue/cash"
basis. On the fully allocated accrual basis, revenues consist of the account
maintenance fees, distribution fees, the CDSCs and certain other related
revenues, and expenses consist of financial consultant compensation, branch
office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation.
As of December 31, 1998, the fully allocated accrual revenues of the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded the fully allocated accrual expenses by
approximately $23,332,000 (.49% of Class B net assets at that date). As of
June 30, 1999, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $175,319,715
(3.62% of Class B net assets at that date). As of December 31, 1998, 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 the
fully allocated accrual revenues by approximately $1,096,000 (.21% of Class C
net assets at that date). As of June 30, 1999, direct cash revenues for the
period since the commencement of operations of Class C shares exceeded direct
cash expenses by $9,723,204 (1.82% of Class C net assets at that date).
For the fiscal year ended June 30, 1999, the Fund paid the Distributor
$46,490,232 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $4.6
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, 1999, the Fund paid
the Distributor $5,049,032 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $504.9 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, 1999,
the Fund paid the Distributor $4,408,011 pursuant to the Class D Distribution
Plan (based on average daily net assets subject to such Class D Distribution
Plan of approximately $1.8 billion), all of which was paid to Merrill Lynch
for providing account maintenance activities in connection with Class D
shares.
21
<PAGE>
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.
The following table sets forth comparative information as of June 30, 1999
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to the Class B shares, the Distributor's
voluntary maximum.
<TABLE>
<CAPTION>
Data Calculated as of June 30, 1999
-------------------------------------------------------------------------------
(in thousands)
Annual
Distribution
Allowable Allowable Amounts Fee at
Eligible Aggregate Interest on Maximum Previously Aggregate Current Net
Gross Sales Unpaid Amount Paid to Unpaid Asset
Sales(1) Charge(2) Balance(3) Payable Distributor(4) Balance Level(5)
---------- --------- ----------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares for the
period October 21, 1988
(commencement of
operations) to June 30,
1999
Under NASD Rule as
Adopted................ $5,204,145 $325,811 $95,122 $420,933 $204,181 $216,752 $36,350
Under Distributor's
Voluntary Waiver....... $5,204,145 $325,811 $26,021 $351,832 $204,181 $147,651 $36,350
Class C Shares, for the
period October 21, 1994
(commencement of
operations) to June 30,
1999
Under NASD Rule as
Adopted................ $ 583,376 $ 36,938 $ 7,377 $ 44,315 $ 10,791 $ 33,524 $ 4,013
</TABLE>
- ----------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of
Summit can only be purchased by exchange from another fund (the "redeemed
fund"). Upon such an exchange, the maximum allowable sales charge payment
to the redeemed fund is reduced in accordance with the amount of the
redemption. This amount is then added to the maximum allowable sales
charge payment with respect to Summit. Upon an exchange out of Summit, the
remaining balance of this amount is deducted from the maximum allowable
sales charge payment to Summit and added to the maximum allowable sales
charge payment to the fund into which the exchange is made.
(3) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(4) Consists of CDSC payments, distribution fee payments and accruals. See
"What are the Fund's fees and expenses?" in the Prospectus. Of the
distribution fee payments made with respect to Class B shares prior to
July 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. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares
in conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFASM) Program (the "MFA Program"). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(5) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).
22
<PAGE>
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in the
Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period
during which trading on the New York Stock Exchange (the "NYSE") is restricted
as determined by the Commission or the NYSE is closed (other than customary
weekend and holiday closings), for any period during which an emergency exists
as defined by the Commission as a result of which disposal of portfolio
securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-
5289. Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares
deposited with the Transfer Agent may be accomplished by a written letter
requesting redemption. Proper notice of redemption in the case of shares for
which certificates have been issued may be accomplished by a written letter as
noted above accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s) on the
Transfer Agent's register. The Signature on the redemption request may require
a guarantee by an "eligible guarantor institution" as defined in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the existence and validity of which may be verified by the Transfer Agent
through the use of industry publications. In the event a signature guarantee
is required, notarized signatures are not sufficient. In general, signature
guarantees are waived on redemptions of less than $50,000 as long as the
following requirements are met: (i) all requests require the signature(s) of
all persons whose name(s) shares are recorded on the Transfer Agent's
register; (ii) all checks must be mailed to the stencil address of record on
the Transfer Agent's register and (iii) the stencil address must not have
changed within 30 days. Certain rules may apply regarding certain account
types such as but not limited to UGMA/UTMA accounts, Joint Tenancies With
Rights of Survivorship, contra broker transactions, and institutional
accounts. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent,
payments will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash, Federal funds or certified check drawn on a United
States bank) has been collected for the purchase of such Fund shares, which
will usually not exceed 10 days.
Repurchase
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the
23
<PAGE>
net asset value next computed after the order is placed. Shares will be priced
at the net asset value calculated on the day the request is received, provided
that the request for repurchase is submitted to the dealer prior to fifteen
minutes after the regular close of business on the NYSE (generally, the NYSE
closes at 4:00 p.m., Eastern time) and such request is received by the Fund
from such dealer not later than 30 minutes after the close of business on the
NYSE on the same day. Dealers have the responsibility of submitting such
repurchase requests to the Fund not later than 30 minutes after the close of
business on the NYSE, in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms that do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill
Lynch may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through the
Transfer Agent on accounts held at the Transfer Agent are not subject to the
processing fee. The Fund reserves the right to reject any order for
repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem Fund shares as
set forth above.
Reinstatement Privilege -- Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds.
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday after the close of business on the NYSE on
each day the NYSE is open for trading. The NYSE generally closes at 4:00 p.m.,
Eastern time. Any assets or liabilities initially expressed in terms of non-
U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of
valuation. The NYSE is not open for trading on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Net asset value is computed by dividing the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time, rounded to
the nearest cent. Expenses, including the fees payable to the Investment
Adviser and Distributor, are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net
asset value of the Class B and Class C shares generally will be lower than the
per share net asset value of Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will tend to
converge (although not necessarily meet) immediately after the payment
24
<PAGE>
of dividends, which will differ by approximately the amount of the expense
accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (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 for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Directors as the primary
market. Long positions in securities traded in the over-the-counter ("OTC")
market are valued at the last available bid price in the OTC market prior to
the time of valuation. Short positions in securities traded in the OTC market
are valued at the last available ask price in the OTC market prior to the time
of valuation. Portfolio securities that are traded both in the OTC market and
on a stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or,
in the case of options traded in the OTC market, the last bid price. Other
investments, including financial futures contracts and related options, are
stated at market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by
or under the direction of the Directors of the Fund. Such valuations and
procedures will be reviewed periodically by the Directors.
Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day
at various times prior to the close of business on the NYSE. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of business
on the NYSE that will not be reflected in the computation of the Fund's net
asset value.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on June 30, 1999 is set forth below.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Net Assets.............. $5,521,623,292 $4,846,702,228 $535,132,028 $1,980,152,330
============== ============== ============ ==============
Number of Shares
Outstanding............ 126,354,364 113,144,805 12,630,794 45,465,044
============== ============== ============ ==============
Net Asset Value Per
Share (net assets
divided by number of
shares outstanding).... $ 43.70 $ 42.84 $ 42.37 $ 43.55
Sales Charge (for Class
A and Class D shares:
5.25% of offering
price; 5.54% of net
asset value per
share)*................ 2.42 ** ** 2.41
-------------- -------------- ------------ --------------
Offering Price.......... $ 46.12 $ 42.84 $ 42.37 $ 45.96
============== ============== ============ ==============
</TABLE>
- ----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
herein.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions and the allocation of brokerage. The Fund has
25
<PAGE>
no obligation to deal with any broker or group of brokers in the execution of
transactions in portfolio securities and does not use any particular broker or
dealer. In executing transactions with brokers and dealers, the Investment
Adviser seeks to obtain the best net results for the Fund, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates,
the Fund does not necessarily pay the lowest spread or commission available.
In addition, consistent with the Conduct Rules of the NASD and policies
established by the Board of Directors of the Fund, the Manager may consider
sales of shares of the Fund as a factor in the selection of brokers or dealers
to execute portfolio transactions for the Fund; however, whether or not a
particular broker or dealer sells shares of the Fund neither qualifies nor
disqualifies such broker or dealer to execute transactions for the Fund.
Subject to obtaining the best price and execution, brokers who provide
supplemental investment research services to the Investment Adviser may
receive orders for transactions by the Fund. Such supplemental research
services ordinarily consist of assessments and analyses of the business or
prospects of a company, industry or economic sector. Information so received
will be in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Investment Advisory Agreement,
and the expenses of the Investment Adviser will not necessarily be reduced as
a result of the receipt of such supplemental information. If in the judgment
of the Investment Adviser the Fund will benefit from supplemental research
services, the Investment Adviser is authorized to pay brokerage commissions to
a broker furnishing such services that are in excess of commissions that
another broker may have charged for effecting the same transaction. Certain
supplemental research services may primarily benefit one or more other
investment companies or other accounts for which the Investment Adviser
exercises investment discretion. Conversely, the Fund may be the primary
beneficiary of the supplemental research services received as a result of
portfolio transactions effected for such other accounts or investment
companies.
The Fund anticipates that its brokerage transactions involving securities of
issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
<TABLE>
<CAPTION>
Brokerage
Commissions
Fiscal Year Ended June 30, Paid
-------------------------- -----------
<S> <C>
1999............................ $4,235,940
1998............................ $3,777,402
1997............................ $3,140,326
</TABLE>
For the fiscal year ended June 30, 1999, the brokerage commissions paid to
Merrill Lynch represented 4.59% of the aggregate brokerage commissions paid
and involved 4.43% of the Fund's dollar amount of transactions involving
payment of brokerage commissions.
The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices and execution
are available elsewhere. Under the Investment Company Act, persons affiliated
with the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained
from the Commission. Since transactions in the OTC market usually involve
transactions with the dealers acting as principal for their own accounts, the
Fund will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated
person of the Fund may serve as its broker in OTC transactions conducted on an
agency basis provided that, among other things, the fee or commission received
by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers
26
<PAGE>
in connection with comparable transactions. In addition, the Fund may not
purchase securities during the existence of any underwriting syndicate for
such securities of which Merrill Lynch is a member or in a private placement
in which Merrill Lynch serves as placement agent except pursuant to procedures
approved by the Board of Directors of the Fund that either comply with rules
adopted by the Commission or with interpretations of the Commission staff. See
"Investment Objective and Policies -- Investment Restrictions."
Section 11(a) of the Exchange Act generally prohibits members of the United
States national securities exchanges from executing exchange transactions for
their affiliates and institutional accounts that they manage unless the member
(i) has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with the aggregate
compensation received by the member in effecting such transactions, and (iii)
complies with any rules the Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply
to Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund and annual statements as
to aggregate compensation will be provided to the Fund.
The Board of Directors of the Fund has considered the possibility of seeking
to recapture for the benefit of the Fund brokerage commissions and other
expenses of possible portfolio transactions by conducting portfolio
transactions through affiliated entities. For example, brokerage commissions
received by affiliated brokers could be offset against the advisory fee paid
by the Fund to the Investment Adviser. After considering all factors deemed
relevant, the Board of Directors made a determination not to seek such
recapture. The Board will reconsider this matter from time to time.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser or an affiliate are selling
the same security. If purchases or sales of securities arise for consideration
at or about the same time that would involve the Fund or other clients or
funds for which the Investment Adviser or an affiliate acts as manager
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Investment
Adviser or an affiliate during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
and instructions as to how to participate in the various services or plans, or
how to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch. Certain of these services are available only to U.S.
investors and certain of these services are not available to investors who
place orders through the Merrill Lynch BlueprintSM Program.
Investment Account
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of dividends. The
statements will also show any other activity in the account since the
preceding statement. Shareholders will also receive separate confirmations for
each purchase or sale transaction other than automatic investment purchases
and the reinvestment of dividends. A shareholder with an account held at the
Transfer Agent may make additions to his or her Investment Account at any time
by mailing a check directly to the Transfer Agent. A shareholder may also
maintain an account through Merrill Lynch. 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 at the Transfer Agent.
27
<PAGE>
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with
Merrill Lynch. Certain shareholder services may not be available for the
transferred shares. After the transfer, the shareholder may purchase
additional shares of funds owned before the transfer and all future trading of
these assets must be coordinated by the new firm. If a shareholder wishes to
transfer his or her shares to a securities dealer that has not entered into a
selected dealer agreement with Merrill Lynch, the shareholder must either (i)
redeem his or her shares, paying any applicable CDSC or (ii) continue to
maintain an Investment Account at the Transfer Agent for those shares. The
shareholder may also request the new securities dealer to maintain the shares
in an account at the Transfer Agent registered in the name of the securities
dealer for the benefit of the shareholder whether the securities dealer has
entered into a selected dealer agreement or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares, paying any applicable CDSC, so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch
for those shares.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves
Fund ("Summit"), a series of Financial Institutions Series Trust, which is a
Merrill Lynch-sponsored money market fund specifically designated for exchange
by holders of Class A, Class B, Class C and Class D shares of Select Pricing
Funds. Shares with a net asset value of at least $100 are required to qualify
for the exchange privilege and any shares utilized in an exchange must have
been held by the shareholder for at least 15 days. Before effecting an
exchange, shareholders should obtain a currently effective prospectus of the
fund into which the exchange is to be made. Exercise of the exchange privilege
is treated as a sale of the exchanged shares and a purchase of the acquired
shares for Federal income tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second fund in the account
in which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or
her account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also
may be exchanged for Class A shares of a second Select Pricing Fund at any
time as long as, at the time of the exchange, the shareholder holds Class A
shares of the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund. Class D
shares are exchangeable with shares of the same class of other Select Pricing
Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds
or Class A shares of Summit ("new Class A or Class D shares"), are transacted
on the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the
sales charge previously paid on the outstanding Class A or Class D shares and
the sales charge payable at the time of the exchange on the new Class A or
Class D shares. With respect to outstanding Class A or Class D shares as to
which previous exchanges have taken place, the "sales charge previously paid"
shall include the aggregate of the sales charges paid with respect to such
Class A or Class D shares in the initial purchase and any subsequent exchange.
Class A or Class D shares issued pursuant to dividend reinvestment are sold on
a no-load basis in each of the funds offering Class A or Class D shares. For
purposes of the exchange privilege, Class A or Class D shares acquired through
dividend reinvestment shall be deemed to have been sold with a sales charge
equal to the sales charge previously paid on the Class A or Class D shares on
28
<PAGE>
which the dividend was paid. Based on this formula, Class A and Class D shares
generally may be exchanged into the Class A or Class D shares, respectively,
of the other funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with
Class B or Class C shares outstanding ("outstanding Class B or Class C
shares") offer to exchange their Class B or Class C shares for Class B or
Class C shares, respectively, of certain other Select Pricing Fund or for
Class B shares of Summit ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B shares of the Fund acquired
through use of the exchange privilege will be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the
Class B shares of the fund from which the exchange has been made. For purposes
of computing the CDSC that may be payable on a disposition of the new Class B
or Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having
held the Fund's Class B shares for two and a half years. The 2% CDSC that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption,
since by "tacking" the two and a half year holding period of Fund Class B
shares to the three-year holding period for the Special Value Fund Class B
shares, the investor will be deemed to have held the Special Value Fund Class
B shares for more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing
Funds; Class B shares of Summit have an exchange privilege back into Class B
or Class C shares of Select Pricing Funds and, in the event of such an
exchange, the period of time that Class B shares of Summit are held will count
toward satisfaction of the holding period requirement for purposes of reducing
any CDSC and toward satisfaction of any Conversion Period with respect to
Class B shares. Class B shares of Summit will be subject to a distribution fee
at an annual rate of 0.75% of average daily net assets of such Class B shares.
This exchange privilege does not apply with respect to certain Merrill Lynch
fee-based programs for which alternative exchange arrangements may exist.
Please see your Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-
sponsored money market funds other than Summit. Shareholders who exchanged
Select Pricing Fund shares for shares of such other money market funds and
subsequently wish to exchange those money market fund shares for shares of the
Fund will be subject to the CDSC schedule applicable to such Fund shares, if
any. The holding period for the money market fund shares will not count toward
satisfaction of the holding period requirement for reduction of the CDSC
imposed on such shares, if any, and, with respect to Class B shares, toward
satisfaction of the Conversion Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund
on the basis of relative net asset values in connection with the commencement
of participation in the MFA Program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA Program, Class A
shares will be re-exchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon redemption of Class B
or Class C shares so reacquired, or the Conversion Period for Class B shares
so reacquired, the holding period for the Class A shares will be "tacked" to
the holding period for the Class B or Class C shares originally held. The
Fund's exchange privilege is also modified with respect to purchases of Class
A and Class D shares by non-retirement plan investors under the MFA Program.
First, the initial allocation of assets is made under the MFA Program. Then,
any subsequent exchange under the MFA Program of Class A or Class D shares of
a Select Pricing Fund
29
<PAGE>
for Class A or Class D shares of the Fund will be made solely on the basis of
the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously
paid on the shares of the other Select Pricing Fund and the sales charge
payable on the shares of the Fund being acquired in the exchange under the MFA
Program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and
shareholders of the other Select Pricing Funds with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. 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 Commission. The
Fund reserves the right to limit the number of times an investor may exercise
the exchange privilege. Certain funds may suspend the continuous offering of
their shares to the general public at any time and may thereafter resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.
Fee-Based Programs
Certain Merrill Lynch 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 1-800-MER-FUND (1-(800)-637-3863).
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and education savings
plans are available from Merrill Lynch. Under these plans, investments may be
made in the Fund and certain of the other mutual funds sponsored by Merrill
Lynch as well as in other securities. Merrill Lynch may charge 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.
Capital gains and ordinary income received in each of the plans referred to
above are exempt from Federal taxation until distributed from the plans.
Different tax rules apply to Roth IRA plans and education savings plans.
Investors considering participation in any retirement or education savings
plan should review specific tax laws relating thereto and should consult their
attorneys or tax advisers with respect to the establishment and maintenance of
any such plan.
Automated Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities
dealer, or by mail directly to the
30
<PAGE>
Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation also can be made through a service known as the Fund's Automatic
Investment Plan. The Fund would be authorized, on a regular basis, to provide
systematic additions to the Investment Account of such shareholder through
charges of $50 or more to the regular bank account of the shareholder by
either pre-authorized checks or automated clearing house debits.
Alternatively, an investor that maintains a CMA(R) or CBA(R) account may
arrange to have periodic investments made in the Fund in amounts of $100 ($1
for retirement accounts) or more through the CMA(R) or CBA(R) Automated
Investment Program.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in
additional full and fractional shares of the Fund. Such reinvestment will be
at the net asset value of shares of the Fund as of the close of business on
the NYSE on the monthly payment date for such dividends. No CDSC will be
imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or
by telephone (1-800-MER-FUND) to the Transfer Agent, if their account is
maintained with the Transfer Agent elect to have subsequent dividends, paid in
cash, rather than reinvested in shares of the Fund or vice versa (provided
that, in the event that a payment on an account maintained at the Transfer
Agent would amount to $10.00 or less, a shareholder will not receive such
payment in cash and such payment will automatically be reinvested in
additional shares). Commencing ten days after the receipt by the Transfer
Agent of such notice, those instructions will be effected. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed dividend
checks. Cash payments can also be directly deposited to the shareholder's bank
account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering
price, of $5,000 or more, and monthly withdrawals are available for
shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and the class of shares to be redeemed. Redemptions will be made at net
asset value as determined 15 minutes after the close of business on the NYSE
(generally, the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of
each month or the 24th day of the last month of each quarter, whichever is
applicable. If the NYSE is not open for business on such date, the shares will
be redeemed at the close of business on the following business day. The check
for the withdrawal payment will be made, on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends on
all shares in the Investment Account are reinvested automatically in Fund
shares. A shareholder's Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor.
With respect to redemptions of Class B or Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Sales Charge Alternatives --Class B and Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will be applied thereafter
31
<PAGE>
to Class D shares if the shareholder so elects. If an investor wishes to
change the amount being withdrawn in a systematic withdrawal plan the investor
should contact his or her Merrill Lynch Financial Consultant.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals
are ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. The Fund will not knowingly accept purchase orders for shares
of the Fund from investors that maintain a Systematic Withdrawal Plan unless
such purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Automatic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R) or CBA(R)
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. The minimum fixed dollar amount redeemable is $50. The proceeds of
systematic redemptions will be posted to the shareholder's account three
business days after the date the shares are redeemed. All redemptions are made
at net asset value. A shareholder may elect to have his or her shares redeemed
on the first, second, third or fourth Monday of each month, in the case of
monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automated Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
DIVIDENDS AND TAXES
Dividends
The Fund intends to distribute substantially all of its net investment
income, if any. Dividends from such net investment income will be paid at
least annually. All net realized capital gains, if any, will be distributed to
the Fund's shareholders at least annually. From time to time, the Fund may
declare a special distribution at or about the end of the calendar year in
order to comply with Federal tax requirements that certain percentages of its
ordinary income and capital gains be distributed during the year. If in any
fiscal year, the Fund has net income from certain foreign currency
transactions, such income will be distributed at least annually.
See "Shareholder Services -- Automatic Dividend Reinvestment Plan" for
information concerning the manner in which dividends may be reinvested
automatically in shares of the Fund. A shareholder whose account is maintained
at the Transfer Agent or whose account is maintained through Merrill Lynch may
elect in writing to receive any such dividends in cash. Dividends are taxable
to shareholders, as discussed below, whether they are reinvested in shares of
the Fund or received in cash. The per share dividends on Class B and Class C
shares will be lower than the per share dividends on Class A and Class D
shares as a result of the account maintenance, distribution and higher
transfer agency fees applicable with respect to the Class B and Class C
shares; similarly, the per share dividends on Class D shares will be lower
than the per share dividends on Class A shares as a result of the account
maintenance fees applicable with respect to the Class D shares. See "Pricing
of Shares -- Determination of Net Asset Value."
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains that it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.
32
<PAGE>
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 options) ("capital gain dividends") are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder has owned Fund shares. Any loss upon the sale or exchange of Fund
shares held for six months or less will be treated as long-term capital loss
to the extent of any capital gain dividends received by the shareholder.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Certain categories of capital gains are
taxable at different rates. Generally not later than 60 days after the close
of its taxable year, the Fund will provide its shareholders with a written
notice designating the amount of any capital gain dividends as well as any
amount of capital gain dividends in the different categories of capital gain
referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income
dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. For this
purpose, the Fund will allocate dividends eligible for the dividends received
deduction among the Class A, Class B, Class C and Class D shareholders
according to a method (which it believes is consistent with the Commission
rule permitting the issuance and sale of multiple classes of stock) that is
based on the gross income allocable to Class A, Class B, Class C and Class D
shareholders during the taxable year, or such other method as the Internal
Revenue Service may prescribe. If the Fund pays a dividend in January that was
declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D Shares. A shareholder's basis in the
Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge paid to the
Fund on the exchanged shares reduces any sales charge the shareholder would
have owed upon the purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if the Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days
33
<PAGE>
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 securities held in its
portfolio. In general, unless an election is available to the Fund or an
exception applies, such options that are "Section 1256 contracts" will be
"marked to market" for Federal income tax purposes at the end of each taxable
year, i.e., each such option contract will be treated as sold for its fair
market value on the last day of the taxable year and, any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-
term capital gain or loss. Application of these rules to Section 1256
contracts held by the Fund may alter the timing and character of distributions
to shareholders. The mark-to-market rules outlined above, however, will not
apply to certain transactions entered into by the Fund solely to reduce the
risk of changes in price or interest or currency exchange 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 options. Under
Section 1092, the Fund may be required to postpone recognition for tax
purposes of losses incurred in certain sales of securities and certain closing
transactions in options.
Special Rules for Certain Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options relating to investments in stocks, securities or foreign currencies
will be qualifying income for purposes of determining whether the Fund
qualifies as a RIC. It is currently unclear, however, who will be treated as
the issuer of a foreign currency instrument or how foreign currency options
will be valued for purposes of the RIC diversification requirements applicable
to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary
income or loss under Code Section 988. In certain circumstances, the Fund may
elect capital gain or loss treatment for such transactions. In general,
however, Code Section 988 gains or losses will increase or decrease the amount
of the Fund's investment company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary income dividend distributions, and all
or a portion of distributions made before the losses were realized but in the
same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing the basis of each shareholder's Fund shares and
resulting in a capital gain for any shareholder who received a distribution
greater than such shareholder's basis in Fund shares (assuming the shares were
held as a capital asset). These rules and the mark-to-market rules described
above, however, will not apply to certain transactions entered into by the
Fund solely to reduce the risk of currency fluctuations with respect to its
investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code
34
<PAGE>
sections and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs that
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their 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 formulas specified by the
Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period as in the case
of Class B and Class C shares and the maximum sales charge in the case of
Class A and D shares. Dividends paid by the Fund with respect to all shares,
to the extent any dividends are paid, will be calculated in the same manner at
the same time on the same day and will be in the same amount, except that
account maintenance and distribution charges and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by
that class. The Fund will include performance data for all classes of shares
of the Fund in any advertisement or information including performance data of
the Fund.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $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 charges, actual annual or annualized total return data
generally will be lower than average annual total return data since the
average rates of return reflect compounding of return; aggregate total return
data generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time. 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 loads in the case of Class A and
Class D shares, the performance data account the reduced, and not the maximum,
sales charge or may take into account the waiver of the CDSC and therefore may
reflect greater total return since, due to the reduced sales charges or the
waiver of the CDSC, a lower amount of expenses is deducted. The Fund's total
return may be expressed either as a percentage or as a dollar amount in order
to illustrate such total return on a hypothetical $1,000 investment in the
Fund at the beginning of each specified period.
35
<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
----------------------------------- -----------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ----------------- ----------------- ----------------- -----------------
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended June 30,
1999................... 8.52% $ 1,085.20 9.40% $1,094.00
Five Years Ended June
30, 1999............... 20.45% $ 2,535.50 20.53% $2,543.50
Ten Years Ended June 30,
1999................... 14.69% $ 3,937.00 14.14% $3,751.90
<CAPTION>
Annual Total Return
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended June 30,
1999.................... 14.54% $ 1,145.40 13.40% $1,134.00
1998.................... 23.23% $ 1,232.30 21.97% $1,219.70
1997.................... 29.95% $ 1,299.50 28.61% $1,286.10
1996.................... 19.92% $ 1,199.20 18.71% $1,187.10
1995.................... 21.67% $ 1,216.70 20.45% $1,204.50
1994.................... 5.68% $ 1,056.80 4.61% $1,046.10
1993.................... 19.03% $ 1,190.30 17.81% $1,178.10
1992.................... 15.08% $ 1,150.80 13.90% $1,139.00
1991.................... 5.39% $ 1,053.90 4.33% $1,043.30
1990.................... 1.77% $ 1,017.70 0.73% $1,007.30
1989.................... 16.29% $ 1,162.90
Inception (October 21,
1988) to
June 30, 1989.......... -- -- 10.33% $1,103.30
<CAPTION>
Aggregate Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (July 1, 1977)
to
June 30, 1999.......... 2,699.16% $27,991.60 -- --
Inception (October 21,
1988) to
June 30, 1999.......... -- -- 313.96% $4,139.60
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Class C Shares Class D Shares
----------------------------------- -----------------------------------
Expressed as Redeemable value Expressed as Redeemable value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ----------------- ----------------- ----------------- -----------------
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended June 30,
1999................... 12.36% $1,123.60 8.26% $1,082.60
Inception (October 21,
1994) to June 30,
1999................... 20.94% $2,439.80 20.50% $2,397.70
<CAPTION>
Annual Total Return
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended June 30,
1999.................... 13.36% $1,133.60 14.25% $1,142.50
1998.................... 21.98% $1,219.80 22.89% $1,228.90
1997.................... 28.60% $1,286.00 29.65% $1,296.50
1996.................... 18.69% $1,186.90 19.61% $1,196.10
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>
Inception (October 21,
1994) to June 30,
1999................... 143.98% $2,439.80 139.77% $2,397.70
</TABLE>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares, or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of
Shares," the total return data quoted by the Fund in advertisements directed
to such investors may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC, and therefore may reflect
greater total return since, due to the reduced sales charges or the waiver of
CDSCs, a lower amount of expenses may be deducted.
On occasion, the Fund may compare its performance to various indices
including the Standard & Poor's 500 Index, the Dow Jones Industrial Average,
or performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., ("Morningstar") CDA Investment Technology, Inc., Money
Magazine, U.S. News & World Report, Business Week, Forbes Magazine, Fortune
Magazine or other industry publications. When comparing its performance to a
market index, the Fund may refer to various statistical measures derived from
the historic performance of the Fund and the index, such as standard deviation
and beta. In addition, from time to time the Fund may include the Fund's risk-
adjusted performance ratings in advertisements or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered indicative of the Fund's relative performance for any future
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.
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,
and Class C and Class D each consists of 200,000,000 shares. Class A, Class B,
Class C and Class D Common Stock
37
<PAGE>
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 up 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.
Redemption and conversion rights are discussed elsewhere herein and in the
Prospectus. Each share of Class A, Class B, Class C and Class D Common Stock
is entitled to participate equally in dividends and distributions declared by
the Fund and in the net assets of the Fund 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.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-interested Directors 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 acts as custodian of the Fund's assets (the "Custodian"). Under its
contract with the Fund, the Custodian is authorized, among other things, to
establish separate accounts in foreign currencies and to cause foreign
securities owned by the Fund to be held in its offices outside of the United
States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "How to Buy,
Sell, Transfer and Exchange Shares--Through the Transfer Agent" in the
Prospectus.
Legal Counsel
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on June 30 of each year. The Fund sends to
its shareholders, at least semi-annually, reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
38
<PAGE>
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
Additional Information
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Under a separate agreement, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted ML & Co. under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by ML & Co.
To the knowledge of the Fund, the following persons or entities owned
beneficially 5% or more of a class of the Fund's shares as of October 1, 1999:
<TABLE>
<CAPTION>
Percent
Name Address and Class
------------------------------- ----------------------- ------------
<S> <C> <C>
Merrill Lynch Trust Company (1) P.O. Box 30532 8.9% Class A
Trustee FBO MLSIP New Brunswick, NJ 08989
Investment Account
Merrill Lynch Trust Company 265 Davidson Avenue #4 5.8% Class A
Trustee FBO Chrysler Salaried Somerset, NJ 08873
Employees Savings Plan
Attn: Group Employee Services
</TABLE>
----------
(1) Merrill Lynch Trust Company is the record holder on behalf of
certain employee retirement, personal trust or savings plan
accounts for which it acts as trustee.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.
39
<PAGE>
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<PAGE>
[This page intentionally left blank.]
<PAGE>
Code #10124-10-99
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1(a) --Articles of Incorporation of the Registrant, dated March 22, 1977.(a)
(b) --Articles of Amendment, dated October 3, 1988, to the Articles of
Incorporation of the Registrant.(a)
(c) --Articles Supplementary, dated October 3, 1988, to the Articles of
Incorporation of the Registrant.
(d) --Articles Supplementary, dated November 15, 1991, to the Articles of
Incorporation of the Registrant.
(e) --Articles of Amendment, dated October 17, 1994, to the Articles of
Incorporation of the Registrant.(a)
(f) --Articles Supplementary, dated October 17, 1994, to the Articles of
Incorporation of the Registrant.(a)
(g) --Articles Supplementary, dated March 17, 1995, to the Articles of
Incorporation of the Registrant.(a)
(h) --Articles Supplementary, dated September 16, 1996, to the Articles of
Incorporation of the Registrant.(b)
2 --By-Laws of the Registrant.(c)
3 --Portions of the Articles of Incorporation, as amended and
supplemented, and By-Laws of the Registrant defining the rights of
holders of shares of common stock of the Registrant.(d)
4(a) --Investment Advisory Agreement between the Registrant and Fund Asset
Management, L.P.(a)
(b) --Supplement to Investment Advisory Agreement between the Registrant
and Fund Asset Management, L.P.(c)
(c) --Form of Sub-Advisory Agreement between Fund Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.(e)
5(a) --Form of Revised Class A Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc. (now known as
Princeton Funds Distributor, Inc.)(the "Distributor")(including Form
of Selected Dealers Agreement).(f)
(b) --Class B Distribution Agreement between the Registrant and the
Distributor.(c)
(c) --Form of Class C Distribution Agreement between the Registrant and
the Distributor (including Form of Selected Dealers Agreement).(c)
(d) --Form of Class D Distribution Agreement between the Registrant and
the Distributor (including Form of Selected Dealers Agreement).(c)
(e) --Letter Agreement between the Registrant and the Distributor, dated
September 15, 1993, in connection with the Merrill Lynch Mutual Funds
Advisor Program.(g)
6 --None.
7 --Custody Agreement between the Registrant and The Bank of New York.(e)
8 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc. (now known as Financial Data Services,
Inc.)(a)
9 --Opinion and Consent of Brown & Wood LLP, counsel to the Registrant.
10 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 --None.
12 --None.
13(a) --Amended and Restated Class B Distribution Plan of the Registrant and
Class B Distribution Plan Sub-Agreement.(g)
(b) --Form of Class C Distribution Plan of the Registrant and Class C
Distribution Plan Sub-Agreement.(c)
(c) --Form of Class D Distribution Plan of the Registrant and Class D
Distribution Plan Sub-Agreement.(c)
14 --Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
3.(i)
</TABLE>
C-1
<PAGE>
- ----------
(a) Filed on October 25, 1995 as an exhibit to Post-Effective Amendment No. 24
to the Registrant's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (File No. 2-58521) (the "Registration
Statement").
(b) Filed on October 28, 1996 as an exhibit to Post-Effective Amendment No. 25
to the Registrant's Registration Statement.
(c) Filed on September 7, 1994 as an exhibit to Post-Effective Amendment No.
22 to the Registrant's Registration Statement.
(d) Reference is made to Article III, Article V, Article VI (sections 2, 3, 4
and 5), Article VII, Article VIII, and Article X of the Registrant's
Articles of Incorporation, as amended and supplemented, filed as Exhibit
(1) to the Registration Statement; and to Article II, Article III
(sections 1, 3, 5, 6 and 17), Article VI, Article VII, Article XII,
Article XIII, Article XIV and Article XV of the Registrant's By-Laws,
filed as Exhibit (2) to the Registration Statement.
(e) Filed on September 26, 1997 as an exhibit to Post-Effective Amendment No.
26 to the Registrant's Registration Statement.
(f) Filed on October 11, 1994 as an exhibit to Post-Effective Amendment No. 23
to the Registrant's Registration Statement.
(g) Filed on October 28, 1993 as an exhibit to Post-Effective Amendment No. 21
to the Registrant's Registration Statement.
(h) Previously filed as an exhibit to the Registration Statement.
(i) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund, a series of Merrill Lynch Multi- State
Municipal Series Trust (File No. 2-99473).
Item 24. Persons Controlled by or Under Common Control with Registrant.
The Registrant is not controlled by or under common control with any other
person.
ITEM 25. Indemnification.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class
C and Class D Distribution Agreements.
Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may
be concerned, Article VI of the Registrant's By-Laws provides that such
payments will be made only on the following conditions: (i) advances may be
made only on receipt of a written affirmation of such person's good faith
belief that the standard of conduct necessary for indemnification has been met
and a written undertaking to repay any such advance if it is ultimately
determined that the standard of conduct has not been met; and (ii) (a) such
promise must be secured by a security for the undertaking in form and amount
acceptable to the Registrant, (b) the Registrant is insured against losses
arising by receipt by the advance, or (c) a majority of a quorum of the
Registrant's disinterested non-party Directors, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that at the time the advance is proposed to be made, there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares
Distribution Agreements relating to the securities being offered hereby, the
Registrant agrees to indemnify the Distributor and each person, if any, who
controls the Distributor within the meaning of the Securities Act of 1933, as
amended (the "1933 Act"), against certain types of civil liabilities arising
in connection with the Registration Statement or Prospectus and Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or
C-2
<PAGE>
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Director,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suit or proceeding)
is asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
Item 26. Business and Other Connections of Investment Adviser.
Fund Asset Management, L.P. ("FAM" or the "Investment Adviser") acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-
State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series
Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Corporate High Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc.; and for the following closed-end registered
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc.,
Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies
Fund III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund,
Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II,
Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings California
Insured Fund II, Inc., MuniHoldings California Insured Fund III, Inc.,
MuniHoldings California Insured Fund IV, Inc., MuniHoldings California Insured
Fund V, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured
Fund II, MuniHoldings Florida Insured Fund III, MuniHoldings Florida Insured
Fund IV, MuniHoldings Florida Insured Fund V, MuniHoldings Insured Fund, Inc.,
MuniHoldings Insured Fund II, Inc., MuniHoldings Insured Fund III, Inc.,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings Michigan Insured Fund
II, Inc., MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund II, Inc., MuniHoldings New Jersey Insured Fund III, Inc.,
MuniHoldings New Jersey Insured Fund IV, Inc., MuniHoldings New York Fund,
Inc. MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, Inc., MuniHoldings New York Insured Fund III, Inc., MuniHoldings New
York Insured Fund IV, Inc., MuniHoldings Pennsylvania Insured Fund,
MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest
Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund,
Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc. and Worldwide
DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Investment Adviser, acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc.,
Merrill Lynch Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global
C-3
<PAGE>
Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc., Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM); and for the following
closed-end registered investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund II, Inc. MLAM also acts as sub-adviser
to Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisors Trust.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-
2665. The address of FAM, MLAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. ("Princeton Administrators") is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Princeton
Funds Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor
("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North Tower,
250 Vesey Street, New York, New York 10281-1201. The address of the Fund's
transfer agent, Financial Data Services, Inc. ("FDS"), is 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged since July 1, 1997 for his, her or its own account or in the
capacity of director, officer, partner or trustee. In addition, Mr. Glenn is
President and Mr. Burke is Vice President and Treasurer of all or
substantially all of the investment companies described in the first two
paragraphs of this Item 26, and Messrs. Giordano, Doll and Monagle are
officers of one or more of such companies.
<TABLE>
<CAPTION>
Position(s) with the Other Substantial
Name Investment Adviser Business, Profession, Vocation or Employment
- ---- ------------------------ --------------------------------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company;
Limited Partner of MLAM
Princeton Services...... General Partner General Partner of MLAM
Jeffrey M. Peek......... President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.; Managing Director and Co-Head
of the Investment Banking Division
of Merrill Lynch in 1997
Terry K. Glenn.......... Executive Vice President Executive Vice President of MLAM;
Executive Vice President and
Director of Princeton Services;
President and Director of PFD;
Director of FDS; President of
Princeton Administrators
Gregory A. Bundy........ Chief Operating Officer Chief Operating Officer and Managing
and Managing Director Director of FAM; Chief Operating
Officer and Managing Director of
Princeton Services; Co-CEO of
Merrill Lynch Australia from 1997 to
1999
Donald C. Burke......... Senior Vice President, Senior Vice President and Treasurer
Treasurer and Director of FAM; Senior Vice President and
of Taxation Treasurer of Princeton Services;
Vice President of PFD; First Vice
President of the Manager from 1997
to 1999; Vice President of the
Manager from 1990 to 1997
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Position(s) with the Other Substantial
Name Investment Adviser Business, Profession, Vocation or Employment
- ---- --------------------- --------------------------------------------
<S> <C> <C>
Michael G. Clark........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services; Treasurer and Director of
PFD; First Vice President of the
Manager from 1997 to 1999; Vice
President of the Manager from 1996
to 1997
Robert C. Doll.......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services; Chief Investment Officer
of Oppenheimer Funds, Inc. in 1999
and Executive Vice President thereof
from 1991 to 1999
Linda L. Federici....... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Michael J. Hennewinkel.. Senior Vice President Senior Vice President and General
and General Counsel Counsel of MLAM; Senior Vice
President of Princeton Services
Philip L. Kirstein...... Senior Vice President Senior Vice President and Secretary
and Secretary of MLAM; Senior Vice President,
Director and Secretary of Princeton
Services
Ronald M. Kloss......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Debra Landsman-Yaros.... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services; Vice President of PFD
Stephen M. M. Miller.... Senior Vice President Executive Vice President of
Princeton Administrators; Senior
Vice President of Princeton Services
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
Brian A. Murdock........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gregory D. Upah......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of Princeton
Services
</TABLE>
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies
Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Consults International Portfolio, Merrill Lynch Convertible
Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate
High Yield Fund, Inc., Merrill Lynch Developing Capital Markets, Inc., Merrill
Lynch Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill
Lynch
C-5
<PAGE>
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Real
Estate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Senior
Floating Rate Fund, Inc., Merrill Lynch Senior Floating Rate Fund II, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc., Merrill Lynch World Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc. and Worldwide DollarVest Fund, Inc. The address of
each of these registered investment companies is P.O. Box 9011, Princeton, New
Jersey 08543-9011. The address of MLAM U.K. is 33 King William Street, London
EC4R 9AS, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since July 1,
1997, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Glenn, Burke and Albert are officers
of one or more of the registered investment companies listed in the first two
paragraphs of this Item 26:
<TABLE>
<CAPTION>
Other Substantial
Name Positions With MLAM U.K. Business, Profession, Vocation or Employment
- ---- --------------------------- --------------------------------------------
<S> <C> <C>
Terry K. Glenn.......... Director and Chairman Executive Vice President of FAM and
MLAM; Executive Vice President and
Director of Princeton Services;
President and Director of PFD;
President of Princeton
Adminsitrators
Alan J. Albert.......... Senior Managing Director Vice President of MLAM
Nicholas C.D. Hall...... Director Director of Merrill Lynch Europe
PLC; General Counsel of Merrill
Lynch International Private Banking
Group
Donald C. Burke......... Treasurer Senior Vice President and Treasurer
of MLAM and FAM; Director of
Taxation of MLAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President of PFD;
First Vice President of MLAM from
1997 to 1999; Vice President of MLAM
from 1990 to 1997
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company Secretary None
</TABLE>
Item 27. Principal Underwriters.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies
referred to in the first two paragraphs of Item 26 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc. and The Municipal Fund Accumulation Program, Inc.; and MLFD also
acts as the principal underwriter for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc., Merrill Lynch Senior Floating
Rate Fund, Inc. and Merrill Lynch Senior Floating Rate Fund II, Inc. A
separate division of PFD acts as the principal underwriter of a number of
other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
C-6
<PAGE>
<TABLE>
<CAPTION>
Position(s) and Position(s) and Office(s)
Name Office(s) with PFD with Registrant
- ---- ---------------------- ----------------------------
<S> <C> <C>
Terry K. Glenn............. President and Director President and Director
Michael G. Clark........... Treasurer and Director None
Thomas J. Verage........... Director None
Robert W. Crook............ Senior Vice President None
Michael J. Brady........... Vice President None
William M. Breen........... Vice President None
Donald C. Burke............ Vice President Vice President and Treasurer
James T. Fatseas........... Vice President None
Debra W. Landsman-Yaros.... Vice President None
Michelle T. Lau............ Vice President None
Salvatore Venezia.......... Vice President None
William Wasel.............. Vice President None
Robert Harris.............. Secretary None
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the rules thereunder are maintained at the offices
of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey 08536), and
its transfer agent, Financial Data Services, Inc. (4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484).
Item 29. Management Services.
Other than as set forth under the caption "Management of the Fund--Fund
Asset Management" in the Prospectus constituting Part A of the Registration
Statement and under "Management of the Fund--Management and Advisory
Arrangements" in the Statement of Additional Information constituting Part B
of the Registration Statement, the Registrant is not a party to any
management-related service contract.
Item 30. Undertakings.
Not applicable.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Plainsboro, and the State of New Jersey, on the
19th day of October, 1999.
Merrill Lynch Basic Value Fund, Inc.
(Registrant)
/s/ Donald C. Burke
By: __________________________________
Donald C. Burke
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn* President and Director
______________________________________ (Principal Executive
(Terry K. Glenn) Officer)
/s/ Donald C. Burke* Vice President and
______________________________________ Treasurer (Principal
(Donald C. Burke) Financial and Accounting
Officer)
/s/ Donald Cecil* Director
______________________________________
(Donald Cecil)
/s/ M. Colyer Crum* Director
______________________________________
(M. Colyer Crum)
/s/ Edward H. Meyer* Director
______________________________________
(Edward H. Meyer)
/s/ Jack B. Sunderland* Director
______________________________________
(Jack B. Sunderland)
/s/ J. Thomas Touchton* Director
______________________________________
(J. Thomas Touchton)
/s/ Fred G. Weiss* Director
______________________________________
(Fred G. Weiss)
/s/ Arthur Zeikel* Director
______________________________________
(Arthur Zeikel)
*By:
/s/ Donald C. Burke October 19, 1999
______________________________________
(Donald C. Burke, Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
POWER OF ATTORNEY
The undersigned, the Directors/Trustees and the Officers of each of the
registered investment companies listed below, hereby authorize Terry K. Glenn,
Donald C. Burke and Joseph T. Monagle, Jr. or any of them, as attorney-in-
fact, to sign on his behalf in the capacities indicated any Registration
Statement or amendment thereto (including post-effective amendments) for each
of the following registered investment companies and to file the same, with
all exhibits thereto, with the Securities and Exchange Commission: Merrill
Lynch Basic Value Fund, Inc.; Merrill Lynch Capital Fund, Inc.; Merrill Lynch
Global Resources Trust; Merrill Lynch Global Growth Fund, Inc.; Merrill Lynch
Special Value Fund, Inc.; Merrill Lynch Ready Assets Trust; Merrill Lynch
U.S.A. Government Reserves; Merrill Lynch U.S. Treasury Money Fund; MuniVest
Florida Fund; MuniVest Michigan Insured Fund, Inc.; MuniVest New Jersey Fund,
Inc.; MuniYield Florida Insured Fund; MuniYield Pennsylvania Fund; MuniYield
New Jersey Insured Fund, Inc.; MuniYield Michigan Insured Fund, Inc.
Dated: April 25, 1999
<TABLE>
<S> <C>
/s/ Donald C. Burke
/s/ Terry K. Glenn ______________________________________
_____________________________________
Donald C. Burke
Terry K. Glenn (VicePresident/Treasurer/Principal
(President/Director/Trustee) Financial and Accounting Officer)
/s/ Donald Cecil /s/ M. Colyer Crum
______________________________________
_____________________________________
Donald Cecil M. Colyer Crum
(Director/Trustee) (Director/Trustee)
/s/ Edward H. Meyer /s/ Jack B. Sunderland
______________________________________
_____________________________________
Edward H. Meyer Jack B. Sunderland
(Director/Trustee) (Director/Trustee)
/s/ J. Thomas Touchton /s/ Arthur Zeikel
______________________________________
_____________________________________
J. Thomas Touchton Arthur Zeikel
(Director/Trustee) (Director/Trustee)
/s/ Fred G. Weiss
_____________________________________
Fred G. Weiss
(Director/Trustee)
</TABLE>
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1(c) Articles Supplementary, dated October 3, 1998, to the Articles of
Incorporation of the Registrant.
(d) Articles Supplementary, dated November 15, 1991, to the Articles of
Incorporation of the Registrant.
9 Opinion and Consent of Brown & Wood LLP; counsel to the Registrant.
10 Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
</TABLE>
<PAGE>
Exhibit 1(c)
MERRILL LYNCH BASIC VALUE FUND, INC.
ARTICLES SUPPLEMENTARY
INCREASING THE AUTHORIZED CAPITAL STOCK
AS AUTHORIZED BY SECTION 2-105(c) OF
THE MARYLAND GENERAL CORPORATION LAW
Merrill Lynch Basic Value Fund, Inc., a Maryland corporation having its
principal Maryland office c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202 (hereinafter called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: In accordance with Section 2-105(c) of the Maryland General
Corporation Law, the Board of Directors has increased the authorized capital
stock of the Corporation to 100,000,000 shares of Class A Common Stock (par
value $0.10 per share) and 100,000,000 shares of Class B Common Stock (par
value $0.10 per share).
SECOND: The Corporation, is registered as an open-end investment
company under the Investment Company Act of 1940.
THIRD: (a) As of immediately before the increase, the total number of
shares of stock of all classes which the Corporation has authority to issue is
100,000,000 shares of Common Stock (par value $0.10 per share).
(b) As increased the total number of shares of stock of all
classes which the Corporation has authority to issue is 200,000,000
shares of Common Stock (par value $0.10 per share.
(c) The aggregate par value of all shares having a par value is
$10,000,000 before the increase and $20,000,000 as increased.
IN WITNESS WHEREOF, Merrill Lynch Basic Value Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its President and
witnessed by its Secretary on October 3, 1988.
MERRILL LYNCH BASIC VALUE FUND, INC.
By: /s/ Arthur Zeikel
Arthur Zeikel, President
Witness:
/s/ Mark B. Goldfus
- -------------------
Mark B. Goldfus, Secretary
<PAGE>
THE UNDERSIGNED President Merrill Lynch Basic Value Fund, Inc., who
executed on behalf of the Corporation Articles Supplementary, of which this
certificate is made a part, hereby acknowledges, in the name and on behalf of
said Corporation the foregoing Articles Supplementary to be the corporate act of
said Corporation and hereby certifies that the matters and facts set forth
herein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
/s/ Arthur Zeikel
------------------
Arthur Zeikel, President
2
<PAGE>
Exhibit 1(d)
ARTICLES SUPPLEMENTARY TO THE
ARTICLES OF INCORPORATION OF
MERRILL LYNCH BASIC VALUE FUND, INC.
MERRILL LYNCH BASIC VALUE FUND, INC. (Hereinafter called the
"Corporation"), a Maryland corporation, registered as an open-end investment
company under the Investment Company Act of 1940 and having its principal office
in the City of Baltimore, Maryland, hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation at a meeting duly
convened and held on November 15, 1991 adopted a resolution in accordance with
section 2-105(c) of the General Corporation Law of Maryland, to increase the
total number of shares of capital stock of the Corporation. The capital stock
shall be classified into two classes, consisting of TWO HUNDRED MILLION
(200,000,000) shares of Class A Common Stock with the par value of Ten Cents
(0.10) per share and of the aggregate par value of Twenty Million Dollars
($20,000,000) and TWO HUNDRED MILLION (200,000,000) shares of Class B Common
Stock with the par value of Ten Cents ($0.10) per share and of the aggregate par
value of Twenty Million Dollars ($20,000,000).
SECOND: The total number of shares of all classes of capital stock of
the Corporation heretofore authorized, and the number and par value of the
shares of each class, are as follows:
Two Hundred Million (200,000,000) shares of capital stock of the
par value of Ten Cents ($0.10) per share and of the aggregated
par value of Twenty Million Dollars ($20,000,000), classified
into two classes consisting of ONE HUNDRED MILLION (100,000,000)
shares of Class A Common Stock with the par value of Ten Cents
($0.10) per share and of the aggregate par value of Ten Million
Dollars ($10,000,000) and ONE HUNDRED MILLION (100,000,000)
shares of Class B Common Stock with the par value of Ten Cents
($0.10) per share and of the aggregate par value of Ten Million
Dollars ($10,000,000).
THIRD: The total number of shares of all classes of capital stock of
the Corporation as increased, and the number and par value of the shares of each
class, are as follows:
The total number of shares of capital stock which the
Corporation shall have the authority to issue shall consist of
FOUR HUNDRED MILLION (400,000,000)
<PAGE>
shares of the par value of Ten Cents ($0.10) per share
and of the aggregate par value of Forty Million Dollars
divided into TWO HUNDRED MILLION (200,000,000) shares of
Class A Common Stock with the par value of Ten Cents
($0.10) per share and of the aggregate par value of
Twenty Million Dollars ($20,000,000) and TWO HUNDRED
MILLION (200,000,000) shares of Class B Common Stock
with the par value of Ten Cents ($0.10) per share and of
the aggregate par value of Twenty Million Dollars
($20,000,000).
FOURTH: The aforesaid action by the Board of Directors was taken
pursuant to authority and power contained in the Articles of Incorporation of
the Corporation.
IN WITNESS WHEREOF, MERRILL LYNCH BASIC VALUE FUND, INC. has caused
these presents to be signed in its name and on its behalf by its President and
attested by its Secretary on November 15, 1991.
MERRILL LYNCH BASIC VALUE FUND, INC.
By: /s/ Arthur Zeikel
------------------
Arthur Zeikel
President
Attest:
/s/ Mark B. Goldfus
- -------------------
Mark B. Goldfus
Secretary
<PAGE>
THE UNDERSIGNED President of MERRILL LYNCH BASIC VALUE FUND, INC., who
executed on behalf of said corporation the foregoing Articles Supplementary to
the Charter, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said corporation, the foregoing Articles Supplementary
to the Charter to be the corporate act of said corporation and further certifies
that, to the best of his knowledge, information and belief, the matters and
facts set forth therein with respect to the approval thereof are true in all
material respects, under the penalties of perjury.
/s/ Arthur Zeikel
-----------------
Arthur Zeikel
President
<PAGE>
EXHIBIT 9
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
October 19, 1999
Merrill Lynch Basic Value Fund, Inc.
800 Scudders Mill Road
Plainsboro, NJ 08536
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch Basic Value Fund, Inc., a
corporation organized under the laws of the State of Maryland (the "Fund"), in
connection with the organization of the Fund and its registration as an open-end
investment company under the Investment Company Act of 1940, as amended. This
opinion is being furnished in connection with the registration of an indefinite
number of shares of common stock, designated Class A, Class B, Class C and Class
D, par value $0.10 per share, of the Fund (the "Shares") under the Securities
Act of 1933, as amended, which registration is being effected pursuant to a
registration statement on Form N-1A (File No. 2-58521), as amended (the
"Registration Statement").
As counsel for the Fund, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund, as amended, and such other
documents as we have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of common stock of the Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus and
Statement of Additional Information constituting parts thereof.
Very truly yours,
/s/ Brown & Wood LLP
<PAGE>
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Basic Value Fund, Inc.
We consent to the incorporation by reference in this Post-Effective Amendment
No. 28 to Registration Statement No. 2-58521 of our report dated August 9, 1999
appearing in the annual report to shareholders of Merrill Lynch Basic Value
Fund, Inc. for the year ended June 30, 1999, and to the reference to us under
the caption "Financial Highlights" in the Prospectus, which is a part of such
Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Princeton, New Jersey
October 13, 1999
