<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1994
SECURITIES ACT FILE NO. 2-60836
INVESTMENT COMPANY ACT FILE NO. 811-2809
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 19 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 18 /X/
(CHECK APPROPRIATE BOX OR BOXES)
---------------
MERRILL LYNCH SPECIAL VALUE FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH SPECIAL VALUE FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies to:
<TABLE>
<S> <C> <C>
Philip L. Kirstein, Esq. Counsel for the Fund: Mark B. Goldfus, Esq.
MERRILL LYNCH ASSET BROWN & WOOD FUND ASSET
MANAGEMENT One World Trade Center MANAGEMENT, L.P.
P.O. Box 9011 New York, N.Y. 10048-0557 P.O. Box 9011
Princeton, N.J. 08543-9011 Attention: Thomas R. Smith, Jr., Esq. Princeton, N.J. 08543-9011
</TABLE>
---------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
/X/ immediately upon filing pursuant to paragraph (b), or
/ / on (date) pursuant to paragraph (b), or
/ / 60 days after filing pursuant to paragraph (a), or
/ / on (date) pursuant to paragraph (a) of Rule 485.
---------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON MAY 24, 1994.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MERRILL LYNCH SPECIAL VALUE FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
------------------------
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM
NO. LOCATION
- ---------- --------------------------------------
<C> <S> <C>
PART A
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Not Applicable
Item 3. Condensed Financial Information....... Financial Highlights; Performance Data
Item 4. General Description of Registrant..... Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund................ Fee Table; Management of the Fund;
Portfolio Transactions and
Brokerage; Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance......................... Not applicable
Item 6. Capital Stock and Other Securities.... Cover Page; Additional Information
Item 7. Purchase of Securities Being
Offered............................. Cover Page; Fee Table; Alternative
Sales Arrangements; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase.............. Fee Table; Alternative Sales
Arrangements; Redemption of Shares;
Shareholder Services; Purchase of
Shares
Item 9... Pending Legal Proceedings............. Not Applicable
PART B
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Back Cover Page
Item 12. General Information and History....... Not Applicable
Item 13. Investment Objective and Policies..... Investment Objective and Policies
Item 14. Management of the Fund................ Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities....................... Management of the Fund
Item 16. Investment Advisory and Other
Services............................ Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices........................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.... General Information--Description of
Shares
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............ Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status............................ Dividends; Distributions and Taxes
Item 21. Underwriters.......................... Purchase of Shares
Item 22. Calculation of Performance Data....... Performance Data
Item 23. Financial Statements.................. Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so
numbered, in Part C to this Registration Statement.
</TABLE>
<PAGE> 3
PROSPECTUS
- -----------------
JULY 28, 1994
MERRILL LYNCH SPECIAL VALUE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Special Value Fund, Inc. (the "Fund") is a diversified,
open-end investment company seeking long-term growth of capital by investing in
a diversified portfolio of securities, primarily common stocks, of relatively
small companies which management of the Fund believes have special investment
value and emerging growth companies regardless of size. Such companies are
selected by management on the basis of their long-term potential for expanding
their size and profitability or for gaining increased market recognition for
their securities. Current income is not a factor in such selection.
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed (i) at the time of
purchase (the "Class A shares"), or (ii) on a deferred basis (the "Class B
shares"). The deferred sales charges to which the Class B shares are subject
shall consist of a contingent deferred sales charge which may be imposed on
redemptions made within four years of purchase and an ongoing account
maintenance fee and distribution fee. These alternatives permit an investor to
choose the method of purchasing shares that is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other circumstances. Class A shares are not subject to ongoing fees; Class B
shares pay ongoing fees at the annual rate of 1.00% of the Fund's average daily
net assets attributable to the Class B shares, comprised of a 0.25% fee for
account maintenance services and a 0.75% fee for distribution services.
Investors should understand that the purpose and function of the deferred sales
charges with respect to the Class B shares are the same as those of the initial
sales charge with respect to the Class A shares. Investors also should
understand that over time the deferred sales charges related to Class B shares
may exceed the initial sales charge with respect to Class A shares. See
"Alternative Sales Arrangements" on page 4.
Each Class A and Class B share represents identical interests in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance fee, distribution fee and
certain other costs resulting from the deferred sales charge arrangement, which
will cause Class B shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares, and that Class B shares have
exclusive voting rights with respect to the account maintenance and the
distribution fees. The two classes also have different exchange privileges.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
purchase is $100 and the minimum subsequent purchase is $1. Merrill Lynch may
charge its customers a processing fee (presently $4.85) for confirming purchases
and repurchases. Purchases and redemptions directly through the Fund's transfer
agent are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be retained
for future reference. A statement containing additional information about the
Fund, dated July 28, 1994 (the "Statement of Additional Information"), has been
filed with the Securities and Exchange Commission and can be obtained, without
charge, by calling or by writing the Fund at the above telephone number or
address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
------------------------
FUND ASSET MANAGEMENT, L.P.--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
SHAREHOLDER TRANSACTION EXPENSES: CHARGE ALTERNATIVE CHARGE ALTERNATIVE
------------------ ------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchase
(as a percentage of offering price)....... 6.50%(a) None
Sales Charge Imposed on Dividend
Reinvestments............................. None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............. None 4.0% during the first
year, decreasing 1.0%
annually to 0% after
the fourth year(b)
Exchange Fee..................................... None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS) FOR THE FISCAL YEAR
ENDED MARCH 31, 1994:
Investment Advisory Fees(c)................. 0.75% 0.75%
Rule 12b-1 Fees............................. None 1.00%(d)
Other Expenses
Custodian Fees......................... 0.02% 0.02%
Shareholder Servicing Costs(e)......... 0.18% 0.20%
Other.................................. 0.22% 0.22%
---- ----
Total Other Expenses.............. 0.42% 0.44%
------ ------
Total Fund Operating Expenses.................... 1.17% 2.19%
============= =============
</TABLE>
- ---------------
(a) Reduced for purchases of $10,000 and over, decreasing to 0.75% for purchases
of $1,000,000 and over. See "Purchase of Shares-- Initial Sales Charge
Alternative--Class A Shares"--page 18.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 19.
(c) See "Management of the Fund--Management and Advisory Arrangements"--page 15.
(d) Such fee is comprised of a 0.25% fee for account maintenance services and a
0.75% fee for distribution services. See "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares--Distribution Plan"--page 20.
(e) See "Management of the Fund--Transfer Agency Services"--page 15.
2
<PAGE> 5
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES
PAID FOR THE
PERIOD OF:
---------------------------------------
10
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS YEARS
------ ------- ------- -------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including, for Class A shares, the maximum
$65 front-end sales charge and assuming (1) an operating
expense ratio of 1.17% for Class A shares and 2.19% for
Class B shares, (2) a 5% annual return throughout the
periods and (3) redemption at the end of the period:
Class A............................................ $76.15 $ 99.74 $125.18 $197.81
Class B............................................ $62.21 $ 88.51 $117.46 $252.37
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
the period:
Class A............................................ $76.15 $ 99.74 $125.18 $197.81
Class B............................................ $22.21 $ 68.51 $117.46 $252.37
</TABLE>
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF RETURN,
AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN THOSE
ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B shareholders who hold their shares
for an extended period of time may pay more in Rule 12b-1 distribution fees than
the economic equivalent of the maximum front end sales charges permitted under
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. Merrill Lynch may charge its customers a processing fee (presently $4.85)
for confirming purchases and redemptions. Purchases and redemptions directly
through the Fund's transfer agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".
3
<PAGE> 6
ALTERNATIVE SALES ARRANGEMENTS
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed either (i) at the time of the purchase (the "initial
sales charge alternative") or (ii) on a deferred basis (the "deferred sales
charge alternative").
Class A Shares. An investor who elects the initial sales charge
alternative acquires Class A shares. Although Class A shares incur a sales
charge when they are purchased, they enjoy the benefit of not being subject to
any ongoing account maintenance fee or distribution fee or any sales charge when
they are redeemed. Certain purchases of Class A shares qualify for reduced
initial sales charges. See "Purchase of Shares".
Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B shares. Class B shares do not incur a sales charge
when they are purchased, but they are subject to an ongoing account maintenance
fee of 0.25%, an ongoing distribution fee of 0.75% and a sales charge if they
are redeemed within four years of purchase. Class B shares provide the benefit
of permitting all of the investor's dollars to work from the time the investment
is made. The ongoing account maintenance fee and distribution fee paid by Class
B shares will cause such shares to have a higher expense ratio and to pay lower
dividends than Class A shares.
As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Moreover, shares acquired under the initial sales charge
alternative would not be subject to ongoing account maintenance and distribution
fees. However, because initial sales charges are deducted at the time of
purchase, such investors would not have all of their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also might elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution charges may exceed the initial sales
charge. Again, however, such investors must weigh this consideration against the
fact that not all of their funds will be invested initially. Furthermore, the
ongoing account maintenance and distribution charges will be offset to the
extent any return is realized on the additional funds initially invested under
the deferred sales charge alternative. However, there can be no assurance as to
the return, if any, which will be realized on such additional funds. Certain
other investors might determine it to be more advantageous to have all their
funds invested initially, although remaining subject to continued account
maintenance and distribution charges and, for a four-year period of time, a
contingent deferred sales charge.
The distribution expenses incurred by the Distributor, and dealers,
primarily Merrill Lynch, in connection with the sale of the shares will be paid,
in the case of the Class A shares, from the proceeds of the initial sales charge
and, in the case of the Class B shares, from the proceeds of the ongoing
distribution fee and the contingent deferred sales charge incurred upon
redemption within four years of purchase. Sales personnel may receive different
compensation for selling Class A or Class B shares. Investors should understand
that the purpose and function of the deferred sales charges with respect to the
Class B shares are the same as those of the initial sales charge with respect to
the Class A shares.
Dividends paid by the Fund with respect to Class A and Class B 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 fees and any incremental transfer agency costs
relating to
4
<PAGE> 7
Class B shares will be borne exclusively by that class. See "Additional
Information--Determination of Net Asset Value". Class A and Class B shareholders
of the Fund each have an exchange privilege for Class A and Class B shares,
respectively, with certain other mutual funds sponsored by Merrill Lynch. Class
A and Class B shareholders of the Fund also may exchange their shares for shares
of certain money market funds sponsored by Merrill Lynch. See "Shareholder
Services--Exchange Privilege".
The Directors of the Fund have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the Investment
Company Act of 1940, as amended (the "Investment Company Act") and state laws,
will seek to assure that no such conflict arises.
THE ALTERNATIVE SALES ARRANGEMENTS PERMIT AN INVESTOR TO CHOOSE THE METHOD OF
PURCHASING SHARES THAT IS MOST BENEFICIAL GIVEN THE AMOUNT OF THE PURCHASE, THE
LENGTH OF TIME THE INVESTOR EXPECTS TO HOLD THE SHARES AND OTHER CIRCUMSTANCES.
INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR PARTICULAR CIRCUMSTANCES IT IS
MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES CHARGE AND NOT BE SUBJECT TO ONGOING
CHARGES OR TO HAVE THE ENTIRE INITIAL PURCHASE PRICE INVESTED IN THE FUND WITH
THE INVESTMENT THEREAFTER BEING SUBJECT TO ONGOING ACCOUNT MAINTENANCE CHARGES
AND DISTRIBUTION CHARGES. TO ASSIST INVESTORS IN MAKING THIS DETERMINATION, THE
FEE TABLE ON PAGE 2 SETS FORTH THE CHARGES APPLICABLE TO EACH CLASS OF SHARES
AND A DISCUSSION OF RELEVANT FACTORS IN MAKING SUCH DETERMINATION IS SET FORTH
UNDER "PURCHASE OF SHARES--ALTERNATIVE SALES ARRANGEMENTS" ON PAGE 17.
5
<PAGE> 8
FINANCIAL HIGHLIGHTS
Financial statements for the year ended March 31, 1994 and the independent
auditors' report thereon are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in such financial statements. Financial highlights are not
presented for Class B shares for the period April 1, 1984 to October 20, 1988
since no shares of that class were publicly issued prior to that period.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------------------
1994++ 1993 1992 1991 1990 1989 1988 1987 1986
------- ------- ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease)
in Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset values
beginning of year... $ 15.32 $ 13.86 $ 10.84 $ 11.36 $ 12.20 $ 11.77 $ 15.99 $ 16.34 $ 12.48
------- ------- ------- ------- ------- ------- -------- -------- --------
Investment income
(loss)--net......... .10 .05 .10 .12 .22 .22 .17 .07 .08
Realized and
unrealized
gain (loss) on
investments--net.... 1.87 1.43 3.00 (.49) (.82) .46 (3.17) .25 4.21
------- ------- ------- ------- ------- ------- -------- -------- --------
Total from investment
operations.......... 1.97 1.48 3.10 (.37) (.60) .68 (3.00) .32 4.29
------- ------- ------- ------- ------- ------- -------- -------- --------
Less dividends and
distributions:
Investment
income--net......... -- (.02) (.08) (.15) (.24) (.23) (.14) (.05) (.09)
Realized gain on
investments--net... (1.41) -- -- -- -- (.02) (1.08) (.62) (.34)
------- ------- ------- ------- ------- ------- -------- -------- --------
Total dividends and
distributions....... (1.41) (.02) (.08) (.15) (.24) (.25) (1.22) (.67) (.43)
------- ------- ------- ------- ------- ------- -------- -------- --------
Net asset value, end
of year............. $ 15.88 $ 15.32 $ 13.86 $ 10.84 $ 11.36 $ 12.20 $ 11.77 $ 15.99 $ 16.34
------- ------- ------- ------- ------- ------- -------- -------- --------
TOTAL INVESTMENT
RETURN:**/
Based on net asset
value per share..... 13.14% 10.69% 28.71% (3.15)% (5.05)% 5.85% (18.82)% 1.99% 35.40%
------- ------- ------- ------- ------- ------- -------- -------- --------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement and
excluding
distribution
fees................ 1.17% 1.28% 1.55% 1.88% 1.45% 1.20% 1.17% 1.19% 1.19%
------- ------- ------- ------- ------- ------- -------- -------- --------
Expenses............. 1.17% 1.28% 1.55% 1.88% 1.45% 1.35% 1.20% 1.22% 1.19%
------- ------- ------- ------- ------- ------- -------- -------- --------
Investment income
(loss)--net......... .62% .37% .83% 1.13% 1.62% 1.78% 1.30% .46% .56%
------- ------- ------- ------- ------- ------- -------- -------- --------
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands).......... $78,804 $70,920 $57,056 $44,818 $57,800 $87,167 $108,830 $107,521 $107,527
------- ------- ------- ------- ------- ------- -------- -------- --------
Portfolio turnover... 68.70% 42.25% 98.76% 73.06% 44.66% 75.11% 60.47% 50.63% 40.01%
======= ======= ======= ======= ======= ======= ======== ======== ========
<CAPTION>
CLASS B
------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------
1985 1994++ 1993++ 1992++ 1991++ 1990 1989+
------- -------- ------- ------- ------ ------ ------
<S> <C<C> <C> <C> <C> <C> <C> <C>
Increase (Decrease)
in Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset values
beginning of year... $ 11.35 $ 15.01 $ 13.70 $ 10.77 $11.29 $12.15 $12.01
------- -------- ------- ------- ------ ------ ------
Investment income
(loss)--net......... .12 (.06) (.09) (.03) -- .07 .03
Realized and
unrealized
gain (loss) on
investments--net.... 1.42 1.83 1.40 2.98 (.47) (.79) .22
------- -------- ------- ------- ------ ------ ------
Total from investment
operations.......... 1.54 1.77 1.31 2.95 (.47) (.72) .25
------- -------- ------- ------- ------ ------ ------
Less dividends and
distributions:
Investment
income--net......... (.12) -- -- (.02) (.05) (.14) (.09)
Realized gain on
investments--net... (.29) (1.29) -- -- -- -- (.02)
------- -------- ------- ------- ------ ------ ------
Total dividends and
distributions....... (.41) (1.29) -- (.02) (.05) (.14) (.11)
------- -------- ------- ------- ------ ------ ------
Net asset value, end
of year............. $ 12.48 $ 15.49 $ 15.01 $ 13.70 $10.77 $11.29 $12.15
------- -------- ------- ------- ------ ------ ------
TOTAL INVESTMENT
RETURN:**/
Based on net asset
value per share..... 13.95% 12.05% 9.56% 27.41% (4.16)% (6.00)% 2.75%
------- -------- ------- ------- ------ ------ ------
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement and
excluding
distribution
fees................ 1.19% 1.19% 1.28% 1.51% 1.95% 1.49% 1.23%*
------- -------- ------- ------- ------ ------ ------
Expenses............. 1.19% 2.19% 2.28% 2.51% 2.95% 2.49% 2.45%*
------- -------- ------- ------- ------ ------ ------
Investment income
(loss)--net......... 1.01% (.41)% (.65)% (.27)% (.04)% .59% .63%*
------- -------- ------- ------- ------ ------ ------
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands).......... $88,671 $112,768 $76,182 $29,534 $3,783 $1,456 $ 906
------- -------- ------- ------- ------ ------ ------
Portfolio turnover... 36.21% 68.70% 42.25% 98.76% 73.06% 44.66% 75.11%
======= ======== ======= ======= ====== ====== ======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sale loads.
+ Class B Shares commencement operations on October 21, 1988.
++ Based on an average number of shares outstanding during the period.
++ Aggregate total investment return.
6
<PAGE> 9
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of capital
by investing in a diversified portfolio of securities, primarily common stock,
of relatively small companies which management of the Fund believes have special
investment value and emerging growth companies regardless of size. Companies are
selected by management on the basis of their long-term potential for expanding
their size and profitability or for gaining increased market recognition for
their securities. Current income is not a factor in the selection of securities.
The Fund is intended to provide an opportunity for investors who are not
ordinarily in a position to perform the specialized type of research or analysis
involved in investing in small and emerging growth companies and to invest
sufficient assets in such companies to provide wide diversification.
Management seeks to identify those small and emerging growth companies
which can show significant and sustained increases in earnings over an extended
period of time. Management believes that while these companies present
above-average risks, properly selected companies of this type also have the
potential to increase their earnings at a rate substantially in excess of the
general growth of the economy. The Fund attempts to achieve its objective by
focusing on the long-range view of a company's prospects through a fundamental
analysis of its management, financial structure, product development, marketing
ability and other relevant factors. Full development of these companies
frequently takes time and, for this reason, the Fund should be considered as a
long-term investment and not as a vehicle for seeking short-term profits.
Small companies. Management seeks small companies that offer special
investment value in terms of their product or service, research capability or
other unique attributes, and are relatively undervalued in the marketplace when
compared with similar, but larger, enterprises. These companies typically have
total market capitalization of up to $750 million and generally are little known
to most individual investors although some may be dominant in their respective
industries. Underlying this is management's belief that relatively small
companies will continue to have the opportunity to develop into significant
business enterprises. Some such companies may be in a relatively early stage of
development; others may manufacture a new product or perform a new service. Such
companies may not be counted upon to develop into major industrial companies but
management believes that eventual recognition of their special value
characteristics by the investment community can provide above-average long-term
growth to the portfolio.
Emerging growth companies. Management also seeks emerging growth companies
that either occupy a dominant position in an emerging industry or sub-industry
or have a significant and growing market share in a large, fragmented industry.
The Fund believes that capable and flexible management is one of the most
important criteria of emerging growth companies and that such companies should
employ sound financial and accounting policies and also demonstrate effective
research, successful product development and marketing, efficient service and
pricing flexibility. Emphasis is given to companies with rapid historical growth
rates and above-average returns on equity. Management of the Fund also analyzes
and weighs relevant factors beyond the company itself, such as the level of
competition in the industry, the extent of governmental regulation, the nature
of labor conditions and other related matters.
While the process of selection and continuous supervision by the Fund's
management does not, of course, guarantee successful investment results, it does
provide ingredients not available to the average individual in making his
investments in small and emerging growth companies due to time and cost
involved. Careful initial selection is particularly important in this area as
many new enterprises have promise but lack certain of the ingredients necessary
to prosper.
7
<PAGE> 10
It should be apparent that an investment in a fund of this type involves
greater risk than is customarily associated with more established companies. The
securities of smaller or emerging growth companies may be subject to more abrupt
or erratic market movements than larger, more established companies or the
market average in general. These companies may have limited product lines,
markets or financial resources, or they may be dependent on a limited management
group. Because of these factors, the Fund believes that its shares are suitable
for investment by persons who can invest without concern for current income and
who are in a financial position to assume above-average investment risk in
search of above-average long-term reward. As indicated, the Fund is designed for
investors whose investment objective is growth rather than income. It is
definitely not intended as a complete investment program but is designed for
those long-term investors who are prepared to experience above-average
fluctuations in net asset value.
Investment emphasis is on equities, primarily common stock and, to a lesser
extent, securities convertible into common stock and rights to subscribe for
common stock, and the Fund will maintain at least 80% of its net assets invested
in equity securities of small or emerging growth companies except during
defensive periods. The Fund reserves the right as a defensive measure and to
provide for redemptions to hold other types of securities, including
non-convertible preferred stocks and debt securities, Government and money
market securities, including repurchase agreements, or cash, in such proportions
as, in the opinion of management, prevailing market or economic conditions
warrant.
It is anticipated that, in the immediate future, the Fund will invest not
more than 30% of its total assets in the securities of foreign issuers.
Nevertheless, investors should note that investment in securities of foreign
issuers involves risks not typically involved in domestic investment, including
fluctuations in foreign exchange rates, future political and economic
development and the possible imposition of exchange controls or other foreign or
U.S. governmental laws or restrictions applicable to such investments.
Since the Fund may invest in securities denominated or quoted in currencies
other than the United States dollar, changes in foreign currency exchange rates
may affect the value of investments in the portfolio and the unrealized
appreciation or depreciation of investments insofar as United States investors
are concerned. Changes in foreign currency exchange rates relative to the United
States dollar will affect the United States dollar value of the Fund's assets
denominated in that currency and the Fund's yield on such assets. With respect
to certain foreign countries, there is the possibility of expropriation of
assets, confiscatory taxation, political or social instability or diplomatic
developments which could affect investment in those countries. There may be less
publicly available information about a foreign financial instrument than about a
United States instrument, and foreign issuers may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to those
of United States entities. In addition, certain foreign investments may be
subject to foreign withholding taxes. Foreign financial markets, while growing
in volume, have, for the most part, substantially less volume than United States
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. The
foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of the Fund are uninvested and no return is earned thereon. The inability
of the Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result either in losses
to the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell
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<PAGE> 11
the security, could result in possible liability to the purchaser. Costs
associated with transactions in foreign securities are generally higher than
with transactions in United States securities. There is generally less
government supervision and regulation of exchanges, financial institutions and
issuers in foreign countries than there is in the United States.
The investment policies of the Fund described in the preceding paragraphs
are fundamental policies of the Fund and may not be changed without the approval
of the holders of a majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Options and Futures. The Fund may seek to
increase its return through the use of options on portfolio securities and to
hedge its portfolio against adverse movements in the equity, debt and currency
markets through the use of various portfolio strategies. The Fund may write
(i.e., sell) covered put and call options on its portfolio securities, purchase
put and call options on securities and engage in transactions in stock index
options, stock index futures and financial futures, and related options on such
futures. The Fund may deal in forward foreign exchange transactions and foreign
currency options and futures, and related options on such futures. Each of these
portfolio strategies is described below. Although certain risks are involved in
options and futures transactions as discussed below, the Fund's investment
adviser, Fund Asset Management, L.P. (the "Investment Adviser" or "FAM")
believes that, because the Fund will (i) write only covered options on portfolio
securities and (ii) engage in other options and futures transactions only for
hedging purposes, the options and futures portfolio strategies of the Fund will
not subject the Fund to the risks frequently associated with the speculative use
of options and futures transactions. While the Fund's use of hedging strategies
is intended to reduce the volatility of the net asset value of Fund shares, the
Fund's net asset value will fluctuate. There can be no assurance that the Fund's
hedging transactions will be effective. Furthermore, the Fund will only engage
in hedging activities from time to time and may not necessarily be engaging in
hedging activities when movements in the equity, debt and currency markets
occur.
Set forth below is a description of the portfolio strategies involving
options and futures that the Fund may utilize.
Writing Covered Options. The Fund may write (i.e., sell) covered call
options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund in return for a premium gives another party a
right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. The principal reason for writing call
options is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying security
will be limited while the option is in effect unless the Fund effects a closing
purchase transaction. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options serve as a partial hedge against the price of the underlying
security declining.
The Fund may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option
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<PAGE> 12
which increases the Fund's return. The Fund may write only covered put options,
which means that so long as the Fund is obligated as the writer of the option it
will, through its custodian, have deposited and maintained cash, cash
equivalents, United States Government securities or other high grade liquid debt
securities denominated in United States dollars or non-United States currencies
with a securities depository with a value equal to or greater than the exercise
price of the underlying securities. By writing a put, the Fund will be obligated
to purchase the underlying security at a price that may be higher than the
market value of that security at the time of exercise for as long as the option
is outstanding. The Fund may engage in closing transactions in order to
terminate put options that it has written.
The exchanges on which the Fund may conduct options transactions generally
have established limitations governing the maximum number of call or put options
on the same underlying security or currency (whether or not covered) that may be
written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number of contracts that
any person may trade on a particular trading day. The Investment Adviser does
not believe that these trading and position limits will have any adverse impact
on the portfolio strategies for hedging the Fund's portfolio.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its securities. By buying a put option the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction and profit or loss for the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of any offsetting sale of an identical option prior to the expiration of
the option it has purchased.
In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if as a result of such purchase,
the aggregate cost of all outstanding options on securities held by the Fund
would exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund may engage
in transactions in stock index options and futures and financial futures, and
related options on such futures. The Fund may purchase or write put and call
options on stock indices to hedge against the risks of market-wide stock price
movements in the securities in which the Fund invests. Options on indices are
similar to options on securities except that on exercise or assignment, the
parties to the contract pay or receive an amount of cash equal to the difference
between the closing value of the index and the exercise price of the option
times a specified multiple. The Fund may invest in stock index options based on
a broad market index or based on a narrow index representing an industry or
market segment.
The Fund may purchase and sell stock index futures contract and financial
futures contracts ("futures contracts") as a hedge against adverse changes in
the market value of its portfolio securities as described below. A futures
contract is an agreement between two parties which obligates the purchaser of
the futures
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<PAGE> 13
contract to buy and the seller of a futures contract to sell a security for a
set price on a future date. Unlike most other futures contracts, a stock index
futures contract does not require actual delivery of securities, but results in
cash settlement based upon the difference in value of the index between the time
the contract was entered into and the time of its settlement. The Fund may
effect transactions in stock index futures contracts in securities and financial
futures contracts in United States Government and agency securities and
corporate debt securities. Transactions by the Fund in stock index futures and
financial futures are subject to limitations as described below under
"Restrictions on the Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market advance,
it may purchase futures in order to gain rapid market exposure that may in part
or entirely offset increases in the cost of securities that the Fund intends to
purchase. As such purchases are made, an equivalent amount of futures contracts
will be terminated by offsetting sales. The Investment Adviser does not consider
purchases of futures contracts to be a speculative practice under these
circumstances.
The Fund may sell financial futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market values of debt securities which may be held by the Fund as a
temporary defensive measure will fall, thus reducing the net asset value of the
Fund. However, as interest rates rise, the value of the Fund's short position in
the futures contract will also tend to increase, thus offsetting all or a
portion of the depreciation in the market value of the Fund's investments which
are being hedged. While the Fund will incur commission expenses in selling and
closing out futures positions, these commissions are generally less than the
transaction expenses which the Fund would have incurred had the Fund sold
portfolio securities in order to reduce its exposure to increases in interest
rates. The Fund also may purchase financial futures contracts in anticipation of
a decline in interest rates when it is not fully invested in a particular market
in which it intends to make investments to gain market exposure that may in part
or entirely offset an increase in the cost of securities it intends to purchase.
The Fund may purchase and write call and put options on futures contracts
and stock indices in connection with its hedging activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which the Fund
enters into futures transactions. The Fund may purchase put options or write
call options on futures contracts and stock indices rather than selling the
underlying futures contract in anticipation of a decrease in the market value of
its securities. Similarly, the Fund may purchase call options, or write put
options on futures contracts and stock indices, as a substitute for the purchase
of such futures to hedge against the increased cost resulting from an increase
in the market value of securities which the Fund intends to purchase.
The Fund may engage in options and futures transactions on United States
and foreign exchanges and in OTC options. Exchange-traded contracts are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which, in general, have
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller. See
"Restrictions on OTC Options" below for information as to restrictions on the
use of OTC options.
Foreign Currency Hedging. The Fund may deal in forward foreign exchange
among currencies of the different countries in which it will invest and
multinational currency units as a hedge against possible
11
<PAGE> 14
variations in the foreign exchange rates among these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date (up to one year) and price set at the time
of the contract. The Fund's dealings in forward foreign exchange will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Fund accruing in connection
with the purchase and sale of its portfolio securities, the sale and redemption
of shares of the Fund or the payment of dividends and distributions by the Fund.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency. The
Fund will not speculate in forward foreign exchange. The Fund may purchase or
sell listed or OTC foreign currency options, foreign currency futures and
related options on foreign currency futures as a short or long hedge against
possible variations in foreign exchange rates. Such transactions may be effected
with respect to hedges on non-U.S. dollar denominated securities owned by the
Fund, sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the rights to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade of
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities which it has committed
to, or anticipates it will, purchase which are denominated in such currency, and
in the case of securities which have been sold by the Fund but not yet
delivered, the proceeds thereof in its denominated currency. The Fund may not
incur potential net liabilities of more than 20% of its total assets from
foreign currency options, futures or related options.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
options and futures transactions to hedge the portfolio involves the risk of
imperfect correlation in movements in the price of options and futures and
movements in the prices of the securities, interest rates or currencies which
are the subject of the hedge. If the price of the options or futures moves more
or less than the price of the subject of the hedge, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options, futures and currency
transactions also depends on the Investment Adviser's ability to predict
correctly price movements in the market involved in a particular options or
futures transaction.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Investment Adviser believes the Fund can receive on each business day at least
two independent bids or offers. There can be no assurance, however, that a
liquid secondary market will exist at any specific time. Thus, it may not be
possible to close an options or futures position. The inability to close options
and futures positions also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits or collateral in the event of the bankruptcy of a broker with
whom the Fund has an open position in an option, a futures contract or related
option.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission ("CFTC") applicable to the Fund provide
that the futures trading activities described herein will
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<PAGE> 15
not result in the Fund being deemed a "commodity pool" under such regulations if
the Fund adheres to certain restrictions. In particular, the Fund may purchase
and sell futures contracts and options thereon (i) for bona fide hedging
purposes, and (ii) for non-hedging purposes, if the aggregate initial margin and
premiums required to establish positions in such contracts and options does not
exceed 5% of the liquidation value of the Fund's portfolio, after taking into
account unrealized profits and unrealized losses on any such contracts and
options.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's Custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
insuring that the use of such futures contract is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options,
including OTC stock index options, OTC foreign currency options and options on
foreign currency futures, only with member banks of the Federal Reserve System
and primary dealers in United States Government securities or with affiliates of
such banks or dealers that have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
The Fund will acquire only these OTC options for which the Investment Adviser
believes the Fund can receive on each business day at least two independent bids
or offers (one of which will be from an entity other than a party to the
option).
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on futures contracts
exceed 15% of the net assets of the Fund, taken at market value, together with
all other assets of the Fund which are illiquid or are not otherwise readily
marketable. However, if the OTC option is sold by the Fund to a primary U.S.
Government securities dealer recognized by the Federal Reserve Bank of New York
and the Fund has the unconditional contractual right to repurchase such OTC
option from the dealer at a predetermined price, then the Fund will treat as
illiquid such amount of the underlying securities as is equal to the repurchase
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying security minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money." This policy as to OTC options is
not a fundamental policy of the Fund and may be amended by the Directors of the
Fund without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.
Lending of Portfolio Securities. The Fund may from time to time lend
securities (but not in excess of 20% of its total assets) from its portfolio to
brokers, dealers and financial institutions and receive collateral in cash or
securities issued or guaranteed by the United States Government which will be
maintained at all times in amounts equal to at least 100% of the current market
value of the loaned securities. Such cash collateral will be invested in
short-term securities, which will increase the current income of the Fund.
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<PAGE> 16
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
Among the more significant restrictions, the Fund may not:
-- Invest in securities of any one issuer (other than the United
States or its agencies or instrumentalities), if immediately after and as a
result of such investment, more than 5% of the total assets of the Fund,
taken at market value, would be invested in the securities of such issuer,
or more than 10% of the outstanding securities, or more than 10% of any
class of securities, of such issuer would be owned by the Fund; or
-- Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Directors of the Fund are responsible for the overall
supervision of the operations of the Fund and perform the various duties imposed
on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL*--President and Chief Investment Officer of the Investment
Adviser and Merrill Lynch Asset Management, L.P. ("MLAM"); President and
Director of Princeton Services, Inc. ("Princeton Services"); Executive
Vice President of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"); Executive Vice President of Merrill Lynch & Co., Inc.
("ML&Co."); Director of the Distributor.
DONALD CECIL--Special Limited Partner of Cumberland Partners (an investment
partnership).
M. COLYER CRUM--James R. Williston Professor of Investment Management,
Harvard Business School.
EDWARD H. MEYER--Chairman of the Board of Directors, President and Chief
Executive Officer of Grey Advertising Inc.
JACK B. SUNDERLAND--President and Director of American Independent Oil
Company, Inc. (an energy company).
J. THOMAS TOUCHTON--Managing Partner of The Witt-Touchton Company (a
private investment partnership).
- ---------------
* Interested person, as defined in the Investment Company Act, of the Fund.
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<PAGE> 17
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser acts as the investment adviser to the Fund and
provides the Fund with management and investment advisory services. The
Investment Adviser is an affiliate owned and controlled by MLAM, which is an
affiliate owned and controlled by ML&Co., a financial services holding company.
The Investment Adviser or MLAM acts as the investment adviser to more than 90
registered investment companies. MLAM also provides investment advisory services
to individual and institutional accounts. As of June 30, 1994, the Investment
Adviser and MLAM had a total of $161.4 billion in investment company and other
portfolio assets under management, including accounts of certain affiliates of
MLAM.
The investment advisory agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the direction of the
Board of Directors, the Investment Adviser is responsible for the actual
management of the Fund's portfolio. The responsibility for making decisions to
buy, sell or hold a particular security rests with the Investment Adviser,
subject to review by the Board of Directors. The Investment Adviser provides the
portfolio managers for the Fund, who consider analyses from various sources,
make the necessary investment decisions and place transactions accordingly. The
Investment Adviser also is obligated to perform certain administrative and
management services for the Fund and to provide all the office space,
facilities, equipment and personnel necessary to perform its duties under the
Investment Advisory Agreement. The Investment Adviser has access to the total
securities research and economic facilities of Merrill Lynch.
The Investment Adviser receives monthly compensation at the annual rate of
0.75% of the average daily net assets of the Fund. This fee is higher than that
of many other mutual funds, but the Fund believes it is justified by the high
degree of care that must be given to the initial selection and continuous
supervision of the types of portfolio securities in which the Fund invests. For
the fiscal year ended March 31, 1994, the Investment Adviser earned a fee of
$1,179,244.
The Investment Advisory Agreement obligates the Fund to pay certain
expenses incurred in its operations including, among other things, the
investment advisory fee, legal and audit fees, unaffiliated Directors' fees and
expenses, custodian and transfer agency fees, accounting costs, the costs of
issuing and redeeming shares and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Accounting services are provided to the Fund by the Investment Adviser, and the
Fund reimburses the Investment Adviser for its costs in connection with such
services. For the fiscal year ended March 31, 1994, the amount of such
reimbursement was $48,221. For the fiscal year ended March 31, 1994, the ratio
of total expenses to average net assets was 1.17% for the Class A shares and
2.19% for the Class B shares.
Dennis W. Stattman is Vice President and Portfolio Manager of the Fund. Mr.
Stattman has been a Vice President of MLAM since 1989 and was the Vice President
of Meridian Management Company from 1984 to 1989.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the "Transfer Agent"), which is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc., 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
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<PAGE> 18
the opening and maintenance of shareholder accounts. Pursuant to the Transfer
Agency Agreement, the Fund pays the Transfer Agent a fee of $7.00 per Class A
shareholder account and $9.00 per Class B shareholder account and the Transfer
Agent is entitled to reimbursement from the Fund for out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement. For the
fiscal year March 31, 1994, the Fund paid the Transfer Agent $295,717 pursuant
to the Transfer Agency Agreement. At April 30, 1994, the Fund had 16,575 Class A
shareholder accounts and 14,470 Class B shareholder accounts. At this level of
accounts the annual fee payable to the Transfer Agent would aggregate
approximately $246,255 plus out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, a subsidiary of MLAM, acts as the distributor of the
shares of the Fund. Shares of the Fund are offered continuously for sale by the
Distributor and other eligible securities dealers (including Merrill Lynch).
Shares of the Fund may be purchased from securities dealers or by mailing a
purchase order directly to the Transfer Agent. The minimum initial purchase is
$1,000. The minimum subsequent purchase is $50 except that for retirement plans
the minimum initial purchase is $100 and minimum subsequent purchase is $1.
The Fund is offering its shares at a public offering price equal to the
next determined net asset value per share plus sales charges which, at the
option of the purchaser, may be imposed, either at the time of purchase (the
"initial sales charge alternative") or on a deferred basis (the "deferred sales
charge alternative"), as described below. The applicable offering price for
purchase orders is based on the net asset value of the Fund next determined
after receipt of the purchase order by the Distributor. As to purchase orders
received by securities dealers prior to 4:15 P.M., New York time, which includes
orders received after the determination of net asset value on the previous day,
the applicable offering price will be based on the net asset value determined as
of 4:15 P.M., New York time, on the day the order is placed with the
Distributor, provided the order is received by the Distributor prior to 4:30
P.M., New York time, on that day. If the purchase orders are not received by the
Distributor prior to 4:30 P.M., New York time, such orders shall be deemed
received on the next business day. Any order may be rejected by the Distributor
or the Fund. The Fund or the Distributor may suspend the continuous offering of
the Fund's shares at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to time.
Neither the Distributor nor the dealers are permitted to withhold placing orders
to benefit themselves by a price change. Merrill Lynch may charge its customers
a processing fee (presently $4.85) to confirm a sale of shares to such
customers. Purchases directly through the Transfer Agent are not subject to the
processing fee.
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B shares bear the expenses of account maintenance fee and the deferred sales
arrangements and any expenses (including incremental transfer agency costs)
resulting from such sales arrangements and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the account
maintenance and distribution fees are paid. The two classes also have different
exchange privileges. See "Shareholder Services--Exchange Privilege". The net
income attributable to Class B shares and the dividends payable on Class B
shares will be reduced by the amount of the account maintenance and distribution
fees and incremental expenses associated with such account
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<PAGE> 19
maintenance and distribution fees; accordingly, the net asset value of the Class
B shares will be reduced by such amount to the extent the Fund has undistributed
net income. Sales personnel may receive different compensation for selling Class
A or Class B shares. Investors are advised that only Class A shares may be
available for purchase through securities dealers, other than Merrill Lynch,
which are eligible to sell shares.
ALTERNATIVE SALES ARRANGEMENTS
The alternative sales arrangements of the Fund permit investors to choose
the method of purchasing shares that is most beneficial given the amount of
their purchase, the length of time the investor expects to hold his shares and
other relevant circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and not be subject to ongoing charges, as discussed below, or to have the
entire initial purchase price invested in the Fund with the investment
thereafter being subject to ongoing charges.
As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to ongoing account
maintenance and distribution fees as described below. However, because initial
sales charges are deducted at the time of purchase, such investors would not
have all their funds invested initially.
Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time might also elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially.
Furthermore, the ongoing account maintenance and distribution fees will be
offset to the extent any return is realized on the additional funds initially
invested under the deferred alternative.
Another factor that may be applicable under certain circumstances is that
the payment of the Class B distribution fee and contingent deferred sales charge
is subject to certain limits as set forth below under "Deferred Sales Charge
Alternative--Class B Shares."
Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continued
account maintenance and distribution fees and, for a four-year period of time, a
contingent deferred sales charge as described below. For example, an investor
subject to the 6.50% initial sales charge will have to hold his investment at
least 6 1/2 years for the ongoing 0.25% account maintenance fee and 0.75%
distribution fee to exceed the initial sales charge. This example does not take
into account the time value of money which further reduces the impact of the
ongoing account maintenance and distribution fees on the investment,
fluctuations in the net asset value or the effect of the return on the
investment over this period of time.
17
<PAGE> 20
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The public offering price of Class A shares for purchasers choosing the
initial sales charge alternative is the next determined net asset value plus
varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE
AS DISCOUNT TO
SALES CHARGE AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- -------------------------------------------------- --------------- -------------- ------------------
<S> <C> <C> <C>
Less than $10,000................................. 6.50% 6.95% 6.25%
$10,000 but less than $25,000..................... 6.00 6.38 5.75
$25,000 but less than $50,000..................... 5.00 5.26 4.75
$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............................... .75 .76 .65
</TABLE>
- ------------
*Rounded to the nearest one-hundredth percent.
Initial sales charges may be waived for shareholders purchasing $1 million
or more in a single transaction (other than an employer sponsored retirement or
savings plan, such as a tax qualified retirement plan under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"), or a deferred
compensation plan under Section 403(b) and Section 457 of the Code, other
deferred compensation arrangements, VEBA plans and non-qualified After Tax
Savings and Investment programs maintained on the Merrill Lynch Group Employee
Services System, herein referred to as Employer Sponsored Retirement or Savings
Plan), or a purchase by a TMASM Managed Trust, of Class A shares of the Fund. In
addition, purchases of Class A shares of the Fund made in connection with a
single investment of $1 million or more under the Merrill Lynch Mutual Fund
Adviser Program will not be subject to an initial sales charge. Purchases
described in this paragraph will be subject to a contingent deferred sales
charge if the shares are redeemed within one year after purchase at the
following rates:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT OF PURCHASE
- ---------------------------------------------------------------------- --------------------------
<S> <C>
$1 million up to $2.5 million......................................... 1.00%
Over $2.5 million up to $3.5 million.................................. 0.60%
Over $3.5 million up to $5 million.................................... 0.40%
Over $5 million....................................................... 0.25%
</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 shares of
the Fund will receive a concession equal to most of the sales charge, they may
be deemed to be underwriters under the Securities Act of 1933, as amended.
Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Directors of the Fund, to directors or
18
<PAGE> 21
trustees of certain other Merrill Lynch-sponsored investment companies, to an
investor who has a business relationship with a financial consultant who joined
Merrill Lynch from another investment firm within six months prior to the date
of purchase if certain conditions set forth in the Statement of Additional
Information are met, to directors of ML&Co., to an investor who has a business
relationship with a Merrill Lynch financial consultant and who has invested in a
mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has
served as a selected dealer and where Merrill Lynch has either received or given
notice that such arrangement will be terminated if certain conditions set forth
in the Statement of Additional Information are met, and to employees of Merrill
Lynch & Co., Inc. and its subsidiaries. Also, Class A shares may be offered at
net asset value in connection with the acquisition of assets of other investment
companies. No initial sales charges are imposed on Class A shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions. Class A shares are offered with reduced sales charges and, in
certain circumstances, at net asset value, to participants in the Merrill Lynch
BlueprintSM Program. Class A shares are offered at net asset value to certain
Employer Sponsored Retirement or Savings Plans, including eligible 401(k) plans,
provided such plans meet the required number of eligible employees or required
amount of assets by the Investment Adviser or any of its affiliates. Class A
shares of the Fund are also offered at net asset value to shareholders of
certain closed-end funds advised by the Investment Adviser or MLAM who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund, provided certain conditions are met. Additional
information concerning these reduced initial sales charges is set forth in the
Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being sold without an initial sales
charge so that the Fund will receive the full amount of the investor's purchase
payment. Merrill Lynch compensates its financial consultants for selling Class B
shares at the time of purchase from its own funds. The proceeds of the
contingent deferred sales charge and the distribution fee discussed below are
used to defray Merrill Lynch's expenses, including compensating its financial
consultants. The proceeds from the ongoing account maintenance fee are used to
compensate Merrill Lynch for providing continuing account maintenance
activities.
Proceeds from the contingent deferred sales charge 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 shares, such as the payment of compensation to financial consultants for
selling Class B shares, from its own funds. The combination of the contingent
deferred sales charge and the ongoing distribution fee facilitates the ability
of the Fund to sell the Class B shares without a sales charge being deducted at
the time of purchase. 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 contingent deferred sales charge schedule
if such schedule is higher than the deferred sales charge schedule relating to
the Class B shares acquired as a result of the exchange.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
four years of purchase may be subject to a contingent deferred sales charge
("CDSC") at the rates set forth below charged as a percentage of the dollar
amount subject thereto. The charge will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed.
Accordingly, no CDSC will be imposed
19
<PAGE> 22
on increases in net asset value above the initial purchase price. In addition,
no CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions. For the fiscal year ended March 31, 1994, the
Distributor received contingent deferred sales charges of $158,825 with respect
to redemptions of Class B shares, all of which was paid to Merrill Lynch.
The following table sets forth the rates of the CDSC:
<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
YEARS SINCE PURCHASE DOLLAR AMOUNT
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>
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another will be assumed to be made in the
same order as a redemption.
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 through dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to the CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the CDSC is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The CDSC is waived on redemptions of shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account or other
retirement plan or following the death or disability (as defined in the Internal
Revenue Code) of a shareholder.
The CDSC is waived on redemptions of shares in connection with certain
group plans through Merrill Lynch BlueprintSM Program. The CDSC is waived on
redemption of shares by certain eligible 401(a) and eligible 401(k) plans and in
connection with certain group plans placing orders through the Merrill Lynch
BlueprintSM Program. The CDSC is also waived for any Class B shares which are
purchased by an eligible 401(k) or eligible 401(a) plan and are rolled over into
a Merrill Lynch or Merrill Lynch Trust Company custodied Individual Retirement
Account and held in such account at the time of redemption. Additional
information concerning the waiver of the CDSC is set forth in the Statement of
Additional Information.
Distribution Plan. Pursuant to a distribution plan adopted by the Fund
pursuant to Rule 12b-1 under the Investment Company Act (the "Distribution
Plan"), the Fund pays the Distributor an ongoing account maintenance fee and
distribution fee, which are accrued daily and paid monthly, at the annual rates
of 0.25% and 0.75%, respectively, of the average daily net assets of the Class B
shares of the Fund. Pursuant to a
20
<PAGE> 23
subagreement with the Distributor, Merrill Lynch also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and Merrill Lynch for providing
account maintenance services to Class B shareholders. The ongoing distribution
fee compensates the Distributor and Merrill Lynch for providing shareholder and
distribution services and bearing certain distribution-related expenses of the
Fund, including payments to financial consultant for selling Class B shares of
the Fund.
Prior to 1992, the Fund paid the Distributor an ongoing distribution fee,
accrued daily and paid monthly, at the annual rate of 1.0% of average daily net
assets of the Class B shares of the Fund under a distribution plan previously
adopted by the Fund (the "Prior Plan") to compensate the Distributor and Merrill
Lynch for providing account maintenance and distribution-related activities and
services to Class B shareholders. The fee rate payable and the services provided
under the Prior Plan are identical to the aggregate fee rate payable and the
services provided under the Distribution Plan, the difference being that the
account maintenance and distribution services have been unbundled. For the
fiscal year ended March 31, 1994, the Fund paid the Distributor $846,070
pursuant to the Prior Plan, all of which was paid to Merrill Lynch for providing
account maintenance and distribution-related activities and services in
connection with Class B shares. Both the Distribution Plan and the Prior Plan
were designed to permit an investor to purchase Class B shares through dealers
without the assessment of a front-end sales load and at the same time permit the
dealer to compensate its financial consultants in connection with the sale of
the Class B shares. In this regard, the purpose and function of the ongoing
account maintenance and distribution fees under either the Distribution Plan or
the Prior Plan and the CDSC are the same as those of the initial sales charge
with respect to the Class A shares of the Fund in that the deferred sales
charges provide for the financing of the distribution of the Fund's Class B
shares.
The payments under the Distribution Plan are based upon a percentage of
average daily net assets regardless of the amount of expenses incurred and,
accordingly, distribution-related revenues may be more or less than
distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Directors each
year for their consideration in connection with their deliberations as to the
continuance of the Distribution Plan. This information is presented annually as
of December 31 of each year on a "fully allocated accrual" basis and quarterly
on a "direct expense and revenue/cash" basis. On the fully allocated accrual
basis, revenues consist of the account maintenance fees, distribution fees, the
CDSCs and certain other related revenues, and expenses consist of financial
consultant compensation, branch office and regional operation center selling and
transaction processing expenses, advertising, sales promotion and marketing
expenses, corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs and the expenses consist of financial consultant
compensation. At December 31, 1993, the last date at which fully allocated data
is available, the fully allocated accrual expenses incurred by the Distributor
and Merrill Lynch exceeded fully allocated accrual revenues for such period by
approximately $1,170,000 (1.35% of Class B net assets at that date). As of
December 31, 1993, direct cash revenues for the period since commencement of the
offering of Class B shares exceeded direct cash expenses by $406,309 (.47% of
Class B net assets at that date); as of March 31, 1994, direct cash revenues for
the period since the commencement of the offering of Class B shares exceeded
direct cash expenses by $361,762 (.32% of net assets at that date).
The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, and there is no assurance that the Board of Directors of
21
<PAGE> 24
the Fund will approve the continuance of the Distribution Plan from year to
year. However, the Distributor intends to seek annual continuation of the
Distribution Plan. In their review of the Distribution Plan, the Directors will
not be asked to take into consideration expenses incurred in connection with the
distribution of Class A shares or of shares of other funds for which the
Distributor acts as distributor. The account maintenance fee, distribution fee
and the CDSC in the case of Class B shares will not be used to subsidize the
sale of Class A shares.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the Fund's distribution fee and the CDSC but
not the account maintenance fee. As applicable to the Fund, the maximum sales
charge rule limits the aggregate of distribution fee payments and CDSC payable
by the Fund to (1) 6.25% of eligible gross sales of Class B shares (defined to
exclude shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance 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). 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") 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 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. Under certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable under the NASD
formula. In such circumstances, payment in excess of the amount payable under
the NASD formula will not be made.
The following table sets forth comparative information as of March 31, 1994
with respect to the Class B shares of the Fund indicating the maximum allowable
payments that can be made under the NASD
22
<PAGE> 25
maximum sales charge rule and the Distributor's voluntary maximum for the period
October 21, 1988 (commencement of Class B operations) to March 31, 1994:
<TABLE>
<CAPTION>
DATA CALCULATED AS OF MARCH 31, 1994
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------------
ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
----------- ---------- ----------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted............. $91,833,010 $5,739,563 $ 429,053 $6,168,616 $1,394,410 $4,774,207 $845,721
Under Distributor's
Voluntary Waiver.... $91,833,010 $5,739,563 $ 459,165 $6,198,728 $1,394,410 $4,804,319 $845,721
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since October 21, 1988
(commencement of Class B operations) other than shares acquired through
dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to 1992 under the Prior Plan at the
1.0% rate, 0.75% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all full and fractional shares of
the Fund on receipt of a written request in proper form. The redemption price is
the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable to
Class B shares, there will be no charge for redemption if the redemption request
is sent directly to the Transfer Agent. Shareholders liquidating their holdings
will receive upon redemption all dividends reinvested through the date of
redemption. The value of shares at the time of redemption may be more or less
than the shareholder's cost, depending on the market value of the securities
held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., Transfer Agency Operations Department, P.O. Box 45289, Jacksonville,
Florida 32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Operations
Department, 4800 Deer Lake Drive East, Jacksonville, Florida 32246. 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 writing a letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signatures of
all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signatures on the notice must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may
23
<PAGE> 26
require additional documents, such as, but not limited to, trust instruments,
death certificates, appointments as executor or administrator, or certificates
of corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days of receipt of a proper notice of
redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares, which will not exceed 10 days.
REPURCHASE
The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the dealer
receives the request for repurchase prior to the close of business on the New
York Stock Exchange on the day received and is received by the Fund from such
dealer not later than 4:30 P.M., New York time, on the same day. Dealers have
the responsibility of submitting such repurchase requests to the Fund not later
than 4:30 P.M., New York time, in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
contingent deferred sales charge in the case of Class B shares). Securities
firms which do not have selected dealer agreements with the Distributor,
however, may impose a charge on the shareholder for transmitting the notice of
repurchase to the Fund. Merrill Lynch charges its customers a processing fee
(presently $4.85) to confirm a repurchase of shares. Redemptions directly
through the Fund's Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order to repurchase, which right of
rejection might adversely affect shareholders seeking redemption through the
repurchase procedure. A shareholder whose order for repurchase is rejected by
the Fund, however, may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A SHARES
Shareholders who have redeemed their Class A shares have a one-time
privilege to reinstate their accounts by purchasing Class A shares of the
Company at net asset value without a sales charge up to the dollar amount
redeemed. The reinstatement privilege may be exercised by sending a notice of
exercise along with a check for the amount to be reinstated to the Transfer
Agent within 30 days after the date the request for redemption was accepted by
the Transfer Agent or the Distributor. The reinstatement will be made at the net
asset value per share next determined after the notice of reinstatement is
received and cannot exceed the amount of the redemption proceeds. The
reinstatement privilege is a one-time privilege and may be exercised by the
Class A shareholder only the first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place orders
for the Fund through the Merrill Lynch BlueprintSM Program. Full details as to
each of such services, copies of the various plans described below and
instructions as to how to participate in the various
24
<PAGE> 27
services or plans, or to change options with respect thereto, can be obtained
from the Fund, by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements quarterly
from the Transfer Agent showing any reinvestments of dividends and capital gains
distributions activity in the account since the previous statement. Shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestments of dividends and capital gains distributions. A
shareholder may make additions to his Investment Account at any time by mailing
a check directly to the Transfer Agent. Shareholders also may maintain their
accounts through Merrill Lynch. Upon the transfer of shares out of a Merrill
Lynch brokerage account, an Investment Account in the transferring shareholder's
name may be opened at the Transfer Agent. Shareholders considering transferring
their Class A shares from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the Class A shares are to
be transferred will not take delivery of shares of the Fund, a shareholder
either must redeem the Class A shares so that the cash proceeds can be
transferred to the account at the new firm or such shareholder must continue to
maintain an Investment Account at the Transfer Agent for those Class A shares.
Shareholders interested in transferring their Class B shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates from his shares, and then must turn the certificates over to the
new firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred retirement account such as
an individual retirement account from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable contingent
deferred sales charge) 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. Class A and Class B shareholders of the Fund each have
an exchange privilege with certain other mutual funds sponsored by Merrill
Lynch. There is currently no limitation on the number of times a shareholder may
exercise the exchange privilege. The exchange privilege may be modified or
terminated in accordance with the rules of the Securities and Exchange
Commission. Class A shareholders of the Fund may exchange their shares
("outstanding Class A shares") for Class A shares of another fund ("new Class A
shares") on the basis of relative net asset value per Class A share, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the outstanding Class A shares and the sales charge payable at the time of
the exchange on the new Class A shares. Class B shareholders of the Fund may
exchange their shares ("outstanding Class B shares") for Class B shares of
another fund ("new Class B shares") on the basis of relative net asset value per
share, without the payment of any CDSC that might otherwise be due on redemption
of the outstanding Class B 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 deferred sales charge schedule relating to
the new Class B shares. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the Fund's deferred sales charge 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 upon a disposition of the new
Class B shares, the holding period for the outstanding Class B shares is
"tacked"
25
<PAGE> 28
to the holding period of the new Class B shares. Class A and Class B
shareholders of the Fund also may exchange their shares for shares of certain
money market funds, but in the case of an exchange from Class B shares the
period of time that shares are held in a money market fund will not count toward
satisfaction of the holding period requirement for purposes of reducing the
CDSC. Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information. 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 deferred sales charge
schedule relating to the new Class B shares. In addition, Class B shares of the
Fund acquired through use of the exchange privilege will be subject to the
Fund's CDSC schedule if such schedule is higher than the deferred sales charge
schedule relating to the Class B shares of the fund from which the exchange has
been made. The Fund's exchange privilege is modified with respect to purchases
of Class A shares under the Merrill Lynch Mutual Fund Adviser Program. First,
the initial allocation of assets is made under the program. Then, any subsequent
exchange under the program of Class A shares of a fund for Class A 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 fund and the
sales charge payable on the shares of the Fund being acquired in the exchange
under this program.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without sales charge, at the net asset value
per share next determined on the ex-dividend date of such dividend or
distribution. A shareholder may at any time, by written notification or by
telephone (1-(800) MER-FUND) to the Transfer Agent, elect to have subsequent
dividends or both dividends and capital gains distributions paid in cash rather
than reinvested, in which event payment will be mailed on or about the payment
date. No CDSC will be imposed upon redemption of shares issued as a result of
the automatic reinvestment dividends or capital gains distributions. The
Automated Investment Program is not available to shareholders whose shares are
held in a brokerage account with Merrill Lynch (other than a CMA account).
Systematic Withdrawal and Automatic Investment Plans. A Class A
shareholder may elect to receive systematic withdrawal payments from his
Investment Account in the form of payments by check or through automatic payment
by direct deposit to the investor's bank account on either a monthly or
quarterly basis. A Class A shareholder whose shares are held within a CMA, CBA
or Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption Program,
subject to certain conditions. Regular additions of both Class A and Class B
shares may be made to an investor's Investment Account by pre-arranged charges
of $50 or more to his regular bank account.
Investors who maintain CMA accounts may arrange to have periodic
investments made in the Fund in their CMA accounts or in certain related
accounts in amounts of $100 or more through the CMA Automated Investment
Program. The Automatic Investment Program is not available to shareholders whose
shares are held in a brokerage account with Merrill Lynch or to shareholders
participating in retirement plans.
26
<PAGE> 29
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. In executing such transactions,
the Investment Adviser seeks to obtain the best net results for the Fund, taking
into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund does not necessarily pay the lowest
commission or spread available. Transactions with respect to the securities of
small and emerging growth companies in which the Fund invests may involve
specialized services on the part of the broker or dealer and thereby entail
higher commissions or spreads than would be the case with transactions involving
more widely traded securities of more established companies.
The Fund has no obligation to deal with any broker in the execution of
transactions for its portfolio securities. The Fund pays brokerage fees or
commissions to Merrill Lynch in connection with portfolio transactions executed
by Merrill Lynch. Brokers and dealers, including Merrill Lynch, who provide
supplemental investment research to the Investment Adviser may receive orders
for transactions by the Fund. Supplemental investment research received by the
Investment Adviser also may be used by it in servicing its other accounts.
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. The expenses of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental information. Whether or
not a particular broker-dealer sells shares of the Fund neither qualifies nor
disqualifies that broker-dealer to execute transactions for the Fund.
PERFORMANCE DATA
From time to time, the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A and Class B shares in accordance with a formula specified
by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A shares and the CDSC
that would be applicable to a complete redemption of the investment at the end
of the specified period in the case of Class B shares. Dividends paid by the
Fund with respect to Class A and Class B 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 the account maintenance fee and
distribution charges and any incremental transfer agency costs relating to Class
B shares will be borne exclusively by that class. The Fund will include
performance data for both Class A and Class B shares of the Company in any
advertisement or information including performance data of the Fund.
27
<PAGE> 30
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a long period of time. In
advertisements directed to investors whose purchases are subject to reduced
sales charges in the case of Class A shares or waiver of the CDSC in the case of
Class B shares (such as investors in certain retirement plans), performance data
may take into account the reduced, and not the maximum, sales charge or may not
take into account the CDSC and therefore may reflect greater total return since,
due to the reduced sales charges or waiver of the contingent deferred sales
charge, a lower amount of expenses may be deducted. See "Purchase of Shares".
The Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Company will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine and Fortune Magazine. As with other
performance data, performance comparisons should not be considered
representative of the Fund's relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income, if
any. Dividends from such net investment income will be paid semi-annually. All
net realized long-or short-term capital gains, if any, will be distributed to
the Fund's shareholders at least annually. The per share dividends and
distributions on Class B shares will be lower than the per share dividends and
distributions on Class A shares as a result of the distribution and transfer
agency fees applicable with respect to the Class B shares. See "Additional
Information--Determination of Net Asset Value". Dividends and distributions may
be reinvested automatically in shares of the Fund, at the net asset value
without sales charge. Shareholders may elect in writing to receive any such
dividends or distributions, or both, in cash. Dividends and distributions are
taxable to shareholders as discussed below whether they are reinvested in shares
of the Fund or received in cash.
28
<PAGE> 31
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily as
of 4:00 P.M., New York Time, on each day during which the New York Stock
Exchange is open for trading and, under certain circumstances, on other days.
Any assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation. The net asset
value per share is computed by dividing the sum of the value of the securities
held by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued expenses)
by the total number of shares outstanding at such time, rounded to the nearest
cent. Expenses, including the investment advisory fees payable to the Investment
Adviser and the distribution fee payable to the Distributor, are accrued daily.
The per share net asset value of the Class B shares generally will be lower than
the per share net asset value of the Class A shares reflecting the daily expense
accruals of the account maintenance, distribution and transfer agency fees
applicable with respect to the Class B shares. It is expected, however, that the
per share net asset value of the two classes will tend to converge immediately
after the payment of dividends or distributions which will differ by
approximately the amount of the expense accrual differential between the
classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued or, lacking any sales, at the mean between closing bid and asked prices.
Securities traded in the NASDAQ National Market System are valued at the last
sale price, or lacking any sales, at the closing bid price. Securities traded in
other over-the-counter markets are valued at the most recent bid prices as
obtained from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A
and Class B shareholders (together, the "shareholders"). The Fund intends to
distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
("capital gain dividends") are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
distributions. A portion of the
29
<PAGE> 32
Fund's ordinary income dividends may be eligible for the dividends received
deduction allowed to corporations under the Code, if certain requirements are
met. If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as being
paid by the Fund and received by its shareholders on December 31 of the year in
which the dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing the basis of each shareholder's Fund
shares and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's tax basis in Fund shares (assuming
shares were held as a capital asset).
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class A
shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether under the Automatic
Investment Program or otherwise) within a 61-day period beginning 30 days before
and ending 30 days after the date that the shares are disposed of. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the
30
<PAGE> 33
pertinent Code sections and the Treasury regulations promulgated thereunder. The
Code and the Treasury regulations are subject to change by legislative or
administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on 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.
ORGANIZATION OF THE FUND
The Fund, a diversified, open-end investment company, was incorporated
under Maryland law on February 23, 1978. It has an authorized capital of
200,000,000 shares of Common Stock, par value $0.10 per share, divided into two
classes, designated Class A and Class B Common Stock, each of which consists of
100,000,000 shares. Both Class A and Class B Common Stock represent an interest
in the same assets of the Fund and are identical in all respects except that the
Class B shares bear certain expenses related to the distribution of such shares
and have exclusive voting rights with respect to matters relating to such
distribution expenditures. See "Purchase of Shares." The Fund has received an
order from the Securities and Exchange Commission (the "Commission") permitting
the issuance and sale of two classes of Common Stock. The Directors of the Fund
may classify and reclassify the shares of the Fund into additional classes of
Common Stock at a future date. The creation of additional classes would require
an additional order from the Commission. There is no assurance that such an
additional order will be issued.
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 matters submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Also, the by-laws of the Fund require that a special
meeting of stockholders be held on the written request of at least 10% of the
outstanding shares of the Fund entitled to vote at such meeting. Voting rights
for Directors are not cumulative. Shares issued are fully paid and
non-assessable and have no preemptive or conversion rights. Each share of Class
A and Class B Common Stock is entitled to participate equally in dividends and
distributions declared by the Fund and in the net assets of the Fund upon
liquidation or dissolution after satisfaction of outstanding liabilities, except
as noted above, the Class B shares bear certain expenses related to the
distribution of such shares.
31
<PAGE> 34
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Financial Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
32
<PAGE> 35
MERRILL LYNCH SPECIAL VALUE FUND, INC.--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING TOLL FREE (800) 637-3766.
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase ........ Class A shares or ........
Class B shares (choose one) of Merrill Lynch Special Value Fund, Inc. and
establish an Investment Account as described in the Prospectus.
Basis for establishing an Investment Account:
A. I enclose a check for $...... payable to Financial Data Services, Inc.,
as an initial investment (minimum $1,000) (subsequent investments $50 or
more). I understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is received by
you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation outlined in the Statement of
Additional Information:
1. ........................... 4. ...............................
2. ........................... 5. ...............................
3. ........................... 6. ...............................
(Please list all Funds. Use a separate sheet of paper if necessary.)
Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------- -------------------------------------
Distribution Elect / / reinvest dividends Elect / / reinvest capital gains
Options One / / pay dividends in cash One / / pay capital gains in cash
------------------------------------- -------------------------------------
</TABLE>
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
------------------------
<TABLE>
<S> <C>
(PLEASE PRINT) ---------------------------
Name........................................
First Name Initial Last Name ---------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner
(if any)...................................
First Name Initial Last Name
Address......................................
............................................. .............. , 19....
(Zip Code) Date
</TABLE>
Occupation.......................... Name and Address of Employer
...................................
...................................
...................................
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security No. or Taxpayer Identification No. and (2) that I am not
subject to backup withholding (as discussed in the Prospectus under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING, AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
Signature of Owner ............. Signature of Co-Owner (if any) ...............
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- --------------------------------------------------------------------------------
2. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
................, 19.....
Date of initial purchase
Gentlemen:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Special Value Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds Distributor,
Inc. acts as a distributor over the next 13-month period which will equal or
exceed:
/ /$10,000 / /$25,000 / /$50,000 / /$100,000 / /$250,000 / /$1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund's Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Special Value Fund, Inc. held as security.
<TABLE>
<S> <C> <C>
By:............................. ....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
(1)Name.......................... (2)Name..................................
A-1
<PAGE> 36
MERRILL LYNCH SPECIAL VALUE FUND, INC.--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
3. SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch Special Value Fund, Inc., at cost or
current offering price. Begin systematic withdrawal on ..............., 19....
(date)
Withdrawals to be made either (check one) / / Monthly / / Quarterly*
*Quarterly withdrawals are made on the 24th day of March, June, September and
December.
Specify withdrawal amount (check one): / / $ .................. or
/ / .........% of the current value of Class A shares in the account.
Specify withdrawal method: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
- --------------------------------------------------------------------------------
(A) I HEREBY AUTHORIZE PAYMENT BY CHECK
Draw checks payable
(check one)
/ / as indicated in Item 1.
/ / to the order of............................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (Please Print)........................................................
Address.........................................................................
Signature of Owner..............................................................
Signature of Co-Owner (if any)..................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND (IF
NECESSARY) DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT.
Specify type of account (check one): / / checking / / savings
I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.
Name on your Account............................................................
Bank............................................................................
Bank #................. Account #...............................................
Bank Address....................................................................
Signature of Depositor ........................... Date.........................
Signature of Depositor (if joint account).......................................
NOTE: If Automatic Direct Deposit is elected, your blank, unsigned check marked
"VOID" or a deposit slip from your savings account shall accompany this
Application.
- --------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase ..... Class A shares or ..... Class B shares (choose one)
of Merrill Lynch Special Value Fund, Inc. subject to the terms set forth below.
- --------------------------------------------------------------------------------
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw checks or an ACH debit each month on my bank
account for investment in Merrill Lynch Special Value Fund, Inc. as indicated
below:
Amount of each check or ACH debit $............................................
Account No.....................................................................
Please date and invest checks or draw ACH debits on the 20th day
of each month beginning........................................................
(Month)
or as soon thereafter as possible.
I agree that you are preparing these checks or drawing these debits voluntarily
at my request and that you shall not be liable for any loss arising from any
delay in preparing or failure to prepare any such check or debit. If I change
banks or desire to terminate or suspend this program, I agree to notify you
promptly in writing.
I further agree that if a check or debit is not honored upon presentation,
Financial Data Services, Inc. is authorized to discontinue immediately the
Automatic Investment Plan and to liquidate sufficient shares held in my account
to offset the purchase made with the returned check or dishonored debit.
<TABLE>
<S> <C>
........................ ...............................................
Date Signature of Depositor
...............................................
Signature of Depositor
(If joint account, both must sign)
</TABLE>
AUTHORIZATION TO HONOR CHECKS OR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City....................... State.......... Zip Code........
As a convenience to me, I hereby request and authorize you to pay and charge to
my account checks or ACH debits drawn on my account by and payable to Financial
Data Services, Inc. I agree that your rights in respect to each such check or
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
check or debit. I further agree that if any such check or debit be dishonored,
whether with or without cause and whether intentionally or inadvertently, you
shall be under no liability.
<TABLE>
<S> <C>
...................... ...........................................
Date Signature of Depositor
...................... ...........................................
Bank Account Number Signature of Depositor
(If joint account, both must sign)
</TABLE>
NOTE: If Automatic Investment Plan is elected, your blank, unsigned check marked
"VOID" should accompany this Application.
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
................................................................................
................................................................................
................................................................................
................................................................................
................................................................................
This form when completed should be mailed to:
Merrill Lynch Special Value Fund, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Operations Department
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our
agent in connection with transactions under this authorization form and
agree to notify the Distributor of any purchases made under a Letter of
Intention or Systematic Withdrawal Plan. We guarantee the Shareholder's
signature.
...........................................................................
Dealer Name and Address
By.........................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
------- ----------
------- ---------- ..................................
Branch-Code F/C No. F/C Last Name
------- ------------
------- ------------
Dealer's Customer A/C No.
</TABLE>
A-2
<PAGE> 37
INVESTMENT ADVISER
Fund Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
The Bank of New York
1 Wall Street
New York, New York 10286
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Operations Department
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 38
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table............................... 2
Alternative Sales Arrangements.......... 4
Financial Highlights.................... 6
Investment Objective and Policies....... 7
Management of the Fund.................. 14
Board of Directors.................... 14
Management and Advisory Arrangements.... 15
Transfer Agency Services.............. 15
Purchase of Shares...................... 16
Alternative Sales Arrangements.......... 17
Initial Sales Charge Alternative--Class
A Shares.............................. 18
Deferred Sales Charge Alternative--Class
B Shares.............................. 19
Limitations on the Payment of Deferred
Sales Charges......................... 22
Redemption of Shares.................... 23
Redemption............................ 23
Repurchase............................ 24
Reinstatement Privilege--Class A
Shares................................ 24
Shareholder Services.................... 24
Portfolio Transactions and Brokerage.... 27
Performance Data........................ 27
Additional Information.................. 28
Dividends and Distributions........... 28
Determination of Net Asset Value...... 29
Taxes................................. 29
Organization of the Fund.............. 31
Shareholder Reports................... 32
Shareholder Inquiries................. 32
Authorization Form...................... A-1
Code #10044-0794
</TABLE>
Merrill Lynch
Special Value Fund, Inc.
Prospectus
July , 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 39
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH SPECIAL VALUE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
---------------------------------
Merrill Lynch Special Value Fund, Inc. (the "Fund") is a diversified,
open-end investment company seeking long-term growth of capital by investing in
a diversified portfolio of securities, primarily common stocks, of relatively
small companies which management of the Fund believes have special investment
value and emerging growth companies regardless of size. Such companies are
selected by management on the basis of their long-term potential for expanding
their size and profitability or for gaining increased market recognition for
their securities. Current income is not a factor in such selection.
The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus a sales charge
which, at the election of the purchaser, may be imposed (i) at the time of
purchase (the "Class A shares"), or (ii) on a deferred basis (the "Class B
shares"). These alternatives permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.
Investors should understand that the purpose and function of the deferred sales
charges with respect to the Class B shares are the same as those of the initial
sales charge with respect to the Class A shares. Each share of Class A and Class
B represents identical interests in the investment portfolio of the Fund and has
the same rights, except that Class B shares bear the expenses of the ongoing
account maintenance and distribution fees and certain other costs resulting from
the deferred sales charge arrangement. The two classes also have different
exchange privileges.
---------------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated July
28, 1994 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
---------------------------------
FUND ASSET MANAGEMENT, L.P.--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
---------------------------------
The date of this Statement of Additional Information is July 28, 1994.
<PAGE> 40
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of capital
by investing in a diversified portfolio of securities, primarily common stock,
of relatively small companies which management of the Fund believes have special
investment value and emerging growth companies regardless of size. Reference is
made to "Investment Objective and Policies" in the Prospectus for a discussion
of the investment objective and policies of the Fund.
The Fund emphasizes investments in companies that, due to the size and
kinds of markets which they serve, are less susceptible than large companies to
intervention from the Federal government by means of price controls, regulations
or litigation.
It is anticipated that, in the immediate future, not more than 30% of the
Fund's total assets (taken at market value at the time of their acquisition)
will be invested in the securities of foreign issuers. Investments in securities
of foreign issuers involve certain risks, including fluctuations in foreign
exchange rates, future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. These risks are described more fully in the Fund's Prospectus
under the caption "Investment Objective and Policies".
The securities in which the Fund invests often will be traded only in the
over-the-counter market or on a regional securities exchange and may not be
traded every day or in the volume typical of trading on a national securities
exchange. As a result, the disposition by the Fund of portfolio securities to
meet redemptions or otherwise may require the Fund to sell these securities at a
discount from market prices or during periods when, in management's judgment,
such disposition is not desirable or to make many small sales over a lengthy
period of time.
While it is the policy of the Fund generally not to engage in trading for
short-term gains, the management will effect portfolio transactions without
regard to holding period if, in its judgment, such transactions are advisable in
light of a change in circumstances of a particular company or within a
particular industry or in general market, economic or financial conditions. The
annual portfolio turnover rate of the Fund is calculated by dividing the lesser
of the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of the securities in the
portfolio during the year. The rates of portfolio turnover for the years ended
March 31, 1993 and 1994 were 42.25% and 68.70%, respectively.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Other Investment Policies and Practices--Portfolio Strategies
Involving Options and Futures" in the Prospectus for information with respect to
various portfolio strategies involving options and futures. The Fund may seek to
increase its return through the use of options on portfolio securities and to
hedge its portfolio against adverse movements in the equity, debt and currency
markets. The Fund may write (i.e., sell) covered put and call options on its
portfolio securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and stock futures and
financial futures, and related options on such futures. The Fund may deal in
forward foreign exchange transactions, foreign currency options and futures and
related options on such futures. Each of such portfolio strategies is described
in the Prospectus. Although certain risks are involved in options and futures
transactions (as discussed on the Prospectus and below), Fund
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<PAGE> 41
Asset Management, L.P. (the "Investment Adviser"), believes that, because the
Fund will (i) write only covered options on portfolio securities and (ii) engage
in other options and futures transactions only for hedging purposes, the options
and futures portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of options and futures
transactions. While the Fund's use of hedging strategies is intended to reduce
the volatility off the net asset value of Fund shares, the Fund's net asset
value will fluctuate. There can be no assurance that the Fund's hedging
transactions will be effective. Furthermore, the Fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities where movements on the equity markets, interest rates or
currency exchange rates occur. The following is further information relating to
portfolio strategies involving options and futures the Fund may utilize.
Writing Covered Options. The Fund may write (i.e., sell) covered call
options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where the Fund, in return for a premium, gives another party
a right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. The principal reason for writing call
options is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
price. In addition, the Fund's ability to sell the underlying security will be
limited while the option is in effect unless the Fund effects a closing purchase
transaction. A closing purchase transaction cancels out the Fund's position as
the writer of an option by means of an offsetting purchase of an identical
option prior to the expiration of the option it has written. Covered call
options serve as a particular hedge against the price of the underlying security
declining.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security.
The Fund may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund will write only covered put options which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies with a securities depository with a value equal
to or greater than the exercise price of the underlying securities. By writing a
put, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of the
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written.
Options referred to herein and in the Fund's Prospectus may be options
traded on foreign securities exchanges. An options position may be closed only
on an exchange which provides a secondary market for an option of the same
series. If a secondary market does not exist, it might not be possible to effect
closing transactions in particular options, with the result, in the case of a
covered call option, that the Fund will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
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<PAGE> 42
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
the Options Clearing Corporation (the "Clearing Corporation") may not, at all
times, be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
The Fund may also enter into over-the-counter options transactions ("OTC
options"), which are two party contracts with prices and terms negotiated
between the buyer and seller. The staff of the Commission has taken the position
that OTC options and the assets used as cover for written OTC options are
illiquid securities.
Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund may purchase
either exchange-traded options or OTC options. The Fund will not purchase
options on securities (including stock index options discussed below) if as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund may engage in transactions in stock index options and
futures and financial futures, and related options on such futures. Set forth
below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security, or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the
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<PAGE> 43
performance of both the purchaser and seller under the futures contract.
Subsequent payments to and from the broker, called "variation margin", are
required to be made on a daily basis as the price of the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "mark to the market". At any time prior to the
settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the broker, and the
purchaser realizes a loss or gain. In addition, a nominal commission is paid on
each completed sale transaction.
An order has been obtained from the Commission exempting the Fund from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940 (the "Investment Company Act") in connection with its strategy of investing
in futures contracts. Section 17(f) relates to the custody of securities and
other assets of an investment company and may be deemed to prohibit certain
arrangements between the Fund and commodities brokers with respect to initial
and variation margin. Section 18(f) of the Investment Company Act prohibits an
open-end investment company such as the Fund from issuing a "senior security"
other than a borrowing from a bank. The staff of the Commission has in the past
indicated that a futures contract may be a "senior security" under the
Investment Company Act.
Foreign Currency Hedging. Generally, the foreign exchange transactions of
the Fund will be conducted on a spot (i.e., cash basis), at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. The
Fund may deal in forward foreign exchange among currencies of the different
countries in which it may invest as a hedge against possible variations in the
foreign exchange rate among these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not speculate in forward foreign
exchange. The Fund may not position hedge with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. The Fund will enter into such
transactions only to the extent, if any, deemed appropriate by the Investment
Adviser. The Fund will not enter into a forward contract with a term of more
than one year.
The Fund may purchase or sell listed or over-the-counter ("OTC") foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to hedges on
non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but
not yet delivered, or committed or anticipated to be purchased by the Fund. As
an illustration, the Fund may use such techniques to hedge the stated value in
U.S. dollars of an investment in a pound sterling denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of pounds for dollars at a specified
price by a future date. To the extent the hedge is successful, a loss in the
value of the pound relative to the dollar will tend to be offset by an increase
in the value of the put option. To offset in whole or part the cost of acquiring
such a put option, the Fund may also sell a call option which, if
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<PAGE> 44
exercised, requires it to sell a specified amount of pounds for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the pound to the
dollar. The Investment Adviser believes that "straddles" of the type which may
be utilized by the Fund constitute hedging transactions and are consistent with
the policies described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures and movements in the prices of the securities
and currencies which are the subject of the hedge. If the prices of the options
and futures move more or less than the prices of the hedged securities or
currencies, the Fund will experience a gain or loss which will not be completely
offset by movements in the prices of the securities and currencies which are the
subject of the hedge. The successful use of options, futures and currency
transactions also depends on the Investment Adviser's ability to predict
correctly price movements in the market involved in a particular options or
futures transaction.
Prior to exercise or expiration, an exchange-traded option or futures
position can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into options or futures
transactions on an exchange only if there appears to be a liquid secondary
market for such options or futures. However, there can be no assurance that a
liquid secondary market will exist for any particular call or put option or
futures contract at any specific time. Thus, it may not be possible to close an
option or futures position. The Fund will acquire only OTC options for which
management believes the Fund can receive on each business day at least two
independent bids or offers. In the case of a futures position or an option on a
futures position written by the Fund in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to take or make delivery of the security underlying futures contracts it holds.
The inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. The risk of loss from investing in futures transactions is theoretically
unlimited.
The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the
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<PAGE> 45
maximum number of contracts which any person may trade on a particular trading
day. An exchange may order the liquidation of positions found to be in violation
of these limits and it may impose other sanctions or restrictions. The
Investment Adviser does not believe that these trading and positions limits will
have any adverse impact on the portfolio strategies for hedging the Fund's
portfolio.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose means the lesser of
(a) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (b) more than 50% of the outstanding
shares). The Fund may not:
1. Make investments for the purpose of exercising control or management.
2. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved and only if immediately thereafter not more than 10% of
the Fund's total assets, taken at market value, would be invested in such
securities.
3. Purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
4. Purchase or sell commodities or commodity contracts, except that the
Fund may deal in forward foreign exchange between currencies of the different
countries in which it may invest and purchase and sell stock index and currency
options, stock index futures, financial futures and currency futures contracts
and related options on such futures.
5. Purchase any securities on margin, except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities. (The deposit or payment by the Fund of initial or
variation margin in connection with futures or related options transactions, if
applicable, is not considered the purchase of a security on margin.)
6. Make loans to other persons (except as provided in (7) below); provided
that for purposes of this restriction the acquisition of a portion of an issue
of publicly distributed bonds, debentures, or other corporate debt securities
and investment in Government obligations, short-term commercial paper,
certificates of deposit and bankers' acceptances shall not be deemed to be the
making of a loan (the acquisition of bonds, debentures, or other corporate debt
securities which are not publicly distributed is considered to be the making of
a loan under the Investment Company Act.
7. Lend its portfolio securities in excess of 20% of its total assets,
taken at market value; provided that such loans shall be made in accordance with
the guidelines set forth below.
8. Borrow amounts in excess of 5% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary or
emergency purposes.
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<PAGE> 46
9. Mortgage, pledge, hypothecate or in any manner transfer as security for
indebtedness any securities owned or held by the Fund except as may be necessary
in connection with borrowings mentioned in (8) above, and then such mortgaging,
pledging or hypothecating may not exceed 10% of its total assets, taken at
market value. [In order to comply with certain state statutes the Fund will not,
as a matter of operating policy, mortgage, pledge or hypothecate its portfolio
securities to the extent that at any time the percentage of the value of pledged
securities plus the maximum sales charge will exceed 10% of the value of the
Fund's shares at the maximum offering price.] (For the purpose of this
restriction and restriction (8) above, collateral arrangements with respect to
the writing of options, futures contracts, options on futures contracts, and
collateral arrangements with respect to initial and variation margin are not
deemed to be a pledge of assets, and neither such arrangements nor the purchase
and sale of options, futures or related options are deemed to be the issuance of
a senior security.)
10. Invest in securities which cannot be readily resold to the public
because of legal or contractual restrictions or for which no readily available
market exists if, regarding all such securities, more than 5% of its total
assets, taken at market value, would be invested in such securities.
11. Underwrite securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling portfolio
securities.
12. Purchase or sell interests in oil, gas or other mineral exploration or
development programs.
13. Invest in securities of issuers having a record, together with
predecessors, of less than three years of continuous operation if more than 5%
of the total assets, taken at market value, would be invested in such
securities.
14. Invest in warrants if at the time of acquisition such investments,
valued at the lower of cost or market value, would exceed 5% of its total
assets, taken at market value, provided that for purposes of this investment
restriction, investments in warrants that are not listed on the New York or
American Stock Exchange may not exceed 2% of the Fund's total assets. In
addition, for purposes of this restriction, warrants acquired by the Fund in
units or attached to securities may be deemed to be without value.
15. Purchase or retain the securities of an issuer, if those individual
officers and directors of the Fund, Merrill Lynch Asset Management, L.P.
("MLAM"), or any affiliate thereof each owning beneficially more than 1/2 of 1%
of the securities of such issuer own in the aggregate more than 5% of the
securities of such issuer.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch except pursuant to an
exemptive order or otherwise in compliance with the provisions of the Investment
Company Act and the rules and regulations thereunder. Included among such
restricted transactions are purchases from or sales to Merrill Lynch of
securities in transactions in which it acts as principal and purchases of
securities from underwriting syndicates of which Merrill Lynch is a member.
Lending of Portfolio Securities. Subject to investment restriction (7)
above, the Fund may from time to time lend securities from its portfolio to
brokers, dealers and financial institutions and receive collateral in cash or
securities issued or guaranteed by the United States Government which will be
maintained at all times in amounts equal to at least 100% of the current market
value of the loaned securities. Such cash collateral will be invested in
short-term securities, which will increase the current income of the Fund. Such
loans will be
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<PAGE> 47
terminable at any time. The Fund will have the right to regain record ownership
of loaned securities to exercise beneficial rights such as voting rights,
subscription rights and rights to dividends, interest or other distributions.
The Fund may pay reasonable fees to persons unaffiliated with the Fund for
services in arranging such loans.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL--President and Director(1)(2)--President and Chief Investment
Officer of the Investment Adviser since 1977; President of MLAM since 1977, and
Chief Investment Officer since 1976; President and Director of Princeton
Services, Inc. ("Princeton Services") since 1993; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML&Co.") since 1990; Executive Vice President of
Merrill Lynch since 1990 and Senior Vice President of Merrill Lynch from 1985 to
1990; and Director of Merrill Lynch Funds Distributor (the "Distributor").
DONALD CECIL--Director(2)--1114 Avenue of the Americas, New York, New York
10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; and General Partner of Cumberland Associates (asset
management company) from 1970 to 1982; Member of Institute of Chartered
Financial Analysis; Member and Chairman of Westchester County (N.Y.) Board of
Transportation.
M. COLYER CRUM--Director(2)--Soldiers Field Road, Boston, Massachusetts
02163. James R. Williston Professor of Investment Management, Harvard Business
School, since 1971; Director of Cambridge Bancorp, Copley Properties, Inc. and
Sun Life Assurance Company of Canada.
EDWARD H. MEYER--Director(2)--777 Third Avenue, New York, New York 10017.
President Grey Advertising Inc. since 1968, Chief Executive Officer since 1990
and Chairman of the Board of Directors since 1972; Director of The May
Department Stores Company, Bowne & Co., Inc., Harman International Industries,
Inc. and Ethan Allen Interiors, Inc.
JACK B. SUNDERLAND--Director(2)--P.O. Box 1177, Scarsdale, New York 10583.
President and Director of American Independent Oil Company (an energy company)
since 1987; Chairman of Murexco Petroleum, Inc. (an energy company) from 1981 to
1988; Member of Council on Foreign Relations since 1971; President, Director and
Chief Executive Officer of Coroil, Inc. (an energy company) from 1979 to 1986.
J. THOMAS TOUCHTON--Director(2)--Suite 3405, One Tampa City Center, Tampa,
Florida 33602. Managing Partner of The Witt-Touchton Company and its predecessor
The Witt Co. (a private investment partnership) since 1972; Trustee Emeritus of
Washington and Lee University; Director of TECO Energy, Inc. (an electric
utility holding company).
TERRY K. GLENN--Executive Vice President(1)(2)--Executive Vice President of
the Investment Adviser and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President and Director of the
Distributor since 1986.
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<PAGE> 48
NORMAN R. HARVEY--Senior Vice President(1)(2)--Senior Vice President of the
Investment Adviser and MLAM since 1982; Senior Vice President of Princeton
Services since 1993.
DENNIS W. STATTMAN--Vice President(1)--Vice President of MLAM since 1989
and associated with MLAM since 1989; Vice President of Meridian Management
Company from 1984 to 1989.
DONALD C. BURKE--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche from 1981 to 1990.
GERALD M. RICHARD--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Investment Adviser and MLAM since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993; Vice President of the Distributor since 1981
and Treasurer of the Distributor since 1984.
MARK B. GOLDFUS--Secretary(1)(2)--Vice President of the Investment Adviser
and MLAM since 1985.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director or officer of certain other
investment companies for which the Investment Adviser or MLAM acts as
investment adviser.
At June 1, 1994, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares of
the Fund. At that date, Mr. Zeikel, an officer and a Director of the Fund, and
the officers of the Fund owned less than 1/4 of 1% of the outstanding Common
Stock of ML&Co., Inc.
Pursuant to the terms of the Fund's investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement"), the Investment Adviser
pays all compensation of officers and employees of the Fund as well as the fees
of all Directors of the Fund who are affiliated persons of the Investment
Adviser or any of its affiliates. The Fund pays each unaffiliated Director a fee
for each meeting attended and pays all Directors' actual out-of-pocket expenses
relating to attendance at meetings. The Fund also compensates members of the
Audit Committee of the Board of Directors, which consists of all of the
unaffiliated Directors. Fees and expenses paid to the unaffiliated Directors
aggregated $43,898 for the fiscal year ended March 31, 1994.
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<PAGE> 49
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
The Investment Advisory Agreement provides that, subject to the direction
of the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors. The Investment Adviser
provides the portfolio managers for the Fund, who consider analyses from various
sources, make the necessary investment decisions and place transactions
accordingly. The Investment Adviser also is obligated to perform certain
administrative and management services for the Fund and to provide all the
office space, facilities, equipment and personnel necessary to perform its
duties under the Investment Advisory Agreement.
Securities held by the Fund also may be held by or be appropriate
investments for other funds for which the Investment Adviser or MLAM acts as an
adviser or by investment advisory clients of MLAM. Because of different
investment objectives or other factors, a particular security may be bought for
one or more clients when one or more clients are selling the same security. If
purchases or sales of securities for the Fund or other funds for which the
Investment Adviser or MLAM acts as investment adviser or for their advisory
clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or MLAM during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
As compensation for its services to the Fund, the Investment Adviser
receives monthly compensation at the annual rate of 0.75% of the average daily
net assets of the Fund. California imposes limitations on the expenses of the
Fund. These expense limitations require that the Investment Adviser reimburse
the Fund if, during the Fund's fiscal year, ordinary operating expenses exceed
2.5% of the Fund's first $30 million of average daily net assets, 2.0% of the
next $70 million of average daily net assets and 1.5% of the remaining average
daily net assets. Expenses not covered by this limitation are interest, taxes,
brokerage commissions and other items such as extraordinary legal expenses. No
fee payment will be made to the Investment Adviser during any fiscal year which
will cause such expenses to exceed the pro rata expense limitation at the time
of such payment. For the fiscal years ended March 31, 1992, 1993 and 1994, the
Investment Adviser earned fees of $469,018, $735,344 and $1,179,244,
respectively, from the Fund.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the fees of all Directors of the Fund who are affiliated persons of ML&Co. or
any of its affiliates. The Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, taxes, expenses for legal
and auditing services, costs of printing proxies, stock certificates,
shareholders reports and prospectuses and statements of additional information
(except to the extent paid by the Distributor), charges of the custodian and the
transfer agent, expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under Federal and state
securities laws, fees and expenses of unaffiliated Directors, accounting and
pricing costs (including the daily calculation of net asset value),
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<PAGE> 50
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 pays certain of the expenses of the Fund in connection
with the continuous offering of Fund Shares. See "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares--Distribution Plan".
Duration and Termination. Unless earlier terminated as described below,
the Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B shares bear the expenses of the ongoing account maintenance and distribution
fees relating to Class B shares, the deferred sales arrangements and any
expenses (including incremental transfer agency costs) resulting from such sales
arrangements, and have exclusive voting rights with respect to the Rule 12b-1
distribution plan pursuant to which the account maintenance fee and the
distribution fee are paid. The two classes also have different exchange
privileges. See "Shareholder Services--Exchange Privilege".
The Fund has entered into separate distribution agreements with Merrill
Lynch Funds Distributor, Inc. (the "Distributor") in connection with the
continuous offering of Class A and Class B shares of the Fund (the "Distribution
Agreements"). The Distribution Agreements obligate the Distributor to pay
certain expenses in connection with the offering of the separate 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 requirement and termination
provisions as the Investment Advisory Agreement described above.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
For the fiscal years ended March 31, 1992, 1993 and 1994, $163,657,
$253,499 and $162,426, respectively, was received by the Distributor as sales
charges on Class A shares sold, of which $156,056, $240,395 and $156,666,
respectively, was paid to Merrill Lynch as a selected dealer. For information as
to brokerage commissions received by Merrill Lynch, see "Portfolio Transactions
and Brokerage".
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<PAGE> 51
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company", as that
term is defined in the Investment Company Act, but does not include purchases by
any such company which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other mutual funds advised by MLAM or the Investment Adviser (the "Eligible
Class A Shares") are offered at net asset value to shareholders of certain
closed-end funds advised by MLAM or the Investment Adviser who 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. First,
the sale of the closed-end fund shares must be made through Merrill Lynch and
the net proceeds therefrom must be immediately reinvested in Eligible Class A
shares. Second, the closed-end fund shares must have been either 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.
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
Class A shares of the Fund at the offering price applicable to the total of (a)
the dollar amount 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 the Class A and Class B shares of the Fund and of any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or 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.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $10,000 or more of the Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor made within a thirteen-month
period starting with the first purchase pursuant to a Letter of Intention in the
form provided in the Prospectus. The Letter of Intention is available only to
investors whose accounts are maintained at the Fund's Transfer Agent. The Letter
of Intention is not available to employee benefit plans for which Merrill Lynch
provides plan participant, record-keeping services. The Letter of Intention is
not a binding obligation to purchase any amount of Class A shares, however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a
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<PAGE> 52
subsequent Letter of Intention executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. The
value of Class A shares of the Fund and of other investment companies with an
initial sales charge or a deferred sales charge for which the Distributor acts
as the distributor presently held, at cost or maximum offering price (whichever
is higher), on the date of the first purchase under the Letter of Intention, may
be included as a credit toward the completion of such Letter but the reduced
sales charge applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not equal the amount
stated in the Letter of Intention (minimum of $10,000), 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 shares purchased at the
reduced rate and the sales charge applicable to the shares actually purchased
through the Letter. Class A shares equal to five percent of the intended amount
will be held in escrow during the thirteen-month period (while remaining
registered in the name of the purchaser) for this purpose. The first purchase
under the Letter of Intention must be at least five percent of the dollar amount
of such Letter. If a purchase during the term of such Letter would otherwise be
subject to a further reduced sales charge based on the right of accumulation,
the purchaser will be entitled on that purchase and subsequent purchases to the
reduced percentage sales charge which would be applicable to a single purchase
equal to the total dollar value of the Class A shares then being purchased under
such Letter, but there will be no retroactive reduction of the sales charges on
any previous purchase. The value of any shares redeemed or otherwise disposed of
by the purchaser prior to termination or completion of the Letter of Intention
will be deducted from the total purchases made under such Letter. An exchange
from Merrill Lynch Government Fund, Merrill Lynch Institutional Fund, Merrill
Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund, Merrill
Lynch Treasury Fund, Merrill Lynch Institutional Tax-Exempt Fund or Merrill
Lynch U.S.A. Government Reserves into the Fund that creates a sales charge will
count toward completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint SM Program. Class A shares of the Fund are offered
to participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). The
Blueprint program is directed to small investors, group IRAs and participants in
certain affinity groups such as credit unions and trade associations. Investors
placing orders to purchase Class A shares of the Fund through Blueprint will
acquire the Class A shares at net asset value plus a sales charge calculated in
accordance with the Blueprint sales charge schedule (i.e., up to $300 at 5.5%,
from $300.01 to $5,000 at 4.5% plus $3.00 and $5,000.01 or more at the standard
sales charge rates disclosed in the Prospectus). In addition, Class A shares of
the Fund are being offered at net asset value plus a sales charge of 1/2 of 1%
for corporate or group IRA programs placing orders to purchase their Class A
shares through Blueprint. Services, including the exchange privilege, available
to Class A investors through Blueprint, however, may differ from those available
to other investors in Class A shares. Orders for purchases and redemptions of
Class A 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.
Employer Sponsored Retirement or Savings Plans. Class A shares are offered
at net asset value to employer sponsored retirement or savings plans, such as
tax qualified retirement plans within the meaning of Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), deferred compensation
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<PAGE> 53
plans within the meaning of Sections 403(b) and 457 of the Code, other deferred
compensation arrangements, VEBA plans, and non-qualified After-Tax Savings and
Investment programs maintained on the Merrill Lynch Group Employee Services
system (herein referred to as "Employer Sponsored Retirement or Savings
Plan(s)"), provided the Employer Sponsored Retirement or Savings Plan has $5
million or more in existing plan assets initially invested in portfolios, mutual
funds or trusts advised by the Investment Adviser either directly or through an
affiliate. Class A shares are also offered at net asset value to Employer
Sponsored Retirement or Savings Plans, provided the plan has accumulated $5
million or more in existing plan assets invested in mutual funds advised by the
Investment Adviser charging a front end sales charge or contingent deferred
sales charge. In either case, assets of Employer Sponsored Retirement or Savings
Plans sponsored by the same sponsor or an affiliated sponsor may be aggregated.
The Class A share reduced load breakpoints also apply to these aggregated
assets. Employer Sponsored Retirement or Savings Plans are also offered Class A
shares at net asset value, provided such plan initially has 1,000 or more
employees eligible to participate in the plan. Employees eligible to participate
in Employer Sponsored Retirement or Savings Plans of the same sponsoring
employer or its affiliates may be aggregated. Tax qualified retirement plans
within the meaning of Section 401(a) of the Code meeting any of the foregoing
requirements, and which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a wide
range of investments including individual corporate equities and other
securities in addition to mutual fund shares) by the Merrill Lynch Blueprint SM
Program, are offered Class A shares at a price equal to net asset value per
share plus a reduced sales charge of 0.50%. Any Employer Sponsored Retirement or
Savings Plan which does not meet the above-described qualifications to purchase
Class A shares at net asset value has the option of purchasing Class A shares at
the sales charge schedule disclosed in the Prospectus, or if the Employer
Sponsored Retirement or Savings Plan is a tax qualified retirement plan and
meets the specified requirements (see "Redemption of Shares--Contingent Deferred
Sales Charge--Class B Shares"), then it may purchase Class B shares with a
waiver of the CDSC upon redemption. The minimum initial and subsequent purchase
requirements are waived in connection with all the above-referenced Employer
Sponsored Retirement or Savings Plans.
Purchase Privileges of Certain Persons. Directors of the Fund, directors
and trustees of certain other Merrill Lynch-sponsored investment companies,
employees of Merrill Lynch & Co., Inc. and its subsidiaries, and any trust,
pension, profit-sharing or other benefit plan for such persons, may purchase
Class A shares of the Fund at net asset value.
Class A shares of the Fund also are offered at net asset value, without
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must purchase Class A 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 imposed a sales charge
either at the time of purchase or on a deferred basis. Second, such redemption
must have been made within 60 days prior to the investment in the Fund, and the
proceeds from the redemption must have been maintained in the interim in cash or
a money market fund.
Class A shares of the Fund are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the
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<PAGE> 54
following conditions are satisfied: First, the investor must purchase Class A
shares of the Fund with proceeds from a redemption of shares of such other
mutual fund and such fund imposed a sales charge either at the time of purchase
or on a deferred basis; second, such purchase of Class A shares must be made
within 90 days after notice.
Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may in appropriate
cases be adjusted to reduce possible adverse tax consequences to the Fund which
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund.
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.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Distribution Plan. Reference is made to "Purchase of Shares--Deferred
Sales Charge Alternative-- Class B Shares--Distribution Plan" in the Prospectus
for certain information with respect to the distribution plan of the Fund (the
"Distribution Plan").
The payment of the account maintenance fee and distribution fee is subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, the Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the
distribution fees paid to the Distributor. In their consideration of the
Distribution Plan, the Directors must consider all factors they deem relevant,
including information as to the benefits of the Distribution Plan to the Fund
and its Class B shareholders. The Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination of
Directors who are not "interested persons" of the Fund, as defined in the
Investment Company Act (the "Independent Directors"), shall be committed to the
discretion of the Independent Directors then in office. In approving the
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that the Distribution Plan will
benefit the Fund and its Class B shareholders. The Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or by the vote of the holders of a majority of the
outstanding Class B voting securities of the Fund. The Distribution Plan cannot
be amended to increase materially the amount to be spent by the Fund without
Class B shareholder approval, and all material amendments are required to be
approved by the vote of Directors, including a majority of the Independent
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.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
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<PAGE> 55
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the New
York Stock Exchange is restricted as determined by the Securities and Exchange
Commission or such Exchange is closed (other than customary weekend and holiday
closings) for any period during which an emergency exists, as defined by the
Securities and Exchange 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 Securities and Exchange
Commission may by order permit for the protection of shareholders of the Fund.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares", while Class B shares redeemed within four
years of purchase are subject to a contingent deferred sales charge under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan or attaining age
59 1/2 in the case of an IRA or other retirement plan, or any redemption
resulting from the tax-free return of an excess contribution to an IRA; or (b)
any partial or complete redemption following the death or disability (as defined
in the Internal Revenue Code) of a Class B shareholder (including one who owns
the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination of
disability. For the fiscal years ended March 31, 1992, 1993 and 1994, the
Distributor received contingent deferred sales charges of $43,808, $118,233 and
$158,825, respectively, all of which was paid to Merrill Lynch.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). Blueprint
is directed to small investors and participants in certain affinity groups such
as trade associations, credit unions and benefit plans. Class B shares of the
Fund are offered through Blueprint only to members of certain affinity groups.
The contingent deferred sales charge is waived in connection with purchase
orders placed through Blueprint by members of such affinity groups. Services,
including the exchange privilege, available to Class B investors through
Blueprint, however, may differ from those available to other Class B investors.
Orders for purchases and redemptions of Class B shares of the Fund 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 is no minimum initial or
subsequent purchase requirement for investors who are part of a Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A shares at net asset value has the option of
purchasing Class A shares at the sales charge schedule disclosed in the
Prospectus, or if the Retirement Plan meets the following requirements, then it
may purchase Class B shares with a waiver of the contingent deferred sales
charge upon redemption. The contingent deferred sales charge is waived for any
Eligible 401(k) Plan redeeming Class B shares. "Eligible 401(k) Plan" is defined
as a retirement plan qualified under Section 401(k) of the Code with a salary
reduction feature offering a menu
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<PAGE> 56
of investments to plan participants. The contingent deferred sales charge is
also waived for redemptions from a 401(a) plan qualified under the Code,
provided, however, that such plan has the same or an affiliated sponsoring
employer as an Eligible 401(k) Plan purchasing MLAM or FAM advised mutual fund
Class B shares ("Eligible 401(a) Plan"). The contingent deferred sales charge is
waived for any Class B shares which are purchased by an Eligible 401(k) Plan or
Eligible 401(a) Plan and are rolled over into a Merrill Lynch or Merrill Lynch
Trust Company custodied IRA and held in such account at the time of redemption.
The contingent deferred sales charge is also waived for any Class B shares which
are purchased by a Merrill Lynch rollover IRA that was funded by a rollover from
a terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The minimum initial and subsequent
purchase requirements are waived in connection with all the above-referenced
Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. In executing such transactions,
the Investment Adviser seeks to obtain the best net results for the Company,
taking into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund does not necessarily pay the lowest
commission or spread available. Transactions with respect to the securities of
small and emerging growth companies in which the Fund invests may involve
specialized services on the part of the broker or dealer and thereby entail
higher commissions or spreads than would be the case with transactions involving
more widely traded securities of more established companies. The Fund has no
obligation to deal with any broker in the execution of transactions for its
portfolio securities. In addition, consistent with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. and policies established by
the Trustees of the Fund, the Investment Adviser may consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund.
For the fiscal year ended March 31, 1992, the Fund paid brokerage
commissions of $183,351. Merrill Lynch received $10,932, or 5.96% of such amount
for effecting transactions involving 8.07% of the aggregate dollar amount of
transactions in which the Fund paid brokerage commissions. For the fiscal year
ended March 31, 1993, the Fund paid brokerage commissions of $190,566. Merrill
Lynch received $11,549, or 6.1%, of such amount for effecting transactions
involving 8.01% of the aggregate dollar amount of transactions in which the Fund
paid brokerage commissions. For the fiscal year ended March 31, 1994, the Fund
paid brokerage commissions of $354,950. Merrill Lynch received $15,386 or 4.3%
of such amount for effecting transactions involving 5.1% of the aggregate dollar
amount of transactions in which the Fund paid brokerage commissions. The Fund
has been informed by Merrill Lynch that it will in no way, at any time, attempt
to influence or control the placing by the Investment Adviser or by the Fund of
orders for brokerage transactions. Brokers and dealers, including Merrill Lynch,
who provide supplemental investment research (such as securities and economic
research and market forecasts) to the Investment Adviser may receive orders for
transactions by the Fund. Supplemental investment research received by the
Investment Adviser also may be used in connection with other investment advisory
accounts of the Investment Adviser and its affiliates. 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. The expenses
of the Investment Adviser will
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<PAGE> 57
not necessarily be reduced as a result of the receipt of such supplemental
information. Whether or not a particular broker-dealer sells shares of the Fund
neither qualifies nor disqualifies such broker-dealer to execute transactions
for the Fund.
Many of the securities in which the Fund invests are traded only in the
over-the-counter market. Transactions in the over-the-counter market generally
are principal transactions with dealers and the costs of such transactions
involve dealer spreads rather than brokerage commissions. With respect to
over-the-counter transactions, the Fund, where possible, deals directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. Under
the Investment Company Act, persons affiliated with the Fund are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own account, affiliated persons of
the Fund, including Merrill Lynch, may not serve as the Fund's dealer in
connection with such transactions. See "Investment Objective and
Policies--Investment Restrictions". However, affiliated persons of the Fund may
serve as its broker in over-the-counter transactions conducted on an agency
basis.
The Board of Directors of the Fund has considered the possibilities of
recapturing for the benefit of the Fund brokerage commissions, dealer spreads
and other expenses of possible portfolio transactions, such as underwriting
commissions, by conducting such portfolio transactions through affiliated
entities, including Merrill Lynch. For example, brokerage commissions received
by Merrill Lynch could be offset against the advisory fee payable by the Fund to
the Investment Adviser. After considering all factors deemed relevant, the Board
made a determination not to seek such recapture. The Board will reconsider this
matter from time to time. The Investment Adviser has arranged for the Transfer
Agent to receive any tender offer solicitation fees on behalf of the Fund
payable with respect to portfolio securities of the Fund.
Section 11(a) of the Securities Exchange Act of 1934 prohibits members of
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts which they manage. Pursuant to such
provision, Merrill Lynch may not act as broker for the Fund in any of its
portfolio transactions executed on any such securities exchange of which Merrill
Lynch is a member, except in accordance with regulations adopted by the
Securities and Exchange Commission. The Board of Directors of the Fund has
approved a written contract, in accordance with such a regulation adopted by the
Securities and Exchange Commission, among the Fund, Merrill Lynch and the
Investment Adviser, to permit Merrill Lynch to effect portfolio transactions on
national securities exchanges for the Fund and to retain compensation in
connection with such transactions. For the fiscal years ended March 31, 1992,
1993 and 1994, Merrill Lynch effected 32, 18 and 28 portfolio transactions,
respectively, pursuant to such contract and received $10,932, $11,549 and
$15,386, respectively, as compensation in connection with such transactions.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 4:00 P.M., New York time, on each day during which
the New York Stock Exchange is open for trading. The New York Stock Exchange is
not open on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. The Fund will also determine its
net asset
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value on any day in which there is sufficient trading in its portfolio
securities that the net asset value might be materially affected, but only if on
any such day the Fund is required to sell or redeem shares. The net asset value
per share is computed by dividing the sum of the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the investment advisory fees and distribution fees, are
accrued daily. The per share net asset value of the Class B shares generally
will be lower than the per share net asset value of the Class A shares
reflecting the daily expense accruals of the distribution and transfer agency
fees applicable with respect to the Class B shares. It is expected, however,
that the per share net asset value of the two classes will tend to converge
immediately after the payment of dividends or distributions, which will differ
by approximately the amount of the expense accrual differential between the
classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the mean between closing bid and asked prices.
Securities traded in the over-the-counter market are valued at the most recent
bid prices as obtained from one or more dealers that make markets in the
securities. Securities traded in the NASDAQ National Market System are valued at
the last sale price on the day the securities are being valued or, lacking any
sales, at the closing bid price. Portfolio securities which are traded both in
the over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to each
of such services and copies of the various plans described below can be obtained
from the Fund, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive quarterly statements from the Transfer Agent
showing any reinvestment of dividends and capital gains distributions activity
in the account since the previous statement. A shareholder may make additions to
his Investment Account at any time by mailing a check directly to the Transfer
Agent.
Share certificates are issued only for full shares and only on the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
A shareholder may make additions to an Investment Account at any time by
purchasing Class A or Class B shares at the public offering price either through
the shareholder's securities dealer, or by mail directly to the Transfer Agent,
acting as agent for such securities dealer. Voluntary accumulation can also be
made through a service known as the Automatic Investment Plan whereby the Fund
is authorized through pre-authorized checks of $50 or more to charge the regular
bank account of the shareholder on a regular basis to
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<PAGE> 59
provide systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through the Merrill Lynch BlueprintSM
Program, no minimum charge to the investor's bank account is required. Investors
who maintain CMACopyright accounts may arrange to have periodic investments made
in the Fund, in the CMA accounts or in certain related accounts in amounts of
$100 or more through the CMA Automatic Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the ex-dividend date of the dividend or distribution. Shareholders may elect
in writing to receive either their income dividends or capital gains
distributions, or both, in cash, in which event payment will be mailed on or
about the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-(800) MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES
A Class A shareholder may elect to make systematic withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals for shareholders with Class A shares
with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A shares are
redeemed from those on deposit in the shareholder's account to provide the
withdrawal payment specified by the shareholder. The shareholder may specify
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the normal close of
business of the New York Stock Exchange (currently 4:00 P.M., New York City
time) on the 24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. If the New York Stock Exchange is not open for
business on such date, the Class A shares will be redeemed at the close of
business on the following business day. The check for the withdrawal payment
will be mailed, or the direct deposit for the withdrawal payment will be made on
the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends and distributions on all Class A shares in the
Investment Account are reinvested automatically in Fund Class A 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. Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional Class A shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for Class A shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic
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<PAGE> 60
investments may not be made into an Investment Account in which the shareholder
has elected to make systematic withdrawals.
A Class A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption Program.
The minimum fixed dollar amount redeemable is $25. The proceeds of systematic
redemptions will be posted to a shareholder's account five business days after
the date the shares are redeemed. Monthly systematic redemptions will be made at
net asset value on the first Monday of each month, bimonthly systematic
redemptions will be made at net asset value on the first Monday of every other
month, and quarterly, semiannual or annual redemptions are made at net asset
value on the first Monday of months selected at the shareholder's option. If the
first Monday of the month is a holiday, the redemption will be processed at net
asset value on the next business day. The Systematic Redemption Program is not
available if Fund shares are being purchased within the account pursuant to the
Automatic Investment Program. For more information on the Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch financial
consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as
in other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available upon request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100 (except that the minimum initial purchase
through the Merrill Lynch BlueprintSM Program is $100) and the minimum
subsequent purchase is $1.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Class A and Class B shareholders of the Fund may exchange their Class A or
Class B shares of the Fund for shares of the same class of the funds that issue
Class A and Class B shares listed below. In addition, Class A shareholders of
the Fund may exchange their Class A shares of the Fund for shares of the "Class
A money market funds", and Class B shareholders of the Fund may exchange their
shares for shares of the "Class B money market funds", on the basis described
below. 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. Certain funds into which exchanges
may be made may impose a redemption fee (not in excess of 2.00% of the amount
redeemed) on shares purchased through the exchange privilege when such shares
are subsequently redeemed, including redemption through subsequent exchanges.
Such redemption fee would be in addition to any CDSC otherwise applicable to a
redemption of Class B shares. It is contemplated that the exchange privilege may
be applicable to other new mutual funds whose shares may be distributed by the
Distributor.
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Under the exchange privilege, each of the funds with Class A shares
outstanding offers to exchange its Class A shares ("new Class A shares") for
Class A shares ("outstanding Class A shares") of any of the other funds, on the
basis of relative net asset value per Class A share, plus an amount equal to the
difference, if any, between the sales charge previously paid on the outstanding
Class A shares and the sales charge payable at the time of the exchange on the
new Class A shares. With respect to outstanding Class A 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
shares in the initial purchase and any subsequent exchange. Class A shares
issued pursuant to dividend reinvestment are sold on a no-load basis in each of
the funds offering Class A shares. For purposes of the exchange privilege, Class
A 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 shares on which the dividend was paid. Based on this formula, Class A shares
generally may be exchanged into the Class A shares of the other funds or into
shares of a money market fund advised by the Investment Adviser or its
affiliates with a reduced or without a sales charge.
In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B 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 that Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales load that
may be payable on a disposition of the new Class B shares, the holding period
for the outstanding Class B shares is "tacked" to the holding period of the new
Class B shares. For example, an investor may exchange Class B shares of the Fund
for those of Merrill Lynch Global Resources Trust (formerly known as Merrill
Lynch Natural Resources Trust) after having held the Fund Class B shares for two
and a half years. The 2% sales charge that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Merrill Lynch Global Resources Trust 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 Merrill Lynch Natural Global Trust Class B shares, the investor
will be deemed to have held the new Class B shares for more than five years.
Shareholders also may exchange Class A shares and Class B shares from any
of the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period requirement for purposes of reducing the contingent deferred
sales charge. However, shares of a Class B money market fund which were acquired
as a result of an exchange for Class B shares of a fund may, in turn, be
exchanged back into Class B shares of any fund offering such shares, in which
event the holding period for Class B shares of the fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. Thus, for example,
an investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund after having held the Class B shares for two and a half years
and three years later decide to redeem the shares of Merrill Lynch Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Merrill Lynch Institutional Fund will be payable. If,
instead of such redemption the
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<PAGE> 62
shareholder exchanged such shares for Class B shares of a fund which the
shareholder continues to hold for an additional two and a half years, any
subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC. High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value by
investing primarily in a portfolio
of adjustable rate securities,
consisting principally of
mortgage-backed and asset-backed
securities.
MERRILL LYNCH AMERICAS INCOME
FUND, INC. A high level of current income,
consistent with prudent investment
risk, by investing primarily in
debt securities denominated in a
currency of a country located in
the Western Hemisphere (i.e., North
and South America and the
surrounding waters).
MERRILL LYNCH ARIZONA LIMITED MATURITY
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
as high a level of income exempt
from Federal and Arizona income
taxes as is consistent with prudent
investment management through
investment in a portfolio primarily
of intermediate-term investment
grade Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL BOND
FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and Arizona income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH BALANCED FUND FOR
INVESTMENT AND RETIREMENT As high a level of total investment
return as is consistent with a
reasonable risk by investing in
common stocks and other types of
securities, including fixed income
securities and convertible
securities.
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MERRILL LYNCH BASIC VALUE FUND, INC. Capital appreciation and,
secondarily, income through
investment in securities, primarily
equities, that are undervalued and
therefore represent basic
investment value.
MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL BOND FUND A portfolio of Merrill Lynch
California Municipal Series Trust,
a series fund, whose objective is
to provide shareholders with as
high a level of income exempt from
Federal and California income taxes
as is consistent with prudent
investment management through
investment in a portfolio primarily
of insured California Municipal
Bonds.
MERRILL LYNCH CALIFORNIA LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity Series
Trust, a series fund, whose
objective is to provide
shareholders with as high a level
of income exempt from Federal and
California income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade
California Municipal Bonds.
MERRILL LYNCH CALIFORNIA MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
California Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and California income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CAPITAL FUND, INC. The highest total investment return
consistent with prudent risk
through a fully managed investment
policy utilizing equity, debt and
convertible securities.
MERRILL LYNCH COLORADO MUNICIPAL BOND
FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
as high a level of income exempt
from Federal and Colorado income
taxes as is consistent with prudent
investment management.
MERRILL LYNCH CONNECTICUT MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to
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provide investors with as high a
level of income exempt from
Federal and Connecticut income
taxes as is consistent with
prudent investment management.
MERRILL LYNCH CORPORATE BOND FUND,
INC. Current income from three separate
diversified portfolios of fixed
income securities.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC. Long-term appreciation through
investment in securities,
principally equities, of issuers in
countries having smaller capital
markets.
MERRILL LYNCH DRAGON FUND, INC. Capital appreciation primarily
through investment in equity and
debt securities of issuers
domiciled in developing countries
located in Asia and the Pacific
Basin other than Japan, Australia
and New Zealand.
MERRILL LYNCH EUROFUND Capital appreciation primarily
through investment in equity
securities of corporations
domiciled in Europe.
MERRILL LYNCH FEDERAL SECURITIES TRUST High current return through
investments in U.S. Government and
Government agency securities,
including GNMA mortgage-backed
certificates and other
mortgage-backed Government
securities.
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management while
serving to offer shareholders the
opportunity to own securities
exempt from Florida intangible
personal property taxes through
investment in a portfolio primarily
of intermediate-term investment
grade Florida Municipal Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management while
seek-
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ing to offer shareholders the
opportunity to own securities
exempt from Florida intangible
personal property taxes.
MERRILL LYNCH FUND FOR TOMORROW, INC. Long-term growth through investment
in a portfolio of good quality
securities, primarily common stock,
potentially positioned to benefit
from demographic and cultural
changes as they affect consumer
markets.
MERRILL LYNCH FUNDAMENTAL GROWTH
FUND, INC. Long-term growth of capital through
investment in a diversified
portfolio of equity securities
placing particular emphasis on
companies that have exhibited an
above-average growth rate in
earnings.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC. High total investment return,
consistent with prudent risk,
through a fully managed investment
policy utilizing United States and
foreign equity, debt and money
market securities, the combination
of which will be varied from time
to time both with respect to the
types of securities and markets in
response to changing market and
economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT High total investment return from
investment in a global portfolio of
debt investments denominated in
various currencies and
multinational currency units.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC. High total return from investment
primarily in an internationally
diversified portfolio of
convertible debt securities,
convertible preferred stock and
"synthetic" convertible securities
consisting of a combination of debt
securities or preferred stock and
warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS
(residents of Arizona must meet
investor
suitability standards) The highest total investment return
consistent with prudent risk
through worldwide investment in an
internationally diversified
portfolio of securities.
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MERRILL LYNCH GLOBAL RESOURCES TRUST...... Long-term growth and protection of
capital from investment in
securities of domestic and foreign
companies that possess substantial
natural resource assets.
MERRILL LYNCH GLOBAL UTILITY FUND,
INC. ..................................... Capital appreciation and current
income through investment in equity
and debt securities issued by
domestic and foreign companies
which are primarily engaged in the
ownership or operation of
facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH GOVERNMENT FUND............ A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to provide
current income consistent with
liquidity and security of principal
from investment in securities
issued or guaranteed by the U.S.
Government, its agencies and
instrumentalities and in repurchase
agreements secured by such
obligations.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT................. Growth of capital and, secondarily,
income from investment in a
diversified portfolio of equity
securities placing principal
emphasis on those securities which
management of the fund believes to
be undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet
investor suitability standards)........ Capital appreciation through
worldwide investment in equity
securities of companies that derive
or are expected to derive a
substantial portion of their sales
from products and services in
healthcare.
MERRILL LYNCH INSTITUTIONAL FUND.......... A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to provide
maximum current income consistent
with liquidity and the maintenance
of a high quality portfolio of
money market securities.
MERRILL LYNCH INSTITUTIONAL TAX-EXEMPT
FUND.................................... A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to provide
maximum current income exempt from
Federal income taxes, preservation
of capital and liquidity available
from investing in a diversified
portfolio of short-term, high
quality municipal bonds.
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<PAGE> 67
MERRILL LYNCH INTERNATIONAL EQUITY
FUND Capital appreciation and,
secondarily, income by investing in
a diversified portfolio of equity
securities of issuers located in
countries other than the United
States.
MERRILL LYNCH LATIN AMERICA FUND,
INC. Capital appreciation by investing
primarily in Latin American equity
and debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL BOND
FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and Maryland income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MASSACHUSETTS MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and Massachusetts income taxes as
is consistent with prudent
investment management.
MERRILL LYNCH MASSACHUSETTS LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Massachusetts income taxes as
is consistent with prudent
investment management through
investment in a portfolio primarily
of intermediate-term investment
grade Massachusetts Municipal
Bonds.
MERRILL LYNCH MICHIGAN LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is as high a
level of income exempt from Federal
and Michigan income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade
Michigan Municipal Bonds.
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<PAGE> 68
MERRILL LYNCH MICHIGAN MUNICIPAL BOND
FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and Michigan income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MINNESOTA MUNICIPAL BOND
FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and Minnesota income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MUNICIPAL BOND FUND,
INC. Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
MERRILL LYNCH MUNICIPAL INTERMEDIATE
TERM FUND Currently the only portfolio of
Merrill Lynch Municipal Series
Trust, a series fund, whose
objective is to provide investors
with as high a level of income
exempt from Federal income taxes as
possible by investing in investment
grade obligations with a dollar
weighted average maturity of five
to twelve years.
MERRILL LYNCH NEW JERSEY LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
investors with as high a level of
income exempt from Federal and New
Jersey income taxes as is
consistent with prudent investment
management through a portfolio
primarily of intermediate-term
investment grade New Jersey
Municipal Bonds.
MERRILL LYNCH NEW JERSEY MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and New Jersey income taxes as is
consistent with prudent investment
management.
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<PAGE> 69
MERRILL LYNCH NEW MEXICO MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and New Mexico income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
investors with as high a level of
income exempt from Federal, New
York State and New York City income
taxes as is consistent with prudent
investment management through
investment in a portfolio primarily
of intermediate-term grade New York
Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL BOND
FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from
Federal, New York State and New
York City income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NORTH CAROLINA MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and North Carolina income taxes as
is consistent with prudent
investment management.
MERRILL LYNCH OHIO MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and Ohio income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH OREGON MUNICIPAL BOND
FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and Oregon income taxes
31
<PAGE> 70
as is consistent with prudent
investment management.
MERRILL LYNCH PACIFIC FUND, INC. Capital appreciation by investing in
equity securities of corporations
domiciled in Far Eastern and
Western Pacific countries,
including Japan, Australia, Hong
Kong and Singapore.
MERRILL LYNCH PENNSYLVANIA LIMITED
MATURITY MUNICIPAL BOND FUND A portfolio of Merrill Lynch
Multi-State Limited Maturity
Municipal Series Trust, a series
fund, whose objective is to provide
as high a level of income exempt
from Federal and Pennsylvania
income taxes as is consistent with
prudent investment management
through investment in a portfolio
of intermediate-term investment
grade Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA MUNICIPAL
BOND FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH PHOENIX FUND, INC. Long-term growth of capital by
investing in equity and
fixed-income securities, including
tax-exempt securities, of issuers
in weak financial condition or
experiencing poor operating results
believed to be undervalued relative
to the current or prospective
condition of such issuer.
MERRILL LYNCH READY ASSETS TRUST Preservation of capital, liquidity
and the highest possible current
income consistent with the
foregoing objectives from the
short-term money market securities
in which the Trust invests.
MERRILL LYNCH RETIREMENT RESERVES
MONEY FUND (available only if the
exchange occurs within certain
retirement plans)................... Currently the only portfolio of
Merrill Lynch Retirement Series
Trust, a series fund, whose
objectives are current income,
preservation of capital and
liquidity available from investing
in a diversified portfolio of
short-term money market securities.
32
<PAGE> 71
MERRILL LYNCH SHORT-TERM GLOBAL INCOME
FUND, INC. As high a level of current income as
is consistent with prudent
investment management from a global
portfolio of high quality debt
securities denominated in various
currencies and multinational
currency units and having remaining
maturities not exceeding three
years.
MERRILL LYNCH STRATEGIC DIVIDEND FUND Long-term total return from
investment in dividend-paying
common stock which yield more than
Standard & Poor's 500 Composite
Stock Price Index.
MERRILL LYNCH TECHNOLOGY FUND, INC. Capital appreciation through
worldwide investment in equity
securities of companies that derive
or are expected to derive a
substantial portion of their sales
from products and services in
technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND
FUND A portfolio of Merrill Lynch
Multi-State Municipal Series Trust,
a series fund, whose objective is
to provide investors with as high a
level of income exempt from Federal
income taxes as is consistent with
prudent investment management by
investing primarily in a portfolio
of long-term, investment grade
obligations issued by the State of
Texas, its political subdivisions,
agencies and instrumentalities.
MERRILL LYNCH TREASURY FUND A portfolio of Merrill Lynch Funds
for Institutions Series, a series
fund, whose objective is to provide
maximum current income consistent
with liquidity and security of
principal from investment in direct
obligations of the U.S. Treasury
and up to 10% of its total assets
in repurchase agreements secured by
such obligations.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES Preservation of capital, current
income and liquidity available from
investing in direct obligations of
the U.S. Government and repurchase
agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY MONEY FUND Preservation of capital, liquidity
and current income through
investment exclusively in a
diversified portfolio of short-term
marketable securities which are
direct obligations of the U.S.
Treasury.
33
<PAGE> 72
MERRILL LYNCH UTILITY INCOME FUND,
INC. High current income through
investment in equity and debt
securities issued by companies
which are primarily engaged in the
ownership or operation of
facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME FUND, INC. High current income by investing in a
global portfolio of fixed income
securities denominated in various
currencies, including
multi-national currencies.
Before effecting an exchange, shareholders of the Fund 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 for Federal income
tax purposes and, depending on the circumstances, a short-or long-term capital
gain or loss may be realized. In addition, a shareholder exchanging shares of
any of the funds may be subject to a backup withholding tax unless such
shareholder certifies under penalty of perjury that the taxpayer identification
number on file with any such fund is correct and that such investor is not
otherwise subject to backup withholding. See "Dividends, Distributions and
Taxes" below.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the relevant Fund of the
exchange, or, if the exchange does not involve a money market fund, the
shareholder may write to the Transfer Agent requesting that the exchange be
effected. Such letter must be signed exactly as the account is registered with
signatures guaranteed by an "eligible guarantor institution" as such term is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended,
the existence and validity of which may be verified by the Transfer Agent
through the use of industry publications. Shareholders of the Funds, and
shareholders of the other funds described above with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. Each 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. Each Fund reserves
the right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares at
any time and thereafter may resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income, if any.
Dividends from such net investment income will be paid semi-annually. All net
realized long-or short-term capital gains, if any, will be distributed to the
Fund's shareholders at least annually. See "Shareholder Services--Automatic
Reinvestment of Dividends and Capital Gains Distributions" for information
concerning the manner in which dividends and distributions may be reinvested
automatically in shares of the Fund. Shareholders may elect in writing to
receive any such dividends or distributions, or both, in cash. Dividends and
distributions are taxable to shareholders as discussed below whether they are
reinvested in shares of the Fund or received in cash. The per share dividends
and distributions on Class B shares will be lower than the per share dividends
and distributions
34
<PAGE> 73
on Class A shares as a result of the distribution and transfer agency fees
applicable with respect to the Class B shares. See "Determination of Net Asset
Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A
and Class B shareholders (together, the "shareholders"). The Fund intends to
distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options) are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction between the Class A and Class B
shareholders according to a method (which it believes is consistent with the
Securities and Exchange Commission exemptive order permitting the issuance and
sale of two classes of stock) that is based on the gross income allocable to
Class A and Class B shareholders during the taxable year, or such other method
as the Internal Revenue Service may prescribe. If the Fund pays a dividend in
January which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and received
by its shareholders on December 31 of the year in which such dividend was
declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding").
35
<PAGE> 74
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.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether under the Automatic
Investment Program or otherwise) within a 61-day period beginning 30 days before
and ending 30 days after the date that the shares are disposed of. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
If a Class A shareholder exercises the exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class A
shares.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to avoid imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's taxable income
and capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the amount by
which it does not meet the foregoing distribution requirements.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures or forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. The mark-to-market rules
outlined above, however, will not apply to certain transactions entered into by
the Fund solely to reduce the risk of changes in price or interest or currency
exchange rates with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange contracts.
36
<PAGE> 75
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the Fund
may be restricted in effecting closing transactions within three months after
entering into an options or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.
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 United States
dollar). In general, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will be treated as
ordinary income or loss under Code Section 988. In certain circumstances, the
Fund may elect capital gain or loss treatment for such transactions. Regulated
futures contracts, as described above, will be taxed under Code Section 1256
unless application of Section 988 is elected by the Fund. In general, however,
Code Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Fund's net capital gains. 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 dividend distributions, and any distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than such shareholder's basis in
Fund shares (assuming the shares were held as a capital asset). These rules and
the mark-to-market rules described above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of currency
fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
Treasury regulations promulgated thereunder. The Code and Treasury regulations
are subject to change by legislative or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
37
<PAGE> 76
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 and Class B
shares in accordance with a formula specified by the Securities and Exchange
Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A shares and
the contingent deferred sales charge that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
Set forth below is total return information for the Class A and Class B
shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------- -------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL HYPOTHETICAL
$1,000 $1,000
EXPRESSED AS A INVESTMENT EXPRESSED AS A INVESTMENT
PERCENTAGE BASED AT THE END OF PERCENTAGE BASED AT THE END OF
ON A HYPOTHETICAL THE ON A HYPOTHETICAL THE
PERIOD $1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
- -------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
One Year Ended
March 31, 1994................ 5.79% $ 1,057.90 8.03% $ 1,080.30
Five Years Ended
March 31, 1994................ 6.75% $ 1,386.00 7.09% $ 1,408.80
Ten Years Ended
March 31, 1994................ 6.48% $ 1,874.20
October 21, 1988 to
March 31, 1994................ 6.92% $ 1,439.10
</TABLE>
38
<PAGE> 77
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------- -------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL HYPOTHETICAL
$1,000 $1,000
EXPRESSED AS A INVESTMENT EXPRESSED AS A INVESTMENT
PERCENTAGE BASED AT THE END OF PERCENTAGE BASED AT THE END OF
ON A HYPOTHETICAL THE ON A HYPOTHETICAL THE
PERIOD $1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
- -------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
Year Ended March 31,
1994.......................... 13.14% $ 1,131.40 12.03% $ 1,120.30
1993.......................... 10.69% $ 1,106.90 9.56% $ 1,095.60
1992.......................... 28.71% $ 1,287.10 27.41% $ 1,274.10
1991.......................... (3.15)% $ 968.50 (4.16)% $ 958.40
1990.......................... (5.05)% $ 949.50 (6.00)% $ 940.00
1989.......................... 5.85% $ 1,058.50
1988.......................... (18.82)% $ 811.80
1987.......................... 1.99% $ 1,019.90
1986.......................... 35.40% $ 1,354.00
1985.......................... 13.95% $ 1,139.50
1984.......................... (7.63)% $ 923.70
1983.......................... 55.89% $ 1,558.90
1982.......................... (19.36)% $ 806.40
1981.......................... 59.88% $ 1,598.80
1980.......................... (4.76)% $ 952.40
Inception (May 5, 1978) to March
31, 1979...................... 3.42% $ 1,034.20
October 21, 1988 to
March 31, 1989*............... 2.75% $ 1,027.50
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
Inception (May 5, 1978) to
March 31, 1994................ 242.67% $ 3,426.70
October 21, 1988 to
March 31, 1994*............... 43.91% $ 1,439.10
</TABLE>
- ---------------
* Information as to Class B shares is presented only for the period October 21,
1988 to March 31, 1994. Prior to October 21, 1988, no Class B shares were
publicly issued.
In order to reflect the reduced sales charges in the case of Class A shares
or the waiver of the contingent deferred sales charge in the case of Class B
shares applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the
contingent deferred sales charge and therefore may reflect a greater total
return since, due to the reduced sales charges or the waiver of sales charges, a
lower amount of expenses may be deducted.
39
<PAGE> 78
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on February 23, 1978. It has
an authorized capital of 200,000,000 shares of Common Stock, par value of $0.10
per share, divided into two classes, designated Class A and Class B Common
Stock, each of which consists of 100,000,000 shares. Both Class A and Class B.
Common Stock represent an interest in the same assets of the Fund and are
identical in all respects except that the Class B shares bear certain expenses
related to the distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The Fund has
received an order from the Securities and Exchange Commission (the "Commission")
permitting the issuance and sale of two classes of Common Stock. The Board of
Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes of Common Stock at a future date. The creation of additional
classes would require an additional order from the Commission. There is no
assurance that such an additional order will be issued.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Generally, under Maryland law, a meeting of shareholders
may be called for any purpose on the written request of the holders of at least
25% of the outstanding shares of the Fund. Also, the by-laws of the Fund require
that a special meeting of stockholders be held on the written request of at
least 10% of the outstanding shares of the Fund entitled to vote at such
meeting. Voting rights for Directors are not cumulative. Shares issued are fully
paid and non-assessable and have no preemptive or conversion rights. Redemption
rights are discussed elsewhere herein and in the Prospectus. Each share is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund on liquidation or dissolution after
satisfaction of outstanding liabilities. Stock certificates will be issued by
the Transfer Agent only on specific request. Certificates for fractional shares
are not issued in any case.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A shares of the Fund, based on the value of
the Fund's net assets as of March 31, 1994, is calculated as follows:
<TABLE>
<CAPTION>
CLASS A
-----------
<S> <C>
Net Assets..................................................... $78,804,119
==========
Number of Shares Outstanding................................... 4,961,948
==========
Net Asset Value Per Share (net assets divided by number of
shares outstanding).......................................... $15.88
Sales Charge................................................... $ 1.10
----------
Offering Price................................................. $16.98
==========
</TABLE>
40
<PAGE> 79
Class B shares are not subject to an initial sales charge but may be
subject to a contingent deferred sales charge on redemption of shares within
four years of purchase. See "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares" in the Prospectus.
INDEPENDENT AUDITORS
Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, has been
selected as the independent auditors of the Fund. The selection of independent
auditors is subject to ratification by the shareholders of the Fund. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
The Bank of New York, 1 Wall Street, New York, New York 10286, acts as
custodian of the Fund's assets. The Custodian is responsible for safeguarding
and controlling the Fund's cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on the Fund's
investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, 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.
LEGAL COUNSEL
Brown & Wood, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on March 31 of each year. The Fund sends
to its shareholders at least semi-annually, reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on July 15, 1994.
41
<PAGE> 80
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MERRILL LYNCH SPECIAL VALUE FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Special Value Fund, Inc. as of
March 31, 1994, the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period then
ended. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Special Value Fund, Inc. as of March 31, 1994, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
Princeton, New Jersey
April 29, 1994
42
<PAGE> 81
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Value Percent of
Industry Shares Held Stocks & Convertible Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Aerospace 85,000 ++Banner Aerospace, Inc. $ 585,575 $ 499,375 0.3%
115,000 ++BE Aerospace, Inc. 1,048,229 1,092,500 0.6
------------ ------------ ------
1,633,804 1,591,875 0.9
Agriculture & 25,000 ++Calgene, Inc. 268,438 290,625 0.2
Agricultural 35,000 Delta & Pine Land Co. 452,501 481,250 0.3
Pharmaceuticals ------------ ------------ ------
720,939 771,875 0.5
Apparel 30,000 Kellwood Co. 515,975 723,750 0.4
15,000 St. John Knits, Inc. 255,000 363,750 0.2
80,000 ++The Warnaco Group, Inc. (Class A) 2,364,255 2,430,000 1.3
------------ ------------ ------
3,135,230 3,517,500 1.9
Banks & Finance 70,000 American Federal Bank, FSB 612,500 805,000 0.4
222,500 Bankers Corp. 2,164,922 3,838,125 2.0
40,000 Banknorth Group, Inc. 632,500 725,000 0.4
385,000 Charter One Financial, Inc. 7,133,237 7,266,875 3.8
170,000 Civic Bancorp, Inc. 926,250 850,000 0.4
125,000 Coast Savings Financial, Inc. 1,836,424 1,734,375 0.9
182,000 ++The Co-Operative Bank of Concord 2,184,876 3,276,000 1.7
60,000 NFS Financial Corp. 641,875 1,020,000 0.5
80,000 ONBANCorp, Inc. 2,648,784 2,440,000 1.3
52,500 Resource Bancshares Mortgage
Group, Inc. 418,750 551,250 0.3
140,000 Roosevelt Financial Group, Inc. 4,044,900 6,195,000 3.2
28,000 Simmons First National Corp. 616,000 630,000 0.3
55,000 Sterling BancShares, Inc. 1,088,750 2,076,250 1.1
------------ ------------ ------
24,949,768 31,407,875 16.3
Biotechnology 50,000 ++Alteon, Inc. 633,550 412,500 0.2
212,643 ++Applied Immune Sciences, Inc. 3,478,381 1,860,626 1.0
42,900 ++AutoImmune, Inc. 284,213 311,025 0.2
27,200 ++COR Therapeutics, Inc. 324,088 323,000 0.2
90,000 ++Cyto Therapeutics, Inc. 918,050 933,750 0.5
28,500 ++Genetic Therapy, Inc. 350,328 356,250 0.2
25,000 ++Gilead Sciences, Inc. 253,125 268,750 0.1
164,000 ++The Immune Response Corp. 2,157,484 1,722,000 0.9
37,500 ++The Liposome Company, Inc. 229,688 239,063 0.1
76,100 National Patent Development Corp. 208,155 309,156 0.2
135,000 ++NeoRx Corp. 917,758 877,500 0.5
50,000 ++Sepracor, Inc. 386,875 350,000 0.2
10,000 ++Somatogen, Inc. 190,000 77,500 0.0
------------ ------------ ------
10,331,695 8,041,120 4.3
Business Services 249,700 ++Applied Bioscience
International, Inc. 1,425,381 1,560,625 0.8
Computer Equipment 5,000 Cadence Design Systems, Inc. 67,175 70,000 0.0
226,000 ++Micronics Computers, Inc. 1,198,238 1,214,750 0.6
------------ ------------ ------
1,265,413 1,284,750 0.6
Computer Products 20,000 Sigma Designs, Inc. 62,500 175,000 0.1
</TABLE>
43
<PAGE> 82
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Value Percent of
Industry Face Amount Stocks & Convertible Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Computer Services 725,000 Anacomp, Inc. $ 2,691,367 $ 2,809,375 1.5%
181,000 ++Boole & Babbage, Inc. 3,454,168 4,253,500 2.2
35,950 Computer Task Group, Inc. 449,573 283,106 0.1
25,000 Primark Corp. 282,750 337,500 0.2
------------ ------------ ------
6,877,858 7,683,481 4.0
Computer Software 271,500 ++Cognos, Inc. 1,712,435 3,156,188 1.6
Computers 130,000 Alpha Industries, Inc. 629,856 406,250 0.2
40,000 Amdahl Corp. 181,600 260,000 0.1
50,000 ++DH Technology, Inc. 688,750 862,500 0.5
135,000 SHL Systemhouse, Inc. 843,750 928,125 0.5
130,000 ++Western Digital Corp. 1,676,801 2,193,750 1.1
------------ ------------ ------
4,020,757 4,650,625 2.4
Electrical 60,000 Catalina Lighting, Inc. 471,291 660,000 0.3
Equipment 135,000 Comptek Research, Inc. 2,159,300 2,615,625 1.4
75,000 ++Comptronix Enterprises, Inc. 388,780 365,625 0.2
10,000 Core Industries, Inc. 149,550 116,250 0.1
26,300 ++WPI Group, Inc. 164,375 78,900 0.0
------------ ------------ ------
3,333,296 3,836,400 2.0
Electronics 100,000 Alden Electronics, Inc. 422,500 300,000 0.2
324,200 Automated Security Holdings PLC 1,238,076 1,094,175 0.6
27,562 ++Maxwell Laboratories, Inc. 316,726 234,277 0.1
50,000 ++VLSI Technology, Inc. 503,915 706,250 0.4
------------ ------------ ------
2,481,217 2,334,702 1.3
Energy $ 900,000 Swift Energy Corp., Convertible
Bonds, 6.50% due 6/30/2003 924,000 918,000 0.5
Environmental & 385,250 NSC Corp. 2,047,537 1,637,313 0.9
Environmental 170,000 Rollins Environmental
Control Services, Inc. 879,087 786,250 0.4
------------ ------------ ------
2,926,624 2,423,563 1.3
Health Care-- 55,300 ++Analogic Corp. 915,631 843,325 0.4
Products & Services 100,000 Beverly Enterprises, Inc. 953,736 1,312,500 0.7
45,000 Community Psychiatric Centers 489,481 720,000 0 4
80,000 Healthcare Services Group, Inc. 783,450 820,000 0.4
130,000 ++The Hillhaven Corp. 1,861,092 2,518,750 1.3
105,000 ++Medical Care America, Inc. 2,376,577 2,231,250 1.2
75,500 ++Ramsay Health Care, Inc. 588,423 566,250 0.3
275,000 ++Unilab Corp. 1,528,125 1,409,375 0.7
------------ ------------ ------
9,496,515 10,421,450 5.4
Home Builders 30,000 Washington Homes, Inc. 270,000 232,500 0.1
Home Furnishings 30,000 Crown Crafts, Inc. 524,300 562,500 0.3
Housing 110,000 ++Redman Industries, Inc. 1,757,956 1,952,500 1.0
</TABLE>
44
<PAGE> 83
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industry Shares Held Stocks & Convertible Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Insurance 100,000 Phoenix Re Corp. $ 2,360,714 $ 2,075,000 1.1%
162,500 Security-Connecticut Corp. 3,181,400 3,128,125 1.6
142,000 ++Transnational Re Corp. (Class A) 2,899,912 2,502,750 1.3
------------ ------------ ------
8,442,026 7,705,875 4.0
Leasing 167,100 LDI Corp. 1,682,660 856,388 0.4
100,000 ++Sea Containers, Ltd. 2,146,996 1,525,000 0.8
------------ ------------ ------
3,829,656 2,381,388 1.2
Leisure 24,400 Outboard Marine Corp. 469,488 469,700 0.2
Machinery & 34,245 ++Varity Corp. 1,138,324 1,434,009 0.7
Machine Tools
Medical 32,600 ++Everest & Jennings International
(Class A) 456,544 34,638 0.0
15,000 ++Fischer Imaging Corp. 288,440 97,500 0.1
36,000 ++Thermo Cardiosystems, Inc. 308,225 715,500 0.4
------------ ------------ ------
1,053,209 847,638 0.5
Metals--Non-Ferrous 76,800 Handy & Harman 1,205,929 1,132,800 0.6
Natural Resources 145,000 ++Abraxas Petroleum Corp. 1,642,500 1,558,750 0.8
35,000 ++Addington Resources, Inc. 227,290 498,750 0.3
110,000 ++American Oilfield Divers, Inc. 1,008,750 935,000 0.5
90,900 ++Atwood Oceanics, Inc. 763,563 1,170,337 0.6
95,000 ++Tom Brown, Inc. 410,463 1,080,625 0.6
38,300 ++Cliffs Drilling Co. 494,563 450,025 0.2
29,000 Cliffs Drilling Co.,
Convertible Preferred 774,875 746,750 0.4
282,253 ++Coho Resources, Inc. 1,990,477 1,199,575 0.6
25,000 ++Energy Ventures, Inc. 468,750 334,375 0.2
275,000 ++Gerrity Oil & Gas Corp. 3,571,250 2,578,125 1.3
65,000 ++Grant Tensor Geophysical Corp.,
Convertible Preferred 1,103,750 812,500 0.4
20,600 ++Input/Output, Inc. 800,502 795,675 0.4
359,000 ++International Petroleum Corp. 990,247 359,000 0.2
40,000 ++Noble Drilling Corp. 265,000 270,000 0.1
100,000 ++Nuevo Energy Co. 2,008,475 1,925,000 1.0
266,200 ++Plains Resources, Inc. 2,174,772 1,497,375 0.8
42,500 ++Tetra Technologies, Inc. 311,135 308,125 0.2
20,000 The Wiser Oil Co. 360,000 320,000 0.2
------------ ------------ ------
19,366,362 16,839,987 8.8
Personal Care 50,000 ++Marietta Corp. 441,875 393,750 0.2
Products
Pharmaceuticals 10,000 ++Amylin Pharmaceuticals, Inc. 108,750 107,500 0.1
Photo-Optical 80,000 Instron Corp. 1,010,849 820,000 0.4
Instruments
Plastics 19,800 Tredegar Industries, Inc. 297,088 287,100 0.2
Pollution Control 60,000 Attwoods PLC (ADR) (a) 567,376 525,000 0.3
</TABLE>
45
<PAGE> 84
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Shares Held/ Value Percent of
Industry Face Amount Stocks & Convertible Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Real Estate $1,000,000 Alexander Haagen Properties,
Inc., 7.25% due 12/27/2003 $ 1,000,000 $ 980,000 0.5%
Real Estate 67,100 Carr Realty Corp. 1,476,200 1,576,850 0.8
Investment Trusts 45,000 Crown American Realty Trust 643,950 618,750 0.3
41,200 Health Equity Properties, Inc. 347,110 381,100 0.2
------------ ------------ ------
2,467,260 2,576,700 1.3
Restaurants 240,000 ++TPI Enterprises, Inc. 2,126,394 1,650,000 0.9
Retail Stores 320,000 J. Baker, Inc. 5,299,544 6,400,000 3.3
51,500 Bradlees, Inc. 876,378 772,500 0.4
110,000 ++Catherines Stores Corp. 1,496,475 1,787,500 0.9
40,000 ++Gantos, Inc. 497,276 160,000 0.1
1,053,000 ++Grossman's, Inc. 3,230,162 4,475,250 2.3
147,000 ++Just Toys, Inc. 957,267 918,750 0.5
106,951 Pier 1 Imports, Inc. 1,153,213 895,715 0.5
60,000 ++S & K Famous Brands, Inc. 766,650 795,000 0 4
312,500 Service Merchandise Co., Inc. 2,418,330 2,460,937 1.3
80,000 The Stride Rite Corp. 1,261,496 1,180,000 0.6
110,000 The United States Shoe Corp. 1,131,371 1,870,000 1.0
30,000 Venture Stores, Inc. 784,580 648,750 0.3
485,000 ++The Wet Seal, Inc. (Class A) 1,876,035 2,061,250 1.1
------------ ------------ ------
21,748,777 24,425,652 12.7
Services 60,000 Pinkertons Security &
Investigation Services 1,219,030 1,207,500 0.6
Utilities 105,000 American Water Works Co., Inc. 1,394,798 2,940,000 1.5
Total Stocks & Convertible Bonds 145,736,879 153,247,128 80.0
<CAPTION>
Face Amount Short-Term Securities
<S> <C> <S> <C> <C> <C>
Commercial Paper* $4,000,000 Abbott Laboratories,
3.47% due 4/12/1994 3,995,759 3,995,759 2.1
7,000,000 AT&T Capital Corp.,
3.50% due 4/04/1994 6,997,958 6,997,958 3.7
7,000,000 Corporate Bond Trust,
3.58% due 4/29/1994 6,980,509 6,980,509 3.6
5,000,000 Delaware Funding Corp.,
3.54% due 4/15/1994 4,993,117 4,993,117 2.6
General Electric Capital Corp.:
549,000 3.50% due 4/01/1994 549,000 549,000 0.3
6,371,000 3.53% due 4/04/1994 6,369,126 6,369,126 3.3
8,000,000 PepsiCo Inc., 3.55% due 4/22/1994 7,983,433 7,983,433 4.2
7,000,000 PHH Corp., 3.55% due 4/18/1994 6,988,265 6,988,265 3.6
5,000,000 Sheffield Receivables Corp.,
3.475% due 4/04/1994 4,998,552 4,998,552 2.6
Total Short-Term Securities 49,855,719 49,855,719 26.0
Total Investments $195,592,598 203,102,847 106.0
============
Liabilities in Excess of Other Assets (11,530,933) (6.0)
------------ ------
Net Assets $191,571,914 100.0%
============ ======
<FN>
*Commercial Paper is traded on a discount basis; the interest rates shown are the discount
rates paid at the time of purchase by the Fund.
(a)American Depositary Receipt (ADR).
++Non-income producing securities.
See Notes to Financial Statements.
</TABLE>
46
<PAGE> 85
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of March 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$195,592,598)
(Note 1a) $203,102,847
Receivables:
Capital shares sold $ 2,314,560
Securities sold 480,752
Dividends 53,795
Interest 33,556 2,882,663
------------
Prepaid registration fees and other assets (Note 1d) 38,036
------------
Total assets 206,023,546
------------
Liabilities: Payables:
Securities purchased 12,403,343
Capital shares redeemed 1,317,262
Investment adviser (Note 2) 119,148
Distributor (Note 2) 91,767 13,931,520
------------
Accrued expenses and other liabilities 520,112
------------
Total liabilities 14,451,632
------------
Net Assets: Net assets $191,571,914
============
Net Assets Class A Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 496,195
Class B Common Stock, $0.10 par value,
100,000,000 shares authorized 727,889
Paid-in capital in excess of par 170,972,690
Undistributed investment income--net 99,234
Undistributed realized capital gains--net 11,765,657
Unrealized appreciation on investments--net 7,510,249
------------
Net assets $191,571,914
============
Net Asset Value: Class A--Based on net assets of $78,804,119
and 4,961,948 shares outstanding $ 15.88
============
Class B--Based on net assets of $112,767,795
and 7,278,885 shares outstanding $ 15.49
============
See Notes to Financial Statements.
</TABLE>
47
<PAGE> 86
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended March 31, 1994
<S> <S> <C>
Investment Dividends (net of $1,039 foreign withholding tax) $ 1,578,992
Income Interest and discount earned 1,220,566
(Note 1b & 1c): ------------
Total income 2,799,558
------------
Expenses: Investment advisory fees (Note 2) 1,179,244
Distribution fees--Class B (Note 2) 846,077
Transfer agent fees--Class B (Note 2) 168,543
Transfer agent fees--Class A (Note 2) 127,174
Printing and shareholder reports 98,277
Professional fees 94,471
Accounting services (Note 2) 48,221
Registration fees (Note 1d) 47,106
Directors' fees and expenses 43,898
Custodian fees 37,487
Amortization of organization expenses (Note 1d) 2,927
Other 6,899
------------
Total expenses 2,700,324
------------
Investment income--net 99,234
------------
Realized & Realized gain on investments--net 23,450,584
Unrealized Gain Change in unrealized appreciation on investments--net (6,187,920)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 17,361,898
(Notes 1c & 3): ============
See Notes to Financial Statements.
</TABLE>
48
<PAGE> 87
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ 99,234 $ (41,297)
Realized gain on investments--net 23,450,584 2,626,562
Change in unrealized appreciation on investments--net (6,187,920) 7,794,016
------------ ------------
Net increase in net assets resulting from operations 17,361,898 10,379,281
------------ ------------
Dividends & Investment income--net:
Distributions to Class A -- (77,614)
Shareholders Class B -- --
(Note 1e): Realized gain on investments--net:
Class A (6,037,362) --
Class B (6,735,508) --
------------ ------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (12,772,870) (77,614)
------------ ------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 39,880,101 50,210,840
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 44,469,129 60,512,507
Beginning of year 147,102,785 86,590,278
------------ ------------
End of year* $191,571,914 $147,102,785
============ ============
<FN>
* Undistributed investment income--net $ 99,234 $ 0
============ ============
See Notes to Financial Statements.
</TABLE>
49
<PAGE> 88
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived from Class A
information provided in the financial statements. For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1994** 1993 1992 1991 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 15.32 $ 13.86 $ 10.84 $ 11.36 $ 12.20
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .10 .05 .10 .12 .22
Realized and unrealized gain (loss) on
investments--net 1.87 1.43 3.00 (.49) (.82)
-------- -------- -------- -------- --------
Total from investment operations 1.97 1.48 3.10 (.37) (.60)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.02) (.08) (.15) (.24)
Realized gain on investments--net (1.41) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (1.41) (.02) (.08) (.15) (.24)
-------- -------- -------- -------- --------
Net asset value, end of year $ 15.88 $ 15.32 $ 13.86 $ 10.84 $ 11.36
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 13.14% 10.69% 28.71% (3.15%) (5.05%)
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 1.17% 1.28% 1.55% 1.88% 1.45%
Net Assets: ======== ======== ======== ======== ========
Investment income--net .62% .37% .83% 1.13% 1.62%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 78,804 $ 70,920 $ 57,056 $ 44,818 $ 57,799
Data: ======== ======== ======== ======== ========
Portfolio turnover 68.70% 42.25% 98.76% 73.06% 44.66%
======== ======== ======== ======== ========
<FN>
* Total investment returns exclude the effects
of sales loads.
** Based on an average number of shares outstanding
during the period.
See Notes to Financial Statements.
</TABLE>
50
<PAGE> 89
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
The following per share data and ratios have been derived from Class B
information provided in the financial statements. For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1994** 1993** 1992** 1991** 1990
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 15.01 $ 13.70 $ 10.77 $ 11.29 $ 12.15
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.06) (.09) (.03) -- .07
Realized and unrealized gain (loss) on
investments--net 1.83 1.40 2.98 (.47) (.79)
-------- -------- -------- -------- --------
Total from investment operations 1.77 1.31 2.95 (.47) (.72)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.02) (.05) (.14)
Realized gain on investments--net (1.29) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions (1.29) -- (.02) (.05) (.14)
-------- -------- -------- -------- --------
Net asset value, end of year $ 15.49 $ 15.01 $ 13.70 $ 10.77 $ 11.29
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 12.03% 9.56% 27.41% (4.16%) (6.00%)
Return:* ======== ======== ======== ======== ========
Ratios to Average Total expenses, excluding
Net Assets: distribution fees 1.19% 1.28% 1.51% 1.95% 1.49%
======== ======== ======== ======== ========
Expenses 2.19% 2.28% 2.51% 2.95% 2.49%
======== ======== ======== ======== ========
Investment income (loss)--net (.41%) (.65%) (.27%) (.04%) .59%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $112,768 $ 76,182 $ 29,534 $ 3,783 $ 1,456
Data: ======== ======== ======== ======== ========
Portfolio turnover 68.70% 42.25% 98.76% 73.06% 44.66%
======== ======== ======== ======== ========
<FN>
* Total investment returns exclude
the effects of sales loads.
** Based on an average number of shares
outstanding during the period.
See Notes to Financial Statements.
</TABLE>
51
<PAGE> 90
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Special Value Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
investment management company. The Fund offers both Class A and
Class B Shares. Class A Shares are sold with a front-end sales
charge. Class B Shares may be subject to a contingent deferred sales
charge. Both classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B Shares bear certain expenses related to the
distribution of such shares and have exclusive voting rights with
respect to matters relating to such distribution expenditures. The
following is a summary of significant accounting policies followed
by the Fund.
(a) Valuation of investments--Portfolio securities which are
traded on stock exchanges are valued at the last sale price as of
the close of business on the day the securities are being valued,
or, lacking any sales, at the mean between closing bid and asked
prices. Securities traded in the over-the-counter market are valued
at the most recent bid prices as obtained from one or more dealers
that make markets in the securities. Portfolio securities which are
traded both in the over-the-counter market and on a stock exchange
are valued according to the broadest and most representative market.
Short-term securities are valued at amortized cost which approximates
market. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good
faith by or under the direction of the Fund's Board of Directors.
(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital
gains at various rates.
(c) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend date, except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the funds are informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis. Transaction gains or losses
resulting from changes in the exchange rate on foreign dividends
between ex-dividend date and payable date are reported in net
investment income.
(d) Deferred organization expenses and prepaid registration fees--
Costs related to the organization of the second class of shares are
charged to expense over a five-year period. Prepaid registration
fees are charged to expense as the related shares are issued.
(e) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates.
(f) Reclassifications--Certain items from 1993 have been restated
to conform to the 1994 presentation.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). Effective January 1, 1994, the
investment advisory business of FAM was reorganized from a
corporation to a limited partnership. Both prior to and after the
reorganization, ultimate control of FAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner of FAM is
Princeton Services, Inc., an indirect wholly-owned subsidiary of ML
& Co. The limited partners are ML & Co. and Merrill Lynch Investment
Management, Inc. ("MLIM"), which is also an indirect wholly-owned
subsidiary of ML & Co., and a Distribution Agreement and a
Distribution Plan with Merrill Lynch Funds Distributor, Inc. ("MLFD"
or "Distributor"), a wholly-owned subsidiary of MLIM. FAM is
responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services,
the Fund pays a monthly fee of 0.75%, on an annual basis, of the
average daily value of the Fund's net assets. The Investment
Advisory Agreement obligates FAM to reimburse the Fund to the extent
the Fund's expenses (excluding interest, taxes, distribution fees,
brokerage fees and commissions, and extraordinary items) exceed 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the Fund's next $70 million of average daily net assets, and 1.5% of
the average daily net assets in excess thereof. No fee payment will
be made to the Investment Adviser during the fiscal year which will
cause such expenses to exceed the pro rata expense limitation at the
time of such payment.
52
<PAGE> 91
Pursuant to a distribution plan (the "Distribution Plan") adopted by
the Fund in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Fund pays the Distributor an ongoing account main-
tenance fee and distribution fee, which are accrued daily and paid
monthly at the annual rates of 0.25% and 0.75%, respectively, of the
average daily net assets of the Class B Shares of the Fund. These
fees are to compensate the Distributor for services it provides and
the expenses borne by the Distributor under the Distribution Agree-
ment. As authorized by the Plan, the Distributor has entered into
an agreement with Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S")
which provides for the compensation of MLPF&S for providing distri-
bution-related services to the Fund.
For the year ended March 31, 1994, MLFD earned underwriting discounts
of $5,760, and MLPF&S earned dealer concessions of $156,666 on sale
of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales charges of $158,825 re-
lating to transactions in Class B Shares and $15,386 in commissions
on the execution of portfolio security transactions for the Fund dur-
ing the year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or dir-
ectors of FAM, MLIM, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended March 31, 1994 were $116,050,967 and $85,493,409,
respectively.
Net realized and unrealized gains as of March 31, 1994 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $23,450,584 $7,510,249
----------- ----------
Total $23,450,584 $7,510,249
=========== ==========
As of March 31, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $7,510,249, of which $20,764,885 related to
appreciated securities and $13,254,636 related to depreciated secur-
ities. The aggregate cost of investments at March 31, 1994 for Federal
income tax purposes was $195,592,598.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $39,880,101 and $50,210,840 for the years ended March 31, 1994
and 1993, respectively.
Transactions in capital shares for Class A Shares and Class B Shares
were as follows:
Class A Shares for the Year Dollar
Ended March 31, 1994 Shares Amount
Shares sold 1,242,225 $ 19,995,495
Shares issued to shareholders
in reinvestment of dividends
and distributions 322,010 4,973,387
------------ ------------
Total issued 1,564,235 24,968,882
Shares redeemed (1,232,902) (19,830,929)
------------ ------------
Net increase 331,333 $ 5,137,953
============ ============
Class A Shares for the Year Dollar
Ended March 31, 1993 Shares Amount
Shares sold 1,376,699 $19,725,815
Shares issued to share-
holders in reinvestment
of dividends 5,053 65,682
------------ ------------
Total issued 1,381,752 19,791,497
Shares redeemed (867,861) (12,070,108)
------------ ------------
Net increase 513,891 $ 7,721,389
============ ============
Class B Shares for the Year Dollar
Ended March 31, 1994 Shares Amount
Shares sold 3,509,022 $55,127,981
Shares issued to share-
holders in reinvestment
of dividends and
distributions 387,961 5,863,597
------------ ------------
Total issued 3,896,983 60,991,578
Shares redeemed (1,692,858) (26,249,430)
------------ ------------
Net increase 2,204,125 $ 34,742,148
============ ============
Class B Shares for the Year Dollar
Ended March 31,1993 Shares Amount
Shares sold 4,180,480 $ 59,842,332
Shares issued to shareholders
in reinvestment of dividends -- --
------------ ------------
Total issued 4,180,480 59,842,332
Shares redeemed (1,260,880) (17,352,881)
------------ ------------
Net increase 2,919,600 $ 42,489,451
============ ============
53
<PAGE> 92
[This page is intentionally left blank.]
<PAGE> 93
[This page is intentionally left blank.]
<PAGE> 94
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Investment Objective and Policies........ 2
Portfolio Strategies Involving Options
and Futures............................ 2
Investment Restrictions.................. 7
Management of the Fund................... 9
Directors and Officers............... 9
Management and Advisory
Arrangements....................... 11
Purchase of Shares....................... 12
Alternative Sales Arrangements....... 12
Initial Sales Charge
Alternative--Class A Shares........ 12
Reduced Initial Sales Charges--Class
A Shares........................... 13
Deferred Sales Charge Alternative--
Class B Shares..................... 16
Redemption of Shares..................... 16
Contingent Deferred Sales Charge--
Class B Shares..................... 17
Portfolio Transactions and Brokerage..... 18
Determination of Net Asset Value......... 19
Shareholder Services..................... 20
Investment Account................... 20
Automatic Investment Plan............ 20
Automatic Reinvestment of Dividends
and Capital Gains Distributions.... 21
Systematic Withdrawal Plans--Class A
Shares............................. 21
Retirement Plans..................... 22
Exchange Privilege................... 22
Dividends, Distributions and Taxes....... 34
Dividends and Distributions.......... 34
Taxes................................ 35
Tax Treatment of Options, Futures and
Forward Foreign Exchange
Transactions....................... 36
Special Rules for Certain Foreign
Currency Transactions.................. 37
Performance Data......................... 38
General Information...................... 40
Description of Shares................ 40
Computation of Offering Price per
Share.............................. 40
Independent Auditors................. 41
Custodian............................ 41
Transfer Agent....................... 41
Legal Counsel........................ 41
Reports to Shareholders.............. 41
Additional Information............... 41
Independent Auditors' Report............. 42
Financial Statements..................... 43
Code #10256-0794
</TABLE>
Merrill Lynch
Special Value Fund, Inc.
Statement of
Additional Information
July 28, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 95
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material ommitted
from this EDGAR submission file due to ASCII-incompatability and
cross-references this material to the location of each occurance in the text.
Description of Ommitted Location of Graphic
Graphic or Image Or Image in text
----------------------- -------------------
Merrill Lynch logo and illustration Back Cover of Prospectus and
of part of compass plate and back cover of Statment of
circular graph plate Additional Information
<PAGE> 96
PART C
INFORMATION REQUIRED TO BE INCLUDED IN PART C IS SET FORTH UNDER THE
APPROPRIATE ITEM, SO NUMBERED, IN PART C TO THIS REGISTRATION STATEMENT.
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the ten year period ended
March 31, 1994.
Contained in Part B:
Schedule of Investments, March 31, 1994.
Statement of Assets and Liabilities, March 31, 1994.
Statement of Operations for the year ended March 31, 1994.
Statements of Changes in Net Assets for the years ended March 31, 1994
and 1993.
Financial Highlights for each of the years in the five year period
ended March 31, 1994.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<S> <C>
1(a) -- Articles of Incorporation of Registrant.(a)
(b) -- Articles of Amendment to Articles of Incorporation of Registrant.(b)
2 -- By-Laws of Registrant.
3 -- None.
4(a) -- Portions of Articles of incorporation and By-laws of Registrant
defining the rights of holders of shares of common stock of
Registrant.(d)
(b) -- Specimen certificate for Class A shares of common stock of
Registrant.(b)
(c) -- Specimen certificate for Class B shares of common stock of
Registrant.(b)
</TABLE>
<TABLE>
<S> <C>
5(a) -- Investment Advisory Agreement between Registrant and Fund Asset
Management, Inc.(e)
(b) -- Supplement to Investment Advisory Agreement with Fund Asset Management
L.P.
6(a) -- Class A Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including form of Selected Dealers
Agreement).(f)
(b) -- Class B Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (including form of Selected Dealers
Agreement).(b)
(c) -- Letter Agreement between the Fund and Merrill Lynch Funds Distributor,
Inc., dated September 15, 1993, in connection with the Merrill Lynch
Mutual Fund Adviser program.
7 -- None.
8 -- Custodian Agreement between Registrant and The Bank of New York.(g)
9 -- Transfer Agency Agreement between Registrant and Merrill Lynch
Financial Data Service, Inc. (now known as Financial Data Services,
Inc.).(c)
10 -- None.
11 -- Consent of Deloitte & Touche, independent auditors for the Registrant.
</TABLE>
C-1
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<S> <C>
12 -- None.
13 -- Letter from Fund Asset Management, Inc. with respect to the purchase of
10,417 shares of Registrant's Common Stock.(h)
14(b) -- Prototype Individual Retirement Account Plan, Simplified Employee
Pension Plan and Corporate Individual Retirement Account Plan available
from Merrill Lynch, Pierce, Fenner & Smith Incorporated.(i)
(c) -- Prototype Merrill Lynch Tax-Deferred Basic Retirement Plan available
from Merrill Lynch, Pierce, Fenner & Smith Incorporated.(j)
15 -- Amended and Restated Distribution Plan of Registrant.(k)
16(a) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class A
shares.(b)
(b) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class B
shares.(b)
</TABLE>
- ---------------
(a) Incorporated by reference to Registration Statement under the Securities
Act of 1933 on Form S-5, filed February 24, 1978.
(b) Incorporated by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A, filed October 7, 1988.
(c) Incorporated by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A, filed July 29, 1988.
(d) Reference is made to Article IV, Article V (Sections 3, 5, 6 and 7) and
Articles VI, VII and IX of the Registrant's Articles of Incorporation,
filed as Exhibit 1 to the Registration Statement on Form N-1A and to
Article II, Article III (Sections 1, 3, 5 and 6) and Articles VI, VII, XIII
and XIV of the Registrant's By-Laws, filed as Exhibit 2 to the Registration
Statement on Form N-1A.
(e) Incorporated by reference to Post-Effective Amendment No. 3 to Registrant's
Registration Statement under the Securities Act of 1933 on Form N-1, filed
July 11, 1979.
(f) Incorporated by reference to Post-Effective Amendment No. 3 to Registrant's
Registration Statement under the Securities Act of 1933 on Form N-1, filed
July 11, 1979.
(g) Incorporated by reference to Post-Effective Amendment No. 3 to Registrant's
Registration Statement under the Securities Act of 1933 on Form N-1, filed
July 11, 1979.
(h) Incorporated by reference to Post-Effective Amendment No. 3 to Registrant's
Registration Statement under the Securities Act of 1933 on Form N-1, filed
July 11, 1979.
(i) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement under the Securities Act of 1933 on Form N-1 (File
No. 2-74584) of Merrill Lynch Retirement Series Trust, filed January 26,
1982.
(j) Incorporated by reference to Post-Effective Amendment No. 3 to the
Registration Statement under the Securities Act of 1933 on Form N-1A (File
No. 2-74584) of Merrill Lynch Retirement Series Trust, filed December 29,
1983.
(k) Incorporated by reference to Post-Effective Amendment No. 18 to the
Registrant's Registration Statement under the Securities Act of 1933 on Form
N-1A, filed June 11, 1993.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS JUNE 30, 1994
--------------------------------------------------------------------- -----------------
<S> <C>
Class A Common Stock, par value $0.10 per share...................... 3,124
Class B Common Stock, par value $0.10 per share...................... 16,231
</TABLE>
C-2
<PAGE> 98
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A and Class B Shares Distribution
Agreements.
Insofar as the conditional advancing of indemnification monies 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) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a defense
to the action, including costs connected with the preparation of a settlement;
(ii) advances may be made only on receipt of a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the amount
to which it is ultimately determined that he is entitled to receive from the
Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, (b) the Registrant is insured
against losses arising by receipt of 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 the recipient of the advance ultimately will be found
entitled to indemnification.
In Section 9 of the Class A and Class B 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 the Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Fund Asset Management, L.P. (the "Investment Adviser") acts as investment
adviser for the following registered investment companies: Apex Municipal Fund,
Inc., CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Financial Institutions Series Trust, Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal Securities Trust,
Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.,
MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc.,
MuniYield
C-3
<PAGE> 99
California Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield
California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida
Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield New York Insured Fund III, Inc. and MuniYield Pennsylvania Fund.
Merrill Lynch Asset Management, L.P. ("MLAM"), acts as investment adviser for
the following investment companies: Convertible Holdings, Inc., Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund, Inc.,
Merrill Lynch Balanced Fund for Investment and Retirement, Merrill Lynch Capital
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Global Bond
Fund for Investment and Retirement, Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Convertible Fund, Inc., Merrill Global Holdings, Merrill
Lynch Global Resources Trust, Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc. The address of each of these investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Institutional Intermediate Fund
is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Investment Adviser and Merrill Lynch Funds Distributor, Inc. (the
"Distributor"), and their parent corporation (MLAM), is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281-1201.
Set forth below is a list of each officer and director of the Investment
Adviser indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since April 1,
1989 for his own account or in the capacity of director, officer, partner or
trustee. In addition, Mr. Zeikel is President, Mr. Richard is Treasurer and Mr.
Glenn is Executive Vice President of all or substantially all of the investment
companies described in the preceding paragraph and also hold the same positions
with all or substantially all of the investment companies advised by MLAM as
they do with those advised by the Investment Adviser. Messrs. Durnin, Giordano,
Harvey, Monagle and Kirstein are directors or officers of one or more of such
companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
- ------------------------- -------------------------- -----------------------------------------
<S> <C> <C>
Arthur Zeikel............ President President of MLAM; Director of the
Distributor; Executive Vice President
of ML & Co.; Executive Vice President
of Merrill Lynch
Terry K. Glenn........... Executive Vice President Executive Vice President of MLAM;
President and Director of the
Distributor; President of Princeton
Administrators, L.P.
Bernard J. Durnin........ Senior Vice President Senior Vice President of MLAM
Vincent R. Giordano...... Senior Vice President Senior Vice President of MLAM
Elizabeth Griffin........ Senior Vice President Senior Vice President of MLAM
Norman R. Harvey......... Senior Vice President Senior Vice President of MLAM
N. John Hewitt........... Senior Vice President Senior Vice President of MLAM
</TABLE>
C-4
<PAGE> 100
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
- ------------------------- -------------------------- -----------------------------------------
<S> <C> <C>
Philip L. Kirstein....... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of MLAM, Director of the
Secretary Distributor
Ronald M. Kloss.......... Senior Vice President and Senior Vice President and Controller of
Controller MLAM
Joseph T. Monagle, Senior Vice President Senior Vice President of MLAM
Jr. ...................
Gerald M. Richard........ Senior Vice President and Senior Vice President and Treasurer of
Treasurer MLAM; Vice President and Treasurer of
the Distributor
Richard L. Rufener....... Senior Vice President Senior Vice President of MLAM; Vice
President of the Distributor
Ronald L. Welburn........ Senior Vice President Senior Vice President of MLAM
Anthony Wiseman.......... Senior Vice President Senior Vice President of MLAM
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) The Distributor acts as the principal underwriter for the Registrant
and for each of the investment companies referred to in the first paragraph of
Item 28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities
Fund 2000, Inc., MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California
Insured Fund, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest New York Insured Fund Inc., MuniVest
Pennsylvania Fund, MuniYield Arizona Fund, MuniYield Arizona Fund II, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured
Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield New York Insured
Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High
Income Portfolio II, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew
York Holdings, Inc. and Worldwide DollarVest, Inc.
(b) Set forth below is information concerning each director and officer of
the Distributor. The principal business address of each such person is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the
C-5
<PAGE> 101
address of Messrs. Aldrich, Crook, Breen, Graczyk, Fatseas and Wasel is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH THE DISTRIBUTOR WITH REGISTRANT
- ---------------------------- --------------------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn.............. President and Director Executive Vice President
Arthur Zeikel............... Director President and Director
Philip L. Kirstein.......... Director None
William E. Aldrich.......... Senior Vice President None
Robert W. Crook............. Senior Vice President None
Michael J. Brady............ Vice President None
William M. Breen............ Vice President None
Sharon Creveling............ Vice President and Assistant Treasurer None
Mark A. DeSario............. Vice President None
James T. Fatseas............ Vice President None
Stanley Graczyk............. Vice President None
Michelle T. Lau............. Vice President None
Gerald M. Richard........... Vice President and Treasurer Treasurer
Richard L. Rufener.......... Vice President None
Salvatore Venezia........... Vice President None
William Wasel............... Vice President None
Robert Harris............... Vice President None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder are
maintained at the offices of the Registrant and its Custodian and Financial Data
Services, Inc.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Fund--Management and Advisory Arrangements" in the Prospectus constituting Part
A of the Registration Statement and under "Management of the Fund--Management
and Advisory Arrangements" in the Statement of Additional Information
constituting Part B of the Registration Statement, Registrant is not a party to
any management-related service contract.
ITEM 32. UNDERTAKINGS.
Not applicable.
C-6
<PAGE> 102
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 REGISTRATION STATEMENT PURSUANT TO
RULE 485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND THE STATE OF NEW JERSEY, ON
THE 27TH DAY OF JULY 1994.
MERRILL LYNCH SPECIAL VALUE FUND, INC.
(REGISTRANT)
By /s/ ARTHUR ZEIKEL
------------------------------------
(ARTHUR ZEIKEL, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE(S) INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE(S)
- ------------------------------------------------ ------------------------------- --------------
<S> <C> <C>
/s/ ARTHUR ZEIKEL* President and Director July 27, 1994
- ------------------------------------------------ (Principal Executive Officer)
(ARTHUR ZEIKEL)
/s/ GERALD M. RICHARD Treasurer (Principal Financial July 27, 1994
- ------------------------------------------------ and Accounting Officer)
(GERALD M. RICHARD)
DONALD CECIL* Director
- ------------------------------------------------
(DONALD CECIL)
M. COLYER CRUM* Director
- ------------------------------------------------
(M. COLYER CRUM)
EDWARD H. MEYER* Director
- ------------------------------------------------
(EDWARD H. MEYER)
JACK B. SUNDERLAND* Director
- ------------------------------------------------
(JACK B. SUNDERLAND)
J. THOMAS TOUCHTON* Director
- ------------------------------------------------
(J. THOMAS TOUCHTON)
*By ARTHUR ZEIKEL July 27, 1994
- ------------------------------------------------
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT)
</TABLE>
C-7
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ -------------------------------------------------------------------- ------
<S> <C> <C>
2 -- By-Laws of Registrant
5(b) -- Supplement to Investment Advisory Agreement with Fund Asset
Management, L.P.
6(c) -- Letter Agreement between the Fund and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection with
the Merrill Lynch Mutual Fund Adviser program
11 -- Consent of Deloitte & Touche, independent auditors for Registrant
</TABLE>
<PAGE> 1
EXHIBIT 2
Adopted May 5, 1994
BY-LAWS
OF
MERRILL LYNCH SPECIAL VALUE FUND, INC.
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the the
Corporation shall be in the City of Baltimore, State of Maryland.
Section 2. Principal Executive Office. The principal executive
office of the Corporation shall be at 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
Section 3. Other Offices. The Corporation may have such other
offices in such places as the Board of Directors may from time to time
determine.
ARTICLE II
Meetings of Stockholders
Section 1. Annual Meeting. The Corporation shall not be required to
hold an annual meeting of its stockholders in any year in which the election of
directors is not required to be acted upon under the Investment Company Act of
1940. In the event that the Corporation shall be required to hold an annual
meeting of stockholders to elect directors by the Investment
<PAGE> 2
Company Act of 1940, as amended, such meeting shall be held no later than 120
days after the occurrence of the event requiring the meeting. Any
stockholders' meeting held in accordance with this Section shall for all
purposes constitute the annual meeting of stockholders for the year in which
the meeting is held.
Section 2. Special Meetings. Special meetings of the stockholders,
unless otherwise provided by law, may be called for any purpose or purposes by
a majority of the Board of Directors, the President, or on the written request
of the holders of at least 10% of the outstanding shares of capital stock of
the Corporation entitled to vote at such meeting if they comply with Section 2-
502(b) or (c) of the Maryland General Corporation Law.
Section 3. Place of Meetings. Meetings of the stockholders shall be
held at such place within the United States as the Board of Directors may from
time to time determine.
Section 4. Notice of Meetings; Waiver of Notice. Notice of the
place, date and time of the holding of each stockholders' meeting and, if the
meeting is a special meeting, the purpose or purposes of the special meeting,
shall be given personally or by mail, not less than ten nor more than ninety
days before the date of such meeting, to each stockholder entitled to vote at
such meeting and to each other stockholder entitled to notice of the meeting.
Notice by mail shall be deemed to be duly given when deposited in the United
States mail addressed to the stockholder
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at his address as it appears on the records of the Corporation, with postage
thereon prepaid.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, or who shall,
either before or after the meeting, submit a signed waiver of notice which is
filed with the records of the meeting. When a meeting is adjourned to another
time and place, unless the Board of Directors, after the adjournment, shall fix
a new record date for an adjourned meeting, or the adjournment is for more than
one hundred and twenty days after the original record date, notice of such
adjourned meeting need not be given if the time and place to which the meeting
shall be adjourned were announced at the meeting at which the adjournment is
taken.
Section 5. Quorum. At all meetings of the stockholders, the holders
of shares of stock of the Corporation entitled to cast a majority of the votes
entitled to be cast, present in person or by proxy, shall constitute a quorum
for the transaction of any business, except with respect to any matter which
requires approval by a separate vote of one or more classes of stock, in which
case the presence in person or by proxy of the holders of shares entitled to
cast a majority of the votes entitled to be cast by each class entitled to vote
as a separate class shall constitute a quorum. In the absence of a quorum no
business may be transacted, except that the holders of a majority of the shares
of stock present in person or by proxy and entitled to
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<PAGE> 4
vote may adjourn the meeting from time to time, without notice other than
announcement thereat except as otherwise required by these By-Laws, until the
holders of the requisite amount of shares of stock shall be so present. At any
such adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally
called. The absence from any meeting, in person or by proxy, of holders of the
number of shares of stock of the Corporation in excess of a majority thereof
which may be required by the laws of the State of Maryland, the Investment
Company Act of 1940, as amended, or other applicable statute, the Articles of
Incorporation, or these By-Laws, for action upon any given matter shall not
prevent action at such meeting upon any other matter or matters which may
properly come before the meeting, if there shall be present thereat, in person
or by proxy, holders of the number of shares of stock of the Corporation
required for action in respect of such other matter or matters.
Section 6. Organization. At each meeting of the stockholders, the
Chairman of the Board (if one has been designated by the Board), or in his
absence or inability to act, the President, or in the absence or inability to
act of the Chairman of the Board and the President, a Vice President, shall act
as chairman of the meeting. The Secretary, or in his absence or inability to
act, any person appointed by the chairman of the meeting, shall act as
secretary of the meeting and keep the minutes thereof.
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<PAGE> 5
Section 7. Order of Business. The order of business at all meetings
of the stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute or the
Articles of Incorporation, each holder of record of shares of stock of the
Corporation having voting power shall be entitled at each meeting of the
stockholders to one vote for every share of such stock standing in his name on
the record of stockholders of the Corporation as of the record date determined
pursuant to Section 9 of this Article or if such record date shall not have
been so fixed, then at the later of (i) the close of business on the day on
which notice of the meeting is mailed or (ii) the thirtieth day before the
meeting.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by such
stockholder or his attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof, unless otherwise provided in
the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy states that it is
irrevocable and where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, the Articles of Incorporation or these By-Laws,
any corporate action to be taken by vote of the stockholders (other than the
election of directors, which shall be by plurality vote)
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<PAGE> 6
shall be authorized by a majority of the total votes cast at a meeting of
stockholders by the holders of shares present in person or represented by proxy
and entitled to vote on such action.
If a vote shall be taken on any question other than the election of
directors, which shall be by written ballot, then unless required by statute or
these By-Laws, or determined by the chairman of the meeting to be advisable,
any such vote need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his proxy, if there be such proxy, and
shall state the number of shares voted.
Section 9. Fixing of Record Date. The Board of Directors may set a
record date for the purpose of determining stockholders entitled to vote at any
meeting of the stockholders. The record date, which may not be prior to the
close of business on the day the record date is fixed, shall be not more than
ninety nor less than ten days before the date of the meeting of the
stockholders. All persons who were holders of record of shares at such time,
and not others, shall be entitled to vote at such meeting and any adjournment
thereof.
Section 10. Inspectors. The Board may, in advance of any meeting of
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any
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<PAGE> 7
stockholder entitled to vote thereat shall, appoint inspectors. Each
inspector, before entering upon the discharge of his duties, may be required to
take and sign an oath to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of his ability. The
inspectors may be empowered to determine the number of shares outstanding and
the voting powers of each, the number of shares represented at the meeting, the
existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them.
No director or candidate for the office of director shall act as inspector of
an election of directors. Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by statute or the Articles of Incorporation, any action
required to be taken at any meeting of stockholders, or any action which may be
taken at any meeting of such stockholders, may be taken without a meeting,
without prior
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<PAGE> 8
notice and without a vote, if the following are filed with the records of
stockholders meetings: (i) a unanimous written consent which sets forth the
action and is signed by each stockholder entitled to vote on the matter and
(ii) a written waiver of any right to dissent signed by each stockholder
entitled to notice of the meeting but not entitled to vote thereat.
ARTICLE III
Board of Directors
Section 1. General Powers. Except as otherwise provided in the
Articles of Incorporation, the business and affairs of the Corporation shall be
managed under the direction of the Board of Directors. All powers of the
Corporation may be exercised by or under authority of the Board of Directors
except as conferred on or reserved to the stockholders by law or by the
Articles of Incorporation or these By-Laws.
Section 2. Number of Directors. The number of directors shall be
fixed from time to time by resolution of the Board of Directors adopted by a
majority of the entire Board of Directors; provided, however, that the number
of directors shall in no event be less than three nor more than fifteen. Any
vacancy created by an increase in Directors may be filled in accordance with
Section 6 of this Article III. No reduction in the number of directors shall
have the effect of removing any director from office prior to the expiration of
his term unless such director is specifically
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<PAGE> 9
removed pursuant to Section 5 of this Article III at the time of such decrease.
Directors need not be stockholders.
Section 3. Election and Term of Directors. Directors shall be
elected annually by written ballot at a meeting of stockholders held for that
purpose; provided, however, that if no meeting of the stockholders of the
Corporation is required to be held in a particular year pursuant to Section 1
of Article II of these By-Laws, directors shall be elected at the next meeting
held. The term of office of each director shall be from the time of his
election and qualification until the election of directors next succeeding his
election and until his successor shall have been elected and shall have
qualified, or until his death, or until he shall have resigned, or until
December 31 of the year in which he shall have reached seventy-two years of
age, or until he shall have been removed as hereinafter provided in these
By-Laws, or as otherwise provided by statute or the Articles of Incorporation.
Section 4. Resignation. A director of the Corporation may resign at
any time by giving written notice of his resignation to the Board or the
Chairman of the Board or the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
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<PAGE> 10
Section 5. Removal of Directors. Any director of the Corporation may
be removed by the stockholders by a vote of a majority of the votes entitled to
be cast for the election of directors.
Section 6. Vacancies. Any vacancies in the Board, whether arising
from death, resignation, removal, an increase in the number of directors or any
other cause, may be filled by a vote of the majority of the Board of Directors
then in office even though such majority is less than a quorum, provided that
no vacancies shall be filled by action of the remaining directors, if after the
filling of said vacancy or vacancies, less than two-thirds of the directors
then holding office shall have been elected by the stockholders of the
Corporation. In the event that at any time there is a vacancy in any office of
a director which vacancy may not be filled by the remaining directors, a
special meeting of the stockholders shall be held as promptly as possible and
in any event within sixty days, for the purpose of filling said vacancy or
vacancies.
Section 7. Place of Meetings. Meetings of the Board may be held at
such place as the Board may from time to time determine or as shall be
specified in the notice of such meeting.
Section 8. Regular Meetings. Regular meetings of the Board may be
held without notice at such time and place as may be determined by the Board of
Directors.
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<PAGE> 11
Section 9. Special Meetings. Special meetings of the Board may be
called by two or more directors of the Corporation or by the Chairman of the
Board or the President.
Section 10. Telephone Meetings. Members of the Board of Directors or
of any committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Subject to the provisions of
the Investment Company Act of 1940, as amended, participation in a meeting by
these means constitutes presence in person at the meeting.
Section 11. Notice of Special Meetings. Notice of each special
meeting of the Board shall be given by the Secretary as hereinafter provided,
in which notice shall be stated the time and place of the meeting. Notice of
each such meeting shall be delivered to each director, either personally or by
telephone or any standard form of telecommunication, at least twenty-four hours
before the time at which such meeting is to be held, or by first-class mail,
postage prepaid, addressed to him at his residence or usual place of business,
at least three days before the day on which such meeting is to be held.
Section 12. Waiver of Notice of Meetings. Notice of any special
meeting need not be given to any director who shall, either before or after the
meeting, sign a written waiver of notice which is filed with the records of the
meeting or who
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<PAGE> 12
shall attend such meeting. Except as otherwise specifically required by these
By-Laws, a notice or waiver or notice of any meeting need not state the
purposes of such meeting.
Section 13. Quorum and Voting. One-third, but not less than two, of
the members of the entire Board shall be present in person at any meeting of
the Board in order to constitute a quorum for the transaction of business at
such meeting, and except as otherwise expressly required by statute, the
Articles of Incorporation, these By-Laws, the Investment Company Act of 1940,
as amended, or other applicable statute, the act of a majority of the directors
present at any meeting at which a quorum is present shall be the act of the
Board. In the absence of a quorum at any meeting of the Board, a majority of
the directors present thereat may adjourn such meeting to another time and
place until a quorum shall be present thereat. Notice of the time and place of
any such adjourned meeting shall be given to the directors who were not present
at the time of the adjournment and, unless such time and place were announced
at the meeting at which the adjournment was taken, to the other directors. At
any adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally
called.
Section 14. Organization. The Board may, by resolution adopted by a
majority of the entire Board, designate a Chairman of the Board, who shall
preside at each meeting of the Board. In
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<PAGE> 13
the absence or inability of the Chairman of the Board to preside at a meeting,
the President or, in his absence or inability to act, another director chosen
by a majority of the directors present, shall act as chairman of the meeting
and preside thereat. The Secretary (or, in his absence or inability to act,
any person appointed by the Chairman) shall act as secretary of the meeting and
keep the minutes thereof.
Section 15. Written Consent of Directors in Lieu of a Meeting.
Subject to the provisions of the Investment Company Act of 1940, as amended,
any action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing, and the writings or writing are filed with the minutes of the
proceedings of the Board or committee.
Section 16. Compensation. Directors may receive compensation for
services to the Corporation in their capacities as directors or otherwise in
such manner and in such amounts as may be fixed from time to time by the Board.
Section 17. Investment Policies. It shall be the duty of the Board
of Directors to direct that the purchase, sale, retention and disposal of
portfolio securities and the other investment practices of the Corporation are
at all times consistent with the investment policies and restrictions with
respect to securities investments and otherwise of the Corporation, as
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<PAGE> 14
recited in the current Prospectus and Statement of Additional Information of
the Corporation, as filed from time to time with the Securities and Exchange
Commission and as required by the Investment Company Act of 1940, as amended.
The Board however, may delegate the duty of management of the assets and the
administration of its day to day operations to an individual or corporate
management company and/or investment adviser pursuant to a written contract or
contracts which have obtained the requisite approvals, including the requisite
approvals of renewals thereof, of the Board of Directors and/or the
stockholders of the Corporation in accordance with the provisions of the
Investment Company Act of 1940, as amended.
ARTICLE IV
Committees
Section 1. Executive Committee. The Board may, by resolution adopted
by a majority of the entire board, designate an Executive Committee consisting
of two or more of the directors of the Corporation, which committee shall have
and may exercise all the powers and authority of the Board with respect to all
matters other than:
(a) the submission to stockholders of any action requiring
authorization of stockholders pursuant to statute or the Articles of
Incorporation;
(b) the filling of vacancies on the Board of Directors;
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(c) the fixing of compensation of the directors for serving on the
Board or on any committee of the Board, including the Executive Committee;
(d) the approval or termination of any contract with an investment
adviser or principal underwriter, as such terms are defined in the Investment
Company Act of 1940, as amended, or the taking of any other action required to
be taken by the Board of Directors by the Investment Company Act of 1940, as
amended;
(e) the amendment or repeal of these By-Laws or the adoption of new
By-Laws;
(f) the amendment or repeal of any resolution of the Board
which by its terms may be amended or repealed only by the Board;
(g) the declaration of dividends and the issuance of capital stock
of the Corporation; and
(h) the approval of any merger or share exchange which does not
require stockholder approval.
The Executive Committee shall keep written minutes of its proceedings
and shall report such minutes to the Board. All such proceedings shall be
subject to revision or alteration by the Board; provided, however, that third
parties shall not be prejudiced by such revision or alteration.
Section 2. Other Committees of the Board. The Board of Directors may
from time to time, by resolution adopted by a majority of the whole Board,
designate one or more other committees of the Board, each such committee to
consist of two or
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more directors and to have such powers and duties as the Board of Directors
may, by resolution, prescribe.
Section 3. General. One-third, but not less than two, of the members of
any committee shall be present in person at any meeting of such committee in
order to constitute a quorum for the transaction of business at such meeting,
and the act of a majority present shall be the act of such committee. The Board
may designate a chairman of any committee and such chairman or any two members
of any committee may fix the time and place of its meetings unless the Board
shall otherwise provide. In the absence or disqualification of any member of
any committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. The Board shall
have the power at any time to change the membership of any committee, to fill
all vacancies, to designate alternate members to replace any absent or
disqualified member, or to dissolve any such committee. Nothing herein shall be
deemed to prevent the Board from appointing one or more committees consisting in
whole or in part of persons who are not directors of the Corporation; provided,
however, that no such committee shall have or may exercise any authority or
power of the Board in the management of the business or affairs of the
Corporation.
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ARTICLE V
Officers, Agents and Employees
Section 1. Number and Qualifications. The officers of the
Corporation shall be a President, a Secretary and a Treasurer, each of whom
shall be elected by the Board of Directors. The Board of Directors may elect
or appoint one or more Vice Presidents and may also appoint such other
officers, agents and employees as it may deem necessary or proper. Any two or
more offices may be held by the same person, except the offices of President
and Vice President, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity. Such officers shall be elected by the
Board of Directors each year at a meeting of the Board of Directors, each to
hold office for the ensuing year and until his successor shall have been duly
elected and shall have qualified, or until his death, or until he shall have
resigned, or have been removed, as hereinafter provided in these By-Laws. The
Board may from time to time elect, or delegate to the President the power to
appoint, such officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) and such
agents, as may be necessary or desirable for the business of the Corporation.
Such officers and agents shall have such duties and shall hold their offices
for such terms as may be prescribed by the Board or by the appointing
authority.
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Section 2. Resignations. Any officer of the Corporation may resign
at any time by giving written notice of resignation to the Board, the Chairman
of the Board, President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall be
necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent
or employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors.
Such removal shall be without prejudice to such person's contract rights, if
any, but the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board of Directors, but
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this power may be delegated to any officer in respect of other officers under
his control.
Section 6. Bonds or Other Security. If required by the Board, any
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
Section 7. President. The President shall be the chief executive
officer of the Corporation. In the absence of the Chairman of the Board (or if
there be none), he shall preside at all meetings of the stockholders and of the
Board Directors. He shall have, subject to the control of the Board of
Directors, general charge of the business and affairs of the Corporation. He
may employ and discharge employees and agents of the Corporation, except such
as shall be appointed by the Board, and he may delegate these powers.
Section 8. Vice President. Each Vice President shall have such
powers and perform such duties as the Board of Directors or the President may
from time to time prescribe.
Section 9. Treasurer. The Treasurer shall:
(a) have charge and custody of, and be responsible for, all the funds
and securities of the Corporation, except those which the Corporation has
placed in the custody of a bank or trust company or member of a national
securities exchange (as that term is defined in the Securities Exchange Act of
1934, as amended)
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pursuant to a written agreement designating such bank or trust company or
member of a national securities exchange as custodian of the property of the
Corporation;
(b) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(c) cause all moneys and other valuables to be deposited to the
credit of the Corporation;
(d) receive, and give receipts for, moneys due and payable, to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board, taking proper
vouchers therefor; and
(f) in general, perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him by
the Board or the President.
Section 10. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books provided for the
purpose, the minutes of all meetings of the Board, the committees of the Board
and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a facsimile,
as
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hereinafter provided) and affix and attest the seal to all other documents to
be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly kept
and filed; and
(e) in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Board or the President.
Section 11. Delegation of Duties. In case of the absence of any
officer of the Corporation, or for any other reason that the Board may deem
sufficient, the Board may confer for the time being the powers or duties, or
any of them, of such officer upon any other officer or upon any director.
ARTICLE VI
Indemnification
Each officer and director of the Corporation shall be indemnified by
the Corporation to the full extent permitted under the Maryland General
Corporation Law, except that such indemnity shall not protect any such person
against any liability to the Corporation or any stockholder thereof to which
such person would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office. Absent a court determination that an
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officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office, the decision by
the Corporation to indemnify such person must be based upon the reasonable
determination of independent legal counsel in a written opinion or the vote of
a majority of a quorum of the directors who are neither "interested persons,"
as defined in Section 2(a)(19) of the Investment Company Act of 1940, as
amended, nor parties to the proceeding ("non-party independent directors"),
after review of the facts, that such officer or director is not guilty of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Each officer and director of the Corporation claiming indemnification
within the scope of this Article VI shall be entitled to advances from the
Corporation for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the
full extent permitted under the Maryland General Corporation Law without a
preliminary determination as to his or her ultimate entitlement to
indemnification (except as set forth below); provided, however, that the person
seeking indemnification shall provide to the Corporation a written affirmation
of his good faith belief that the standard of conduct necessary for
indemnification by the Corporation has been met and a written
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undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person
seeking indemnification shall provide a security in form and amount acceptable
to the Corporation for his undertaking; (b) the Corporation is insured against
losses arising by reason of the advance; (c) a majority of a quorum of
non-party independent directors, or independent legal counsel in a written
opinion, shall determine, based on a review of facts readily available to the
Corporation at the time the advance is proposed to be made, that there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
The Corporation may purchase insurance on behalf of an officer or
director protecting such person to the full extent permitted under the General
Laws of the State of Maryland, from liability arising from his activities as
officer or director of the Corporation. The Corporation, however, may not
purchase insurance on behalf of any officer or director of the Corporation that
protects or purports to protect such person from liability to the Corporation
or to its stockholders to which such officer or director would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
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The Corporation may indemnify, make advances or purchase insurance to
the extent provided in this Article VI on behalf of an employee or agent who is
not an officer or director of the Corporation.
ARTICLE VII
Capital Stock
Section 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon request to have a certificate or
certificates, in such form as shall be approved by the Board, representing the
number of shares of stock of the Corporation owned by him, provided, however,
that certificates for fractional shares will not be delivered in any case. The
certificates representing shares of stock shall be signed by or in the name of
the Corporation by the Chairman, President or a Vice President and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer
and sealed with the seal of the Corporation. Any or all of the signatures or
the seal on the certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate shall be issued, it may be issued by the
Corporation with the same effect as if such officer, transfer agent or
registrar were still in office at the date of issue.
24
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Section 2. Books of Account and Record of Stockholders. There shall
be kept at the principal executive office of the Corporation correct and
complete books and records of account of all the business and transactions of
the Corporation. There shall be made available upon request of any
stockholder, in accordance with Maryland law, a record containing the number of
shares of stock issued during a specified period not to exceed twelve months
and the consideration received by the Corporation for each such share.
Section 3. Transfers of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only by the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and on surrender of the certificate or certificates, if issued,
for such shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation shall not be bound to recognize any
equitable or
25
<PAGE> 26
legal claim to or interest in any such share or shares on the part of any other
person.
Section 4. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of
any certificates representing shares of stock of the Corporation shall
immediately notify the Corporation of any loss, destruction or mutilation of
such certificate, and the Corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it which the owner thereof
shall allege to have been lost or destroyed or which shall have been
mutilated, and the Board may, in its discretion, require such owner or his
legal representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance
26
<PAGE> 27
of a new certificate. Anything herein to the contrary notwithstanding, the
Board, in its absolute discretion, may refuse to issue any such new
certificate, except pursuant to legal proceedings under the laws of the State
of Maryland.
Section 6. Fixing of a Record Date for Dividends and Distributions.
The Board may fix, in advance, a date not more than ninety days preceding the
date fixed for the payment of any dividend or the making of any distribution or
the allotment of rights to subscribe for securities of the Corporation, or for
the delivery of evidences of rights or evidences of interests arising out of
any change, conversion or exchange of common stock or other securities, as the
record date for the determination of the stockholders entitled to receive any
such dividend, distribution, allotment, rights or interests, and in such case
only the stockholders of record at the time so fixed shall be entitled to
receive such dividend, distribution, allotment, rights or interests.
Section 7. Information to Stockholders and Others. Any stockholder
of the Corporation or his agent may inspect and copy during usual business
hours the Corporation's By-Laws, minutes of the proceedings of its
stockholders, annual statements of its affairs, and voting trust agreements on
file at its principal office.
27
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ARTICLE VIII
Seal
The seal of the Corporation shall be circular in form and shall bear,
in addition to any other emblem or device approved by the Board of Directors,
the name of the Corporation, the year of its incorporation and the words
"Corporate Seal" and "Maryland." Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner reproduced.
ARTICLE IX
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the 31st day of March.
ARTICLE X
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation shall be
deposited with such banks or other depositories as the Board of Directors of
the Corporation may from time to time determine.
Section 2. Custodians. All securities and other investments shall be
deposited in the safekeeping of such banks or other companies as the Board of
Directors of the Corporation may from time to time determine. Every
arrangement entered into
28
<PAGE> 29
with any bank or other company for the safekeeping of the securities and
investments of the Corporation shall contain provisions complying with the
Investment Company Act of 1940, as amended, and the general rules and
regulations thereunder.
ARTICLE XI
Execution of Instruments
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as
the Board of Directors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Stock certificates, bonds
or other securities at any time owned by the Corporation may be held on behalf
of the Corporation or sold, transferred or otherwise disposed of subject to any
limits imposed by these By-Laws and pursuant to authorization by the Board
and, when so authorized to be held on behalf of the Corporation or sold,
transferred or otherwise disposed of, may be transferred from the name of the
Corporation by the signature of the President or a Vice President or the
Treasurer or pursuant to any procedure approved by the Board of Directors,
subject to applicable law.
29
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ARTICLE XII
Independent Public Accountants
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the Securities
and Exchange Commission shall be selected annually by the Board of Directors
and, if required by the provisions of the Investment Company Act of 1940, as
amended, ratified by the stockholders.
ARTICLE XIII
Annual Statement
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of
the Corporation and at such other times as may be directed by the Board. A
report to the stockholders based upon each such examination shall be mailed to
each stockholder of the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the same appears
on the books of the Corporation. Such annual statement shall also be available
at the annual meeting of stockholders, if any, and within 20 days after the
meeting (or, in the absence of an annual meeting, within 120 days after the end
of the fiscal year), shall be placed on file at the Corporation's principal
office. Each such report shall show the
30
<PAGE> 31
assets and liabilities of the Corporation as of the close of the annual or
quarterly period covered by the report and the securities in which the funds of
the Corporation were then invested. Such report shall also show the
Corporation's income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the annual or quarterly
period covered by the report and any other information required by the
Investment Company Act of 1940, as amended, and shall set forth such other
matters as the Board or such firm of independent public accountants shall
determine.
ARTICLE XIV
Amendments
These By-Laws or any of them may be amended, altered or repealed by
the Board of Directors. The stockholders shall have no power to make, amend,
alter or repeal By-Laws.
31
<PAGE> 1
Exhibit 5(b)
SUPPLEMENT TO INVESTMENT ADVISORY AGREEMENT
WITH
MERRILL LYNCH ASSET MANAGEMENT
As of January 1, 1994 Merrill Lynch Investment Management, Inc. d/b/a Merrill
Lynch Asset Management was reorganized as a limited partnership, formally known
as Merrill Lynch Asset Management, L.P. and continuing to do business under the
name Merrill Lynch Asset Management ("MLAM"). The general partner of MLAM is
Princeton Services, Inc. and the limited partners are Merrill Lynch Investment
Management, Inc. and Merrill Lynch & Co., Inc. Pursuant to Rule 202(a)(1)-1
under the Investment Advisers Act of 1940 and Rule 2a-6 under the Investment
Company Act of 1940 such reorganization did not constitute an assignment of
this investment advisory agreement since it did not involve a change of control
or management of the investment adviser. Pursuant to the requirements of
Section 205 of the Investment Advisers Act of 1940, however, Merrill Lynch
Asset Management hereby supplements this investment advisory agreement by
undertaking to advise you of any change in the membership of the partnership
within a reasonable time after any such change occurs.
By /s/ ARTHUR ZEIKEL
-----------------
Dated: January 3, 1994
<PAGE> 1
September 15, 1993
Merrill Lynch Funds Distributor, Inc.
Post Office Box 9011
Princeton, New Jersey 08543-9011
Each of the undersigned open-end investment companies (the "Funds")
has entered into a Distribution Agreement with Merrill Lynch Funds Distributor,
Inc. (the "Distributor"). Under the terms of such agreements, the Distributor
is authorized to offer shares of each Fund and to purchase, as principal, such
number of shares from each of the Funds as are needed to fill unconditional
orders for shares of such Fund placed with the Distributor by investors or by
securities dealers.
This letter confirms the agreement by each Fund with the Distributor
that, in connection with the Merrill Lynch Mutual Fund Adviser program, the
Distributor and its affiliate, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, are also authorized
<PAGE> 2
to offer and sell shares of such Fund, as agent for the Fund, to participants
in such program. This letter further confirms that the terms of the
Distribution Agreement between each Fund and the Distributor shall apply to
such sales, including terms as to the offering price of shares, the proceeds to
be paid to each Fund, the duties of the Distributor, the payment of expenses
and indemnification obligations of each Fund and the Distributor.
If the foregoing is consistent with your understanding of our
agreement, please sign and return one copy of the enclosed agreement.
Very truly yours,
The Investment Companies
listed on Schedule A hereto
By: /s/ Terry K. Glenn
Authorized Signatory
Accepted as of the date
set forth above
Merrill Lynch Funds Distributor, Inc.
By: /s/ Gerald M. Richard
Authorized Signatory
2
<PAGE> 3
The Declaration of Trust establishing each investment company listed
on Schedule A hereto which has been organized as a Massachusetts trust (each, a
"Fund"), a copy of which, together with all amendments thereto, is on file in
the office of the Secretary of the Commonwealth of Massachusetts, provides that
the name of the Fund refers to the Trustees under the Declaration collectively
as Trustees, but not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of the Fund shall be held to any personal liability,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim or otherwise in connection with the affairs of the Fund,
but the Fund estate only shall be liable.
3
<PAGE> 4
SCHEDULE A
EQUITY FUNDS:
Merrill Lynch Balanced Fund for Investment and Retirement
Merrill Lynch Basic Value Fund, Inc.
Merrill Lynch Capital Fund, Inc.
Merrill Lynch Developing Capital Markets Fund, Inc.
Merrill Lynch Dragon Fund, Inc.
Merrill Lynch EuroFund
Merrill Lynch Fundamental Growth Fund, Inc.
Merrill Lynch Fund for Tomorrow, Inc.
Merrill Lynch Global Allocation Fund, Inc.
Merrill Lynch Global Utility Fund, Inc.
Merrill Lynch Growth Fund for Investment and Retirement
Merrill Lynch Healthcare Fund, Inc.
Merrill Lynch International Equity Fund
Merrill Lynch International Holdings, Inc.
Merrill Lynch Latin America Fund, Inc.
Merrill Lynch Natural Resources Trust
Merrill Lynch Pacific Fund, Inc.
Merrill Lynch Phoenix Fund, Inc.
Merrill Lynch Special Value Fund, Inc.
Merrill Lynch Strategic Dividend Fund
Merrill Lynch Technology Fund, Inc.
FIXED INCOME FUNDS:
Merrill Lynch Adjustable Rate Securities Fund, Inc.
Merrill Lynch Americas Income Fund, Inc.
Merrill Lynch Corporate Bond Fund, Inc.
Merrill Lynch Federal Securities Trust
Merrill Lynch Global Bond Fund for Investment and Retirement
Merrill Lynch Global Convertible Fund, Inc.
Merrill Lynch Short-Term Global Income Fund, Inc.
Merrill Lynch World Income Fund, Inc.
TAX-EXEMPT FIXED INCOME FUNDS:
Merrill Lynch Arizona Municipal Bond Fund
Merrill Lynch California Municipal Bond Fund
Merrill Lynch California Insured Municipal Bond Fund
Merrill Lynch Florida Municipal Bond Fund
Merrill Lynch Massachusetts Municipal Bond Fund
Merrill Lynch Michigan Municipal Bond Fund
Merrill Lynch Minnesota Municipal Bond Fund
Merrill Lynch Municipal Bond Fund, Inc.
A-1
<PAGE> 5
Merrill Lynch Municipal Income Fund
Merrill Lynch New Jersey Municipal Bond Fund
Merrill Lynch New York Municipal Bond Fund
Merrill Lynch North Carolina Municipal Bond Fund
Merrill Lynch Ohio Municipal Bond Fund
Merrill Lynch Pennsylvania Municipal Bond Fund
Merrill Lynch Texas Municipal Bond Fund
INSTITUTIONAL MONEY MARKET FUNDS:
Merrill Lynch Institutional Fund
Merrill Lynch Government Fund
Merrill Lynch Treasury Fund
Merrill Lynch Institutional Tax-Exempt Fund
A-2
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH SPECIAL VALUE FUND, INC.:
We consent to the use in Post-Effective Amendment No. 19 to Registration
Statement No. 2-60836 of our report dated April 29, 1994 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE
Princeton, New Jersey
July 28, 1994
