Filed pursuant to rule 497(c)
Registration No. 2-60836
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
JULY 29, 1996
MERRILL LYNCH SPECIAL VALUE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 o 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. Current income is not a
factor in management's selection of companies in which the Fund will invest. For
more information on the Fund's investment objective and policies, please see
'Investment Objective and Policies' on page 10.
Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. See 'Merrill Lynch Select Pricing(Service Mark)
System' on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the 'Distributor'), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from other securities dealers which have entered into dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch'). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See 'Purchase of Shares'
and 'Redemption of Shares.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated July 29, 1996 (the 'Statement of Additional Information'),
has been filed with the Securities and Exchange Commission (the 'Commission')
and can be obtained, without charge, by calling or by writing the Fund at the
above telephone number or address. The Statement of Additional Information is
hereby incorporated by reference into this Prospectus.
------------------------
FUND ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C CLASS D
---------- ------------------------- ----------------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed
on Purchases (as a percentage of offering
price)........................................ 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments................................. None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)................. None(d) 4.0% during 1.0% for None(d)
the first year, one year
decreasing 1.0%
annually
thereafter to
0.0% after the
fourth year
Exchange Fee.................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS):
Investment Advisory Fees(e)..................... 0.75% 0.75% 0.75% 0.75%
Rule 12b-l Fees(f):
Account Maintenance Fees...................... None 0.25% 0.25% 0.25%
Distribution Fees............................. None 0.75% 0.75% None
(Class B shares
convert to Class D
shares automatically
after approximately
eight years and cease
being subject to
distribution fees)
Other Expenses:
Custodian Fees................................ 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Costs(g)................ 0.24% 0.27% 0.29% 0.24%
Other......................................... 0.12% 0.12% 0.11% 0.12%
---------- ------ ------ -------
Total Other Expenses........................ 0.37% 0.40% 0.41% 0.37%
---------- ------ ------ -------
Total Fund Operating Expenses..................... 1.12% 2.15% 2.16% 1.37%
---------- ------ ------ -------
---------- ------ ------ -------
</TABLE>
- ---------------
<TABLE>
<S> <C>
(a) Class A shares are sold to a limited group of investors, including existing
Class A shareholders, certain retirement plans and investment programs. See
'Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares'--page 22.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See 'Purchase of Shares-- Deferred Sales
Charge Alternatives--Class B and Class C Shares'--page 24.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A or Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares'--page 22.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ('CDSC'), except that purchases of $1,000,000 or more which are not
subject to an initial sales charge may instead be subject to a CDSC of 1.0%
of amounts redeemed within the first year of purchase.
(e) See 'Management of the Fund--Management and Advisory Arrangements'--page 19.
(f) See 'Purchase of Shares--Distribution Plans'--page 28.
(g) See 'Management of the Fund--Transfer Agency Services'--page 20.
</TABLE>
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment
including the maximum $52.50
initial sales charge (Class A and
Class D shares only) and assuming
(1) the Total Fund Operating
Expenses for each class set forth
on page 2; (2) a 5% annual return
throughout the periods and (3)
redemption at the end of the
period:
Class A....................... $ 63 $86 $ 111 $182
Class B....................... $ 62 $87 $ 115 $229*
Class C....................... $ 32 $68 $ 116 $249
Class D....................... $ 66 $94 $ 124 $208
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption
at the end of the period:
Class A....................... $ 63 $86 $ 111 $182
Class B....................... $ 22 $67 $ 115 $229*
Class C....................... $ 22 $68 $ 116 $249
Class D....................... $ 66 $94 $ 124 $208
</TABLE>
- ---------------
* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
'NASD'). Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
directly through the Fund's transfer agent are not subject to the processing
fee. See 'Purchase of Shares' and 'Redemption of Shares'.
3
<PAGE>
MERRILL LYNCH SELECT PRICING(Service Mark) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System. The shares of each class may be purchased at a
price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of Class A
and Class D are sold to investors choosing the initial sales charge
alternatives, and shares of Class B and Class C are sold to investors choosing
the deferred sales charge alternatives. The Merrill Lynch Select Pricing(Service
Mark) System is used by more than 50 mutual funds advised by Merrill Lynch Asset
Management, L.P. ('MLAM') or Fund Asset Management, L.P. ('FAM' or the
'Investment Adviser'), an affiliate of MLAM. Funds advised by MLAM or FAM which
utilize the Merrill Lynch Select Pricing(Service Mark) System are referred to
herein as 'MLAM-advised mutual funds'.
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges will not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares are calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
'Shareholder Services--Exchange Privilege'.
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System, followed by a more detailed description of each class and a discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(Servicemark) System
that the investor believes is most beneficial under his or her particular
circumstances. More detailed information as to each class of shares is set
forth under 'Purchase of Shares'.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales charge(2)(3) No No No
B CDSC for a period of 4 years, at 0.25% 0.75% B shares convert to D
a rate of 4.0% during the first shares automatically
year, decreasing 1.0% annually to 0.0% after approximately
eight years(4)
C 1.0% CDSC for one year 0.25% 0.75% No
D Maximum 5.25% initial sales charge(3) 0.25% No No
</TABLE>
(footnotes on following page)
4
<PAGE>
(footnotes for preceding page)
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors'.
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $l,000,000 or more which
are not subject to an initial sales charge may instead be subject to a 1.0%
CDSC for one year. See 'Class A' and 'Class D' below.
(4) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans were modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A
shares. Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
in that account. Other eligible investors include certain retirement
plans and participants in certain investment programs. In addition,
Class A shares will be offered at net asset value to Merrill Lynch &
Co., Inc. ('ML & Co.') and its subsidiaries (the term 'subsidiaries,'
when used herein with respect to ML & Co. includes MLAM, the Investment
Adviser and certain other entities directly or indirectly wholly-owned
and controlled by ML & Co.) and to their directors and employees, and
to members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge is 5.25%, which is reduced for purchases of
$25,000 and over and waived for purchases by certain retirement plans
in connection with certain investment programs. Purchases of $1,000,000
or more may not be subject to an initial sales charge but if the
initial sales charge is waived such purchases will be subject to a 1.0%
CDSC if the shares are redeemed within one year after purchase. Sales
charges also are reduced under a right of accumulation which takes into
account the investor's holdings of all classes of all MLAM-advised
mutual funds. See 'Purchase of Shares--Initial Sales Charge
Alternatives-- Class A and Class D Shares'.
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25%, and an
ongoing distribution fee of 0.75%, of the Fund's average net assets
attributable to the Class B shares, and a CDSC if they are redeemed
within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase
5
<PAGE>
or sale of the shares for Federal income tax purposes. Shares purchased
through reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares, and the conversion and holding periods for certain
retirement plans, are modified as described under 'Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C
Shares--Conversion of Class B Shares to Class D Shares'.
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC if they are redeemed within one year of purchase. Although Class C
shares are subject to a 1.0% CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares, except that there is no waiver for purchases by
retirement plans in connection with certain investment programs. Class
D shares also will be issued upon conversion of Class B shares as
described above under 'Class B.' See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares.'
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(Servicemark) System that the investor believes is most beneficial under
his or her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
6
<PAGE>
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all of their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all of their assets invested initially and they are
uncertain as to the length of time they intend to hold their assets in
MLAM-advised mutual funds. Although Class C shareholders are subject to a
shorter CDSC period at a lower rate, they forgo the Class B conversion feature,
making their investment subject to account maintenance and distribution fees for
an indefinite period of time. In addition, while both Class B and Class C
distribution fees are subject to the limitations on asset-based sales charges
imposed by the NASD, the Class B distribution fees are further limited under a
voluntary waiver of asset-based sales charges. See 'Purchase of
Shares--Limitations on the Payment of Deferred Sales Charges'.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in connection
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements and the independent
auditors' report thereon for the year ended March 31, 1996 are included in the
Statement of Additional Information. The following per share data and ratios
have been derived from information provided in the Fund's audited financial
statements. Further information about the performance of the Fund is contained
in the Fund's most recent annual report to shareholders which may be obtained,
without charge, by calling or by writing the Fund at the telephone number or
address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------------------------
1996++ 1995++ 1994++ 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year....................... $ 15.63 $ 15.88 $ 15.32 $ 13.86 $ 10.84 $ 11.36 $ 12.20 $ 11.77 $ 15.99
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
Investment income--net....... .24 .16 .10 .05 .10 .12 .22 .22 .17
Realized and unrealized gain
(loss) on
investments--net........... 2.72 1.09 1.87 1.43 3.00 (.49) (.82) .46 (3.17)
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
Total from investment
operations................. 2.96 1.25 1.97 1.48 3.10 (.37) (.60) .68 (3.00)
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
Less dividends and
distributions:
Investment income--net..... (.23) (.10) (.00)+ (.02) (.08) (.15) (.24) (.23) (.14)
Realized gain on
investments--net......... (.59) (1.40) (1.41) (.00)+ (.00)+ (.00)+ (.00)+ (.02) (1.08)
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
Total dividends and
distributions.............. (.82) (1.50) (1.41) (.02) (.08) (.15) (.24) (.25) (1.22)
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
Net asset value, end of
year....................... $ 17.77 $ 15.63 $ 15.88 $ 15.32 $ 13.86 $ 10.84 $ 11.36 $ 12.20 $ 11.77
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
TOTAL INVESTMENT RETURN: #
Based on net asset value per
share...................... 19.56% 8.85% 13.14% 10.69% 28.71% (3.15)% (5.05)% 5.85% (18.82)%
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
RATIOS TO AVERAGE NET ASSETS:
Expenses..................... 1.12% 1.15% 1.17% 1.28% 1.55% 1.88% 1.45% 1.35% 1.20%
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
Investment income--net....... 1.43% 1.04% .62% .37% .83% 1.13% 1.62% 1.78% 1.30%
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................. $181,297 $106,506 $ 78,804 $70,920 $57,056 $44,818 $57,800 $87,167 $108,830
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
Portfolio turnover........... 60.37% 59.79% 68.70% 42.25% 98.76% 73.06% 44.66% 75.11% 60.47%
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
Average commission rate
paid....................... $ .0503 --** --** --** --** --** --** --** --**
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
---------- ---------- ---------- ------- ------- ------- ------- ------- --------
<CAPTION>
1987
--------
<S> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year....................... $ 16.34
--------
Investment income--net....... .07
Realized and unrealized gain
(loss) on
investments--net........... .25
--------
Total from investment
operations................. .32
--------
Less dividends and
distributions:
Investment income--net..... (.05)
Realized gain on
investments--net......... (.62)
--------
Total dividends and
distributions.............. (.67)
--------
Net asset value, end of
year....................... $ 15.99
--------
--------
TOTAL INVESTMENT RETURN: #
Based on net asset value per
share...................... 1.99%
--------
--------
RATIOS TO AVERAGE NET ASSETS:
Expenses..................... 1.22%
--------
--------
Investment income--net....... .46%
--------
--------
SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................. $107,521
--------
--------
Portfolio turnover........... 50.63%
--------
--------
Average commission rate
paid....................... --**
--------
--------
</TABLE>
- ---------------
Footnotes on next page.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS B
- -------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31, FOR THE PERIOD
- ---------------------------------------------------------------------------------------- OCTOBER 21, 1988*
1996++ 1995++ 1994++ 1993++ 1992++ 1991++ 1990 TO MARCH 31, 1989
- ---------- ---------- ---------- ---------- ---------- ---------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 15.16 $ 15.49 $ 15.01 $ 13.70 $ 10.77 $11.29 $12.15 $ 12.01
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
.07 (.00)+ (.06) (.09) (.03) (.00)+ .07 .03
2.64 1.06 1.83 1.40 2.98 (.47) (.79) .22
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
2.71 1.06 1.77 1.31 2.95 (.47) (.72) .25
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
(.07) (.00)+ (.00)+ (.00)+ (.02) (.05) (.14) (.09)
(.59) (1.39) (1.29) (.00)+ (.00)+ (.00)+ (.00)+ (.02)
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
(.66) (1.39) (1.29) -- (.02) (.05) (.14) (.11)
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
$ 17.21 $ 15.16 $ 15.49 $ 15.01 $ 13.70 $10.77 $11.29 $ 12.15
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
18.37% 7.70% 12.03% 9.56% 27.41% (4.16)% (6.00)% 2.75%+++
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
2.15% 2.20% 2.19% 2.28% 2.51% 2.95% 2.49% 2.45%***
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
.44% .02% (.41)% (.65)% (.27)% (.04)% .59% .63%***
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
$ 310,174 $ 237,359 $ 112,768 $ 76,182 $ 29,534 $3,783 $1,456 $ 906
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
60.37% 59.79% 68.70% 42.25% 98.76% 73.06% 44.66% 75.11%
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
$ .0503 --** --** --** --** --** --** --**
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
<CAPTION>
CLASS C CLASS D
------------------------------------------------ --------------------------------------------
FOR THE FOR THE
YEAR ENDED FOR THE PERIOD YEAR ENDED FOR THE PERIOD
MARCH 31, OCTOBER 21, 1994* MARCH 31, OCTOBER 21, 1994*
1996++ TO MARCH 31, 1995++ 1996++ TO MARCH 31, 1995++
---------- ------------------------------- ---------- -------------------------------
<C> <C> <C> <C>
$ 15.10 $ 15.06 $ 15.61 $ 15.52
---------- ------ ---------- ------
.06 .01 .19 .07
2.63 .65 2.73 .66
---------- ------ ---------- ------
2.69 .66 2.92 .73
---------- ------ ---------- ------
(.10) (.06) (.20) (.08)
(.59) (.56) (.59) (.56)
---------- ------ ---------- ------
(.69) (.62) (.79) (.64)
---------- ------ ---------- ------
$ 17.10 $ 15.10 $ 17.74 $ 15.61
---------- ------ ---------- ------
---------- ------ ---------- ------
18.34% 4.82%+++ 19.26% 5.13%+++
---------- ------ ---------- ------
---------- ------ ---------- ------
2.16% 2.41%*** 1.37% 1.61%***
---------- ------ ---------- ------
---------- ------ ---------- ------
.36% .14%*** 1.15% .95%***
---------- ------ ---------- ------
---------- ------ ---------- ------
$ 26,920 $11,434 $ 24,795 $11,037
---------- ------ ---------- ------
---------- ------ ---------- ------
60.37% 59.79% 60.37% 59.79%
---------- ------ ---------- ------
---------- ------ ---------- ------
$ .0503 --** $ .0503 --**
---------- ------ ---------- ------
---------- ------ ---------- ------
</TABLE>
- ---------------
* Commencement of Operations.
** Data not required for the period.
*** Annualized.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding during the period.
+++ Aggregate total investment return.
# Total investment returns exclude the effect of sales loads.
9
<PAGE>
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 stocks,
of relatively small companies which management of the Fund believes have special
investment value and emerging growth companies regardless of size. 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.
In attempting to achieve its investment objective, the Fund may employ
various investment strategies. Management seeks to identify those companies
which can show significant and sustained increases in earnings over an extended
period of time. This strategy focuses on the long-range view of a company's
prospects, primarily through fundamental analysis of its management, financial
structure, product development, marketing ability and other relevant factors.
Management anticipates employing such a strategy of fundamental analysis to
small and emerging growth companies.
Management also may seek to identify companies which can show favorable
investment potential through analysis of the economy and the financial markets.
This strategy focuses on the long-range view of a company's market valuation,
primarily through analysis of economic trends, valuation models, market
statistics and other quantitative factors applicable to specific companies,
industries or economic sectors.
Additionally, management of the Fund may, from time to time, identify a
number of companies that it believes share favorable investment potential. These
companies are often in a particular industry or related industries or market
segments. At times, the Fund may acquire the securities of such companies
together as a 'basket' or group in a single transaction. The Fund may
subsequently sell such 'basket' as a unit or it may sell only selected
securities and continue to hold other securities acquired in the 'basket'.
The Fund may also acquire or dispose of 'baskets' of securities as a means
of rapidly increasing or decreasing exposure to the markets in response to the
Fund's cash flow (primarily, the effects of net purchases or net redemptions of
the Fund's shares). These 'baskets' may be comprised of securities selected
solely because their aggregate volatility appears to substantially correlate to
the volatility of the markets (or a portion of the markets) in which the Fund
invests, although the Fund may continue to hold particular securities included
in such a 'basket' based on their favorable investment potential.
Management believes that while the companies in which it invests present
above-average risks, properly selected companies of this type also have the
potential to increase their earnings or market valuation at a rate substantially
in excess of the general growth of the economy. Full development of these
companies and trends 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, or are relatively undervalued in the marketplace when
compared with their favorable investment potential. These companies typically
have total market capitalization of up to $750 million at the time of initial
purchase and generally are little known to most individual investors although
some may be dominant in their respective industries. Underlying this investment
strategy 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;
10
<PAGE>
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
or are relatively undervalued in the marketplace when compared to their
favorable market potential. Emphasis is given to companies with rapid historical
growth rates and above-average returns on equity. Management of the Fund may
also analyze and weigh 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 investment strategies employed by the Fund's management do not,
of course, guarantee successful investment results, they do provide ingredients
not available to the average individual in making his or her investments in
small and emerging growth companies due to time and cost involved. Careful
initial selection is particularly important in this area for new enterprises
which have promise but may lack certain of the ingredients necessary to prosper.
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 (including synthetic
convertible securities consisting of a debt security and a warrant to purchase
common stock, either of which security may be sold by the Fund independently of
the other) 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 may, during
temporary periods as market or economic conditions may warrant, invest in 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 management may determine.
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
11
<PAGE>
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 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 of 1940, as amended (the 'Investment
Company Act').
The Fund may purchase securities that are not registered ('restricted
securities') under the Securities Act of 1933, as amended (the 'Securities
Act'), but can be offered and sold to 'qualified institutional buyers' under
Rule 144A under the Securities Act. However, the Fund will not invest more than
15% of its total assets in illiquid investments, which includes securities for
which there is no readily available market, securities subject to contractual
restrictions on resale, certain investments in asset-backed and
receivable-backed securities and restricted securities, unless the Fund's Board
of Directors determines, based on the trading markets for the specific
restricted security, that it is liquid. The Board of Directors may adopt
guidelines and delegate to the Investment Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board of
Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
The Fund's investments in securities purchased pursuant to Rule 144A are
monitored, focusing on such factors, among others, as valuation, liquidity and
availability of information. Investments in securities purchased pursuant to
Rule 144A could have the effect of increasing the level of illiquidity in the
Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities.
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
12
<PAGE>
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 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 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 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 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.
13
<PAGE>
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 contracts 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 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
14
<PAGE>
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 over-the-counter ('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 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.
15
<PAGE>
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 (the 'CFTC') applicable to the Fund provide
that the futures trading activities described herein will 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).
16
<PAGE>
The staff of 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% (10% to the extent required by certain
state laws) of the total 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
United States 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.
INVESTMENT RESTRICTIONS
The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (a) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its total assets, taken at market value at the time of each
investment, in the securities of issuers in any particular industry (excluding
the United States Government and its agencies and instrumentalities). Investment
restrictions and policies that are non-fundamental policies may be changed by
the Board of Directors without shareholder approval. As a non-fundamental
policy, the Fund may not borrow amounts in excess of 5% of its total assets,
taken at market value, and then only from banks as a temporary measure for
extraordinary or emergency purposes. The purchase of securities while borrowings
are outstanding will have the effect of leveraging the Fund. Such leveraging or
borrowing increases the Fund's exposure to capital risk, and borrowed funds are
subject to interest costs which will reduce net income.
As a non-fundamental policy, the Fund will not invest in securities which
cannot readily be resold because of legal or contractual restrictions or which
are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities,
17
<PAGE>
more than 15% of its total assets (or 10% of its total assets as presently
required by certain state law) taken at market value would be invested in such
securities. Notwithstanding the foregoing, the Fund may purchase without regard
to this limitation securities that are not registered under the Securities Act,
but that can be offered and sold to 'qualified institutional buyers' under Rule
144A under the Securities Act, provided that the Fund's Board of Directors
determines, based on the trading markets for the specific Rule 144A security,
that it is liquid. The Board of Directors may adopt guidelines and delegate to
the Investment Adviser the daily function of determining and monitoring
liquidity of restricted securities. The Board has determined that securities
which are freely tradeable in their primary market offshore should be deemed
liquid. The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of
whom are not 'interested persons' of the Fund as defined in the Investment
Company Act. The Directors of the Fund are responsible for the overall
supervision of the operations of the Fund and perform the various duties imposed
on the directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL*--President of the Investment Adviser and MLAM;
President and Director of Princeton Services, Inc. ('Princeton Services');
Executive Vice President of ML & Co.; and Director of the Distributor.
DONALD CECIL--Special Limited Partner of Cumberland Partners (an
investment partnership).
M. COLYER CRUM--James R. Williston Professor of Investment Management,
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.
18
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, acts as the
investment adviser to the Fund and provides the Fund with management and
investment advisory services. The Investment Adviser or its affiliate, MLAM,
acts as the investment adviser to more than 130 registered investment companies.
MLAM also provides investment advisory services to individual and institutional
accounts. As of June 30, 1996, the Investment Adviser and MLAM had a total of
approximately $206.5 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 of 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, 1996, the Investment Adviser earned a fee of
$3,704,781 (based on average net assets of approximately $495.3 million).
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, 1996, the amount of such
reimbursement was $56,839. For the fiscal year ended March 31, 1996, the ratio
of total expenses to average net assets was 1.12% for Class A shares, 2.15% for
Class B shares, 2.16% for Class C shares, and 1.37% for Class D shares.
Daniel V. Szemis is Vice President and Portfolio Manager of the Fund. Mr.
Szemis has been Vice President of the Investment Adviser since 1996. From 1990
to 1996, Mr. Szemis was a Portfolio Manager with Prudential Mutual Fund
Investment Management Advisors.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the Investment Company Act which incorporates the Code of
Ethics of the Investment Adviser (together, the 'Codes'). The Codes
significantly restrict the personal investing activities of all employees of the
Investment Adviser and, as described below, impose additional, more onerous,
restrictions on fund investment personnel.
19
<PAGE>
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the 'Transfer Agent'), which
is a wholly-owned subsidiary of ML & Co., acts as the Fund's Transfer Agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the 'Transfer Agency Agreement'). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Fund pays the Transfer
Agent a fee of $11.00 per Class A or Class D shareholder account and $14.00 per
Class B or Class C shareholder account and the Transfer Agent is entitled to
reimbursement from the Fund for out-of-pocket expenses incurred by the Transfer
Agent under the Transfer Agency Agreement. For the fiscal year ended March 31,
1996, the Fund paid the Transfer Agent $1,317,156 pursuant to the Transfer
Agency Agreement. At June 30, 1996, the Fund had 36,721 Class A shareholder
accounts, 40,313 Class B shareholder accounts, 5,198 Class C shareholder
accounts and 3,224 Class D shareholder accounts. At this level of accounts the
annual fee payable to the Transfer Agent would aggregate approximately
$1,076,549 plus out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the Distributor of the shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000 and the minimum subsequent
purchase is $50 except that for retirement plans, the minimum initial purchase
is $100 and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed, either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
Pricing(Service Mark) System, 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 the close of business on the New York
Stock Exchange (the 'NYSE') (generally, 4:00 p.m., New York time), which
includes orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value determined as of
15 minutes after the close of business on the NYSE on that day, provided the
Distributor in turn receives the orders from the securities dealer prior to 30
minutes after the close of business on the NYSE on that day. If the purchase
orders are not received by
20
<PAGE>
the Distributor prior to 30 minutes after the close of business on the NYSE,
such orders shall be deemed received on the next business day. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a sale of shares to such customers. Purchases directly through
the Transfer Agent are not subject to the processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System, which permits each investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees. A discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(Service Mark) System is
set forth under 'Merrill Lynch Select Pricing(Service Mark) System' on page 4.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges do not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares are calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted
with respect to such class pursuant to which account maintenance and/or
distribution fees are paid. See 'Distribution Plans' below. Each class has
different exchange privileges. See 'Shareholder Services--Exchange Privilege'.
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
21
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(2)(3)
B CDSC for a period of 4 years, at a 0.25 % 0.75 % B shares convert to D shares
rate of 4.0% during the first year, automatically after approximately
decreasing 1.0% annually to 0.0% eight years(4)
C 1.0% CDSC for one year 0.25 % 0.75 % No
D Maximum 5.25% initial sales charge(3) 0.25 % No No
</TABLE>
- ------------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See 'Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors'.
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but, if the initial sales charge is
waived, may be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans were modified. Also, Class
B shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
DISCOUNT TO
SALES LOAD AS PERCENTAGE* SELECTED DEALERS
SALES LOAD AS PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OF OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------------------ ------------------------ ------------------------- ------------------
<S> <C> <C> <C>
Less than $25,000............. 5.25% 5.54% 5.00%
$25,000 but less than
$50,000..................... 4.75 4.99 4.50
$50,000 but less than
$100,000.................... 4.00 4.17 3.75
$100,000 but less than
$250,000.................... 3.00 3.09 2.75
$250,000 but less than
$1,000,000.................. 2.00 2.04 1.80
$1,000,000 and over**......... 0.00 0.00 0.00
</TABLE>
(Footnotes on next page)
22
<PAGE>
(Footnotes from previous page)
- ------------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994, and on Class A
purchases by certain retirement plan investors in connection with certain
investment programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases may be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Class A
purchases made prior to October 21, 1994 might have been subject to a CDSC if
the shares were redeemed within one year of purchase at the following rates:
1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on purchases of
$2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to $5,000,000; and
0.25% on purchases of more than $5,000,000 in lieu of paying an initial sales
charge. The charge is assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A
or Class D shares by certain employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
During the fiscal year ended March 31, 1996, the Fund sold 6,440,754 Class
A shares for aggregate net proceeds to the Fund of $105,924,815. The gross sales
charges for the sale of Class A shares of the Fund for that year were $49,544,
of which $3,362 and $46,182 were received by the Distributor and Merrill Lynch,
respectively. During the fiscal year ended March 31, 1996, the Fund sold
1,716,390 Class D shares for aggregate net proceeds to the Fund of $28,556,422.
The gross sales charges for the sale of Class D shares of the Fund for that year
were $107,123 of which $7,030 and $100,093 were received by the Distributor and
Merrill Lynch, respectively.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint(Service Mark) Program, are entitled to purchase additional Class A
shares of the Fund in that account. Certain employer sponsored retirement or
savings plans, including eligible 401(k) plans, may purchase Class A shares at
net asset value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its affiliates.
Class A shares are available at net asset value to corporate warranty insurance
reserve fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and certain purchases made in connection
with the Merrill Lynch Mutual Fund Adviser ('MFA') program. In addition, Class A
shares will be offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares of
certain MLAM-advised closed-end funds who wish to reinvest the net proceeds from
a sale of their closed-end fund shares of common stock in shares of the Fund
also may purchase Class A shares of the Fund if certain conditions set forth in
the Statement of Additional Information are met for closed-end funds that
commenced operations prior to October 21, 1994. For example, Class A shares of
the Fund and certain other MLAM-advised mutual funds are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if
certain conditions set forth in the Statement of Additional Information are met,
to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond
23
<PAGE>
Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock pursuant to a tender offer conducted by such funds
in shares of the Fund and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under 'Eligible Class A Investors'.
Class A and Class D shares are offered at net asset value to certain
employer-sponsored retirement or savings plans and to Employee Access
Accounts(Servicemark) available through qualified employers which provide such
plans. Class A and Class D shares are offered at net asset value to
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. who wish to reinvest in shares of the
Fund the net proceeds from a sale of certain of their shares of common stock,
pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without a sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(Service Mark) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
while Class C shares are subject only to a one-year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See 'Conversion of Class B
Shares to Class D Shares' below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under 'Distribution Plans'. The proceeds
from the account maintenance fees are used to compensate Merrill Lynch for its
account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See 'Distribution
Plans' below.
24
<PAGE>
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of Class B and Class C shares,
such as the payment of compensation to financial consultants for selling Class B
and Class C shares from its own funds. The combination of the CDSC and the
ongoing distribution fee facilitates the ability of the Fund to sell the Class B
and Class C shares without a sales charge being deducted at the time of
purchase. Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See 'Limitations on
the Payment of Deferred Sales Charges' below. Class B shareholders of the Fund
exercising the exchange privilege described under 'Shareholder
Services--Exchange Privilege' will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT
PAYMENT MADE TO CHARGE
- ------------------------------------------------------------ ---------------
<S> <C>
0-1..................................................... 4.00%
1-2..................................................... 3.00%
2-3..................................................... 2.00%
3-4..................................................... 1.00%
4 and thereafter........................................ 0.00%
</TABLE>
During the fiscal year ended March 31, 1996, the Distributor received CDSCs
of $681,141 with respect to redemptions of Class B shares, all of which was paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts
25
<PAGE>
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase for shares purchased on or
after October 21, 1994).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the MFA program, the time
period that such Class A shares are held in the MFA program will be included in
determining the holding period of Class B shares reacquired upon termination of
participation in the MFA program (see 'Shareholder Services--Exchange
Privilege').
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
('IRA') or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the 'Code')) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans and in connection with certain group
plans placing orders through the Merrill Lynch Blueprint(Service Mark) Program.
The CDSC also is waived for any Class B shares which are purchased by eligible
401(k) or eligible 401(a) plans which are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
For the fiscal year ended March 31, 1996, the Distributor received CDSCs of
$16,859 with respect to redemptions of Class C shares, all of which was paid to
Merrill Lynch.
26
<PAGE>
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the 'Conversion Period'), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
'Conversion Date') on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ('Class B Retirement Plans').
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate fund at net asset value.
The Conversion Period is also modified for retirement plan investors which
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see 'Shareholder Services--Exchange
Privilege'), then the holding period for such Class A shares will be 'tacked' to
the holding period for the Class B shares originally held for purposes of
calculating the Conversion Period of Class B shares acquired upon termination of
participation in the MFA program.
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DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
'Distribution Plan') with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended March 31, 1996, the Fund paid the Distributor
$2,949,799 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Distribution Plan of approximately $295.8 million), all
of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended March 31, 1996, the Fund paid the Distributor $220,526
pursuant to the Class C Distribution Plan (based on average net assets subject
to such Distribution Plan of approximately $22.1 million), all of which was paid
to Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. For the fiscal year
ended March 31, 1996, the Fund paid the Distributor $50,713 pursuant to the
Class D Distribution Plan (based on average net assets subject to such
Distribution Plan of approximately $20.3 million), all of which was paid to
Merrill Lynch for providing account maintenance activities in connection with
Class D shares. At June 30, 1996, the net assets of the Fund subject to the
Class B Distribution Plan aggregated approximately $341.5 million. At this asset
level, the annual fee payable pursuant to the Class B Distribution Plan would
aggregate approximately $3.4 million. At June 30, 1996, the net assets of the
Fund subject to the Class C Distribution Plan aggregated approximately $32.5
million. At this asset level, the annual fee payable pursuant to the Class C
Distribution Plan would aggregate approximately $325,462. At June 30, 1996, the
net assets of the Fund subject to the Class D Distribution Plan aggregated
approximately $28.6 million. At this asset level, the annual fee payable
pursuant to the Class D Distribution Plan would aggregate approximately $71,381.
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The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a 'fully allocated accrual' basis and quarterly on a 'direct expense and
revenue/cash' basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation.
As of December 31, 1995, with respect to Class B shares, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for the
period since October 21, 1988 (commencement of operations) exceeded fully
allocated accrual revenues by approximately $3,051,000 (.95% of Class B net
assets at that date). As of March 31, 1996, with respect to Class B shares,
direct cash revenues for the period since October 21, 1988 (commencement of
operations) exceeded direct cash expenses by $3,481,709 (1.12% of Class B net
assets at that date). Similar fully allocated accrual data for Class C shares is
not presented because such revenues and expenses for the period from October 21,
1994 (commencement of operations) to December 31, 1995 are de minimis. As of
March 31, 1996, with respect to Class C shares, direct cash expenses for the
period since October 21, 1994 (commencement of operations) exceeded direct cash
revenues by $107,349 (0.40% of Class C net assets at that date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under 'Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares'.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the Fund's
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied separately
to each class. As applicable to the Fund, the maximum sales charge rule limits
the aggregate of distribution fee payments and
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<PAGE>
CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares
and Class C shares, computed separately (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges) plus (2) interest on the
unpaid balance for the respective class, computed separately, at the prime rate
plus 1% (the unpaid balance being the maximum amount payable minus amounts
received from the payment of the distribution fees and the CDSCs). In connection
with the Class B shares, the Distributor has voluntarily agreed to waive
interest charges on the unpaid balance in excess of 0.50% of eligible gross
sales. Consequently, the maximum amount payable to the Distributor (referred to
as the 'voluntary maximum') in connection with the Class B shares is 6.75% of
eligible gross sales. The Distributor retains the right to stop waiving the
interest charges at any time. To the extent payments would exceed the voluntary
maximum, the Fund will not make further payments of the distribution fee in
connection with the Class B shares, and any CDSCs will be paid to the Fund
rather than to the Distributor; however, the Fund will continue to make payments
of the account maintenance fee. In certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable under the NASD
formula. In such circumstances, payment in excess of the amount payable under
the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund on receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares deposited
with the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by 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 signature(s) on the
redemption request must be guaranteed by an 'eligible guarantor institution'
(including, for example, Merrill Lynch branch offices and certain other
financial institutions) as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents, such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payment will be mailed within seven days of receipt of a
proper notice of redemption.
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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 NYSE
(generally, 4:00 p.m., New York time) on the day received, and such request is
received by the Fund from such dealer not later than 30 minutes after the close
of business on the NYSE on the same day. Dealers have the responsibility to
submit such repurchase requests to the Fund not later than 30 minutes after the
close of business on the NYSE in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms which do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
to such customers. Repurchases directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. A shareholder whose order
for repurchase is rejected by the Fund, however, may redeem shares as set forth
above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch financial consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to each
of such services, copies of the various plans described below and instructions
as to how to participate in the various services or plans, or 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.
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Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements also will show any other activity in the account since the preceding
statement. Shareholders will receive separate confirmations for each purchase or
sale transaction other than automatic investment purchases and the reinvestment
of ordinary income dividends and long-term capital gain distributions.
Shareholders may make additions to their Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders also may maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically, without charge, at the Transfer
Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for his or
her shares and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account at Merrill Lynch for those shares.
Exchange Privilege. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated in
accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(Service Mark) System, Class A
shareholders may exchange Class A shares of the Fund for Class A shares of a
second MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his or her account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares for
shares of a second MLAM-advised mutual fund, and the shareholder does not hold
Class A shares of the second fund in his account at the time of the exchange and
is not otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund.
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Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is 'tacked' to the holding period for the newly acquired shares of the
other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the 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
MLAM-advised fund from which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see 'Shareholder Services--Exchange
Privilege' in the Statement of Additional Information.
The exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for Class
A shares of the same fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one-year holding period does not apply to shares reacquired
through reinvestment of dividends. Upon termination of participation in the MFA
program, Class A shares will be re-exchanged for the class of shares originally
held. For purposes of computing any CDSC that may be payable upon redemption of
Class B or Class C shares so reacquired, or the Conversion Period for Class B
shares so acquired, the holding period for the Class A shares will be 'tacked'
to the holding period for the Class B or Class C shares originally held. The
Fund's exchange privilege is also modified with respect to purchases of Class A
and Class D shares by non-retirement plan investors under the MFA Program.
First, the initial allocation of assets is made under the MFA program. Then, any
subsequent exchange under the program of Class A or Class D shares of a
MLAM-advised mutual fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
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Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share next determined after the close of business on the NYSE on the
ex-dividend date of such dividend or distribution. A shareholder may at any
time, by written notification or by telephone (1-800-MER-FUND) to the Transfer
Agent, elect to have subsequent dividends or both dividends and capital gains
distributions paid in cash rather than reinvested, in which event payment will
be mailed on or about the payment date. Cash payment can also be directly
deposited to the shareholder's bank account. No CDSC will be imposed upon
redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his or her Investment Account in the
form of payments by check or through automatic payment by direct deposit to the
investor's bank account on either a monthly or quarterly basis. A Class A or
Class D shareholder whose shares are held within a CMA(Registered),
CBA(Registered) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(Registered) or CBA(Registered) Systematic Redemption Program, subject to
certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
and Class D shares may be made to an investor's Investment Account by
pre-arranged charges of $50 or more to his regular bank account. Investors who
maintain CMA(Registered) or CBA(Registered) accounts may arrange to have
periodic investments made in the Fund in their CMA(Registered) or
CBA(Registered) accounts or in certain related accounts in amounts of $100 or
more ($1 for retirement accounts) through the CMA(Registered) or CBA(Registered)
Automated Investment Program.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. 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.
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PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with a
formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B and
Class C shares, and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance
fees, distribution charges and any incremental transfer agency costs relating to
each class of shares will be borne exclusively by that class. The Fund will
include performance data for all classes of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average 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 longer period of time.
In advertisements directed to investors whose purchases are subject to waiver of
the CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans) or reduced sales charges in the case of Class A and Class D
shares, performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses may be deducted. See 'Purchase of Shares'. The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services,
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<PAGE>
Inc., Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine and Fortune
Magazine or other industry publications. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid semi-annually. All
net realized long- or short-term capital gains, if any, will be distributed to
the Fund's shareholders at least annually. The per share dividends and
distributions on each class of shares will be reduced as a result of any account
maintenance, distribution and transfer agency fees applicable with respect to
that class. 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 a sales charge. Shareholders may elect in
writing to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders as discussed below
whether they are reinvested in shares of the Fund or received in cash. From time
to time, the Fund may declare a special distribution at or about the end of the
calendar year in order to comply with a Federal tax requirement that certain
percentages of its ordinary income and capital gains be distributed during the
calendar year.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m., New York time), on each day during which the NYSE is open for
trading. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation.
The net asset value per share is computed by dividing the sum of the value
of the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the investment advisory
fees payable to the Investment Adviser and any account maintenance and/or
distribution fees payable to the Distributor, are accrued daily. The per share
net asset value of the Class A shares generally will be higher than the per
share net asset value of the shares of the other classes, reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; moreover, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and Class
C shares, reflecting the daily expense accruals of the distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares.
It is expected, however, that the per share net asset value of the classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions which will differ by approximately the amount of
the expense accrual differentials between the classes.
36
<PAGE>
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Securities
traded in the NASDAQ National Market System are valued at the last sale price
or, lacking any sales, at the closing bid price. When the Fund writes an option,
the amount of the premium received is recorded on the books of the Fund as an
asset and an equivalent liability. The amount of the liability is subsequently
valued to reflect the current market value of the option written, based upon the
last sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last asked price. Options purchased by the
Fund are valued at their last sale price in the case of exchange-traded options
or, in the case of options traded in the OTC market, the last bid price. Other
investments, including futures contracts and related options, will be stated at
market value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith under the
direction of the Board of Directors of the Fund.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ('RICs') under the Internal Revenue Code
of 1986, as amended (the 'Code'). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the 'shareholders'). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as 'ordinary income dividends') are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ('capital gain
dividends') are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the 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.
37
<PAGE>
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ('backup withholding'). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
'regulated futures contracts' and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
income dividend distributions, and all or a portion of distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing the basis of each
shareholder's Fund shares and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code
38
<PAGE>
sections and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
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. As of the date of this Prospectus, the
Fund has an authorized capital of 400,000,000 shares of Common Stock, par value
$0.10 per share, divided into four classes, designated Class A, Class B, Class C
and Class D Common Stock, each of which consists of 100,000,000 shares. Shares
of Class A, Class B, Class C and Class D Common Stock represent interests in the
same assets of the Fund and are identical in all respects except that Class B,
Class C and Class D shares bear certain expenses related to the account
maintenance associated with such shares and Class B and Class C shares bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to account maintenance
and distribution expenditures, as applicable. See 'Purchase of Shares'. The
Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other 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. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive rights. Shares
have the conversion rights described in this Prospectus. Each share of Common
Stock is entitled to participate equally in dividends and distributions declared
by the Fund and in the net assets of the Fund on liquidation or dissolution
after satisfaction of outstanding liabilities except, as noted above, the Class
B, Class C and Class D shares bear certain additional expenses.
39
<PAGE>
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Merrill Lynch Financial Data Services, Inc. at
800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
40
<PAGE>
MERRILL LYNCH SPECIAL VALUE FUND, INC.-- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
Note: This form may not be used for purchases through the Merrill Lynch
Blueprint(Service Mark) Program. You may request a Merrill Lynch
Blueprint(Service Mark) Program application by calling toll free (800)
637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Special Value Fund, Inc., and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $ . . . . payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I
understand that this purchase will be executed at the applicable
offering price next to be determined after this Application is
received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the
Statement of Additional Information: (Please list all funds. Use a
separate sheet of paper if necessary.)
<TABLE>
<S> <C>
1. ................................... 4. ...................................
2. ................................... 5. ...................................
3. ................................... 6. ...................................
</TABLE>
Name ...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any) ......................................................
First Name Initial Last Name
<TABLE>
<S> <C>
Address ...............................
...................................... Name and Address of Employer ..........
(Zip Code)
Occupation ............................ .......................................
...................................... .......................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
<TABLE>
<S> <C>
Ordinary Income Dividends Long-Term Capital Gains
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
/ / Check or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Special Value Fund, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): / / checking / / savings
Name of your account ...........................................................
Bank Name ......................................................................
Bank Number ......................... Account Number .........................
Bank Address ...................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor .........................................................
Signature of Depositor ........................ Date ........................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED 'VOID' OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY
THIS APPLICATION.
41
<PAGE>
MERRILL LYNCH SPECIAL VALUE FUND, INC.--AUTHORIZATION FORM
(PART 1)--(CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
/ / / / /-/ / / /-/ / / / / / /
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2) that
I am not subject to backup withholding (as discussed under 'Additional
Information--Taxes') either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ('IRS') has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH-SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
...................................... .......................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
.......... , 19 ......
Date of Initial Purchase
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 distributor over the next 13-month period which will equal or
exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the 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>
By: ................................... .......................................
Signature of Co-Owner (If registered in
Signature of Owner joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts on
which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name .............................. (2) Name ..............................
Account Number ........................ Account Number ........................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
This form, when completed, should be mailed to:
Merrill Lynch Special Value Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
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 or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................................
Dealer Name and Address
By..............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C>
.......................................
/ / / / / / / / /
Branch Code F/C No. F/C Last Name
/ / / / / / / / / /
Dealer's Customer Account No.
</TABLE>
42
<PAGE>
MERRILL LYNCH SPECIAL VALUE FUND, INC.--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
Note: This form is required to apply for the Systematic Withdrawal or Automatic
Investment Plans only.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
Name of Owner ..... / / / /-/ / /-/ / / / /
Name of Co-Owner (if Social Security No.
any) .............. or Taxpayer Identification No.
Address ...........
................... Account Number ..........................
(if existing account)
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Special Value
Fund, Inc. at cost or current offering price. Withdrawals to be made either
(check one) / / monthly on the 24th day of each month, or / / quarterly on the
24th day of March, June, September and December. If the 24th falls on a weekend
or holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ............................ , or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / / $ ....
or / / ............... % of the current value of
/ / Class A or / / Class D shares in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE):
(A) I HEREBY AUTHORIZE PAYMENT BY CHECK
/ / as indicated in Item 1.
/ / to the order of .......................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print) ....................................................
Address .......................................................................
........................................................................
Signature of Owner ....................... Date ..............................
Signature of Co-Owner (if any) .................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name of your account ..........................................................
Bank Name ......................................................................
Bank Number .......................................... Account Number .......
Bank Address ..................................................................
...............................................................................
Signature of Owner ....................... Date ..............................
Signature of Depositor ........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED 'VOID' OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
43
<PAGE>
MERRILL LYNCH SPECIAL VALUE FUND, INC.--AUTHORIZATION FORM (PART 2)--(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ('ACH') debit on my checking account described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Special Value Fund, Inc. subject to the terms set forth below.
In the event that I am not eligible to purchase Class A shares, I understand
that Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Special Value Fund, Inc., as indicated below:
Amount of each ACH debit $ ................................................
Account Number ............................................................
Please date and invest ACH debits on the 20th of each month
beginning .................................. or as soon thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
dishonored debit.
<TABLE>
<S> <C>
...................................... .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
</TABLE>
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH 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 ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
<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.
44
<PAGE>
INVESTMENT ADVISER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10286
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table............................................................. 2
Merrill Lynch Select Pricing(Service Mark) System..................... 4
Financial Highlights.................................................. 8
Investment Objective and Policies..................................... 10
Other Investment Policies and Practices............................. 12
Investment Restrictions............................................. 17
Management of the Fund................................................ 18
Board of Directors.................................................. 18
Management and Advisory Arrangements................................ 19
Code of Ethics...................................................... 19
Transfer Agency Services............................................ 20
Purchase of Shares.................................................... 20
Initial Sales Charge Alternatives--Class A and Class D Shares....... 22
Deferred Sales Charge Alternatives-- Class B and Class C Shares..... 24
Distribution Plans.................................................. 28
Limitations on the Payment of Deferred Sales Charges................ 29
Redemption of Shares.................................................. 30
Redemption.......................................................... 30
Repurchase.......................................................... 31
Reinstatement Privilege--Class A and Class D Shares................. 31
Shareholder Services.................................................. 31
Portfolio Transactions and Brokerage.................................. 34
Performance Data...................................................... 35
Additional Information................................................ 36
Dividends and Distributions......................................... 36
Determination of Net Asset Value.................................... 36
Taxes............................................................... 37
Organization of the Fund............................................ 39
Shareholder Reports................................................. 40
Shareholder Inquiries............................................... 40
Authorization Form.................................................... 41
</TABLE>
Code #10055-0796
Merrill Lynch
Special Value Fund, Inc.
[Artwork]
PROSPECTUS
July 29, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE>
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. Current income is not a
factor in management's selection of companies in which the Fund will invest.
Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, the Fund
offers four classes of shares each with a different combination of sales
charges, ongoing fees, and other features. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated July
29, 1996 (the 'Prospectus'), which has been filed with the Securities and
Exchange Commission (the 'Commission') and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
------------------------
FUND ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is July 29, 1996.
<PAGE>
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 ('OTC') 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 portfolio turnover rate for each of the fiscal
years ended March 31, 1995 and 1996 was 59.79% and 60.37%, 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 in the Prospectus and below), Fund Asset Management,
L.P. (the
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'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 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
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 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 or she may
be required to sell his or her securities since he or she may be assigned an
exercise notice at any time prior to the termination of his or her 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 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>
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 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
4
<PAGE>
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, as amended (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 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 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
5
<PAGE>
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 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.
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<PAGE>
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).
Under the fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Prospectus and Statement
of Additional Information, as they may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes (currently Ohio regulations prohibit
any borrowing in excess of 33 1/3% of the Fund's total assets), (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
7
<PAGE>
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the 'Securities Act') in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental restrictions which may be
changed by the Board of Directors without approval of the Fund's shareholders.
Under the non-fundamental investment restrictions, the Fund may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law.
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act and determined to be liquid by the Fund's Board of Directors are not
subject to the limitations set forth in this investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange (the 'NYSE') or the American Stock Exchange or
a major foreign exchange. For purposes of this restriction, warrants
acquired by the Fund in units or attached to securities may be deemed to be
without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Investment Adviser, the directors of such general partner or
the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
8
<PAGE>
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (7) above,
borrow amounts in excess of 5% of its total assets, taken at market value,
and then only from banks as a temporary measure for extraordinary or
emergency purposes.
The staff of 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 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
exceeds 15% of the total assets of the Fund (10% to the extent required by
certain state laws), 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 if 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 securities 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.
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 such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. 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.
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<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund,
including their ages and their principal occupations for at least the past five
years is set forth below. Unless otherwise noted, the address of each executive
officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64)--President and Director (1)(2)--President of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1977; President of MLAM (which term as used herein includes
MLAM's corporate predecessors) since 1977; President and Director of Princeton
Services, Inc. ('Princeton Services') since 1993; Executive Vice President of
Merrill Lynch & Co., Inc. ('ML & Co.') since 1990; Director of Merrill Lynch
Funds Distributor, Inc. (the 'Distributor') since 1977.
DONALD CECIL (69)--Director (2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
M. COLYER CRUM (63)--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 (69)--Director (2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Harman
International Industries, Inc. and Ethan Allen Interiors, Inc.
JACK B. SUNDERLAND (67)--Director (2)--P.O. Box 7, West Cornwall,
Connecticut 06796. President and Director of American Independent Oil Company,
Inc. (an energy company) since 1987; Member of Council on Foreign Relations
since 1971.
J. THOMAS TOUCHTON (57)--Director (2)--Suite 3405, One Tampa City Center,
Tampa, Florida 33602. Managing Partner of The Witt-Touchton Company and its
predecessor The Witt Co. (a private investment partnership) since 1972; Trustee
Emeritus of Washington and Lee University; Director of TECO Energy, Inc. (an
electric utility holding company).
TERRY K. GLENN (55)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of the
Distributor since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
NORMAN R. HARVEY (62)--Senior Vice President (1)(2)--Senior Vice President
of the Investment Adviser and MLAM since 1982; Senior Vice President of
Princeton Services since 1993.
DANIEL V. SZEMIS (36)--Vice President (1)--Vice President of MLAM since
1996; Portfolio Manager with Prudential Mutual Fund Investment Management
Advisors from 1990 to 1996.
DONALD C. BURKE (36)--Vice President (1)(2)--Vice President and Director of
Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1982 to
1990.
10
<PAGE>
GERALD M. RICHARD (47)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer thereof since 1984.
MARK B. GOLDFUS (49)--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 30, 1996, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At that date, Mr. Zeikel, an officer and a Director of the Fund, and the
other officers of the Fund owned less than 1% of the outstanding Common Stock of
ML & Co.
COMPENSATION OF DIRECTORS
The Fund pays each Director who is not affiliated with the Investment
Adviser (each a 'non-affiliated Director') an annual fee of $2,000 plus a fee of
$500 for each meeting attended and pays all Directors' actual out-of-pocket
expenses relating to attendance at meetings. The Fund also pays each member of
the Audit Committee of the Board of Directors, which consists of all of the
non-affiliated Directors, an annual fee of $2,100 and the chairman of such
committee receives an annual fee of $750. Fees and expenses paid to the
non-affiliated Directors aggregated $31,480 for the fiscal year ended March 31,
1996.
The following table sets forth, for the fiscal year ended March 31, 1996,
compensation paid by the Fund to the non-affiliated Directors and, for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
registered investment companies advised by MLAM and its affiliate, FAM
('MLAM/FAM Advised Funds'), to the non-affiliated Directors.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS AGGREGATE COMPENSATION
ACCRUED AS FROM FUND AND MLAM/FAM
NAME OF COMPENSATION PART OF FUND ADVISED FUNDS PAID
DIRECTOR FROM FUND EXPENSES TO DIRECTORS(1)
-------- ------------ ------------ ----------------------
<S> <C> <C> <C>
Donald Cecil......... $6,850 None $271,850
M. Colyer Crum....... $6,100 None $126,600
Edward H. Meyer...... $6,100 None $239,225
Jack B. Sunderland... $6,100 None $134,600
J. Thomas Touchton... $6,100 None $134,600
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (36 registered investment companies consisting of 36 portfolios); Mr.
Crum (18 registered investment companies consisting of 18 portfolios); Mr.
Meyer (36 registered investment companies consisting of 36 portfolios); Mr.
Sunderland (19 registered investment companies consisting of 28 portfolios);
and Mr. Touchton (19 registered investment companies consisting of 28
portfolios).
11
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to 'Management of the Fund--Management and Advisory
Arrangements' in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
The Investment Advisory Agreement provides that, subject to the direction
of the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio and for the review of the Fund's
holdings in light of its own research analysis and analyses from other relevant
sources.
The responsibility for making decisions to buy, sell or hold a particular
security rests with the Investment Adviser, subject to review by the Board of
Directors. The Investment Adviser supplies the portfolio managers for the Fund
who consider analyses from various sources, make the necessary investment
decisions and place transactions accordingly. The Investment Adviser also is
obligated to perform certain administrative and management services for the Fund
and to provide all of the office space, facilities, equipment and personnel
necessary to perform its duties under the Investment Advisory Agreement.
Securities held by the Fund also may be held by or be appropriate
investments for other funds for which the Investment Adviser or MLAM acts as an
adviser or by investment advisory clients of MLAM. Because of different
investment objectives or other factors, a particular security may be bought for
one or more clients when one or more clients are selling the same security. If
purchases or sales of securities for the Fund or other funds for which the
Investment Adviser or MLAM acts as investment adviser or for their advisory
clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or MLAM during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
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. At the date of this Statement of Additional Information, these expense
limitations require that the Investment Adviser reimburse the Fund in an amount
necessary to prevent the aggregate ordinary operating expenses (excluding
interest, taxes, brokerage fees and commissions, distribution fees and
extraordinary charges such as litigation costs) from exceeding in any fiscal
year 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of
the next $70 million of average daily net assets and 1.5% of the remaining
average daily net assets. The Investment Adviser's obligation to reimburse the
Fund is limited to the amount of the investment advisory fee. No payment will be
made to the Investment Adviser during any fiscal year which will cause such
expenses to exceed the most restrictive expense limitation at the time of such
payment. For the fiscal years ended March 31, 1994, 1995 and 1996, the
Investment Adviser earned fees of $1,179,244, $1,927,770 and $3,704,781,
respectively, from the Fund. For such years the Investment Adviser was not
required to reimburse the Fund pursuant to the applicable expense limitation
provisions.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Fund connected with investment
and economic research, trading and investment management of the Fund, as well as
the fees of all Directors of the Fund who are affiliated persons of ML & Co. or
any of its affiliates. The Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, taxes, expenses for legal
and auditing services, costs of printing proxies, stock certificates,
shareholders reports, prospectuses and
12
<PAGE>
statements of additional information (except to the extent paid by the
Distributor), charges of the custodian and the transfer agent, expenses of
redemption of shares, Commission fees, expenses of registering the shares under
Federal and state securities laws, fees and expenses of unaffiliated Directors,
accounting and pricing costs (including the daily calculation of net asset
value), insurance, interest, brokerage costs, litigation and other extraordinary
or non-recurring expenses, and other expenses properly payable by the Fund.
Accounting services are provided for the Fund by the Investment Adviser, and the
Fund reimburses the Investment Adviser for its costs in connection with such
services. For the fiscal years ended March 31, 1994, 1995 and 1996, the amount
of such reimbursement was $48,221, $47,277 and $56,839, respectively. As
required by the Fund's distribution agreements, the Distributor pays certain of
the expenses of the Fund in connection with the continuous offering of its
shares including the expenses of printing the prospectuses and statements of
additional information used in connection with the continuous offering of shares
by the Fund. Certain expenses will be financed by the Fund pursuant to
distribution plans in compliance with Rule 12b-1 under the Investment Company
Act. See 'Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
Class C Shares--Distribution Plans'.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
'controlling persons' of the Investment Adviser as defined under the Investment
Company Act because of their ownership of its voting securities or their power
to exercise a controlling influence over its management or policies.
Duration and Termination. Unless earlier terminated as described herein,
the Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party 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.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System: shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of the Fund
represents an identical interest in the investment portfolio of the Fund and has
the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees, and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which the account maintenance fee and/or distribution
fees are paid. Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege'.
The Merrill Lynch Select Pricing(Service Mark) System is used by more than
50 mutual funds advised by MLAM or its affiliate, the Investment Adviser. Funds
advised by MLAM or the Investment Adviser which utilize
the Merrill Lynch Select Pricing(Service Mark) System are referred to herein as
'MLAM-advised mutual funds.'
13
<PAGE>
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the 'Distribution Agreements'). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirement and termination provisions as the Investment Advisory Agreement
described above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
For the fiscal years ended March 31, 1994, 1995 and 1996, gross sales
charges on the sale of Class A shares totaled $410,165, $138,623 and $49,544,
respectively, of which $253,499, $9,023 and $3,362, respectively, was received
by the Distributor and $156,666, $129,600 and $46,182, respectively, was paid to
Merrill Lynch as a selected dealer. The gross sales charges on the sale of the
Fund's Class D shares for the fiscal period October 21, 1994 (commencement of
operations) to March 31, 1995, totaled $77,923, of which the Distributor
received $4,692 and Merrill Lynch received $73,231. For the fiscal year ended
March 31, 1996, the gross sales charges on the sale of the Fund's Class D shares
totaled $107,123, of which the Distributor received $7,030 and Merrill Lynch
received $100,093. For information as to brokerage commissions received by
Merrill Lynch, see 'Portfolio Transactions and Brokerage'.
The term 'purchase' as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his or her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary is
involved. The term 'purchase' also includes purchases by 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.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time.
14
<PAGE>
Shares held in the name of a nominee or custodian under pension, profit-sharing,
or other employee benefit plans may not be combined with other shares to
qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant, record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares, however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A or Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward the
completion of such Letter but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intention
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to five percent of the intended amount will be held in escrow
during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the further reduced percentage
sales charge, but there will be no retroactive reduction of the sales charges on
any previous purchase. The value of any shares redeemed or otherwise disposed of
by the purchaser prior to termination or completion of the Letter of Intention
will be deducted from the total purchases made under such Letter. An exchange
from a MLAM-advised money market fund into the Fund that creates a sales charge
will count toward completing a new or existing Letter of Intention from the
Fund.
Merrill Lynch Blueprint(Service Mark) Program. Class D shares of the Fund
are offered to participants in the Merrill Lynch Blueprint(Service Mark) Program
('Blueprint'). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
Blueprint is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions and trade associations. Investors placing
orders to purchase Class A or Class D shares of the Fund through Blueprint will
acquire the Class A or Class D shares at net asset value plus a sales charge
calculated in accordance with the Blueprint sales charge schedule (i.e., up to
$300 at 4.25%, from $300.01 to $5,000 at 3.25% plus $3.00 and $5,000.01 or more
at the standard sales charge rates disclosed in the Prospectus). In addition,
Class A or Class D shares of the Fund are being offered at net asset value plus
a sales charge of 1/2 of 1% for corporate or group IRA programs placing orders
to purchase their Class A or Class D shares through Blueprint. Services,
including the exchange privilege, available to Class A or Class D investors
through Blueprint, however, may differ from those available to other investors
in Class A or Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ('IRA
Rollover Program') available from Merrill Lynch Business Financial
15
<PAGE>
Services, a business unit of Merrill Lynch. The IRA Rollover Program is
available to custodian rollover assets from employer-sponsored retirement and
savings plans whose trustee and/or plan sponsor has entered into a Merrill Lynch
Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(Service Mark)
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA(Service Mark) Managed Trusts. Class A shares are offered at net asset
value to TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services.
Employee Access Accounts(Service Mark). Class A and Class D shares are
offered at net asset value to Employee Access Accounts(Service Mark) available
through qualified employers that provide employer-sponsored retirement or
savings plans that are eligible to purchase such shares at net asset value. The
initial minimum for such accounts is $500, except that the initial minimum for
shares purchased for such accounts pursuant to the Automatic Investment Program
is $50.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ('Eligible Class A shares') are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or the
Investment Adviser who purchased such closed-end fund shares prior to October
21, 1994 (the date the Merrill Lynch Select Pricing(Service Mark) System
commenced operations) and wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in Eligible Class A shares, if the
conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994 and wish to
reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to buy Class A shares) or Class D shares of
the Fund and other MLAM-advised mutual funds ('Eligible Class D shares'), if the
following conditions are met. First, the sale of the closed-end fund shares must
be made through Merrill Lynch and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A Shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an 'eligible fund') must sell his or her shares of
common stock of the eligible fund (the 'eligible shares') back to the fund in
connection with
16
<PAGE>
a tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus) is
applicable. Purchase orders from eligible fund shareholders wishing to exercise
this investment option will be accepted only on the day that the related tender
offer terminates and will be effected at the net asset value of the designated
class of the Fund on such day.
Purchase Privileges of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term 'subsidiaries', when used herein with respect to ML &
Co., includes MLAM, the Investment Adviser and certain other entities directly
or indirectly wholly-owned and controlled by ML & Co.) and their directors and
employees and any trust, pension, profit-sharing or other benefit plan for such
persons, may purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that he
or she will purchase Class D shares of the Fund with proceeds from a redemption
of a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund, and
the proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ('notice'), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of the other mutual fund and such shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
the other mutual fund and such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must be
maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may 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. The issuance of Class D shares for
consideration other than cash is limited to bona fide
17
<PAGE>
reorganizations, statutory mergers or other acquisitions of portfolio securities
which (i) meet the investment objectives and policies of the Fund; (ii) are
acquired for investment and not for resale (subject to the understanding that
the disposition of the Fund's portfolio securities shall at all times remain
within its control); and (iii) are liquid securities, the value of which is
readily ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such transactions
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under 'Investment
Objective and Policies' herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available
toll-free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to 'Purchase of Shares--Distribution Plans' in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a 'Distribution Plan') with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
distribution fees paid to the Distributor. In their consideration of each
Distribution Plan, the Directors must consider all factors they deem relevant,
including information as to the benefits of the Distribution Plan to the Fund
and its related class of shareholders. Each Distribution Plan further provides
that, so long as the Distribution Plan remains in effect, the selection and
nomination of Directors who are not 'interested persons' of the Fund, as defined
in the Investment Company Act (the 'Independent Directors'), shall be committed
to the discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that such Distribution Plan will
benefit the Fund and its related class of shareholders. Each Distribution Plan
can be terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution Plan
cannot be amended to increase materially the amount to be spent by the Fund
without the approval of the related class of shareholders, and all material
amendments are required to be approved by the vote of Directors, including a
majority of the
18
<PAGE>
Independent Directors who have no direct or indirect financial
interest in such Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Fund preserve copies of each
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of such Distribution Plan or such report, the
first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the 'NASD') imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fees and the CDSCs).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the 'voluntary maximum') in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
19
<PAGE>
The following table sets forth comparative information as of March 31, 1996
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares, the Distributor's voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF MARCH 31, 1996 (IN THOUSANDS)
----------------------------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL (4)
-------- ---------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares, for the period
October 21, 1988
(commencement of operations)
to March 31, 1996:
Under NASD Rule as
Adopted................... $244,213 $ 15,263 $2,076 $17,339 $5,856 $11,483 $2,326
Under Distributor's
Voluntary Waiver.......... $244,213 $ 15,263 $1,221 $16,484 $5,856 $10,628 $2,326
Class C Shares, for the period
October 21, 1994
(commencement of operations)
to March 31, 1996:
Under NASD Rule as
Adopted................... $ 27,934 $ 1,746 $ 127 $ 1,873 $ 202 $ 1,671 $ 202
</TABLE>
- ------------------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) 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 with respect to Class B shares prior to July
6, 1993 under the distribution plan in effect at that time, at a 1.0% rate,
0.75% of average daily net assets has been treated as a distribution fee and
0.25% of average daily net assets has been deemed to have been a service fee
and not subject to the NASD maximum sales charge rule. See 'Purchase of
Shares--Distribution Plans' in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to the Class B shares,
the voluntary maximum.
20
<PAGE>
REDEMPTION OF SHARES
Reference is made to 'Redemption of Shares' in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to receive payment with respect to any redemption of shares may
be suspended by the Fund for a period of up to seven days. Suspensions of more
than seven days may not be made except (1) for any period (a) during which the
NYSE is closed other than customary weekend and holiday closings or (b) during
which trading on the NYSE is restricted; (2) for any period during which an
emergency exists as a result of which (a) disposal by the Fund of securities
owned by it is not reasonably practicable or (b) it is not reasonably
practicable for the Fund fairly to determine the value of its net assets; or (3)
for such other periods as the Commission may by order permit for the protection
of security holders of the Fund. The Commission shall by rules and regulations
determine the conditions under which (i) trading shall be deemed to be
restricted and (ii) an emergency shall be deemed to exist within the meaning of
clause (2) above.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares', while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account ('IRA') or
other retirement plan or on redemptions of Class B shares following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a tax-free
distribution following retirement under a tax-deferred retirement plan or
attaining age 59 1/2 in the case of an IRA or other retirement plan, or part of
a series of equal periodic payments (not less frequently than annually) made for
the life (or life expectancy) or any redemption resulting from the tax-free
return of an excess contribution to an IRA; or (b) any partial or complete
redemption following the death or disability (as defined in the Code) of a Class
B shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse), provided the redemption is requested within one year of the
death or initial determination of disability. For the fiscal years ended March
31, 1994, 1995 and 1996, the Distributor received CDSCs of $158,825, $354,631
and $681,141, respectively, with respect to redemptions of Class B shares, all
of which were paid to Merrill Lynch. For the fiscal period October 21, 1994
(commencement of operations) to March 31, 1995 and for the fiscal year ended
March 31, 1996, the Distributor received CDSCs of $3,295 and $16,859,
respectively, with respect to redemptions of Class C shares, all of which were
paid to Merrill Lynch.
Merrill Lynch Blueprint(Service Mark) Program. Class B shares are offered
to certain participants in Blueprint, which is directed to small investors,
group IRAs and participants in certain affinity groups such as trade
associations, and credit unions. Class B shares of the Fund are offered through
Blueprint only to members of certain affinity groups. The CDSC is waived in
connection with purchase orders placed through Blueprint by members of such
affinity groups. Services, including the exchange privilege, available to Class
B investors through Blueprint, however, may differ from those available to other
Class B investors. Orders for purchases and redemptions of Class B shares of the
Fund will be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There is no minimum initial
or subsequent purchase requirement for investors who are part of a Blueprint
automatic investment plan. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is
21
<PAGE>
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint(Servicemark) Program, P.O. Box 30441, New Brunswick, New Jersey
08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to 'Portfolio Transactions and Brokerage' in the
Prospectus.
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 NASD and policies established by the Directors of the Fund, the Investment
Adviser may consider sales of shares of the Fund as a factor in the selection of
brokers or dealers to execute portfolio transactions for the Fund.
For the fiscal year ended March 31, 1994, the Fund paid brokerage
commissions of $354,950 of which $15,386, or 4.3%, was paid to Merrill Lynch for
effecting 5.1% of the aggregate dollar amount of transactions in which the Fund
paid brokerage commissions. For the fiscal year ended March 31, 1995, the Fund
paid brokerage commissions of $784,983 of which $18,421 or 2.3% was paid to
Merrill Lynch for effecting 2.5% of the aggregate dollar amount of transactions
in which the Fund paid brokerage commissions. For the fiscal year ended March
31, 1996, the Fund paid brokerage commissions of $952,066 of which $24,421, or
2.6% was paid to Merrill Lynch for effecting 2.7% 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 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.
The Fund also may invest in securities traded in the OTC market.
Transactions in the OTC market generally are principal transactions with dealers
and the costs of such transactions involve dealer spreads rather than brokerage
commissions. With respect to OTC 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
22
<PAGE>
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless a permissive order
allowing such transaction is obtained from the Commission. Since transactions in
the OTC market usually involve transactions with dealers acting as principal for
their own account, affiliated persons of the Fund, including Merrill Lynch, may
not serve as the Fund's dealer in connection with such transactions. However,
affiliated persons of the Fund may serve as its broker in OTC 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 Fund's
custodian to receive any tender offer solicitation fees on behalf of the Fund
payable with respect to portfolio securities of the Fund.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of United States national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage, unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement of the aggregate compensation received by the member in
effecting such transactions, and (iii) complies with any rules the Commission
has prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as broker for the Fund
in any of its portfolio transactions executed on any such securities exchange of
which Merrill Lynch is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided to
the Fund.
As a non-fundamental restriction, the Fund will not purchase or retain the
securities of any issuer, if those individual officers and Directors of the
Fund, the officers and general partner of the Investment Adviser, the directors
of such general partner or the officers and directors of any subsidiary thereof
each owning beneficially more than one-half of one percent of the securities of
such issuer own in the aggregate more than five percent of the securities of
such issuer.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes Fund is determined once
daily Monday through Friday as of 15 minutes after the close of business on
the NYSE (generally, 4:00 P.M., New York time) on each day during which the NYSE
is open for trading. The NYSE is not open on New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The Fund will also determine its net asset value on any day in which there is
sufficient trading in its portfolio securities that the net asset value might be
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 any account maintenance and/or distribution fees,
are
23
<PAGE>
accrued daily. The per share net asset value of Class B, Class C and Class D
shares generally will be lower than the per share net asset value of Class A
shares reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to Class B
and Class C shares and the daily expense accruals of the account maintenance
fees applicable with respect to Class D shares; moreover the per share net asset
value of Class B and Class C shares generally will be lower than the per share
net asset value of Class D shares reflecting the daily expense accruals of the
distribution fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differentials among the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. 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 which are traded
both in the OTC market and on a stock exchange will be valued according to the
broadest and most representative market. When the Fund writes a call option, the
amount of the premium received is recorded on the books of the Fund as an asset
and an equivalent liability. The amount of the liability is subsequently valued
to reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or,
in the case of options traded in the OTC market, the last bid price. Other
investments, including future contracts and related options, will be stated at
market value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith 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 its shares. Certain of these services are
available only to U.S. investors. Full details as to each of such services,
copies of the various plans described below and instructions as to how to
participate in the various services or plans or how to change options with
respect thereto, can be obtained from the Fund, the Distributor or Merrill
Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent showing any reinvestment of ordinary income dividends and
long-term 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 reinvestment of ordinary income
dividends and capital gains distributions. A shareholder may make additions to
his or her Investment Account at any time by mailing a check directly to the
Transfer Agent.
24
<PAGE>
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.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the transfer agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for his or
her shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account at Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described in the
Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer, or by mail
directly to the Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a service known as the Fund's
Automatic Investment Plan whereby the Fund is authorized through pre-authorized
checks or automated clearing house debits of $50 or more to charge the regular
bank account of the shareholder on a regular basis to provide systematic
additions to the Investment Account of such shareholder. For investors who buy
shares of the Fund through Blueprint, no minimum charge to the investor's bank
account is required. Investors who maintain a CMA(Registered) or CBA(Registered)
account may arrange to have periodic investments made in the Fund in their
CMA(Registered) or CBA(Registered) accounts or in certain related accounts in
amounts of $100 or more ($1 for retirement accounts) through the CMA(Registered)
or CBA(Registered) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the NYSE on the ex-dividend date of 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 or direct deposited on or about the payment date.
25
<PAGE>
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund or vice
versa and, commencing ten days after the receipt by the Transfer Agent of such
notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more, and monthly withdrawals are available
for shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined as of
15 minutes after the close of business of the NYSE (generally, 4:00 P.M., New
York City time) on the 24th day of each month or the 24th day of the last month
of each quarter, whichever is applicable. If the NYSE is not open for business
on such date, the Class A or Class D shares will be redeemed at the close of
business on the NYSE 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 or
Class D shares in the Investment Account are reinvested automatically in Class A
or Class D shares, respectively. A shareholder's Systematic Withdrawal Plan may
be terminated at any time, without charge or penalty, by the shareholder, the
Fund, the Fund's transfer agent or the Distributor. Withdrawal payments should
not be considered as dividends, yield or income. Each withdrawal is a taxable
event. If periodic withdrawals continuously exceed reinvested dividends, the
shareholder's original investment may be reduced correspondingly. Purchases of
additional Class A or Class D shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for Class A or Class D shares
of the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(Registered), CBA(Registered) or Retirement Account may elect to
have shares redeemed on a monthly, bi-monthly, quarterly, semi-annual or annual
basis through the CMA(Registered) or CBA(Registered) 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, bi-monthly
systematic redemptions will be made at net asset value on the first Monday of
every other month, and quarterly, semi-annual or annual redemptions are made at
net asset value on the first Monday of months selected at the shareholder's
option. If the first Monday of the month is a holiday, the redemption will be
processed at net asset value on the next business day. The CMA(Registered) or
CBA(Registered) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the
26
<PAGE>
Automatic Investment Program. For more information on the CMA(Registered) or
CBA(Registered) 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 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
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. Under the Merrill Lynch Select
Pricing(Service Mark) System, Class A shareholders may exchange Class A shares
of the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his or her account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, and
the shareholder does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second MLAM-advised mutual fund at any time as
long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class B, Class C and
Class D shares are exchangeable with shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the holding
period for the previously owned shares of the Fund is 'tacked' to the holding
period for the newly acquired shares of the other Fund as more fully described
below. Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds as follows: Class A shares may
be exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund (available only for exchanges within certain
retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch
U.S. Treasury Money Fund; Class B, Class C and Class D shares may be exchanged
for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ('outstanding Class A or
Class D shares') for Class A or Class D shares of another MLAM-advised mutual
fund ('new Class A or Class D shares') are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the
27
<PAGE>
difference, if any, between the sales charge previously paid on the outstanding
Class A or Class D shares and the sales charge payable at the time of the
exchange on the new Class A or Class D shares. With respect to outstanding Class
A or Class D shares as to which previous exchanges have taken place, the 'sales
charge previously paid' shall include the aggregate of the sales charge paid
with respect to such Class A or Class D shares in the initial purchase and any
subsequent exchange. Class A or Class D shares issued pursuant to dividend
reinvestment are sold on a no-load basis in each of the funds offering Class A
or Class D shares. For purposes of the exchange privilege, Class A or Class D
shares acquired through dividend reinvestment shall be deemed to have been sold
with a sales charge equal to the sales charge previously paid on the Class A or
Class D shares on which the dividend was paid. Based on this formula, Class A
and Class D shares generally may be exchanged into the Class A or Class D shares
of the other funds or into shares of the Class A and Class D money market funds
with a reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
('outstanding Class B and Class C shares') offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively ('new Class B or
Class C shares'), of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the sales charge
that may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is 'tacked' to the
holding period for the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch 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% CDSC that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of 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 Global
Resources Trust Class B shares, the investor will be deemed to have held the new
Merrill Lynch Global Resources Trust Class B shares for more than five years.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ('MFA') program. Such
retirement plans may exchange Class B, Class C or Class D shares that have been
held for at least one year for Class A shares of the same Fund on the basis of
relative net asset values in connection with the commencement of participation
in the MFA program, i.e., no CDSC will apply. The one year holding period does
not apply to shares acquired through reinvestment of dividends. Upon termination
of participation in the MFA program, Class A shares will be re-exchanged for the
class of shares originally held. For purposes of computing any CDSC that may be
payable upon redemption of Class B or Class C shares so reacquired, or the
Conversion Period for Class B shares so reacquired, the holding period for
the Class A shares will be 'tacked' to the holding period for the Class B or
Class C shares originally held.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the
28
<PAGE>
CDSC or, with respect to Class B shares, towards satisfaction of the conversion
period. However, shares of a money market fund which were acquired as a result
of an exchange for Class B or Class C shares of the Fund may, in turn, be
exchanged back into Class B or Class C shares, respectively, of any fund
offering such shares, in which event the holding period for Class B or Class C
shares of that fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange Class
B shares of the Fund for shares of Merrill Lynch Institutional Fund
('Institutional Fund') after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If, instead of such
redemption, the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continues to hold for an additional two and a half years,
any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed exchange application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares at any time and thereafter may resume such offering
from time to time. The exchange privilege is available only to U.S. shareholders
in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
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 and Class C shares will be lower than the per share
dividends and distributions on Class A and Class D shares as a result of the
account maintenance, distribution and higher transfer agency fees applicable
with respect to the Class B and Class C shares; similarly, the per share
dividends and distributions on Class D shares will be lower than the per share
dividends and distributions on Class A shares as a result of the account
maintenance fees applicable with respect to Class D shares. See 'Determination
of Net Asset Value'.
29
<PAGE>
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ('RICs') under the Internal Revenue Code
of 1986, as amended (the 'Code'). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the 'shareholders'). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as 'ordinary income dividends') are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ('capital gain
dividends') are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Fund's ordinary income dividends may be eligible for
the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction among the Class A, Class B, Class
C and Class D shareholders according to a method (which it believes is
consistent with the Commission rule permitting the issuance and sale of multiple
classes of stock) that is based on the gross income allocable to Class A, Class
B, Class C and Class D shareholders during the taxable year, or such other
method as the Internal Revenue Service may prescribe. If the Fund pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult their
own tax advisers concerning the applicability of the United States withholding
tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ('backup withholding'). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is
30
<PAGE>
on file with the Fund or who, to the Fund's knowledge, have furnished an
incorrect number. When establishing an account, an investor must certify under
penalty of perjury that such number is correct and that such investor is not
otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and 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. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to certain transactions entered into by the Fund solely to reduce
the risk of changes in price or interest or currency exchange rates with respect
to its investments.
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.
31
<PAGE>
Code Section 1092, which applies to certain 'straddles', may affect the
taxation of the Fund's sales of securities and 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
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. Accordingly, the Fund may be
restricted in effecting closing transactions within three months after entering
into an option 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 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. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than such
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and the mark-to-market rules described above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
Treasury regulations promulgated thereunder. The Code and Treasury regulations
are subject to change by legislative, judicial or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
32
<PAGE>
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales 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, Class B, Class
C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------ ------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
- ----------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year ended March 31, 1996........................ 13.29% $ 1,132.90 14.37% $ 1,143.70
Five Years ended March 31, 1996...................... 14.73% $ 1,987.80 14.80% $ 1,993.80
Ten Years ended March 31, 1996....................... 4.83% $ 1,602.00
Inception (October 21, 1988) to March 31, 1996*...... 8.49% $ 1,834.70
(Please see footnotes on page 35)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------ ------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
- ----------------------------------------------------- ------------ ------------ ------------ ------------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
YEAR ENDED MARCH 31,
- -----------------------------------------------------
<S> <C> <C> <C> <C>
1996................................................. 19.56% $ 1,195.60 18.37% $ 1,183.70
1995................................................. 8.85% $ 1,088.50 7.70% $ 1,077.00
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
Inception (October 21, 1988) to March 31, 1989*...... 2.15% $ 1,021.50
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (May 5, 1978) to March 31, 1996............ 351.94% $ 4,519.40
Inception (October 21, 1988) to March 31, 1996*...... 83.47% $ 1,834.70
(Please see footnotes on following page)
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------ ------------------------------
REDEEMABLE REDEEMABLE
VALUE OF A VALUE OF A
EXPRESSED AS HYPOTHETICAL EXPRESSED AS HYPOTHETICAL
A PERCENTAGE $1,000 A PERCENTAGE $1,000
BASED ON A INVESTMENT BASED ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF THE $1,000 OF THE
PERIOD INVESTMENT PERIOD INVESTMENT PERIOD
- ----------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended March 31, 1996........................ 17.34% $ 1,173.40 13.00% $ 1,130.00
Inception (October 21, 1994) to March 31, 1996**..... 16.10% $ 1,240.50 12.67% $ 1,188.00
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended March 31, 1996........................ 18.34% $ 1,183.40 19.26% $ 1,192.60
Inception (October 21, 1994) to March 31, 1995**..... 4.82% $ 1,048.20 5.13% $ 1,051.30
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 21, 1994) to March 31, 1996**..... 24.05% $ 1,240.50 18.80% $ 1,188.00
</TABLE>
- ------------------
* Information as to Class B shares is presented only for the period October 21,
1988 to March 31, 1996. Prior to October 21, 1988, no Class B shares were
publicly issued.
** Information as to Class C and Class D shares is presented for the period
October 21, 1994 to March 31, 1996. Prior to October 21, 1994, no Class C or
Class D shares were publicly issued.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under 'Purchase of Shares'
and 'Redemption of Shares', respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and therefore may reflect a greater total return since, due to the reduced sales
charges or the waiver of CDSCs, a lower amount of expenses may be deducted.
35
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on February 23, 1978. As of
the date of this Statement of Additional Information, the Fund has an authorized
capital of 400,000,000 shares of Common Stock, par value of $0.10 per share,
divided into four classes, designated Class A, Class B, Class C and Class D
Common Stock, each of which consists of 100,000,000 shares. Each share of Class
A, Class B, Class C and Class D Common Stock represents an interest in the same
assets of the Fund and is identical in all respects except that the Class B,
Class C and Class D shares bear certain expenses related to the account
maintenance and/or distribution of such shares and have exclusive voting rights
with respect to matters relating to such account maintenance and/or distribution
expenditures. The Board of Directors of the Fund may classify and reclassify the
shares of the Fund into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Generally, under Maryland law, a meeting of shareholders
may be called for any purpose on the written request of the holders of at least
25% of the outstanding shares of the Fund. Also, the by-laws of the Fund require
that a special meeting of shareholders be held on the written request of at
least 10% of the outstanding shares of the Fund entitled to vote at such
meeting. Voting rights for Directors are not cumulative. Shares issued are fully
paid and non-assessable and have no preemptive rights. Redemption and conversion
rights are discussed elsewhere herein and in the Prospectus. Each share is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund on liquidation or dissolution after
satisfaction of outstanding liabilities. Stock certificates 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
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding as of March 31, 1996, is calculated as
set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets........................................ $181,296,866 $310,174,160 $26,920,405 $24,794,928
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Number of Shares Outstanding...................... 10,203,733 18,022,310 1,574,359 1,397,349
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Net Asset Value Per Share (net assets divided by
number of shares outstanding)................... $ 17.77 $ 17.21 $ 17.10 $ 17.74
Sales Charge (for Class A and Class D shares:
5.25% of offering price (5.54% of net asset
value))*........................................ .98 ** ** .98
------------ ------------ ----------- -----------
Offering Price.................................... $ 18.75 $ 17.21 $ 17.10 $ 18.72
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
(Footnotes on next page)
36
<PAGE>
(Footnotes from previous page)
- ------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See 'Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares' in
the Prospectus and 'Redemption of Shares--Deferred Sales Charge--Class B and
Class C Shares' herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent Directors of the
Fund. The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286, acts as custodian of the Fund's assets (the 'Custodian'). 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
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484 (the 'Transfer Agent'), 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 LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on 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 of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to which
reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on June 30, 1996.
37
<PAGE>
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, 1996, the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period then
ended. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Special Value Fund, Inc. as of March 31, 1996, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 7, 1996
38
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Aerospace 375,000 ++UNC, Inc. $ 2,161,424 $ 2,812,500 0.5%
Apparel 815,000 ++Farah, Inc. (k) 6,680,057 4,482,500 0.8
233,000 Kellwood Co. 4,270,366 3,611,500 0.7
84,000 ++Marisa Christina, Inc. 862,660 1,690,500 0.3
700,500 ++Norton McNaughton, Inc. (k) 10,056,577 7,530,375 1.4
38,500 The Warnaco Group, Inc. (Class A) 567,405 928,813 0.2
------------ ------------ ------
22,437,065 18,243,688 3.4
Automotive 100,000 Smith (A.O.) Corp. 2,027,107 2,362,500 0.4
Banks & Finance 60,000 American Federal Bank, FSB 611,250 900,000 0.2
173,100 Bankers Corp. 1,033,803 2,921,063 0.5
20,000 Banknorth Group, Inc. 365,000 705,000 0.1
314,000 Charter One Financial, Inc. 5,779,533 10,597,500 2.0
170,000 ++Civic Bancorp, Inc. 926,250 1,296,250 0.2
28,000 Collective Bancorp., Inc. 468,951 707,000 0.1
201,400 ++FirstFed Financial Corp. 2,785,972 3,197,225 0.6
250,000 Roosevelt Financial Group, Inc. 2,916,708 4,625,000 0.9
83,000 Walden Bancorp, Inc. (a) 943,713 1,639,250 0.3
------------ ------------ ------
15,831,180 26,588,288 4.9
Beverages 76,000 ++Celestial Seasonings, Inc. 1,159,395 1,653,000 0.3
Biotechnology 107,000 ++COR Therapeutics, Inc. 1,046,352 1,243,875 0.2
180,400 ++Ostex International, Inc. 2,749,950 2,886,400 0.5
61,600 ++Pharmacopeia, Inc. 995,086 1,540,000 0.3
560,000 ++Scios, Inc. (h) 2,474,401 2,555,000 0.5
------------ ------------ ------
7,265,789 8,225,275 1.5
Building & Building 525,000 ++Giant Cement Holding, Inc. (k) 5,693,918 6,628,125 1.3
Materials 574,000 ++Redman Industries, Inc. 4,634,704 11,623,500 2.1
195,300 Ryland Group, Inc. 2,757,842 3,149,213 0.6
150,200 ++Washington Homes, Inc. 872,781 732,225 0.1
------------ ------------ ------
13,959,245 22,133,063 4.1
<PAGE>
Business Services 822,600 ++Applied Bioscience International, Inc. 4,698,404 7,506,225 1.4
Chemicals 50,000 Lesco, Inc. 705,682 743,750 0.1
Commercial Services 13,100 Duff & Phelps Credit Rating Co. 206,008 209,600 0.0
111,200 ++Education Alternatives, Inc. 370,299 403,100 0.1
------------ ------------ ------
576,307 612,700 0.1
Computers & Computer 550,500 ++Amdahl Corp. 4,479,487 4,679,250 0.9
Services 360,750 ++Boole & Babbage, Inc. 3,101,038 9,244,219 1.7
$ 4,000,000 Cellnet Data Systems, Inc., 13%++++
due 6/15/2005 (b)(j) 2,352,754 2,740,000 0.5
37,500 ++DH Technology, Inc. 295,000 900,000 0.2
465,000 ++Storage Technology Corp. 11,360,734 12,148,125 2.2
610,000 ++Stratus Computer, Inc. 17,104,028 16,927,500 3.1
------------ ------------ ------
38,693,041 46,639,094 8.6
Cosmetics 1,317 ++Alfin, Inc. (Preferred)(c) 0 24,259 0.0
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Data Processing 80,000 Cognos, Inc. $ 495,625 $ 4,540,000 0.8%
78,800 ++Consilium, Inc. 575,018 650,100 0.1
545,000 ++Control Data Systems, Inc. 6,977,634 10,797,813 2.0
160,000 Hyperion Software Corp. 3,375,969 3,480,000 0.6
362,500 ++Information Resources, Inc. 4,869,211 5,256,250 1.0
80,000 ++ParcPlace Systems, Inc. 675,593 730,000 0.1
140,000 ++Platinum Technology, Inc. 2,773,651 2,117,500 0.4
110,000 Progress Software Corp. 3,273,935 1,650,000 0.3
271,000 ++Software Spectrum, Inc. 5,754,666 5,487,750 1.0
24,000 ++Sterling Commerce, Inc. 576,000 738,000 0.1
45,000 ++Sterling Software, Inc. 1,452,700 3,172,500 0.6
140,700 ++VMARK Software, Inc. 1,879,814 1,020,075 0.2
------------ ------------ ------
32,679,816 39,639,988 7.2
Electrical Equipment 138,000 ++Comptek Research, Inc. 2,204,043 707,250 0.1
Electronics 100,000 ++Alden Electronics, Inc. 422,500 81,250 0.0
140,200 ++Alpha Industries, Inc. 1,100,285 1,217,988 0.2
80,100 ++B.I., Inc. 658,020 670,838 0.2
57,000 ++Benchmark Electronics, Inc. 1,342,920 1,702,875 0.3
55,000 ++DII Group, Inc. (i) 1,599,650 1,670,625 0.3
226,000 ++Micronics Computers, Inc. 1,198,238 607,375 0.1
210,000 ++Symantec Corp. 3,648,500 2,703,750 0.5
40,000 ++VLSI Technology, Inc. 448,125 515,000 0.1
------------ ------------ ------
10,418,238 9,169,701 1.7
<PAGE>
Environmental & 187,100 BHA Group, Inc. (Class A) 2,427,489 2,385,525 0.4
Environmental Control 555,200 ++Envirosource, Inc. 2,263,074 2,290,200 0.4
390,250 NSC Corp. 2,062,737 585,375 0.1
------------ ------------ ------
6,753,300 5,261,100 0.9
Healthcare-- 185,000 ++Beverly Enterprises, Inc. 2,453,303 2,035,000 0.4
Products & Services 640,000 Community Psychiatric Centers 7,214,082 5,360,000 1.0
50,000 ++Healthcare Services Group, Inc. 468,500 475,000 0.1
330,000 ++Magellan Health Services, Inc. (d) 5,885,321 7,425,000 1.3
504,500 ++Ramsay Health Care, Inc. (k) 3,537,506 1,639,625 0.3
131,644 ++Ramsay Managed Care, Inc. (e) 296,199 320,882 0.1
200,000 ++Unilab Corp. 1,106,250 400,000 0.1
------------ ------------ ------
20,961,161 17,655,507 3.3
Home Furnishings 150,000 Crown Crafts, Inc. 2,380,073 1,425,000 0.3
109,800 ++Department 56, Inc. 2,440,854 2,401,875 0.4
------------ ------------ ------
4,820,927 3,826,875 0.7
Insurance 113,000 Ace, Ltd. 2,447,188 5,042,625 0.9
32,000 American National Insurance Co. 1,873,745 2,160,000 0.4
131,000 First Colony Corp. 3,400,524 3,127,625 0.6
37,900 Harleysville Group, Inc. 764,450 1,013,825 0.2
275,200 ++Omni Insurance Group, Inc. 1,950,523 2,476,800 0.5
660,300 PXRE Corp. (k) 14,403,271 16,837,650 3.1
267,300 Security-Connecticut Corp. 5,441,464 6,983,212 1.3
------------ ------------ ------
30,281,165 37,641,737 7.0
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Iron & Steel 129,100 ++Olympic Steel, Inc. $ 1,316,934 $ 1,371,687 0.3%
300,000 Quanex Corp. 5,765,076 6,562,500 1.2
------------ ------------ ------
7,082,010 7,934,187 1.5
Leasing 244,000 Sea Containers, Ltd. 4,237,586 4,209,000 0.8
Machinery 110,000 AGCO Corp. (i) 2,383,050 2,653,750 0.5
50,000 Blount, Inc. (Class A) 1,323,000 1,537,500 0.3
------------ ------------ ------
3,706,050 4,191,250 0.8
<PAGE>
Medical 183,500 Analogic Corp. 3,250,002 3,440,625 0.6
175,000 Medex Inc. 1,899,773 2,078,125 0.4
------------ ------------ ------
5,149,775 5,518,750 1.0
Metals--Non-Ferrous 76,800 Handy & Harman 1,205,929 1,257,600 0.2
Miscellaneous 45,000 PHH Corp. 1,541,238 2,503,125 0.5
Natural Resources 145,000 ++Abraxas Petroleum Corp. 1,642,500 779,375 0.1
90,900 ++Atwood Oceanics, Inc. 763,563 3,272,400 0.6
190,000 ++Tom Brown, Inc. 1,781,265 2,683,750 0.5
135,000 ++Gerrity Oil & Gas Corp. 1,625,550 421,875 0.1
310,000 ++Global Natural Resources, Inc. 3,093,326 4,107,500 0.8
70,700 ++Grant Tensor Geophysical Corp.
(Convertible Preferred) 1,175,940 1,064,919 0.2
50,000 ++Input/Output, Inc. (i) 497,878 1,550,000 0.3
359,000 ++International Petroleum Corp. 990,247 807,750 0.2
587,000 ++Landmark Graphics Corp. 12,346,168 9,758,875 1.8
$ 2,625,000 NS Group, Inc., 13.50% due
7/15/2003 (f) 2,508,750 2,408,437 0.4
320,200 ++Newpark Resources, Inc. 5,630,151 9,525,950 1.8
120,000 ++Noble Drilling Corp. 735,714 1,515,000 0.3
105,000 ++Nuevo Energy Co. 2,023,100 3,018,750 0.6
50,000 ++Plains Resources, Inc. 402,500 453,125 0.1
308,391 ++Plains Resources, Inc. (j) 1,806,983 2,775,519 0.5
$ 900,000 Swift Energy Corp., Convertible
Bonds, 6.50% due 6/30/2003 924,000 1,017,000 0.2
300,000 Total Petroleum of North America,
Ltd. 3,359,308 2,925,000 0.5
$ 2,876,000 Transamerican Refining Corp.,
18.29%++++ due 2/15/2002 (g) 2,061,506 1,843,228 0.3
460,000 ++TransTexas Gas Corp. 5,970,887 4,600,000 0.8
------------ ------------ ------
49,339,336 54,528,453 10.1
Paper/Forest Products 200,000 ++Duplex Products, Inc. 1,497,271 1,837,500 0.3
140,000 Pope & Talbot, Inc. 2,335,976 1,942,500 0.4
------------ ------------ ------
3,833,247 3,780,000 0.7
Pharmaceuticals 250,000 ++NeoRx Corp. 1,620,702 2,031,250 0.4
Photo-Optical Instruments 80,000 Instron Corp. 1,010,849 1,130,000 0.2
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Real Estate & $ 1,000,000 Alexander Haagen Properties, Inc.,
Real Estate 7.25% due 12/27/2003 (j) $ 1,000,000 $ 936,250 0.2%
Investment Trusts 105,000 Bay Apartment Communities, Inc. 1,901,462 2,533,125 0.5
23,000 Cali Realty Corp. 364,567 514,625 0.1
88,000 Catellus Development Corp.
(Convertible Preferred) (j) 3,200,250 4,224,000 0.8
23,200 Duke Realty Investments, Inc. 645,629 698,900 0.1
100,000 Innkeepers USA Trust 874,152 937,500 0.2
60,000 Manufactured Home Communities, Inc. 887,550 1,065,000 0.2
40,000 Merry Land & Investment Co., Inc. 772,400 870,000 0.2
50,000 Mid-America Apartment Communities, Inc. 1,253,000 1,287,500 0.2
$ 3,000,000 National Health Corp., Convertible
Bonds, 7.75% due 1/01/2001 3,000,000 3,045,000 0.5
40,000 Spieker Properties, Inc. 804,350 1,015,000 0.2
------------ ------------ ------
14,703,360 17,126,900 3.2
Restaurants 140,000 ++Shoney's, Inc. 1,406,643 1,260,000 0.2
1,164,900 ++TPI Enterprises, Inc. (k) 5,488,347 3,349,087 0.6
------------ ------------ ------
6,894,990 4,609,087 0.8
Retailing 574,800 J. Baker, Inc. 7,781,064 4,311,000 0.8
232,400 ++Bon-Ton Stores, Inc. 2,429,684 1,568,700 0.3
579,300 CML Group, Inc. 1,766,865 1,810,312 0.3
393,800 ++Catherines Stores Corp. (k) 4,060,257 3,938,000 0.7
1,035,000 Charming Shoppes, Inc. 2,660,559 5,336,719 1.0
69,000 ++Chico's Fashions, Inc. 473,812 483,000 0.1
25,000 ++Dress Barn, Inc. 243,408 293,750 0.1
1,063,000 ++Grossman's, Inc. 3,251,812 1,760,594 0.3
300,000 Hancock Fabrics, Inc. 2,706,004 2,962,500 0.5
125,800 ++Movie Gallery, Inc. 3,084,989 3,176,450 0.6
70,000 OfficeMax, Inc. 886,667 1,697,500 0.3
202,650 Pier 1 Imports, Inc. 1,492,944 2,558,456 0.5
102,000 ++REX Stores Corp. 1,315,670 1,415,250 0.3
700,000 ++Service Merchandise Co., Inc. 3,694,765 3,675,000 0.7
649,900 ++The Wet Seal, Inc. (Class A)(k) 2,238,280 8,286,225 1.5
39,900 ++Whole Foods Market, Inc. 493,762 728,175 0.1
------------ ------------ ------
38,580,542 44,001,631 8.1
Scientific Instruments 80,000 Technitrol, Inc. 1,415,137 2,320,000 0.4
<PAGE>
Telecommunications 145,000 ++General DataComm Industries, Inc. 1,757,401 1,540,625 0.3
Textiles 450,000 ++Burlington Industries, Inc. 5,117,552 5,681,250 1.0
Toy Manufacturing 389,000 ++Just Toys, Inc. (k) 1,738,722 461,937 0.1
Transportation 200,000 ++Kirby Corp. 2,814,824 3,425,000 0.6
Utilities 46,000 American Water Works Co., Inc. 180,682 1,771,000 0.3
55,000 Wicor, Inc. 1,529,287 1,856,250 0.3
------------ ------------ ------
1,709,969 3,627,250 0.6
Total Stocks & Bonds 371,092,508 421,323,795 77.5
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Face Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Commercial Paper* $ 10,000,000 A.I. Credit Corp., 5.13% due
4/02/1996 $ 9,995,725 $ 9,995,725 1.8%
15,000,000 ANZ (Delaware) Inc., 5.10% due
4/22/1996 14,951,125 14,951,125 2.8
10,000,000 CIT Group Holdings, Inc., 5.23% due
4/11/1996 9,982,567 9,982,567 1.8
20,000,000 Commerzbank U.S. Finance Inc., 5.35%
due 4/29/1996 19,910,833 19,910,833 3.7
14,258,000 Ford Motor Credit Co., 5.50% due
4/01/1996 14,253,643 14,253,643 2.6
20,019,000 Matterhorn Capital Corp., 5.35% due
5/01/1996 19,923,799 19,923,799 3.7
8,000,000 Transamerica Corp., 5.28% due
5/14/1996 7,947,200 7,947,200 1.5
15,000,000 Transamerica Finance Corp., 5.17% due
4/11/1996 14,974,150 14,974,150 2.8
------------ ------------ ------
111,939,042 111,939,042 20.7
US Government & 5,000,000 Federal Home Loan Bank, 5.15% due
Agency Obligations* 4/08/1996 4,993,563 4,993,563 0.9
5,150,000 Federal National Mortgage Association,
5.13% due 4/09/1996 5,142,661 5,142,661 0.9
------------ ------------ ------
10,136,224 10,136,224 1.8
Total Short-Term Securities 122,075,266 122,075,266 22.5
Total Investments $493,167,774 543,399,061 100.0
============
Liabilities in Excess of Other Assets (212,702) 0.0
------------ ------
Net Assets $543,186,359 100.0%
============ ======
<PAGE>
<FN>
*Commercial Paper and certain US
Government & Agency Obligations are
traded on a discount basis; the interest
rates shown are the discount rates paid at
the time of purchase by the Fund.
++Non-income producing security.
++++Represents a zero coupon or step bond; the
interest rate shown is the effective yield at
the time of purchase by the Fund.
(a)Formerly the Co-Operative Bank of
Concord.
(b)Each $1,000 face amount contains
4 warrants of Cellnet Data Systems, Inc.
(c)Security represents 14.5% cumulative pre-
ferred stock. For each share of Preferred
Stock, the Fund will receive an annual
dividend of approximately 9.43 shares
of Common Stock.
(d)Formerly Charter Medical Group.
(e)The Fund received these shares from the
spinoff of Ramsay Health Care, Inc.
(f)Each $1,000 face amount contains
1 warrant of NS Group, Inc.
(g)Each $1,000 face amount contains
17.09 warrants of Transamerican
Refining Corp.
(h)Formerly Scios Nova, Inc.
(i)The Company declared a two-for-one stock
split during the quarter.
(j)Restricted securities as to resale. The value of the Fund's
investments in restricted securities was approximately $10,676,000,
representing 2.0% of net assets.
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Alexander Haagen Properties, Inc.,
7.25% due 12/27/2003 12/27/1993 $ 1,000,000 $ 936,250
Catellus Development Corp. 12/14/1994-- 3,200,250 4,224,000
(Convertible Preferred) 2/02/1995
Cellnet Data Systems, Inc.,
13% due 6/15/2005 6/06/1995 2,352,754 2,740,000
Plains Resources, Inc. 5/25/1992--
1/18/1995 1,806,983 2,775,519
Total $ 8,359,987 $10,675,769
=========== ===========
(k)Investment in companies 5% or more of whose outstanding
securities are held by the Fund (such companies are defined as
"Affiliated Companies" in section 2(a)(3) of the Investment Company
Act of 1940) are as follows:
<PAGE>
<CAPTION>
Net Share Net Dividend
Industry Affiliate Activity Cost Income
<S> <S> <C> <C> <C>
Apparel Farah, Inc. 130,200 $ 881,887 +++
Apparel Norton McNaughton, Inc 548,400 7,913,909 +++
Building & Giant Cement Holding, Inc 425,000 4,547,038 +++
Building
Materials
Healthcare-- Ramsay Health Care, Inc -- -- +++
Products
& Services
Insurance PXRE Corp. 265,300 6,041,372 $397,503
Restaurants TPI Enterprises, Inc. 628,500 2,292,156 +++
Retailing Catherines Stores Corp. 80,000 655,547 +++
Retailing The Wet Seal, Inc.
(Class A) (95,500) (404,965) +++
Toy Just Toys, Inc. -- -- +++
Manufacturing
+++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL INFORMATION
<CAPTION>
Statement of Assets and Liabilities as of March 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$493,167,774) (Note 1a) $543,399,061
Cash 349
Receivables:
Securities sold $ 9,618,578
Capital shares sold 1,565,556
Dividends 174,810
Interest 173,528 11,532,472
------------
Prepaid registration fees and other assets (Note 1e) 136,526
------------
Total assets 555,068,408
------------
Liabilities: Payables:
Securities purchased 7,869,014
Capital shares redeemed 2,997,590
Investment adviser (Note 2) 318,849
Distributor (Note 2) 268,308 11,453,761
------------
Accrued expenses and other liabilities 428,288
------------
Total liabilities 11,882,049
------------
<PAGE>
Net Assets: Net assets $543,186,359
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 1,020,373
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 1,802,231
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 157,436
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 139,735
Paid-in capital in excess of par 456,578,905
Undistributed investment income--net 374,217
Undistributed realized capital gains on investments--net 32,882,175
Unrealized appreciation on investments--net 50,231,287
------------
Net assets $543,186,359
============
Net Asset Value: Class A--Based on net assets of $181,296,866 and 10,203,733
shares outstanding $ 17.77
============
Class B--Based on net assets of $310,174,160 and 18,022,310
shares outstanding $ 17.21
============
Class C--Based on net assets of $26,920,405 and 1,574,359
shares outstanding $ 17.10
============
Class D--Based on net assets of $24,794,928 and 1,397,349
shares outstanding $ 17.74
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL INFORMATION (continued)
<CAPTION>
Statement of Operations for the Year Ended March 31, 1996
<S> <S> <C>
Investment Interest and discount earned $ 7,628,104
Income Dividends (net of $9,858 foreign withholding tax) 5,084,073
(Notes 1c & 1d): ------------
Total income 12,712,177
------------
<PAGE>
Expenses: Investment advisory fees (Note 2) 3,704,781
Account maintenance and distribution fees--Class B (Note 2) 2,949,799
Transfer agent fees--Class B (Note 2) 820,486
Transfer agent fees--Class A (Note 2) 382,472
Printing and shareholder reports 233,105
Account maintenance and distribution fees--Class C (Note 2) 220,526
Registration fees (Note 1e) 131,880
Professional fees 82,261
Custodian fees 70,976
Transfer agent fees--Class C (Note 2) 64,219
Accounting services (Note 2) 56,839
Account maintenance fees--Class D (Note 2) 50,713
Transfer agent fees--Class D (Note 2) 49,979
Directors' fees and expenses 31,480
Pricing fees 249
Other 10,467
------------
Total expenses 8,860,232
------------
Investment income--net 3,851,945
------------
Realized & Realized gain on investments--net 39,649,159
Unrealized Gain on Change in unrealized appreciation on investments--net 41,578,720
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 85,079,824
============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended March 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 3,851,945 $ 1,004,317
Realized gain on investments--net 39,649,159 20,737,686
Change in unrealized appreciation on investments--net 41,578,720 1,142,318
------------ ------------
Net increase in net assets resulting from operations 85,079,824 22,884,321
------------ ------------
<PAGE>
Dividends & Investment income--net:
Distributions to Class A (2,232,929) (614,155)
Shareholders Class B (1,325,529) --
(Note 1f): Class C (137,548) (9,723)
Class D (241,696) (19,699)
Realized gain on investments--net:
Class A (5,403,183) (7,894,397)
Class B (10,567,528) (13,778,928)
Class C (748,130) (88,207)
Class D (650,489) (139,464)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (21,307,032) (22,544,573)
------------ ------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 113,078,058 174,423,847
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 176,850,850 174,763,595
Beginning of year 366,335,509 191,571,914
------------ ------------
End of year* $543,186,359 $366,335,509
============ ============
<FN>
*Undistributed investment income--net $ 374,217 $ 459,974
============ ============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1996* 1995* 1994* 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 15.63 $ 15.88 $ 15.32 $ 13.86 $ 10.84
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .24 .16 .10 .05 .10
Realized and unrealized gain on
investments--net 2.72 1.09 1.87 1.43 3.00
-------- -------- -------- -------- --------
Total from investment operations 2.96 1.25 1.97 1.48 3.10
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.23) (.10) .00++ (.02) (.08)
Realized gain on investments--net (.59) (1.40) (1.41) .00++ .00++
-------- -------- -------- -------- --------
Total dividends and distributions (.82) (1.50) (1.41) (.02) (.08)
-------- -------- -------- -------- --------
Net asset value, end of year $ 17.77 $ 15.63 $ 15.88 $ 15.32 $ 13.86
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 19.56% 8.85% 13.14% 10.69% 28.71%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.12% 1.15% 1.17% 1.28% 1.55%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 1.43% 1.04% .62% .37% .83%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $181,297 $106,506 $ 78,804 $ 70,920 $ 57,056
Data: ======== ======== ======== ======== ========
Portfolio turnover 60.37% 59.79% 68.70% 42.25% 98.76%
======== ======== ======== ======== ========
Average commission rate paid $ .0503 -- ++++ -- ++++ -- ++++ -- ++++
======== ======== ======== ======== ========
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1996* 1995* 1994* 1993* 1992*
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 15.16 $ 15.49 $ 15.01 $ 13.70 $ 10.77
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net .07 .00++ (.06) (.09) (.03)
Realized and unrealized gain on
investments--net 2.64 1.06 1.83 1.40 2.98
-------- -------- -------- -------- --------
Total from investment operations 2.71 1.06 1.77 1.31 2.95
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.07) .00++ .00++ .00++ (.02)
Realized gain on investments--net (.59) (1.39) (1.29) .00++ .00++
-------- -------- -------- -------- --------
Total dividends and distributions (.66) (1.39) (1.29) -- (.02)
-------- -------- -------- -------- --------
Net asset value, end of year $ 17.21 $ 15.16 $ 15.49 $ 15.01 $ 13.70
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 18.37% 7.70% 12.03% 9.56% 27.41%
Return:** ======== ======== ======== ======== ========
<PAGE>
Ratios to Average Expenses 2.15% 2.20% 2.19% 2.28% 2.51%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net .44% .02% (.41%) (.65%) (.27%)
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $310,174 $237,359 $112,768 $ 76,182 $ 29,534
Data: ======== ======== ======== ======== ========
Portfolio turnover 60.37% 59.79% 68.70% 42.25% 98.76%
======== ======== ======== ======== ========
Average commission rate paid $ .0503 -- ++++ -- ++++ -- ++++ -- ++++
======== ======== ======== ======== ========
<FN>
++Amount is less than $.01 per share.
++++Data not required for the period.
*Based on average shares outstanding during the period.
**Total investment returns exclude the effect of sales loads.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
Period Period
The following per share data and ratios have been derived For the Oct. 21, For the Oct. 21,
from information provided in the financial statements. Year Ended 1994++ to Year Ended 1994++ to
March 31, March 31, March 31, March 31,
Increase (Decrease) in Net Asset Value: 1996** 1995** 1996** 1995**
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 15.10 $ 15.06 $ 15.61 $ 15.52
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .06 .01 .19 .07
Realized and unrealized gain on
investments--net 2.63 .65 2.73 .66
---------- ---------- ---------- ----------
Total from investment operations 2.69 .66 2.92 .73
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.10) (.06) (.20) (.08)
Realized gain on investments--net (.59) (.56) (.59) (.56)
---------- ---------- ---------- ----------
Total dividends and distributions (.69) (.62) (.79) (.64)
---------- ---------- ---------- ----------
Net asset value, end of period $ 17.10 $ 15.10 $ 17.74 $ 15.61
========== ========== ========== ==========
<PAGE>
Total Investment Based on net asset value per share 18.34% 4.82%+++ 19.26% 5.13%+++
Return:*** ========== ========== ========== ==========
Ratios to Average Expenses 2.16% 2.41%* 1.37% 1.61%*
Net Assets: ========== ========== ========== ==========
Investment income--net .36% .14%* 1.15% .95%*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 26,920 $ 11,434 $ 24,795 $ 11,037
Data: ========== ========== ========== ==========
Portfolio turnover 60.37% 59.79% 60.37% 59.79%
========== ========== ========== ==========
Average commission rate paid $ .0503 -- ++++$ .0503 -- ++++
========== ========== ========== ==========
<FN>
*Annualized.
**Based on average shares outstanding during the period.
***Total investment returns exclude the effect of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
++++Data not required for the period.
See Notes to Financial Statements.
</TABLE>
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
management investment company. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing(Servicemark) System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
<PAGE>
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. Securities traded in the NASDAQ National
Market System are valued at the last sale price, or lacking any
sales, at the closing bid price. In cases where securities are
traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of
Directors as the primary market. Securities which are traded both in
the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market. Options
written are valued at the last sale price in the case of exchange-
traded options or, in the case of options traded in the over-the-
counter market, the last asked price. Options purchased are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
bid price. Short-term securities are valued at amortized cost, which
approximates market value. Other investments, including futures
contracts and related options, are stated at market value.
Securities and assets for which market value quotations are not
available are valued at their fair value as determined in good faith
by or under the direction of the Fund's Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell futures
contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended
purchase of securities. Futures contracts are contracts for delayed
delivery of securities at a specific future date and at a specific
price or yield. Upon entering into a contract, the Fund deposits and
maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
<PAGE>
* Options--The Fund is authorized to write covered call and purchase
put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
NOTES TO FINANCIAL STATEMENTS (continued)
* Forward foreign exchange contracts--The Fund is authorized to enter
into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters such contracts. Premium or
discount is amortized over the life of the contracts.
* Foreign currency options and futures--The Fund may purchase or sell
listed or over-the-counter 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-US 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
(c) 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.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend date, except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the Fund is informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
<PAGE>
(e) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(f) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee 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 FAM during any fiscal year which will cause such expenses
to exceed the most restrictive expense limitation at the time of
such payment.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
<PAGE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended March 31, 1996, MLFD earned underwriting
discounts and commissions and MLPF&S earned dealer concessions on
sales of the Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $3,362 $ 46,182
Class D $7,030 $100,093
For the year ended March 31, 1996, MLPF&S received contingent
deferred sales charges of $681,141 and $16,859 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $24,421 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
March 31, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended March 31, 1996 were $325,901,138 and
$259,000,990, respectively.
Net realized and unrealized gains (losses) as of March 31, 1996 were
as follows:
<PAGE>
Realized
Gains Unrealized
(Losses) Gains
Long-term investments $39,649,160 $50,231,287
Short-term investments (1) --
----------- -----------
Total $39,649,159 $50,231,287
=========== ===========
As of March 31, 1996, net unrealized appreciation for Federal income
tax purposes aggregated $48,714,020, of which $87,521,417 related to
appreciated securities and $38,807,397 related to depreciated
securities. At March 31, 1996, the aggregate cost of investments for
Federal income tax purposes was $494,685,041.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $113,078,058 and $174,423,847 for the years ended March 31, 1996
and 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Dollar
Year Ended March 31, 1996 Shares Amount
Shares sold 6,440,754 $105,924,815
Shares issued to shareholders
in reinvestment of dividends
and distributions 420,869 6,827,898
------------ ------------
Total issued 6,861,623 112,752,713
Shares redeemed (3,473,788) (58,594,494)
------------ ------------
Net increase 3,387,835 $ 54,158,219
============ ============
Class A Shares for the Dollar
Year Ended March 31, 1995 Shares Amount
Shares sold 2,510,523 $ 38,699,950
Shares issued to shareholders
in reinvestment of dividends
and distributions 496,385 7,197,017
------------ ------------
Total issued 3,006,908 45,896,967
Shares redeemed (1,152,958) (17,707,842)
------------ ------------
Net increase 1,853,950 $ 28,189,125
============ ============
<PAGE>
Class B Shares for the Dollar
Year Ended March 31, 1996 Shares Amount
Shares sold 8,847,890 $141,111,187
Shares issued to shareholders
in reinvestment of dividends
and distributions 671,486 10,542,063
------------ ------------
Total issued 9,519,376 151,653,250
Shares redeemed (6,931,949) (113,068,363)
Automatic conversion
of shares (218,662) (3,473,457)
------------ ------------
Net increase 2,368,765 $ 35,111,430
============ ============
Class B Shares for the Dollar
Year Ended March 31, 1995 Shares Amount
Shares sold 11,451,034 $171,088,878
Shares issued to shareholders
in reinvestment of dividends
and distributions 882,748 12,456,145
------------ ------------
Total issued 12,333,782 183,545,023
Shares redeemed (3,711,137) (55,381,255)
Automatic conversion
of shares (247,985) (3,691,530)
------------ ------------
Net increase 8,374,660 $124,472,238
============ ============
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for
the Year Ended Dollar
March 31, 1996 Shares Amount
Shares sold 1,482,478 $ 23,589,611
Shares issued to shareholders
in reinvestment of dividends
and distributions 50,565 791,271
------------ ------------
Total issued 1,533,043 24,380,882
Shares redeemed (715,916) (11,679,944)
------------ ------------
Net increase 817,127 $ 12,700,938
============ ============
<PAGE>
Class C Shares for the
Period October 21, 1994++ to Dollar
March 31, 1995 Shares Amount
Shares sold 828,311 $ 12,105,918
Shares issued to shareholders
in reinvestment of dividends
and distributions 6,268 85,792
------------ ------------
Total issued 834,579 12,191,710
Shares redeemed (77,347) (1,134,143)
------------ ------------
Net increase 757,232 $ 11,057,567
============ ============
[FN]
++Commencement of Operations.
Class D Shares for the Dollar
Year Ended March 31, 1996 Shares Amount
Shares sold 1,716,390 $ 28,556,422
Automatic conversion
of shares 212,202 3,473,457
Shares issued to shareholders
in reinvestment of dividends
and distributions 48,666 790,721
------------ ------------
Total issued 1,977,258 32,820,600
Shares redeemed (1,286,898) (21,713,129)
------------ ------------
Net increase 690,360 $ 11,107,471
============ ============
Class D Shares for the Period Dollar
Oct. 21, 1994++ to March 31, 1995 Shares Amount
Shares sold 496,638 $ 7,482,596
Automatic conversion
of shares 240,716 3,691,530
Shares issued to shareholders
in reinvestment of dividends
and distributions 10,621 149,861
------------ ------------
Total issued 747,975 11,323,987
Shares redeemed (40,986) (619,070)
------------ ------------
Net increase 706,989 $ 10,704,917
============ ============
<PAGE>
[FN]
++Commencement of Operations.
<PAGE>
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................................................ 10
Directors and Officers.............................................. 10
Compensation of Directors........................................... 11
Management and Advisory Arrangements.................................. 12
Purchase of Shares.................................................... 13
Initial Sales Charge Alternatives--Class A and Class D Shares....... 14
Reduced Initial Sales Charges....................................... 14
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements...................................................... 18
Distribution Plans.................................................. 18
Limitations on the Payment of Deferred Sales Charges................ 19
Redemption of Shares.................................................. 21
Deferred Sales Charges--Class B and Class C Shares.................. 21
Portfolio Transactions and Brokerage.................................. 22
Determination of Net Asset Value...................................... 23
Shareholder Services.................................................. 24
Investment Account.................................................. 24
Automatic Investment Plans.......................................... 25
Automatic Reinvestment of Dividends and Capital Gains
Distributions..................................................... 25
Systematic Withdrawal Plans--Class A and Class D Shares............. 26
Retirement Plans.................................................... 27
Exchange Privilege.................................................. 27
Dividends, Distributions and Taxes.................................... 30
Dividends and Distributions......................................... 30
Taxes............................................................... 30
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions...................................................... 32
Special Rules for Certain Foreign Currency Transactions............. 32
Performance Data...................................................... 33
General Information................................................... 37
Description of Shares............................................... 37
Computation of Offering Price Per Share............................. 37
Independent Auditors................................................ 38
Custodian........................................................... 38
Transfer Agent...................................................... 38
Legal Counsel....................................................... 38
Reports to Shareholders............................................. 38
Additional Information.............................................. 38
Independent Auditors' Report.......................................... 39
Financial Statements.................................................. 40
</TABLE>
Code #10256-0796
Merrill Lynch
Special Value Fund, Inc.
[Artwork]
STATEMENT OF
ADDITIONAL
INFORMATION
July 29, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
