<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 1997
SECURITIES ACT FILE NO. 2-60836
INVESTMENT COMPANY ACT FILE NO. 811-2809
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 23 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 22 [X]
(Check appropriate box or boxes.)
----------------
MERRILL LYNCH SPECIAL VALUE FUND, INC.
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH SPECIAL VALUE FUND, INC.
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
----------------
COPIES TO:
PHILIP L. KIRSTEIN, ESQ.
MERRILL LYNCH ASSET MANAGEMENT
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
COUNSEL FOR THE FUND: THOMAS D. JONES, III
BROWN & WOOD LLP FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
----------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
----------------
The Registrant has registered an indefinite number of its shares of common
stock under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940. The notice required by such Rule for the
Registrant's most recent fiscal year was filed on May 22, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH SPECIAL VALUE FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-
1A ITEM NO. LOCATION
----------- --------
<C> <S> <C>
PART A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Fee Table; Merrill Lynch Select
PricingSM System
Condensed Financial
Item 3. Information............ Financial Highlights; Performance Data
Item 4. General Description of Investment Objective and Policies;
Registrant............. Additional Information
Item 5. Management of the Fund.. Fee Table; Management of the Fund;
Portfolio Transactions and Brokerage;
Inside Back Cover Page
Item 5A. Management's Discussion
of Fund Performance.... Not Applicable
Item 6. Capital Stock and Other Cover Page; Purchase of Shares;
Securities............. Redemption of Shares; Shareholder
Services; Additional Information
Item 7. Purchase of Securities Cover Page; Fee Table; Merrill Lynch
Being Offered.......... Select PricingSM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Fee Table; Merrill Lynch Select
Repurchase............. PricingSM System; Purchase of Shares;
Redemption of Shares; Shareholder
Services
Item 9. Pending Legal
Proceedings............ Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
Item 12. General Information and
History................ Not Applicable
Item 13. Investment Objective and
Policies............... Investment Objective and Policies
Item 14. Management of the Fund.. Management of the Fund
Item 15. Control Persons and
Principal Holders of Management of the Fund; General
Securities............. Information--Additional Information
Item 16. Investment Advisory and Management of the Fund; Purchase of
Other Services......... Shares; General Information
Item 17. Brokerage Allocation and
Other Practices........ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other General Information--Description of
Securities............. Shares
Item 19. Purchase, Redemption and
Pricing of Securities Purchase of Shares; Redemption of
Being Offered.......... Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status.............. Dividends; Distributions and Taxes
Item 21. Underwriters............ Purchase of Shares
Item 22. Calculation of
Performance Data....... Performance Data
Item 23. Financial Statements.... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
JULY 18, 1997
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 that seeks 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 SM 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 SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from other securities dealers that have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is
$1,000 and the minimum subsequent purchase is $50, except that for retirement
plans the minimum initial purchase is $100 and the minimum subsequent purchase
is $1, and for participants in certain fee-based programs the minimum initial
purchase is $500 and the minimum subsequent purchase is $50. Merrill Lynch may
charge its customers a processing fee (presently $5.35) for confirming
purchases and repurchases. Purchases and redemptions made directly through the
Fund's transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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 18, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing
the Fund at the above telephone number or address. The 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 pur-
chase price or
redemption
proceeds,
whichever is
lower)........ None(d) 4.0% during the first 1.0% for one year(f) None(d)
year, decreasing 1.0%
annually
thereafter to 0.0% after
the fourth year(e)
Exchange Fee... None None None None
ANNUAL FUND
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS):
Investment Ad-
visory
Fees(g)....... 0.75% 0.75% 0.75% 0.75%
Rule 12b-l
Fees(h):
Account Main-
tenance
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(i)...... 0.25% 0.28% 0.29% 0.25%
Other.......... 0.09% 0.09% 0.09% 0.09%
----- ----- ----- -----
Total Other 0.35% 0.38% 0.39% 0.35%
Expenses..... ----- ----- ----- -----
Total Fund Op-
erating Ex- 1.10% 2.13% 2.14% 1.35%
penses........ ===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors, including
existing Class A shareholders, certain retirement plans and certain
participants in fee-based programs. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares"--page 23.
(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 25 and "Shareholder
Services--Fee-Based Programs"--page 35.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares"--page 23.
(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 that are not
subject to an initial sales charge may instead be subject to a 1.0% CDSC
on amounts redeemed within the first year of purchase. Such CDSC may be
waived in connection with certain fee-based programs. See "Shareholder
Services--Fee-Based Programs" on page 35.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs" on page 35.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs" on page 35.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
19.
(h) See "Purchase of Shares--Distribution Plans"--page 29.
(i) See "Management of the Fund--Transfer Agency Services"--page 21.
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
(including any applicable CDSC
for Class B and Class C
shares):
Class A...................... $ 63 $ 86$ 110 $ 179
Class B...................... $ 62 $ 87$ 114 $ 227*
Class C...................... $ 32 $ 67$ 115 $ 247
Class D...................... $ 66 $ 93$ 123 $ 206
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$ 110 $ 179
Class B...................... $ 22 $ 67$ 114 $ 227*
Class C...................... $ 22 $ 67$ 115 $ 247
Class D...................... $ 66 $ 93$ 123 $ 206
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more
3
<PAGE>
than 50 registered investment companies 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 SM System are referred to
herein as "MLAM-advised mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on 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 and distribution fees with respect to the
Class B and Class C shares in that the sales charges and distribution fees
applicable to each class provide for the financing of the distribution of the
shares of the Fund. The distribution-related revenues paid with respect to a
class will not be used to finance the distribution expenditures of another
class. Sales personnel may receive different compensation for selling
different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase
of Shares."
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURES
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- ------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D Shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- ------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
4
<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 and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$l,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. See "Class
A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares. 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 fee-based
programs. In addition, Class A shares will be offered at net asset
value to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries
(the term "subsidiaries," when used herein with respect to ML & Co.
includes MLAM, 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 of 5.25%
is reduced for purchases of $25,000 and over and waived for purchases
by certain retirement plans and participants in connection with
certain fee-based programs. Purchases of $1,000,000 or more may not
be subject to an initial sales charge but if the initial sales charge
is waived such purchases may be subject to a 1.0% CDSC if the shares
are redeemed within one year after purchase. Such CDSC may be waived
in connection with certain fee-based programs. Sales charges also are
reduced under a right of accumulation that takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds.
See "Purchase of Shares--Initial Sales Charge Alternatives--Class A
and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%,
and an ongoing distribution fee of 0.75%, of the Fund's average net
assets attributable to the Class B shares, and a CDSC if they are
redeemed within four years of purchase. Such CDSC may be modified in
connection with certain fee-based programs. Approximately eight years
after issuance, Class B shares will convert automatically into Class
D shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period
5
<PAGE>
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 or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also will
convert automatically to Class D shares. The conversion period for
dividend reinvestment shares and the conversion and holding periods for
certain retirement plans are modified as described under "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a 1.0% CDSC if they are redeemed within one year of purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor who purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived such purchases will be subject to a 1.0% CDSC
if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. The
schedule of initial sales charges and reductions for Class D shares is
the same as the schedule for Class A shares, except that there is no
waiver for purchases by retirement plans and participants in
connection with certain fee-based programs. Class D shares also will
be issued upon conversion of Class B shares as described above under
"Class B." See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares."
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 SM 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
6
<PAGE>
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 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, 1997 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,
-------------------------------------------------------------------------------------
1997++ 1996++ 1995++ 1994++ 1993 1992 1991 1990
-------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of year....... $ 17.77 $ 15.63 $ 15.88 $ 15.32 $ 13.86 $ 10.84 $ 11.36 $ 12.20
-------- -------- -------- ------- ------- ------- ------- -------
Investment income--net.. .06 .24 .16 .10 .05 .10 .12 .22
Realized and unrealized
gain (loss) on
investments--net........ 3.01 2.72 1.09 1.87 1.43 3.00 (.49) (.82)
-------- -------- -------- ------- ------- ------- ------- -------
Total from investment
operations.............. 3.07 2.96 1.25 1.97 1.48 3.10 (.37) (.60)
-------- -------- -------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net.. (.06) (.23) (.10) (.00)+++ (.02) (.08) (.15) (.24)
Realized gain on
investments--net........ (3.19) (.59) (1.40) (1.41) (.00)+++ (.00)+++ (.00)+++ (.00)+++
-------- -------- -------- ------- ------- ------- ------- -------
Total dividends and
distributions........... (3.25) (.82) (1.50) (1.41) (.02) (.08) (.15) (.24)
-------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of
year.................... $ 17.59 $ 17.77 $ 15.63 $ 15.88 $ 15.32 $ 13.86 $ 10.84 $ 11.36
======== ======== ======== ======= ======= ======= ======= =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share............... 17.62% 19.56% 8.85% 13.14% 10.69% 28.71% (3.15)% (5.05)%
======== ======== ======== ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.10% 1.12% 1.15% 1.17% 1.28% 1.55% 1.88% 1.45%
======== ======== ======== ======= ======= ======= ======= =======
Investment income--net.. .34% 1.43% 1.04% .62% .37% .83% 1.13% 1.62%
======== ======== ======== ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $223,492 $181,297 $106,506 $78,804 $70,920 $57,056 $44,818 $57,800
======== ======== ======== ======= ======= ======= ======= =======
Portfolio turnover...... 97.87% 60.37% 59.79% 68.70% 42.25% 98.76% 73.06% 44.66%
======== ======== ======== ======= ======= ======= ======= =======
Average commission rate
paid##.................. $ .0514 $ .0503 -- -- -- -- -- --
======== ======== ======== ======= ======= ======= ======= =======
<CAPTION>
CLASS A
----------------------------
FOR THE YEAR ENDED MARCH 31,
-----------------
1989 1988
------- --------
<S> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of year....... $ 11.77 $ 15.99
------- --------
Investment income--net.. .22 .17
Realized and unrealized
gain (loss) on
investments--net........ .46 (3.17)
------- --------
Total from investment
operations.............. .68 (3.00)
------- --------
Less dividends and
distributions:
Investment income--net.. (.23) (.14)
Realized gain on
investments--net........ (.02) (1.08)
------- --------
Total dividends and
distributions........... (.25) (1.22)
------- --------
Net asset value, end of
year.................... $ 12.20 $ 11.77
======= ========
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share............... 5.85% (18.82)%
======= ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.35% 1.20%
======= ========
Investment income--net.. 1.78% 1.30%
======= ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $87,167 $108,830
======= ========
Portfolio turnover...... 75.11% 60.47%
======= ========
Average commission rate
paid##.................. -- --
======= ========
</TABLE>
- ----
** Total investment returns exclude the effect of sales loads.
++ Based on average shares outstanding during the period.
+++ Amount is less than $.01 per share.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases
and sales of equity securities.
8
<PAGE>
FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------------------------------
FOR THE
PERIOD
OCTOBER 21,
1988+
FOR THE YEAR ENDED MARCH 31, TO
---------------------------------------------------------------------------------------- MARCH 31,
1997++ 1996++ 1995++ 1994++ 1993++ 1992++ 1991++ 1990 1989
------- -------- -------- -------- ------- ------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (De-
crease) in Net
Asset Value:
PER SHARE OPER-
ATING PERFOR-
MANCE:
Net asset value,
beginning of
period.......... $ 17.21 $15.16 $ 15.49 $ 15.01 $ 13.70 $ 10.77 $11.29 $12.15 $12.01
-------- -------- -------- -------- ------- ------- ------ ------ ------
Investment
income (loss)--
net............. (.12) .07 (.00)+++ (.06) (.09) (.03) (.00)+ .07 .03
Realized and
unrealized gain
(loss) on
investments--
net............. 2.90 2.64 1.06 1.83 1.40 2.98 (.47) (.79) .22
-------- -------- -------- -------- ------- ------- ------ ------ ------
Total from
investment
operations...... 2.78 2.71 1.06 1.77 1.31 2.95 (.47) (.72) .25
-------- -------- -------- -------- ------- ------- ------ ------ ------
Less dividends
and
distributions:
Investment
income--net..... -- (.07) (.00)+++ (.00)+++ (.00)+++ (.02) (.05) (.14) (.09)
Realized gain on
investments--
net............. (3.08) (.59) (1.39) (1.29) (.00)+++ (.00)+++ (.00)+++ (.00)+++ (.02)
-------- -------- -------- -------- ------- ------- ------ ------ ------
Total dividends
and
distributions... (3.08) (.66) (1.39) (1.29) -- (.02) (.05) (.14) (.11)
-------- -------- -------- -------- ------- ------- ------ ------ ------
Net asset value,
end of period... $ 16.91 $17.21 $ 15.16 $ 15.49 $ 15.01 $ 13.70 $10.77 $11.29 $12.15
======== ======== ======== ======== ======= ======= ====== ====== ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 16.44% 18.37% 7.70% 12.03% 9.56% 27.41% (4.16)% (6.00)% 2.15%#
======== ======== ======== ======== ======= ======= ====== ====== ======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses........ 2.13% 2.15% 2.20% 2.19% 2.28% 2.51% 2.95% 2.49% 2.45%*
======== ======== ======== ======== ======= ======= ====== ====== ======
Investment
income (loss)--
net............. (.68)% .44% .02% (.41)% (.65)% (.27)% (.04)% .59% .63%*
======== ======== ======== ======== ======= ======= ====== ====== ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $337,716 $310,174 $237,359 $112,768 $76,182 $29,534 $3,783 $1,456 $ 906
======== ======== ======== ======== ======= ======= ====== ====== ======
Portfolio
turnover........ 97.87% 60.37% 59.79% 68.70% 42.25% 98.76% 73.06% 44.66% 75.11%
======== ======== ======== ======== ======= ======= ====== ====== ======
Average
commission rate
paid##.......... $ .0514 $ .0503 -- -- -- -- -- -- --
======== ======== ======== ======== ======= ======= ====== ====== ======
<CAPTION>
CLASS C CLASS D
----------------------------- -----------------------------
FOR THE
PERIOD FOR THE
FOR THE OCTOBER 21, FOR THE PERIOD
YEAR ENDED 1994+ YEAR ENDED OCTOBER 21,
MARCH 31, TO MARCH 31, 1994+ TO
----------------- MARCH 31, ----------------- MARCH 31,
1997++ 1996++ 1995++ 1997++ 1996++ 1995++
-------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (De-
crease) in Net
Asset Value:
PER SHARE OPER-
ATING PERFOR-
MANCE:
Net asset value,
beginning of
period.......... $ 17.10 $ 15.10 $ 15.06 $ 17.74 $ 15.61 $ 15.52
-------- -------- ----------- -------- -------- -----------
Investment
income (loss)--
net............. (.13) .06 .01 .01 .19 .07
Realized and
unrealized gain
(loss) on
investments--
net............. 2.89 2.63 .65 3.02 2.73 .66
-------- -------- ----------- -------- -------- -----------
Total from
investment
operations...... 2.76 2.69 .66 3.03 2.92 .73
-------- -------- ----------- -------- -------- -----------
Less dividends
and
distributions:
Investment
income--net..... -- (.10) (.06) (.04) (.20) (.08)
Realized gain on
investments--
net............. (3.09) (.59) (.56) (3.17) (.59) (.56)
-------- -------- ----------- -------- -------- -----------
Total dividends
and
distributions... (3.09) (.69) (.62) (3.21) (.79) (.64)
-------- -------- ----------- -------- -------- -----------
Net asset value,
end of period... $ 16.77 $ 17.10 $ 15.10 $ 17.56 $ 17.74 $ 15.61
======== ======== =========== ======== ======== ===========
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 16.39% 18.34% 4.82%# 17.38% 19.26% 5.13%#
======== ======== =========== ======== ======== ===========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses........ 2.14% 2.16% 2.41%* 1.35% 1.37% 1.61%*
======== ======== =========== ======== ======== ===========
Investment
income (loss)--
net............. (.70) .36% .14%* .07% 1.15% .95%*
======== ======== =========== ======== ======== ===========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $31,182 $26,920 $11,434 $40,173 $24,795 $11,037
======== ======== =========== ======== ======== ===========
Portfolio
turnover........ 97.87% 60.37% 59.79% 97.87% 60.37% 59.79%
======== ======== =========== ======== ======== ===========
Average
commission rate
paid##.......... $ .0514 $ .0503 -- $ .0514 $ .0503 --
======== ======== =========== ======== ======== ===========
</TABLE>
- ----
*
Annualized
**
Total investment returns exclude the effect of sales loads.
+
Commencement of Operations.
++
Based on average shares outstanding during the period.
+++
Amount is less than $.01 per share.
#
Aggregate total investment return.
##
For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
9
<PAGE>
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
that 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 applying such a strategy of fundamental analysis to
small and emerging growth companies.
Management also may seek to identify companies that 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 $1 billion at the time of initial
purchase and generally are little known to
10
<PAGE>
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; 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 the time and cost involved. Careful
initial selection is particularly important in this area for new enterprises
that have promise but may lack certain of the ingredients necessary to prosper.
An investment in a fund of this type involves greater risk than is
customarily associated with funds that invest in 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
may be 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.
The Fund's 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, U.S. 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
11
<PAGE>
issuers involves risks not typically involved in domestic investment, including
fluctuations in foreign exchange rates, future political and economic
development and the possible imposition of exchange controls or other foreign
or U.S. governmental laws or restrictions applicable to such investments.
Since the Fund may invest in securities denominated or quoted in currencies
other than the United States dollar, changes in foreign currency exchange rates
may affect the value of investments in the portfolio and the unrealized
appreciation or depreciation of investments insofar as United States investors
are concerned. Changes in foreign currency exchange rates relative to the
United States dollar will affect the United States dollar value of the Fund's
assets denominated in that currency and the Fund's yield on such assets. With
respect to certain foreign countries, there is the possibility of expropriation
of assets, confiscatory taxation, political or social instability or diplomatic
developments that 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 include 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.
12
<PAGE>
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 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 is authorized to 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 on or before a specified
future date and at a specified 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 that 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
13
<PAGE>
maintained cash, cash equivalents, United States Government securities or other
liquid securities denominated in United States dollars or non-United States
currencies with a securities depository with a value equal to or greater than
the exercise price of the underlying securities. By writing a put, the Fund
will be obligated to purchase the underlying security at a price that may be
higher than the market value of that security at the time of exercise for as
long as the option is outstanding. The Fund may engage in closing transactions
in order to terminate put options that it has written.
The exchanges on which the Fund may conduct options transactions generally
have established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts that any person may trade on a particular trading day. The Investment
Adviser does not believe that these trading and position limits will have any
adverse impact on the portfolio strategies for hedging the Fund's portfolio.
Purchasing Options. The Fund is authorized to 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
that 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 (premiums paid) of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock or Other Financial Index Futures and Options. The Fund is authorized to
engage in transactions in stock or other financial index options and futures,
and related options on such futures. The Fund may purchase or write put and
call options on stock or other financial 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
settlement, the parties to the contract pay or receive an amount of cash equal
to the difference between the closing value of the index on the relevant
valuation date and the exercise price of the option times a specified multiple.
The Fund may invest in stock or other financial 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 or other financial index futures
contracts and financial futures contracts ("futures contracts") as a hedge
against adverse changes in the market value of its portfolio
14
<PAGE>
securities as described below. A futures contract is an agreement between two
parties that 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 is authorized to 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 any particular 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 is also authorized to 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 that may be held
by the Fund as a temporary defensive measure will fall, thus reducing the net
asset value of the Fund. However, as interest rates rise, the value of the
Fund's short position in the futures contract will also tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's investments that 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 that 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 is also authorized to purchase and write call and put options on
futures contracts (including financial futures) 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) that, 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.
15
<PAGE>
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. Accordingly, the Fund will not hedge a currency substantially in
excess of the market value of securities that it has committed to, or
anticipates it will, purchase that are denominated in such currency, and in the
case of securities that 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 that
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 that 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.
16
<PAGE>
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 those OTC options for which the Investment Adviser
believes the Fund can receive on each business day at least two independent
bids or offers (one of which will be from an entity other than a party to the
option).
The staff of the 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 that are held by the Fund, the market value of the
underlying securities covered by OTC call options currently outstanding that
were sold by the Fund and margin deposits on the Fund's existing OTC options on
futures contracts exceed 15% of the total assets of the Fund, taken at market
value, together with all other assets of the Fund that 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 that 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
17
<PAGE>
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 102% 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 Funds investment activities are subject to further restrictions that are
described in the Statement of Additional Information. Investment restrictions
and policies that are fundamental policies may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (a) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (b) more than 50% of the
outstanding shares). Among its fundamental policies, the Fund may not invest
more than 25% of its total assets, taken at market value at the time of each
investment, in the securities of issuers in any particular industry (excluding
the 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 that
cannot readily be resold because of legal or contractual restrictions or that
are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its total assets taken at market value would
be invested in such securities. Notwithstanding the foregoing, the Fund may
purchase without regard to this limitation securities that are not registered
under the Securities Act, but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors 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.
18
<PAGE>
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. Coyler Crum--James R. Williston Professor of Investment Management
Emeritus, Harvard Business School.
Edward H. Meyer--Chairman of the Board of Directors, President and Chief
Executive Officer of Grey Advertising Inc.
Jack B. Sunderland--President and Director of American Independent Oil
Company, Inc. (an energy company).
J. Thomas Touchton--Managing Partner of The Witt-Touchton Company (a private
investment partnership).
- --------
* Interested person, as defined in the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company 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 140 registered investment
companies. MLAM also provides investment advisory services to individual and
institutional accounts. As of June 30, 1997, the Investment Adviser and MLAM
had a total of approximately $256.6 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
19
<PAGE>
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, 1997, the
Investment Adviser earned a fee of $4,781,445 (based on average net assets of
approximately $634.1 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, 1997, the amount of such
reimbursement was $73,232. For the fiscal year ended March 31, 1997, the ratio
of total expenses to average net assets was 1.10% for Class A shares, 2.13% for
Class B shares, 2.14% for Class C shares, and 1.35% for Class D shares.
Also, the Investment Adviser has entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K."), an indirect, wholly owned subsidiary of ML & Co. and an
affiliate of the Investment Adviser, pursuant to which the Investment Adviser
pays MLAM U.K. a fee for providing investment advisory services to the
Investment Adviser with respect to the Company in an amount to be determined
from time to time by the Investment Adviser and MLAM U.K. but in no event in
excess of the amount the Investment Adviser actually receives for providing
services to the Company pursuant to the Investment Advisory Agreement. MLAM
U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
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 that incorporates the Code of
Ethics of the Investment Adviser (together, the "Codes"). The Codes
significantly restrict the personal investing activities of all employees of
the Investment Adviser and, as described below, impose additional, more
onerous, restrictions on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security 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).
20
<PAGE>
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is
a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to a
Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives an
annual fee of up to $11.00 per Class A or Class D account and up to $14.00 per
Class B or Class C account and is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing a beneficial
interest of a person in the relevant share class on a record keeping system,
provided the record keeping system is maintained by a subsidiary of ML & Co.
For the fiscal year ended March 31, 1997, the Fund paid the Transfer Agent
$1,695,039 pursuant to the Transfer Agency Agreement.
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, and for
participants in certain fee-based programs, the minimum initial purchase is
$500 and the minimum subsequent purchase is $50.
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 SM 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 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 $5.35) to confirm a sale of shares to such customers.
Purchases made directly through the Transfer Agent are not subject to the
processing fee.
21
<PAGE>
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing SM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a CDSC and ongoing distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing SM System
is set forth under "Merrill Lynch Select Pricing SM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges do not affect the net
asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares are calculated in the same manner at the same time and 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 (except that Class B shareholders may vote
upon any material changes to expenses charged under the Class D Distribution
Plan). See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges and distribution fees with respect to Class B
and Class C shares in that the sales charges and distribution fees applicable
to each class provide for the financing of the distribution of the shares of
the Fund. The distribution-related revenues paid with respect to a class will
not be used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares. Investors are advised that only Class A and Class D shares may be
available for purchase through securities dealers, other than Merrill Lynch,
that are eligible to sell shares.
22
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURES
- ---------------------------------------------------------------------------------------
<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, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D Shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but, if
the initial sales charge is waived, may be subject to a 1.0% CDSC if
redeemed within one year. Such CDSC may be waived in connection with
certain fee-based programs. A 0.75% sales charge for 401(k) purchases over
$1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and 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.
(6) CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
23
<PAGE>
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>
- --------
* 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 and on Class A purchases by certain retirement plan
investors and participants in connection with certain fee-based programs. If
the sales charge is waived in connection with a purchase of $1,000,000 or
more, such purchases may be subject to a 1.0% CDSC if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. The 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, 1997, the Fund sold 7,513,048 Class A shares
for aggregate net proceeds to the Fund of $138,984,315. The gross sales charges
for the sale of Class A shares of the Fund for that year were $29,571, of which
$1,962 and $27,609 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended March 31, 1997, the Distributor
received no CDSCs with respect to redemption within one year after purchase of
Class A shares purchased subject to a front-end sales charge waiver. During the
fiscal year ended March 31, 1997, the Fund sold 2,128,192 Class D shares for
aggregate net proceeds to the Fund of $39,663,904. The gross sales charges for
the sale of Class D shares of the Fund for that year were $117,411 of which
$8,139 and $109,272 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended March 31, 1997, the Distributor
received CDSCs of $800 with respect to redemptions within one year after
purchase of Class D shares purchased subject to front-end sales charge waivers.
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 SM
Program, are entitled to purchase additional Class A shares of the Fund in that
account. Certain employer- sponsored retirement or savings plans, including
eligible 401(k) plans, may purchase Class A shares at net asset value provided
such plans meet the required minimum number of eligible employees or required
amount of assets advised by MLAM or any of its affiliates. Class A shares are
available at net asset value to corporate warranty insurance reserve fund
programs and U.S. branches of foreign banking institutions provided that
24
<PAGE>
the program or branch has $3 million or more initially invested in MLAM-
advised mutual funds. Also eligible to purchase Class A shares at net asset
value are participants in certain investment programs including TMAe SM
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services, collective investment trusts for which Merrill Lynch Trust
Company serves as trustee and purchases made in connection with certain fee-
based programs. In addition, Class A shares will be offered at net asset value
to ML & Co. and its subsidiaries and their directors and employees and to
members of the Boards of MLAM-advised investment companies, including the
Fund. Certain persons who acquired shares of certain MLAM-advised closed-end
funds 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 Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted
by such funds in shares of the Fund and certain other MLAM-advised mutual
funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors." See
"Shareholder Services--Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access SM Accounts
available through authorized employers. Class A shares are offered at a net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
and, subject to certain conditions, Class A and Class D shares are offered at
net asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest
in shares of the Fund the net proceeds from a sale of certain of their shares
of common stock, pursuant to tender offers conducted by those funds.
Class D shares are offered at net asset value without a sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint SM 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
25
<PAGE>
time of purchase. As discussed below, Class B shares are subject to a four-year
CDSC, which declines each year, while Class C shares are subject only to a one-
year 1.0% CDSC. On the other hand, approximately eight years after Class B
shares are issued, such Class B shares, together with shares issued upon
dividend reinvestment with respect to those shares, are automatically converted
into Class D shares of the Fund and thereafter will be subject to lower
continuing fees. See "Conversion of Class B Shares to Class D Shares" below.
Both Class B and Class C shares are subject to an account maintenance fee of
0.25% of net assets and a distribution fee of 0.75% of net assets as discussed
below under "Distribution Plans." The proceeds from the 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.
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 that are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
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.
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<PAGE>
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
OF DOLLAR
AMOUNT SUBJECT
YEAR SINCE PURCHASE 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, 1997, the Distributor received CDSCs
of $1,268,783 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 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).
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 SM
Program. The CDSC also is waived for any Class B shares that are purchased by
eligible 401(k) or eligible 401(a) plans that are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. The Class B CDSC is also waived for any Class B shares
purchased within qualifying Employee Access SM Accounts. The CDSC may be
waived in connection with certain fee-based programs. See "Shareholder
Services--Fee-Based Programs". 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
27
<PAGE>
forth in the Statement of Additional Information. The terms of the CDSC may be
modified in connection with certain fee-based programs. See "Shareholders
Services--Fee-Based Programs."
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The CDSC may be waived in connection
with certain fee-based programs. See "Shareholder Services--Fee-Based
Programs." For the fiscal year ended March 31, 1997, the Distributor received
CDSCs of $27,419 with respect to redemptions of Class C shares, all of which
was paid to Merrill Lynch.
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.
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
28
<PAGE>
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 per share.
The Conversion Period also may be modified for retirement plan investors
which participate in certain fee-based programs. See "Shareholder Services--
Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provides
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities.
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.
29
<PAGE>
For the fiscal year ended March 31, 1997, the Fund paid the Distributor
$3,523,376 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Distribution Plan of approximately $350.4 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, 1997, the Fund paid the Distributor
$336,083 pursuant to the Class C Distribution Plan (based on average net assets
subject to such Distribution Plan of approximately $33.4 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, 1997, the Fund paid the Distributor $80,469
pursuant to the Class D Distribution Plan (based on average net assets subject
to such Distribution Plan of approximately $32.0 million), all of which was
paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares.
The payments under the Distribution Plans are based 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, 1996, 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 $1,988,000 (.54% of Class B net assets at
that date). As of March 31, 1997, with respect to Class B shares, direct cash
revenues for the period since October 21, 1988 (commencement of operations)
exceeded direct cash expenses by $7,288,232 (2.15% of Class B net assets at
that date). As of March 31, 1997 with respect to Class C shares, the fully
allocated accrual expenses for the period since October 21, 1994 (commencement
of operations) exceeded fully allocated accrual revenues by $130,000, .36% of
Class C net assets at that date. As of March 31, 1997, with respect to Class C
shares, direct cash revenues for the period since October 21, 1994
(commencement of operations) exceeded direct cash expenses by $384,637 (1.23%
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
30
<PAGE>
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares into Class D shares as set forth under
"Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of
Class B Shares to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the 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 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
31
<PAGE>
been issued may be accomplished by writing a letter as noted above accompanied
by certificates for the shares to be redeemed. Redemption requests should not
be sent to the Fund. The redemption request in either event requires the
signatures of all persons in whose names the shares are registered, signed
exactly as their names appear on the Transfer Agent's register or on the
certificate, as the case may be. The signature(s) on the redemption request
must be guaranteed by an "eligible guarantor institution" (including, for
example, Merrill Lynch branch offices and certain other financial institutions)
as such is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934,
as amended, the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents, such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders redeeming directly with the Transfer Agent, payment
will be mailed within seven days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
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 $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Fund, 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
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
32
<PAGE>
after the date the request for redemption was accepted by the Transfer Agent or
the Distributor. Alternatively, the reinstatement privilege may be exercised
through the investor's Merrill Lynch financial consultant within 30 days after
the date the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot exceed
the amount of the redemption proceeds.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
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.
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 IRA 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.
33
<PAGE>
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 PricingSM (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 the account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second
fund. If the Class A shareholder wants to exchange Class A shares for shares of
a second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his or her account at the time of the exchange and
is not otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in which
the exchange is made or is otherwise eligible to purchase Class A shares of the
second fund.
Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund 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.
34
<PAGE>
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from Merrill Lynch Investor
Services at (800) MER-FUND or (800) 637-3863.
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(R), CBA(R) or Retirement Account may elect to have
shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis
through the CMA(R) or CBA(R) Systematic Redemption Program, subject to certain
conditions.
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 or her regular bank account. Investors
35
<PAGE>
who maintain CMA(R) or CBA(R) accounts may arrange to have periodic investments
made in the Fund in their CMA(R) or CBA(R) accounts or in certain related
accounts in amounts of $100 or more ($1 for retirement accounts) through the
CMA(R) or CBA(R) Automated Investment Program.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for the Fund's portfolio decisions and the
placing of the Fund's portfolio transactions. In executing such transactions,
the Investment Adviser seeks to obtain the best net results for the Fund,
taking into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning
a block of securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Fund does not necessarily pay the lowest
commission or spread available. Transactions with respect to the securities of
small and emerging growth companies in which the Fund invests may involve
specialized services on the part of the broker or dealer and thereby entail
higher commissions or spreads than would be the case with transactions
involving more widely traded securities of more established companies.
The Fund has no obligation to deal with any broker in the execution of
transactions for its portfolio securities. The Fund pays brokerage fees or
commissions to Merrill Lynch in connection with portfolio transactions executed
by Merrill Lynch. Brokers and dealers, including Merrill Lynch, who provide
supplemental investment research to the Investment Adviser may receive orders
for transactions by the Fund. Supplemental investment research received by the
Investment Adviser also may be used by it in servicing its other accounts.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Investment Adviser under the Investment
Advisory Agreement. The expenses of the Investment Adviser will not necessarily
be reduced as a result of the receipt of such supplemental information. Whether
or not a particular broker-dealer sells shares of the Fund neither qualifies
nor disqualifies that broker-dealer to execute transactions for the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, 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
36
<PAGE>
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 Index, the Dow Jones Industrial Average, or performance
data published by Lipper Analytical Services, Inc., Morningstar Publications,
Inc., Money Magazine, U.S. News & World Report, Business Week, CDA Investment
Technology, Inc., Forbes Magazine and Fortune Magazine or other industry
publications. As with other performance data, performance comparisons should
not be considered indicative of the Fund's relative performance for any future
period.
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
37
<PAGE>
applicable with respect to that class. See "Additional Information--
Determination of Net Asset Value." Dividends and distributions will be
reinvested automatically in shares of the Fund, at the net asset value without
a sales charge. However, a shareholder whose account is maintained at the
Transfer Agent or whose account is maintained through Merrill Lynch may elect
in writing to receive any such dividends or distributions, or both, in cash.
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 or on such other day on which there is sufficient trading in portfolio
securities that the net asset value of the Fund's shares may be materially
affected. 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.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation.
Securities 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
38
<PAGE>
options traded in the OTC market, the last asked price. Options purchased by
the Fund are valued at their last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last bid
price. Any assets or liabilities expressed in terms of foreign currencies are
translated into U.S. dollars at the prevailing market rates as obtained from
one or more dealers. 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"). As long as it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. 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.
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.
39
<PAGE>
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
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 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.
40
<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.
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.
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.
41
<PAGE>
[This Page Intentionally Left Blank]
42
<PAGE>
MERRILL LYNCH SPECIAL VALUE FUND, INC. -- AUTHORIZATION FORM (PART 1)
[LOGO] MERRILL LYNCH
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM 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.)
1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................
Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address................................ Name and Address of Employer ........
....................................... .....................................
(Zip Code) .....................................
Occupation............................. .....................................
....................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
[_] Check or [_] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Special Value Fund, Inc.
Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): [_] checking [_] savings
Name on your Account ..........................................................
Bank Name .....................................................................
Bank Number ...................... Account Number ............................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Signature of Depositor ........................................................
Signature of Depositor ............................... Date...................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
43
<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.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
..................., 19......
Dear Sir/Madam: Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch 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.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch
- - - Funds Distributor, Inc. to act as
our agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
Shareholder's signature.
- - -
This form when completed should be .....................................
mailed to: Dealer Name and Address
Merrill Lynch Special Value Fund, Inc. By: .................................
c/o Merrill Lynch Financial Authorized Signature of Dealer
Data Services, Inc.
P.O. Box 45289 [_][_][_] [_][_][_][_] ............
Jacksonville, Florida 32232-5289 Branch Code F/C No. F/C Last Name
[_][_][_] [_][_][_][_][_]
Dealer's Customer Account No.
44
<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
(Please Print)
[ ]
Name of Owner...................... Social Security No. or
Taxpayer Identification No.
Name of Co-Owner (if any)..........
Address............................ Account Number ....................
(if existing account)
...................................
- -------------------------------------------------------------------------------
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 SHOULD ACCOMPANY THIS APPLICATION.
45
<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 AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
You are hereby authorized to draw an To...............................Bank
ACH debit each month on my bank (Investor's Bank)
account for investment in Merrill
Lynch Special Value Fund, Inc., as Bank Address.........................
indicated below:
Amount of each ACH debit $........ City...... State...... Zip Code......
Account Number ...................
Please date and invest ACH debits on As a convenience to me, I hereby
the 20th of each month beginning request and authorize you to pay and
........... or as soon as possible charge to my account ACH debits
(month) drawn on my account by and payable
thereafter. to Merrill Lynch Financial Data
Services, Inc. I agree that your
I agree that you are drawing these rights in respect to each such debit
ACH debits voluntarily at my request shall be the same as if it were a
and that you shall not be liable for check drawn on you and signed
any loss arising from any delay in personally by me. This authority is
preparing or failure to prepare any to remain in effect until revoked by
such debit. If I change banks or me in writing. Until you receive
desire to terminate or suspend this such notice, you shall be fully
program, I agree to notify you protected in honoring any such
promptly in writing. I hereby debit. I further agree that if any
authorize you to take any action to such debit be dishonored, whether
correct erroneous ACH debits of my with or without cause and whether
bank account or purchases of fund intentionally or inadvertently, you
shares including liquidating shares shall be under no liability.
of the Fund and crediting my bank
account. I further agree that if a ............ .....................
debit is not honored upon Date Signature of
presentation, Merrill Lynch Financial Depositor
Data Services, Inc. is authorized to
discontinue immediately the Automatic ............ .....................
Investment Plan and to liquidate Bank Signature of Depositor
sufficient shares held in my account Account (If joint account,
to offset the purchase made with the Number both must sign)
dishonored debit.
............ .....................
Date Signature of
Depositor
......................
Signature of Depositor
(If joint account,
both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
46
<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 REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE INVESTMENT ADVISER, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select Pricing SM System..................................... 3
Financial Highlights....................................................... 8
Investment Objective and Policies.......................................... 10
Other Investment Policies and Practices................................... 13
Investment Restrictions................................................... 18
Management of the Fund..................................................... 18
Board of Directors........................................................ 18
Management and Advisory Arrangements...................................... 19
Code of Ethics............................................................ 20
Transfer Agency Services.................................................. 21
Purchase of Shares......................................................... 21
Initial Sales Charge Alternatives--Class A and Class D Shares............. 23
Deferred Sales Charge Alternatives-- Class B and Class C Shares........... 25
Distribution Plans........................................................ 29
Limitations on the Payment of Deferred Sales Charges...................... 31
Redemption of Shares....................................................... 31
Redemption................................................................ 31
Repurchase................................................................ 32
Reinstatement Privilege--Class A and Class D Shares....................... 32
Shareholder Services....................................................... 33
Investment Account........................................................ 33
Exchange Privilege........................................................ 34
Fee-Based Programs........................................................ 35
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 35
Systematic Withdrawal Plans............................................... 35
Automatic Investment Plans................................................ 35
Portfolio Transactions and Brokerage....................................... 36
Performance Data........................................................... 36
Additional Information..................................................... 37
Dividends and Distributions............................................... 37
Determination of Net Asset Value.......................................... 38
Taxes..................................................................... 39
Organization of the Fund.................................................. 41
Shareholder Reports....................................................... 41
Shareholder Inquiries..................................................... 41
Authorization Form......................................................... 43
</TABLE>
Code #10055-0797
[LOGO] MERRILL LYNCH
Merrill Lynch
Special Value Fund, Inc.
[ART]
PROSPECTUS
July 18, 1997
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 that seeks 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 PricingSM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees, and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
----------------
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 18,
1997 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
or by writing the Fund at the above telephone number or address. This Statement
of Additional Information has been incorporated by reference into the
Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is July 18, 1997.
<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 that 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 need to dispose 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, 1996 and 1997 was 60.37% and 97.87%, 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
2
<PAGE>
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 "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
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 on or before a specified future
date and at a specified 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 that 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 that 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 liquid 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.
3
<PAGE>
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 that 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.
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 is authorized to 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 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 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 (premium paid) of all outstanding options on securities held by the Fund
would exceed 5% of the market value of the Fund's total assets.
Stock or other Financial Index Futures and Options. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock or other
financial index futures and options, and related options on such futures. Set
forth below is further information concerning futures transactions.
4
<PAGE>
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 fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "marking 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.
5
<PAGE>
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 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
6
<PAGE>
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) 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. An
exchange may order the liquidation of positions found to be in violation of
these limits and it may impose other sanctions or restrictions. The Investment
Adviser does not believe that these trading and positions limits will have any
adverse impact on the portfolio strategies for hedging the Fund's portfolio.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose means the lesser
of (a) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (b) more than 50% of the outstanding
shares).
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.
7
<PAGE>
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes, (iii) the Fund may obtain such short-
term credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) the Fund may purchase securities on margin to
the extent permitted by applicable law. The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in 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.
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 that 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. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the
Investment Company Act at any time its shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law.
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise
determined to be liquid pursuant to applicable law. Securities purchased in
accordance with Rule 144A under the Securities Act and determined to be
liquid by the Fund's Board of Directors are not subject to the limitations
set forth in this investment restriction.
d. 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.
8
<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 if, as a result of such transaction, the sum
of the market value of OTC options currently outstanding that are held by the
Fund, the market value of the underlying securities covered by OTC call options
currently outstanding that 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 taken at market value, together with all other assets of the
Fund that 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.
9
<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 (65)--President and Director(1)(2)--President of the Investment
Adviser (which term as used herein includes its corporate predecessors) since
1977; President of MLAM (which term as used herein includes 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 (70)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
M. Colyer Crum (64)--Director(2)--Soldiers Field Road, Boston, Massachusetts
02163. Currently James R. Williston Professor of Investment Management
Emeritus, Harvard Business School; James R. Williston Professor of Investment
Management, Harvard Business School, from 1971 to 1996; Director of Cambridge
Bancorp, Copley Properties, Inc. and Sun Life Assurance Company of Canada.
Edward H. Meyer (70)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Harman
International Industries, Inc. and Ethan Allen Interiors, Inc.
Jack B. Sunderland (68)--Director(2)--P.O. Box 7, West Cornwall, Connecticut
06796. President and Director of American Independent Oil Company, Inc. (an
energy company) since 1987; Member of Council on Foreign Relations since 1971.
J. Thomas Touchton (58)--Director(2)--Suite 3405, One Tampa City Center, 201
North Franklin Street, Tampa, Florida 33602. Managing Partner of The Witt-
Touchton Company and its predecessor The Witt Co. (a private investment
partnership) since 1972; Trustee Emeritus of Washington and Lee University;
Director of TECO Energy, Inc. (an electric utility holding company).
Terry K. Glenn (56)--Executive Vice President(1)(2)--Executive Vice President
of the Investment Adviser and MLAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.
Norman R. Harvey (63)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and MLAM since 1982; Senior Vice President of Princeton
Services since 1993.
10
<PAGE>
Daniel V. Szemis (37)--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 (37)--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990.
Gerald M. Richard (48)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer thereof since 1984.
- --------
(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, 1997, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At that date, Mr. Zeikel, an officer and 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 (the "Committee"), 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 $31,442 for the
fiscal year ended March 31, 1997.
The following table sets forth, for the fiscal year ended March 31, 1997,
compensation paid by the Fund to the non-affiliated Directors and, for the
calendar year ended December 31, 1996, 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>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
BENEFITS ACCRUED MLAM/FAM ADVISED
NAME OF COMPENSATION AS PART OF FUNDS PAID TO
DIRECTOR FROM FUND FUND EXPENSES DIRECTORS(1)
- -------- ------------ ---------------- ----------------
<S> <C> <C> <C>
Donald Cecil..................... $6,850 None $268,933
M. Colyer Crum................... $6,100 None $117,600
Edward H. Meyer.................. $6,100 None $227,933
Jack B. Sunderland............... $6,100 None $128,100
J. Thomas Touchton............... $6,100 None $128,100
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Cecil (32 registered investment companies consisting of 32
portfolios); Mr. Crum (14 registered investment companies consisting of 14
portfolios); Mr. Meyer (32 registered investment companies consisting of
32 portfolios); Mr. Sunderland (17 registered investment companies
consisting of 29 portfolios); and Mr. Touchton (17 registered investment
companies consisting of 29 portfolios).
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. For the fiscal years ended March 31, 1995, 1996 and 1997,
the Investment Adviser earned fees of $1,927,770, $3,704,781 and $4,781,445,
respectively, from the Fund.
The Investment Advisory Agreement obligates the Investment Adviser to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of the Fund connected with investment and
economic research, trading and investment management of the Fund, as well as
the fees of all Directors of the Fund who are affiliated persons of ML & Co. or
any of its affiliates. The Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, taxes, expenses for legal
and auditing services, costs of printing proxies, stock certificates,
shareholders reports, prospectuses and statements of additional information
(except to the extent paid by the Distributor), charges of the custodian and
the transfer agent, expenses of redemption of shares, Commission fees, expenses
of registering the shares under Federal and state securities laws, fees and
expenses of unaffiliated Directors, accounting and pricing costs (including the
daily calculation of net asset value), insurance, interest, brokerage
12
<PAGE>
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, 1995, 1996 and 1997, the amount of such reimbursement was $47,277,
$56,839 and $73,232, 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."
As described in the Prospectus, the Investment Adviser has also entered into
a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K.") pursuant to which MLAM U.K. provides investment advisory services
to the Investment Adviser with respect to the Fund.
The Investment Adviser is a limited partnership, the partners of which are ML
& Co. and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Investment Adviser as defined under the Investment Company Act
because of their ownership of its voting securities or their power to exercise
a controlling influence over its management or policies.
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
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C 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
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). Each class has different
exchange privileges. See "Shareholder Services--Exchange Privilege."
13
<PAGE>
The Merrill Lynch Select PricingSM System is used by more than 50 registered
investment Company's advised by MLAM or its affiliate, the Investment Adviser.
Funds advised by MLAM or the Investment Adviser that utilize the Merrill Lynch
Select PricingSM System are referred to herein as "MLAM-advised mutual funds."
The Fund has entered into four separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal 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, 1995, 1996 and 1997, gross sales charges
on the sale of Class A shares totaled $138,623, $49,544 and $29,571,
respectively, of which $9,023, $3,362 and $1,962, respectively, was received by
the Distributor and $129,600, $46,182 and $27,609, 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 years ended
March 31, 1996 and 1997, the gross sales charges on the sale of the Fund's
Class D shares totaled $107,123 and $117,411, respectively, of which the
Distributor received $7,030 and $8,139, respectively and Merrill Lynch received
$100,093 and $109,272, respectively. 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
14
<PAGE>
offering price applicable to the total of (a) the public offering price of the
shares then being purchased plus (b) an amount equal to the then current net
asset value or cost, whichever is higher, of the purchaser's combined holdings
of all classes of shares of the Fund and of other MLAM-advised mutual funds.
For any such right of accumulation to be made available, the Distributor must
be provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing, or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of 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 BlueprintSM Program. Class D shares of the Fund are offered to
participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. 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
15
<PAGE>
accordance with the Blueprint sales charge schedule (i.e., up to $300 at 4.25%,
from $300.01 to $5,000 at 3.25% plus $3.00 and $5,000.01 or more at the
standard sales charge rates disclosed in the Prospectus). In addition, Class A
or Class D shares of the Fund are being offered at net asset value plus a sales
charge of .50% of 1% for corporate or group IRA programs placing orders to
purchase their Class A or Class D shares through Blueprint. Services, including
the exchange privilege, available to Class A 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 Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer-sponsored retirement and savings plans
whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA
Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the Fund
may be grouped for execution purposes which, in some circumstances, may involve
the execution of such orders two business days following the day such orders
are placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There are no minimum initial or
subsequent purchase requirements for participants who are part of an automatic
investment plan. Additional information concerning purchases through Blueprint,
including any annual fees and transaction charges, is available from Merrill
Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box
30441, New Brunswick, New Jersey 08989-0441.
TMASM Managed Trusts. Class A shares are offered at net asset value to TMASM
Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services.
Employee AccessSM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee AccessSM Accounts available through authorized employers. The initial
minimum 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 PricingSM System commenced operations) and
wish to reinvest the net proceeds from a sale of their closed-end fund shares
of common stock in Eligible Class A shares, if the conditions set forth below
are satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other 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.
16
<PAGE>
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. 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 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
17
<PAGE>
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 that might result from an acquisition of assets having net unrealized
appreciation that is disproportionately higher at the time of acquisition than
the realized or unrealized appreciation of the Fund. The issuance of Class D
shares for consideration other than cash is limited to bona fide
reorganizations, statutory mergers or other acquisitions of portfolio
securities that (i) meet the investment objectives and policies of the Fund;
(ii) are acquired for investment and not for resale (subject to the
understanding that the disposition of the Fund's portfolio securities shall at
all times remain within its control); and (iii) are liquid securities, the
value of which is readily ascertainable, that are not restricted as to transfer
either by law or liquidity of market (except that the Fund may acquire through
such transactions restricted or illiquid securities to the extent the Fund does
not exceed the applicable limits on acquisition of such securities set forth
under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
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.
18
<PAGE>
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 Independent Directors who have no direct
or indirect financial interest in such Distribution Plan, cast in person at a
meeting called for that purpose. Rule 12b-1 further requires that the Fund
preserve copies of each Distribution Plan and any report made pursuant to such
plan for a period of not less than six years from the date of such Distribution
Plan or such report, the first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution 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, 1997
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and, with respect to Class B shares, the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF MARCH 31, 1997
---------------------------------------------------------------------------
ANNUAL
ALLOWABLE DISTRIBUTION
ALLOWABLE INTEREST AMOUNTS FEE AT
ELIGIBLE AGGREGATE ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL (4)
-------- --------- ---------- ------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares, for the
period October 21, 1988
(commencement of
operations)
to March 31, 1997:
Under NASD Rule as
Adopted............... $305,555 $19,097 $3,204 $22,301 $9,768 $12,533 $2,532
Under Distributor's
Voluntary Waiver...... $305,555 $19,097 $1,527 $20,624 $9,768 $10,857 $2,532
Class C Shares, for the
period October 21, 1994
(commencement of
operations)
to March 31, 1997:
Under NASD Rule as
Adopted............... $ 40,782 $ 2,548 $ 318 $ 2,866 $ 481 $ 2,385 $ 233
</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 certain instances
including in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or on
redemptions of Class B shares following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies in the case of such
withdrawals are: (a) any partial or complete redemption in connection with a
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, 1995, 1996 and 1997, the Distributor received CDSCs of $354,631,
$681,141 and $1,268,783, 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
years ended March 31, 1996 and 1997, the Distributor received CDSCs of $3,295,
$16,859 and $27,419, respectively, with respect to redemptions of Class C
shares, all of which were paid to Merrill Lynch.
Merrill Lynch BlueprintSM Program. Class B shares are offered to certain
participants in Blueprint, 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
21
<PAGE>
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of a Blueprint automatic investment plan. Additional
information concerning these Blueprint programs, including any annual fees or
transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith
Incorporated, The BlueprintSM Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
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 Conduct Rules of the
NASD and policies established by the Directors of the Fund, the Investment
Adviser may consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions for the Fund.
For the fiscal year ended 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. For the fiscal year ended March 31,
1997, the Fund paid brokerage commissions of $1,591,470 of which $9,588 or .60%
was paid to Merrill Lynch for effecting 1.16% 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.
22
<PAGE>
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 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 possibility of seeking
to recapture for the benefit of the Fund brokerage commissions, dealer spreads
and other expenses of possible portfolio transactions, such as underwriting
commissions, 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 of the Fund is determined
once daily Monday through Friday as of 15 minutes after the close of business
on the NYSE (generally, 4:00 p.m., New York time) on each day during which the
NYSE is open for trading. The NYSE is not open on New Year's Day, Martin Luther
King, Jr. 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
23
<PAGE>
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 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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation.
Securities 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
an option, the amount of the premium received is recorded on the books of the
Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in
the case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market,
the last bid price. Any assets or liabilities expressed in terms of foreign
currencies are translated into U.S. dollars at the prevailing market rates as
offered from one or more dealers. 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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that 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.
24
<PAGE>
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.
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 IRA 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(R) or CBA(R) account may
arrange to have periodic investments made in the Fund in their CMA(R) or CBA(R)
accounts or in certain related accounts in amounts of $100 or more ($1 for
retirement accounts) through the CMA(R) or CBA(R) Automated Investment Program.
25
<PAGE>
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.
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(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bi-monthly, quarterly, semi-annual or
26
<PAGE>
annual basis through the CMA(R) or CBA(R) Systematic Redemption Program. The
minimum fixed dollar amount redeemable is $25. The proceeds of systematic
redemptions will be posted to a shareholder's account three 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(R) or CBA(R) Systematic
Redemption Program is not available if Fund shares are being purchased within
the account pursuant to the Automatic Investment Program. For more information
on the CMA(R) or CBA(R) Systematic Redemption Program, eligible shareholders
should contact their Merrill Lynch financial consultant.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select PricingSM System, Class A shareholders may exchange Class A shares of
the Fund for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in the account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, and
the shareholder does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to 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 difference, if any, between the sales charge previously paid on
the outstanding Class A or Class
27
<PAGE>
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 certain 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.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Investment Adviser or its affiliates, but the
period of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or, with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
that were acquired as a result of an exchange for Class B or Class C shares of
the Fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the newly-acquired fund will be
aggregated with previous holding periods for purposes of reducing the CDSC.
Thus, for example, an investor may exchange Class B shares of the Fund for
shares of Merrill Lynch Institutional Fund ("Institutional Fund") after having
held the Fund Class B shares for two and a half years and three years later
decide to redeem the shares of Institutional Fund for cash. At the time of this
redemption, the 2% CDSC that would have been due had the Class B shares of the
Fund been redeemed for cash rather than
28
<PAGE>
exchanged for shares of Institutional Fund will be payable. If, instead of such
redemption, the shareholder exchanged such shares for Class B shares of a fund
that the shareholder 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, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised mutual
funds, with shares for which certificates have not been issued, may exercise
the exchange privilege by wire through their securities dealers. The Fund
reserves the right to require a properly completed exchange application. This
exchange privilege may be modified or terminated in accordance with the rules
of the Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares 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."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable
29
<PAGE>
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 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.
30
<PAGE>
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.
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.
31
<PAGE>
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.
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.
32
<PAGE>
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
------ ------------ ------------ ------------ ------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year ended March 31,
1997..................... 11.44% $1,114.40 12.53% $1,125.30
Five Years ended March 31,
1997..................... 12.68% $1,816.50 12.75% $1,822.10
Ten Years ended March 31,
1997..................... 6.33% $1,847.60
Inception (October 21,
1988) to March 31,
1997*.................... 9.41% $2,136.30
</TABLE>
(Please see footnotes on page 35)
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>
1997...................... 17.62% $1,176.20 16.44% $1,164.40
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
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (May 5, 1978) to
March 31, 1997........... 431.57% $5,315.70
Inception (October 21,
1988) to March 31,
1997*.................... 113.63% $2,136.30
</TABLE>
(Please see footnotes on following page)
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
------ ------------ ------------ ------------ ------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended March 31,
1997..................... 15.41% $1,154.10 11.22% $1,112.20
Inception (October 21,
1994) to March 31,
1997**................... 16.24% $1,443.80 14.59% $1,394.50
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended March 31,
1997..................... 16.39% $1,163.90 17.38% $1,173.80
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
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to March 31,
1997**................... 44.38% $1,443.80 39.45% $1,394.50
</TABLE>
- --------
* Information as to Class B shares is presented only for the period October
21, 1988 to March 31, 1997. 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, 1997. 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.
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
35
<PAGE>
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, 1997, is calculated as
set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets................... $223,491,911 $337,715,568 $31,182,450 $40,172,893
============ ============ =========== ===========
Number of Shares
Outstanding................. 12,705,487 19,974,939 1,859,344 2,288,022
============ ============ =========== ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................ $ 17.59 $ 16.91 $ 16.77 $ 17.56
Sales Charge (for Class A and
Class D shares: 5.25% of
offering price (5.54% of net
asset value))*.............. .97 ** ** .97
------------ ------------ ----------- -----------
Offering Price............... $ 18.56 $ 16.91 $ 16.77 $ 18.53
============ ============ =========== ===========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares" 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.
36
<PAGE>
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, 1997.
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, 1997, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and 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, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Special Value Fund, Inc. as of March 31, 1997, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 2, 1997
38
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Value Percent of
Industries Shares Held Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Advertising 360,000 ++HA-LO Industries, Inc. $ 4,991,888 $ 5,490,000 0.9%
Aerospace 303,000 ++DONCASTERS PLC (ADR)(c) 5,400,178 5,870,625 0.9
475,000 ++UNC, Inc. 2,952,554 6,768,750 1.1
------------ ------------ ------
8,352,732 12,639,375 2.0
Apparel 378,900 ++Farah, Inc. 2,671,171 3,789,000 0.6
700,500 ++Norton McNaughton, Inc. (e) 10,056,577 4,290,563 0.7
------------ ------------ ------
12,727,748 8,079,563 1.3
Automotive 390,000 Walbro Corp. 7,336,592 6,873,750 1.1
Banks & Finance 166,200 Charter One Financial, Inc. 2,857,934 7,292,025 1.2
130,000 ++Civic Bancorp, Inc. 706,250 1,462,500 0.2
251,400 ++FirstFed Financial Corp. 3,600,548 5,907,900 0.9
120,000 Haven Bancorp, Inc. 3,434,038 3,855,000 0.6
------------ ------------ ------
10,598,770 18,517,425 2.9
Biotechnology 239,600 ++Biomatrix, Inc. 3,664,032 3,204,650 0.5
207,000 ++COR Therapeutics, Inc. 2,084,477 1,966,500 0.3
60,000 ++Gilead Sciences, Inc. 1,783,232 1,372,500 0.2
276,600 ++NeoRx Corp. 1,782,214 1,365,712 0.2
249,200 ++Ostex International, Inc. 2,937,627 934,500 0.2
377,600 ++Scios, Inc. 1,571,726 2,572,400 0.4
------------ ------------ ------
13,823,308 11,416,262 1.8
Building & Building 650,000 ++Giant Cement Holding, Inc. (e) 7,315,281 10,075,000 1.6
Materials 602,900 ++Insituform Technologies, Inc.
(Class A) 4,197,921 3,617,400 0.6
155,000 Oakwood Homes Corp. 3,479,969 2,731,875 0.4
245,300 Ryland Group, Inc. 3,575,517 2,882,275 0.5
175,000 ++Toll Brothers, Inc. 3,381,874 3,193,750 0.5
------------ ------------ ------
21,950,562 22,500,300 3.6
Computer Software 50,200 ++Business Objects S.A. (ADR)(c) 653,110 489,450 0.1
236,900 ++MathSoft, Inc. 1,247,851 843,956 0.1
373,400 ++Software Spectrum, Inc. (e) 7,959,567 5,927,725 0.9
102,667 ++Sterling Commerce, Inc. 1,775,650 2,977,343 0.5
486,300 ++Structural Dynamics Research Corp. 9,542,964 10,090,725 1.6
138,900 ++Symantec Corp. 1,393,144 1,979,325 0.3
4,500,000 ++Versus Technology, Inc. (d)(e) 2,250,000 2,362,500 0.4
------------ ------------ ------
24,822,286 24,671,024 3.9
Computers & Computer 388,725 ++Boole & Babbage, Inc. 2,014,533 9,232,219 1.5
Services 48,950 ++Compuware Corp. 1,278,481 3,071,613 0.5
100,800 ++New Horizons Worldwide, Inc. 1,315,541 932,400 0.1
301,900 ++The Peak Technologies Group, Inc. 3,688,928 3,169,950 0.5
290,000 ++Planar Systems, Inc. 3,591,436 3,190,000 0.5
201,300 ++Storage Technology Corp. 4,120,116 7,901,025 1.2
604,700 Texlon Corp. 6,882,844 9,221,675 1.5
445,800 ++Wang Laboratories, Inc. 9,786,049 7,912,950 1.3
------------ ------------ ------
32,677,928 44,631,832 7.1
Cosmetics 1,317 ++Alfin, Inc. (Preferred)(b) 0 24,259 0.0
</TABLE>
39
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Shares Held Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Data Processing 45,800 ++Cognos, Inc. $ 91,383 $ 1,190,800 0.2%
272,000 ++Hyperion Software Corp. 3,315,113 4,488,000 0.7
1,403,800 ++Metromail Corp. (e) 24,626,004 24,040,075 3.8
842,600 ++Platinum Technology, Inc. 12,037,103 10,005,875 1.6
763,800 ++Sybase, Inc. 13,488,987 10,693,200 1.7
659,700 ++VMARK Software, Inc. (e) 6,390,940 4,370,513 0.7
------------ ------------ ------
59,949,530 54,788,463 8.7
Diversified Holdings 180,000 ++ACX Technologies, Inc. 3,483,836 3,465,000 0.5
Electronics 906,100 ++Alpha Industries, Inc. (e) 6,526,312 5,549,863 0.9
403,000 ++B.I., Inc. 4,066,592 3,072,875 0.5
940,000 ++CHS Electronics, Inc. (e) 13,060,895 19,152,500 3.0
742,550 ++C.P. Clare Corp. (e) 6,361,798 7,796,775 1.2
330,000 ++DII Group, Inc. 7,412,852 8,126,250 1.3
431,300 ++ITI Technologies, Inc. 5,169,729 6,146,025 1.0
110,000 ++Marshall Industries 3,220,471 3,465,000 0.5
438,000 ++Nu Horizons Electronics, Inc. (e) 3,987,348 3,504,000 0.6
182,000 ++Rofin-Sinar Technologies, Inc. 1,729,000 2,661,750 0.4
53,200 ++Triumph Group, Inc. 1,010,800 1,336,650 0.2
134,400 Wyle Electronics 4,478,128 4,519,200 0.7
------------ ------------ ------
57,023,925 65,330,888 10.3
Environmental & 529,320 BHA Group, Inc. (Class A)(e) 7,111,261 9,660,090 1.5
Environmental Control 1,823,500 ++Envirosource, Inc. 6,792,508 3,760,969 0.6
------------ ------------ ------
13,903,769 13,421,059 2.1
Gaming 300,000 ++WMS Industries, Inc. 6,231,634 5,625,000 0.9
Healthcare-- 261,000 ++Magellan Health Services, Inc. 4,379,551 6,427,125 1.0
Hospitals & Services 100,000 ++Physician Reliance Network, Inc. 875,000 512,500 0.1
574,500 ++Ramsay Health Care, Inc. (e) 3,830,632 2,369,813 0.4
150,000 ++Sierra Health Services, Inc. 4,760,136 3,806,250 0.6
813,000 ++Transitional Hospitals Corp. 8,865,402 7,012,125 1.1
------------ ------------ ------
22,710,721 20,127,813 3.2
Home Furnishings 426,400 ++Department 56, Inc. 9,867,996 7,408,700 1.2
Identification Systems 215,000 ++Identix, Inc. 1,838,250 1,800,625 0.3
Instruments 188,000 ++Elsag Bailey Process Automation N.V. 3,019,280 3,008,000 0.4
253,000 ++VWR Scientific Products Corp. 3,607,837 3,763,375 0.6
------------ ------------ ------
6,627,117 6,771,375 1.0
Insurance 40,600 American National Insurance Co. 2,442,745 3,176,950 0.5
51,900 ++Gryphon Holdings, Inc. 625,395 739,575 0.1
475,300 PXRE Corp. 9,973,497 12,179,563 1.9
167,300 Security-Connecticut Corp. 3,248,727 7,549,413 1.2
------------ ------------ ------
16,290,364 23,645,501 3.7
Iron & Steel 150,000 ++Gibraltar Steel Corp. 2,698,903 3,000,000 0.5
526,900 Quanex Corp. 10,825,242 13,238,363 2.1
707,000 ++Shiloh Industries, Inc. 9,626,145 10,074,750 1.6
------------ ------------ ------
23,150,290 26,313,113 4.2
Leasing 33,500 ++Sea Containers, Ltd. 420,385 519,250 0.1
</TABLE>
40
<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>
Machinery 110,000 AGCO Corp. $ 2,383,050 $ 3,038,750 0.5%
217,100 Cincinnati Milacron, Inc. 4,681,041 4,070,625 0.6
195,000 Stewart & Stevenson Services, Inc. 4,394,675 3,900,000 0.6
------------ ------------ ------
11,458,766 11,009,375 1.7
Medical Instruments 111,000 Analogic Corp. 1,867,257 3,330,000 0.5
500,000 ++Isolyser Company, Inc. 3,047,185 2,375,000 0.4
372,800 ++Sofamor Danek Group, Inc. 9,164,341 13,467,400 2.1
468,800 ++VISX, Inc. 11,494,579 10,372,200 1.7
------------ ------------ ------
25,573,362 29,544,600 4.7
Metals 180,000 Applied Industrial Technology,
Inc.++++ 5,053,409 6,300,000 1.0
278,000 Castle (A.M.) & Company 4,673,249 4,830,250 0.7
258,400 ++Citation Corp. 3,472,430 3,746,800 0.6
328,300 Commonwealth Aluminum Corp. 5,307,677 5,622,138 0.9
142,700 ++Ryerson Tull, Inc. (Class A) 1,882,780 1,979,962 0.3
------------ ------------ ------
20,389,545 22,479,150 3.5
Natural Resources 272,000 ++American Exploration Co. 3,409,753 3,060,000 0.5
225,000 ++Benton Oil & Gas Co. 3,431,250 3,487,500 0.5
221,000 ++Newpark Resources, Inc. 3,676,465 9,668,750 1.5
140,000 ++Plains Resources, Inc. 1,461,553 1,855,000 0.3
308,391 ++Plains Resources, Inc. (d) 1,806,983 3,970,534 0.6
438,400 ++Titan Exploration, Inc. 4,711,706 3,726,400 0.6
240,000 ++Tom Brown, Inc. 2,556,265 4,440,000 0.7
380,000 Total Petroleum of North
America, Ltd. 4,357,496 3,990,000 0.6
$ 8,626,000 TransAmerican Refining Corp.,
18.29%** due 2/15/2002 6,867,681 7,892,790 1.3
147,437 TransAmerican Refining Corp.
(Warrants)(a) 360,299 294,874 0.1
685,000 ++TransTexas Gas Corp. 8,165,048 9,590,000 1.5
830,076 ++Zemex Corporation (e) 7,282,851 5,603,013 0.9
------------ ------------ ------
48,087,350 57,578,861 9.1
Paper/Forest 1,437,700 Mercer International, Inc. (e) 19,356,477 13,837,862 2.2
Products 191,500 Pope & Talbot, Inc. 2,946,411 2,633,125 0.4
------------ ------------ ------
22,302,888 16,470,987 2.6
Real Estate & $ 1,000,000 Alexander Haagen Properties, Inc.,
Real Estate 7.25% due 12/27/2003 (d) 1,000,000 928,125 0.1
Investment Trusts
Restaurants 731,000 ++Au Bon Pain Company, Inc.
(Class A)(e) 4,656,455 4,705,812 0.7
1,164,900 ++TPI Enterprises, Inc. (e) 113,689 139,788 0.0
------------ ------------ ------
4,770,144 4,845,600 0.7
Retailing 1,061,200 J. Baker, Inc. (e) 12,122,487 9,550,800 1.5
579,300 CML Group, Inc. 1,766,865 1,086,187 0.2
368,100 ++Catherines Stores Corp. (e) 3,606,116 1,794,487 0.3
661,900 ++Chico's Fashions, Inc. (e) 5,035,678 1,985,700 0.3
1,344,700 ++Grossman's, Inc. 2,518,600 294,153 0.0
1,224,900 ++Levitz Furniture, Inc. 6,171,649 3,521,587 0.6
------------ ------------ ------
31,221,395 18,232,914 2.9
Telecommunications 190,000 ++Allen Telcom, Inc. 3,053,908 3,325,000 0.5
179,600 ++Applied Digital Access, Inc. 1,243,764 942,900 0.2
366,700 ++Brite Voice Systems, Inc. 5,037,951 3,850,350 0.6
</TABLE>
41
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Industries Shares Held Stocks & Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Telecommunications 32,000 ++CellNet Data Systems, Inc. $ 399,151 $ 236,000 0.0%
(concluded) 781,300 ++Comdial Corp. (e) 4,790,363 4,785,462 0.8
793,000 ++Network Equipment Technologies, Inc. 14,133,851 10,705,500 1.7
134,100 ++Rural Cellular Corp. (Class A) 1,387,816 1,408,050 0.2
463,250 ++TALX Corp. 3,998,624 3,590,187 0.6
------------ ------------ ------
34,045,428 28,843,449 4.6
Transportation 258,900 Air Express International Corp. 6,992,886 8,220,075 1.3
630,300 ++Landair Services, Inc. (e) 6,282,236 7,327,237 1.2
------------ ------------ ------
13,275,122 15,547,312 2.5
Total Stocks & Bonds 570,903,631 589,540,950 93.2
<CAPTION>
Face Amount Short-Term Securities
Commercial Paper* $ 30,000,000 Countrywide Home Loans, 5.30% due
4/15/1997 29,938,167 29,938,167 4.7
11,128,000 General Motors Acceptance Corp.,
6.75% due 4/01/1997 11,128,000 11,128,000 1.8
Total Short-Term Securities 41,066,167 41,066,167 6.5
Total Investments $611,969,798 630,607,117 99.7
============
Other Assets Less Liabilities 1,955,705 0.3
------------ ------
Net Assets $632,562,822 100.0%
============ ======
<FN>
++Non-income producing security.
++++Formerly Bearings, Inc.
*Commercial Paper is traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by the
Fund.
**Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase by the Fund.
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock. The purchase price and the number of shares
are subject to adjustment under certain conditions until the
expiration date.
(b)Security represents 14.5% cumulative preferred stock. For each
share of Preferred Stock, the Fund will receive an annual dividend
of approximately 9.43 shares of Common Stock.
(c)American Depositary Receipts (ADR).
(d)The security may be sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(e)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:
Net Share Net Dividend
Industry Affiliate Activity Cost Income
<S> <S> <C> <C> <C>
Apparel Norton McNaughton, Inc. -- -- +++
Building & Building Giant Cement Holding, Inc. 125,000 $ 1,621,363 +++
Materials
Computer Software Software Spectrum, Inc. 373,400 7,959,567 +++
Computer Software Versus Technology, Inc. 4,500,000 2,250,000 +++
Data Processing Metromail Corp. 1,403,800 24,626,004 +++
Data Processing VMARK Software, Inc. 519,000 4,511,126 +++
Electronics Alpha Industries, Inc. 765,900 5,426,027 +++
Electronics CHS Electronics, Inc. 940,000 13,060,895 +++
Electronics C.P. Clare Corp. 742,550 6,361,798 +++
Electronics Nu Horizons Electronics, Inc. 438,000 3,987,348 +++
Environmental & BHA Group, Inc. (Class A) 342,220 4,683,772 $ 53,648
Environmental
Control
Healthcare-- Ramsay Health Care, Inc. 70,000 293,126 +++
Hospitals & Services
Paper/Forest Products Mercer International, Inc. 1,437,700 19,356,477 +++
Natural Resources Zemex Corporation 830,076 7,282,851 +++
Restaurants Au Bon Pain Company, Inc. 731,000 4,656,455 +++
(Class A)
Restaurants TPI Enterprises, Inc. -- (5,374,658) +++
Retailing J. Baker, Inc. 486,400 4,341,423 58,137
Retailing Catherines Stores Corp. (25,700) (454,141) +++
Retailing Chico's Fashions, Inc. 592,900 4,561,866 +++
Telecommunications Comdial Corp. 781,300 4,790,363 +++
Transportation Landair Services, Inc. 630,300 6,282,236 +++
<FN>
+++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
42
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of March 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$611,969,798) (Note 1a) $630,607,117
Cash 464
Receivables:
Securities sold $ 13,052,186
Capital shares sold 2,426,354
Dividends 39,000
Interest 18,922 15,536,462
------------
Prepaid registration fees and other assets (Note 1e) 40,384
------------
Total assets 646,184,427
------------
Liabilities: Payables:
Securities purchased 7,143,824
Capital shares redeemed 5,103,423
Investment adviser (Note 2) 423,439
Distributor (Note 2) 339,179 13,009,865
------------
Accrued expenses and other liabilities 611,740
------------
Total liabilities 13,621,605
------------
Net Assets: Net assets $632,562,822
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 1,270,549
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 1,997,494
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 185,934
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 228,802
Paid-in capital in excess of par 557,728,128
Undistributed realized capital gains on investments--net 52,514,596
Unrealized appreciation on investments--net 18,637,319
------------
Net assets $632,562,822
============
Net Asset Value: Class A--Based on net assets of $223,491,911 and 12,705,487
shares outstanding $ 17.59
============
Class B--Based on net assets of $337,715,568 and 19,974,939
shares outstanding $ 16.91
============
Class C--Based on net assets of $31,182,450 and 1,859,344
shares outstanding $ 16.77
============
Class D--Based on net assets of $40,172,893 and 2,288,022
shares outstanding $ 17.56
============
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended March 31, 1997
<S> <S> <C>
Investment Interest and discount earned $ 5,710,559
Income Dividends (net of $16,200 foreign withholding tax) 3,491,890
(Notes 1c & 1d): ------------
Total income 9,202,449
------------
Expenses: Investment advisory fees (Note 2) 4,781,445
Account maintenance and distribution fees--Class B (Note 2) 3,523,376
Transfer agent fees--Class B (Note 2) 979,585
Transfer agent fees--Class A (Note 2) 537,552
Account maintenance and distribution fees--Class C (Note 2) 336,083
Registration fees (Note 1e) 189,523
Printing and shareholder reports 181,202
Transfer agent fees--Class C (Note 2) 97,878
Custodian fees 82,147
Account maintenance fees--Class D (Note 2) 80,469
Transfer agent fees--Class D (Note 2) 80,024
Accounting services (Note 2) 73,232
Professional fees 70,539
Directors' fees and expenses 31,442
Pricing fees 286
Other 11,945
------------
Total expenses 11,056,728
------------
Investment loss--net (1,854,279)
------------
Realized & Realized gain on investments--net 129,452,799
Unrealized Change in unrealized appreciation on investments--net (31,593,968)
Gain (Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 96,004,552
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
44
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year
Ended March 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ (1,854,279) $ 3,851,945
Realized gain on investments--net 129,452,799 39,649,159
Change in unrealized appreciation on investments--net (31,593,968) 41,578,720
------------ ------------
Net increase in net assets resulting from operations 96,004,552 85,079,824
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (626,240) (2,232,929)
Shareholders Class B -- (1,325,529)
(Note 1f): Class C -- (137,548)
Class D (58,931) (241,696)
Realized gain on investments--net:
Class A (37,231,113) (5,403,183)
Class B (59,362,677) (10,567,528)
Class C (5,770,673) (748,130)
Class D (5,290,682) (650,489)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (108,340,316) (21,307,032)
------------ ------------
Capital Share Net increase in net assets derived from capital share
Transactions transactions 101,712,227 113,078,058
(Note 4): ------------ ------------
Net Assets: Total increase in net assets 89,376,463 176,850,850
Beginning of year 543,186,359 366,335,509
------------ ------------
End of year* $632,562,822 $543,186,359
============ ============
<FN>
*Undistributed investment income (loss)--net (Note 1g) -- $ 374,217
============ ============
See Notes to Financial Statements.
</TABLE>
45
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995++++ 1994++++ 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 17.77 $ 15.63 $ 15.88 $ 15.32 $ 13.86
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .06 .24 .16 .10 .05
Realized and unrealized gain on
investments--net 3.01 2.72 1.09 1.87 1.43
-------- -------- -------- -------- --------
Total from investment operations 3.07 2.96 1.25 1.97 1.48
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.06) (.23) (.10) .00++ (.02)
Realized gain on investments--net (3.19) (.59) (1.40) (1.41) .00++
-------- -------- -------- -------- --------
Total dividends and distributions (3.25) (.82) (1.50) (1.41) (.02)
-------- -------- -------- -------- --------
Net asset value, end of year $ 17.59 $ 17.77 $ 15.63 $ 15.88 $ 15.32
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 17.62% 19.56% 8.85% 13.14% 10.69%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 1.10% 1.12% 1.15% 1.17% 1.28%
Net Assets: ======== ======== ======== ======== ========
Investment income--net .34% 1.43% 1.04% .62% .37%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $223,492 $181,297 $106,506 $ 78,804 $ 70,920
Data: ======== ======== ======== ======== ========
Portfolio turnover 97.87% 60.37% 59.79% 68.70% 42.25%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0514 $ .0503 -- -- --
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
++Amount is less than $.01 per share.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities.
See Notes to Financial Statements.
</TABLE>
46
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended March 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995++++ 1994++++ 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 17.21 $ 15.16 $ 15.49 $ 15.01 $ 13.70
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.12) .07 .00++ (.06) (.09)
Realized and unrealized gain on
investments--net 2.90 2.64 1.06 1.83 1.40
-------- -------- -------- -------- --------
Total from investment operations 2.78 2.71 1.06 1.77 1.31
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.07) .00++ .00++ .00++
Realized gain on investments--net (3.08) (.59) (1.39) (1.29) .00++
-------- -------- -------- -------- --------
Total dividends and distributions (3.08) (.66) (1.39) (1.29) --
-------- -------- -------- -------- --------
Net asset value, end of year $ 16.91 $ 17.21 $ 15.16 $ 15.49 $ 15.01
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 16.44% 18.37% 7.70% 12.03% 9.56%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 2.13% 2.15% 2.20% 2.19% 2.28%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net (.68%) .44% .02% (.41%) (.65%)
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $337,716 $310,174 $237,359 $112,768 $ 76,182
Data: ======== ======== ======== ======== ========
Portfolio turnover 97.87% 60.37% 59.79% 68.70% 42.25%
======== ======== ======== ======== ========
Average commission rate paid++++++ $ .0514 $ .0503 -- -- --
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effect of sales loads.
++Amount is less than $.01 per share.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities.
See Notes to Financial Statements.
</TABLE>
47
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C Class D
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year Oct. 21, Year Oct. 21,
from information provided in the financial statements. Ended 1994++ to Ended 1994++ to
March 31, March 31, March 31, March 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995++++ 1997++++ 1996++++ 1995++++
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 17.10 $ 15.10 $ 15.06 $ 17.74 $ 15.61 $ 15.52
Operating ------- ------- ------- ------- ------- -------
Performance: Investment income (loss)--net (.13) .06 .01 .01 .19 .07
Realized and unrealized gain on
investments--net 2.89 2.63 .65 3.02 2.73 .66
------- ------- ------- ------- ------- -------
Total from investment operations 2.76 2.69 .66 3.03 2.92 .73
------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income--net -- (.10) (.06) (.04) (.20) (.08)
Realized gain on investments--net (3.09) (.59) (.56) (3.17) (.59) (.56)
------- ------- ------- ------- ------- -------
Total dividends and distributions (3.09) (.69) (.62) (3.21) (.79) (.64)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 16.77 $ 17.10 $ 15.10 $ 17.56 $ 17.74 $ 15.61
======= ======= ======= ======= ======= =======
Total Investment Based on net asset value per share 16.39% 18.34% 4.82%+++ 17.38% 19.26% 5.13%+++
Return:** ======= ======= ======= ======= ======= =======
Ratios to Average Expenses 2.14% 2.16% 2.41%* 1.35% 1.37% 1.61%*
Net Assets: ======= ======= ======= ======= ======= =======
Investment income (loss)--net (.70%) .36% .14%* .07% 1.15% .95%*
======= ======= ======= ======= ======= =======
Supplemental Net assets, end of period
Data: (in thousands) $31,182 $26,920 $11,434 $40,173 $24,795 $11,037
======= ======= ======= ======= ======= =======
Portfolio turnover 97.87% 60.37% 59.79% 97.87% 60.37% 59.79%
======= ======= ======= ======= ======= =======
Average commission rate paid++++++ $ .0514 $ .0503 -- $ .0514 $ .0503 --
======= ======= ======= ======= ======= =======
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission
rate per share for purchases and sales of equity
securities.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
48
<PAGE>
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 SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. 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.
* 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.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange
49
<PAGE>
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 denomi-nated 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 dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined 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.
(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.
(g) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$2,165,233 have been reclassified between undistributed net realized
capital gains and accumulated net investment losses. These
reclassifications have no effect on net assets or net asset values
per share.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 0.75%, on an annual basis,
of the average daily value of the Fund's net assets.
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% --
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, 1997, MLFD earned underwriting
discounts and commissions and
50
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
MLPF&S earned dealer concessions on sales of the Fund's Class A and Class D
Shares as follows:
MLFD MLPF&S
Class A $1,962 $ 27,609
Class D $8,139 $109,272
For the year ended March 31, 1997, MLPF&S received contingent
deferred sales charges of $1,268,783 and $27,419 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $9,588 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
March 31, 1997.
During the year ended March 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $60 for security
price quotations to compute the net asset value of the Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended March 31, 1997 were $622,721,124 and
$552,077,856, respectively.
Net realized and unrealized gains (losses) as of March 31, 1997 were
as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $129,453,019 $18,637,319
Short-term investments (220) --
------------ -----------
Total $129,452,799 $18,637,319
============ ===========
As of March 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $16,330,723, of which $87,607,397 related to
appreciated securities and $71,276,674 related to depreciated
securities. At March 31, 1997, the aggregate cost of investments for
Federal income tax purposes was $614,276,394.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $101,712,227 and $113,078,058 for the years ended March 31, 1997
and March 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended March 31, 1997 Shares Amount
Shares sold 7,513,048 $138,984,315
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,927,288 34,582,403
------------ ------------
Total issued 9,440,336 173,566,718
Shares redeemed (6,938,582) (127,615,134)
------------ ------------
Net increase 2,501,754 $ 45,951,584
============ ============
Class A Shares for the Year Dollar
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 B Shares for the Year Dollar
Ended March 31, 1997 Shares Amount
Shares sold 6,630,575 $119,062,202
Shares issued to shareholders
in reinvestment of distributions 3,035,511 52,574,409
------------ ------------
Total issued 9,666,086 171,636,611
Shares redeemed (7,614,216) (135,651,522)
Automatic conversion
of shares (99,241) (1,783,849)
------------ ------------
Net increase 1,952,629 $ 34,201,240
============ ============
Class B Shares for the Year Dollar
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
============ ============
51
<PAGE>
Class C Shares for the
Year Ended Dollar
March 31, 1997 Shares Amount
Shares sold 1,075,754 $ 19,224,090
Shares issued to share-
holders in reinvestment of
distributions 299,448 5,144,748
------------ ------------
Total issued 1,375,202 24,368,838
Shares redeemed (1,090,217) (19,334,519)
------------ ------------
Net increase 284,985 $ 5,034,319
============ ============
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
============ ============
Class D Shares for the
Year Ended Dollar
March 31, 1997 Shares Amount
Shares sold 2,128,192 $ 39,663,904
Automatic conversion
of shares 95,817 1,783,849
Shares issued to shareholders
in reinvestment of dividends
and distributions 262,004 4,695,473
------------ ------------
Total issued 2,486,013 46,143,226
Shares redeemed (1,595,340) (29,618,142)
------------ ------------
Net increase 890,673 $ 16,525,084
============ ============
Class D Shares for the
Year Ended Dollar
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
============ ============
52
<PAGE>
[This Page Intentionally Left Blank]
53
<PAGE>
[This Page Intentionally Left Blank]
54
<PAGE>
[This Page Intentionally Left Blank]
55
<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....................................................... 25
Automatic Investment Plans............................................... 25
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 26
Systematic Withdrawal Plans--Class A and Class D Shares.................. 26
Exchange Privilege....................................................... 27
Dividends, Distributions and Taxes........................................ 29
Dividends and Distributions.............................................. 29
Taxes.................................................................... 29
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 31
Special Rules for Certain Foreign Currency Transactions.................. 32
Performance Data.......................................................... 33
General Information....................................................... 35
Description of Shares.................................................... 35
Computation of Offering Price Per Share.................................. 36
Independent Auditors..................................................... 36
Custodian................................................................ 37
Transfer Agent........................................................... 37
Legal Counsel............................................................ 37
Reports to Shareholders.................................................. 37
Additional Information................................................... 37
Independent Auditors' Report.............................................. 38
Financial Statements...................................................... 39
</TABLE>
Code #10256-0797
[LOGO] MERRILL LYNCH
Merrill Lynch
Special Value Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
July 18, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A)FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the ten-year period
ended March 31, 1997.
Contained in Part B:
Schedule of Investments, as of March 31, 1997.
Statement of Assets and Liabilities, as of March 31, 1997.
Statement of Operations for the year ended March 31, 1997.
Statements of Changes in Net Assets for each of the years in the two-
year period ended March 31, 1997.
Financial Highlights for each of the years in the five-year period
ended March 31, 1997.
(B)EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Articles of Incorporation of the Registrant.(a)
(b) --Articles of Amendment to Articles of Incorporation of the
Registrant.(a)
(c) --Articles Supplementary to the Articles of Incorporation of the
Registrant.(a)
(d) --Articles of Amendment to the Articles of Incorporation of the
Registrant.(a)
2 --By-Laws of the Registrant.(b)
3 --None.
4(a) --Portions of Articles of Incorporation, as amended, and By-laws of
the Registrant defining the rights of holders of shares of common
stock of the Registrant.(c)
5(a) --Investment Advisory Agreement between the Registrant and Fund Asset
Management, L.P.(a)
(b) --Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K. Limited.
6(a) --Form of Revised Class A Shares Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc. (including Form
of Selected Dealers Agreement).(d)
(b) --Class B Distribution Agreement between the Registrant and Merrill
Lynch Funds Distributor, Inc. (including Form of Selected Dealers
Agreement).(a)
(c) --Form of Class C Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(d)
(d) --Form of Class D Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(d)
7 --None.
8 --Custody Agreement between the Registrant and The Bank of New York.(a)
9 --Transfer Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc.(a)
10 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --None.
14 --None.
15(a) --Amended and Restated Class B Distribution Plan of the Registrant.(a)
(b) --Form of Class C Distribution Plan of the Registrant and Class C
Distribution Plan Sub-Agreement.(d)
(c) --Form of Class D Distribution Plan of the Registrant and Class D
Distribution Plan Sub-Agreement.(d)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
16(a) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
shares.(a)
(b) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
shares.(a)
(c) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
shares.(a)
(d) --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
shares.(a)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
18 --Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
3.(e)
</TABLE>
- --------
(a) Previously filed with Post-Effective Amendment No. 21 to the Registrant's
Registration Statement on Form N-1A under the Securities Act of 1933, as
amended (File No. 2-60836) (the "Registration Statement") on July 28, 1995.
(b) Previously filed with Post-Effective Amendment No. 19 to the Registration
Statement on July 28, 1994.
(c) Reference is made to Article IV, Article V (Sections 3, 5, 6 and 7),
Articles VI, VII and IX of the Registrant's Articles of Incorporation, as
amended, filed as Exhibits 1(a), 1(b), 1(c) and 1(d) to the Registration
Statement and to Article II, Article III (Sections 1, 3, 5 and 6), Articles
VI, VII, XIII and XIV of the Registrant's By-Laws, previously filed as
Exhibit 2 to the Registration Statement.
(d) Previously filed with Post-Effective Amendment No. 20 to the Registrant's
Registration Statement on October 11, 1994.
(e) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund Series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS JUNE 30, 1997*
-------------- --------------
<S> <C>
Class A Common Stock, par value $0.10 per share............. 35,826
Class B Common Stock, par value $0.10 per share............. 37,214
Class C Common Stock, par value $0.10 per share............. 4,645
Class D Common Stock, par value $0.10 per share............. 3,979
</TABLE>
- --------
* The number of holders shown in the table includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C
and Class D Distribution Agreements.
C-2
<PAGE>
Insofar as the conditional advancing of indemnification monies for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may be
concerned, Article VI of the Registrant's By-Laws provides that such payments
will be made only on the following conditions: (i) advances may be made only on
receipt of a written affirmation of such person's good faith belief that the
standard of conduct necessary for indemnification has been met and a written
undertaking to repay any such advance if it is ultimately determined that the
standard of conduct has not been met and (ii) (a) such promise must be secured
by a security for the undertaking in form and amount acceptable to the
Registrant, (b) the Registrant is insured against losses arising by receipt of
the advance, or (c) a majority of a quorum of the Registrant's disinterested,
non-party Directors, or an independent legal counsel in a written opinion,
shall determine, based upon a review of readily available facts, that at the
time the advance is proposed to be made, there is reason to believe that the
person seeking indemnification will ultimately be found to be entitled to
indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended (the
"1933 Act"), against certain types of civil liabilities arising in connection
with the Registration Statement or the Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Fund Asset Management, L.P. (the "Investment Adviser"), an affiliate of
Merrill Lynch Asset Management L.P. ("MLAM") acts as investment adviser for the
following open-end registered investment companies: CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., Financial Institutions Series Trust, Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill
Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions Series,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Municipal Bond Fund,
Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc., and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Debt Strategies Fund, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New
C-3
<PAGE>
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest, Inc.
MLAM acts as investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Developing Capital
Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund for Tomorrow,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond
Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund,
Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Institutional Intermediate
Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill
Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and the following closed-end registered investment companies: Convertible
Holdings, Inc., Merrill Lynch High Income Municipal Bond Fund, Inc., and
Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisory Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2646. The address of the Investment Adviser, MLAM,
Princeton Services, Inc. ("Princeton Services") and Princeton Administrators,
L.P., is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch Funds Distributor ("MLFD") is P.O. Box 9081, Princeton, New
Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281-1201. The address of Merrill Lynch Financial Data Services, Inc.
("MLFDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each officer and partner of the Investment
Adviser indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since April 1,
1995 for his or its own account or in the capacity of director, officer,
partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard is
Treasurer and Mr. Glenn is Executive Vice President of all or substantially all
of the investment companies listed in the first two paragraphs of this Item 28,
and Messrs. Giordano, Harvey, Kirstein and Monagle are directors, trustees or
officers of one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION BUSINESS, PROFESSION,
NAME WITH INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ----------------------- ----------------------
<C> <C> <S>
ML & Co. ................... Limited Partner Financial Services
Holding Company;
Limited Partner of
MLAM
Princeton Services.......... General Partner General Partner of MLAM
Arthur Zeikel............... President President of MLAM;
President and Director
of Princeton Services;
Director of MLFD;
Executive Vice
President of ML & Co.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION BUSINESS, PROFESSION,
NAME WITH INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ----------------------- ----------------------
<C> <C> <S>
Terry K. Glenn.............. Executive Vice Executive Vice President
President of MLAM; Executive Vice
President and Director
of Princeton Services;
President and Director
of MLFD; President of
Princeton
Administrators, L.P.;
Director of MLFDS
Vincent R. Giordano......... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Elizabeth Griffin........... Senior Vice President Senior Vice President of
MLAM
Norman R. Harvey............ Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Michael J. Hennewinkel...... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Philip L. Kirstein.......... Senior Vice Senior Vice President,
President, General General Counsel and
Counsel and Secretary of MLAM;
Secretary Senior Vice President,
General Counsel,
Director and Secretary
of Princeton Services,
Director of MLFD
Ronald M. Kloss............. Senior Vice President Senior Vice President
and Controller and Controller of MLAM;
Senior Vice President
and Controller of
Princeton Services
Stephen M.M. Miller......... Senior Vice President Executive Vice President
of Princeton
Administrators, L.P.;
Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr. ..... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Michael L. Quinn............ Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services; Managing
Director and First Vice
President of Merrill
Lynch from 1989 to 1995
Gerald M. Richard........... Senior Vice President Senior Vice President
and Treasurer and Treasurer of MLAM;
Senior Vice President
and Treasurer of
Princeton Services;
Vice President and
Treasurer of MLFD
Ronald L. Welburn........... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Anthony Wiseman............. Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill
C-5
<PAGE>
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill
Lynch Phoenix Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Short-
Term Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill
Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill
Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc.,
Merrill Lynch World Income Fund, Inc. and Worldwide DollarVest Fund, Inc. The
address of each of these investment companies is P.O. Box 9011, Princeton, New
Jersey 08543-9011. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London
EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since April 1, 1995, for his
or her own account or in the capacity of director, officer, partner or trustee.
In addition, Messrs. Zeikel, Albert and Richard are officers of one or more of
the registered investment companies listed in the first two paragraphs of this
Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<C> <C> <S>
Arthur Zeikel............... Director and Chairman President of the Manager and
FAM; President and Director
of Princeton Services;
Director of MLFD; Executive
Vice President of ML & Co.
Alan J. Albert.............. Senior Managing Vice President of the Manager
Director
Nicholas C.D. Hall.......... Director Director of Merrill Lynch
Europe PLC; General Counsel
of Merrill Lynch
International Private
Banking Group
Gerald M. Richard........... Senior Vice President Senior Vice President and
Treasurer of the Manager and
FAM; Senior Vice President
and Treasurer of Princeton
Services; Vice President and
Treasurer of MLFD
Carol Ann Langham........... Company Secretary None
Debra Anne Searle........... Assistant Company
Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MFLD acts as the principal underwriter for the Registrant and for each of
the investment companies referred to in the first two paragraphs of Item 28
except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., and The Municipal Fund Accumulation
Program, Inc., and MFLD also acts as the principal underwriter for the
following closed-end investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
Senior Floating Rate Fund, Inc.
C-6
<PAGE>
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas, and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH THE REGISTRANT
---- ------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Arthur Zeikel........... Director President and Director
Philip L. Kirstein...... Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Michael G. Clark........ Vice President None
James T. Fatseas........ Vice President None
Michelle T. Lau......... Vice President None
Debra W. Landsman- Vice President None
Yaros..................
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), and its Transfer Agent (4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484).
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant"s latest annual report to shareholders,
upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro, and State of New Jersey, on the 17th day of July,
1997.
Merrill Lynch Special Value Fund,
Inc.
(Registrant)
/s/ Gerald M. Richard
By: _________________________________
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date(s) indicated.
SIGNATURE TITLE DATE(S)
Arthur Zeikel* President and
- ------------------------------------- Director
(ARTHUR ZEIKEL) (Principal Executive Officer)
Treasurer (Principal Financial
Gerald M. Richard* and Accounting
- ------------------------------------- Officer)
(GERALD M. RICHARD)
Donald Cecil* Director
- -------------------------------------
(DONALD CECIL)
M. Colyer Crum* Director
- -------------------------------------
(M. COLYER CRUM)
Edward H. Meyer* Director
- -------------------------------------
(EDWARD H. MEYER)
Jack B. Sunderland* Director
- -------------------------------------
(JACK B. SUNDERLAND)
J. Thomas Touchton* Director
- -------------------------------------
(J. THOMAS TOUCHTON)
/s/ Gerald M. Richard July 17, 1997
*By: ________________________________
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
5(b) --Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K. Limited.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> MERRILL LYNCH SPECIAL VALUE FUND, INC. - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 611969798
<INVESTMENTS-AT-VALUE> 630607117
<RECEIVABLES> 15536462
<ASSETS-OTHER> 40848
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 646184427
<PAYABLE-FOR-SECURITIES> 7143824
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6477781
<TOTAL-LIABILITIES> 13621605
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 561410907
<SHARES-COMMON-STOCK> 12705487
<SHARES-COMMON-PRIOR> 10203733
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 52514596
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18637319
<NET-ASSETS> 223491911
<DIVIDEND-INCOME> 3491890
<INTEREST-INCOME> 5710559
<OTHER-INCOME> 0
<EXPENSES-NET> (11056728)
<NET-INVESTMENT-INCOME> (1854279)
<REALIZED-GAINS-CURRENT> 129452799
<APPREC-INCREASE-CURRENT> (31593968)
<NET-CHANGE-FROM-OPS> 96004552
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (626240)
<DISTRIBUTIONS-OF-GAINS> (37231113)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7513048
<NUMBER-OF-SHARES-REDEEMED> (6938582)
<SHARES-REINVESTED> 1927288
<NET-CHANGE-IN-ASSETS> 89376463
<ACCUMULATED-NII-PRIOR> 374217
<ACCUMULATED-GAINS-PRIOR> 32882175
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4781445
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11056728
<AVERAGE-NET-ASSETS> 218196993
<PER-SHARE-NAV-BEGIN> 17.77
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> 3.01
<PER-SHARE-DIVIDEND> (.06)
<PER-SHARE-DISTRIBUTIONS> (3.19)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.59
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MERRILL LYNCH SPECIAL VALUE FUND, INC. - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 611969798
<INVESTMENTS-AT-VALUE> 630607117
<RECEIVABLES> 15536462
<ASSETS-OTHER> 40848
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 646184427
<PAYABLE-FOR-SECURITIES> 7143824
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6477781
<TOTAL-LIABILITIES> 13621605
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 561410907
<SHARES-COMMON-STOCK> 19974939
<SHARES-COMMON-PRIOR> 18022310
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 52514596
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18637319
<NET-ASSETS> 337715568
<DIVIDEND-INCOME> 3491890
<INTEREST-INCOME> 5710559
<OTHER-INCOME> 0
<EXPENSES-NET> (11056728)
<NET-INVESTMENT-INCOME> (1854279)
<REALIZED-GAINS-CURRENT> 129452799
<APPREC-INCREASE-CURRENT> (31593968)
<NET-CHANGE-FROM-OPS> 96004552
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (59362677)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6630575
<NUMBER-OF-SHARES-REDEEMED> (7713457)
<SHARES-REINVESTED> 3035511
<NET-CHANGE-IN-ASSETS> 89376463
<ACCUMULATED-NII-PRIOR> 374217
<ACCUMULATED-GAINS-PRIOR> 32882175
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4781445
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11056728
<AVERAGE-NET-ASSETS> 350417549
<PER-SHARE-NAV-BEGIN> 17.21
<PER-SHARE-NII> (.12)
<PER-SHARE-GAIN-APPREC> 2.90
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (3.08)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.91
<EXPENSE-RATIO> 2.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> MERRILL LYNCH SPECIAL VALUE FUND, INC. - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 611969798
<INVESTMENTS-AT-VALUE> 630607117
<RECEIVABLES> 15536462
<ASSETS-OTHER> 40848
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 646184427
<PAYABLE-FOR-SECURITIES> 7143824
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6477781
<TOTAL-LIABILITIES> 13621605
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 561410907
<SHARES-COMMON-STOCK> 1859344
<SHARES-COMMON-PRIOR> 1574359
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 52514596
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<REALIZED-GAINS-CURRENT> 129452799
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<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1075754
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MERRILL LYNCH SPECIAL VALUE FUND, INC. - CLASS D
<S> <C>
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<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
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<SHARES-COMMON-STOCK> 2288022
<SHARES-COMMON-PRIOR> 1397349
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 52514596
<OVERDISTRIBUTION-GAINS> 0
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<DIVIDEND-INCOME> 3491890
<INTEREST-INCOME> 5710559
<OTHER-INCOME> 0
<EXPENSES-NET> (11056728)
<NET-INVESTMENT-INCOME> (1854279)
<REALIZED-GAINS-CURRENT> 129452799
<APPREC-INCREASE-CURRENT> (31593968)
<NET-CHANGE-FROM-OPS> 96004552
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<DISTRIBUTIONS-OF-INCOME> (58931)
<DISTRIBUTIONS-OF-GAINS> (5290682)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2224009
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<SHARES-REINVESTED> 262004
<NET-CHANGE-IN-ASSETS> 89376463
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-EXPENSE> 11056728
<AVERAGE-NET-ASSETS> 32012020
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<PER-SHARE-NII> .01
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</TABLE>
<PAGE>
EXHIBIT 99.5(b)
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the ____ day of __________, ____, by and between FUND
ASSET MANAGEMENT, L.P., a Delaware limited partnership ("FAM"), and MERRILL
LYNCH ASSET MANAGEMENT U.K. LIMITED, a corporation organized under the laws of
England and Wales ("MLAM U.K.").
W I T N E S E T H:
- - - - - - - - -
WHEREAS, MERRILL LYNCH SPECIAL VALUE FUND, INC. (the "Fund") is a Maryland
corporation engaged in business as a diversified, open-end investment company
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"); and
WHEREAS, FAM and MLAM U.K. are engaged principally in rendering investment
advisory services and are registered as investment advisers under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is regulated by the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom ("IMRO"), and the conduct of its
investment business is regulated by IMRO; and
WHEREAS, FAM has entered into an investment advisory agreement dated as of
March 27, 1978 (the "Investment Advisory Agreement"), pursuant to which FAM
provides management and investment and advisory services to the Fund; and
<PAGE>
WHEREAS, MLAM U.K. is willing to provide investment advisory services to
FAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and FAM hereby agree as follows:
ARTICLE I
---------
Duties of MLAM U.K.
-------------------
FAM hereby employs MLAM U.K. to act as investment adviser to FAM and to
furnish, or arrange for affiliates to furnish, the investment advisory services
described below, subject to the broad supervision of FAM and the Fund, for the
period and on the terms and conditions set forth in this Agreement. MLAM U.K.
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. FAM
and its affiliates shall for all purposes herein be deemed a Non Private
Customer as defined under the rules promulgated by IMRO (the "IMRO Rules").
MLAM U.K. and its affiliates shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Fund in any way or
otherwise be deemed an agent of the Fund.
2
<PAGE>
MLAM U.K. shall have the right to make unsolicited calls on FAM and shall
provide FAM with such investment research, advice and supervision as the latter
from time to time may consider necessary for the proper supervision of the
assets of the Fund; shall make recommendations from time to time as to which
securities shall be purchased, sold or exchanged and what portion of the assets
of the Fund shall be held in the various securities in which the Fund invests,
options, futures, options on futures or cash; all of the foregoing subject
always to the restrictions of the Articles of Incorporation and By-Laws of the
Fund, as they may be amended and/or restated from time to time, the provisions
of the Investment Company Act and the statements relating to the Fund's
investment objective, investment policies and investment restrictions as the
same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and the "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
transactions. MLAM U.K. shall also make recommendations or take action as to the
manner in which voting rights, rights to consent
3
<PAGE>
to corporate action and any other rights pertaining to the portfolio securities
of the Fund shall be exercised.
MLAM U.K. will not hold money on behalf of FAM or the Fund, nor will MLAM
U.K. be the registered holder of the registered investments of FAM or the Fund
or be the custodian of documents or other evidence of title.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
-----------
Compensation of MLAM U.K.
-------------------------
For the services rendered, the facilities furnished and expenses assumed by
MLAM U.K., FAM shall pay to MLAM U.K. a fee in an amount to be determined from
time to time by FAM and MLAM U.K. but in no event in excess of the amount that
FAM actually receives for providing services to the Fund pursuant to the
Investment Advisory Agreement.
4
<PAGE>
ARTICLE IV
----------
Limitation of Liability of MLAM U.K.
------------------------------------
MLAM U.K. shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
performance of sub-advisory services rendered with respect to the Fund, except
for willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates
of MLAM U.K. performing services for FAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
---------
Activities of MLAM U.K.
-----------------------
The services of MLAM U.K. to the Fund are not to be deemed to be exclusive,
MLAM U.K. and any person controlled by or under common control with MLAM U.K.
(for purposes of this Article V referred to as "affiliates") being free to
render services to others. It is understood that Directors, officers, employees
and shareholders of the Fund are or may become interested in MLAM U.K. and its
affiliates, as directors, officers, employees and shareholders or otherwise and
that directors, officers, employees and shareholders of MLAM U.K. and its
affiliates are or may become similarly interested in the Fund, and that MLAM
U.K. and directors, officers, employees, partners and shareholders of its
5
<PAGE>
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
----------
MLAM U.K. Statements Pursuant to IMRO Rules
-------------------------------------------
Any complaints concerning MLAM U.K. should be in writing addressed to the
attention of the Managing Director of MLAM U.K. FAM has the right to obtain
from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO and
the Investment Ombudsman directly.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding Investments Not Readily Realisable
(as that term is used in the IMRO Rules) or investments denominated in a
currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding options, futures or contracts for
differences. Markets can be highly volatile and such investments carry a high
degree of risk of loss exceeding the original investment and any margin on
deposit.
6
<PAGE>
ARTICLE VII
-----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until March 1, 1997, and thereafter, but only so long
as such continuance is specifically approved at least annually by (i) the
Directors of the Fund or by the vote of a majority of the outstanding voting
securities of the Fund and (ii) a majority of those Directors who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by FAM or by vote of a majority of the outstanding voting securities of
the Fund, or by MLAM U.K., on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment or
in the event of the termination of the Investment Advisory Agreement. Any
termination shall be without prejudice to the completion of transactions already
initiated.
ARTICLE VIII
------------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Directors of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Directors who
7
<PAGE>
are not parties to this Agreement or interested persons of any such party cast
in person at a meeting called for the purpose of voting on such approval.
ARTICLE IX
----------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
---------
Governing Law
-------------
This Agreement shall be construed in accordance with the laws of the State
of New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
FUND ASSET MANAGEMENT, L.P.
By: ________________________________________
Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By: ________________________________________
Title:
9
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Special Value Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 23 to Registration
Statement No. 2-60836 of our report dated May 2, 1997 appearing in the Statement
of Additional Information, which is a part of such Registration Statement, and
to the reference to us under the caption "Financial Highlights" appearing in the
Prospectus, which also is a part of such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
July 17, 1997
