<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1998
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. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 24
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 23
(Check appropriate box or boxes.)
----------------
MERRILL LYNCH SPECIAL VALUE FUND, INC.
(Exact Name of Registrant as Specified in Charter)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)
(609) 282-2800
(Registrant's Telephone Number, including Area Code)
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.
----------------
TITLE OF SECURITIES BEING REGISTERED: Shares of Common Stock, par value $.10
per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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................ General Information
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
JUNE 30, 1998
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 that 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 11.
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 $250 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
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent") are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated June 30, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing
the Fund at the above telephone number or address. The Commission maintains a
web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information
regarding the Fund. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Maximum Sales
Charge 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:
Shareholder
Servicing
Costs(i)...... 0.20% 0.23% 0.24% 0.20%
Other.......... 0.07% 0.07% 0.07% 0.07%
----- ----- ----- -----
Total Other
Expenses..... 0.27% 0.30% 0.31% 0.27%
----- ----- ----- -----
Total Fund Op-
erating Ex-
penses........ 1.02% 2.05% 2.06% 1.27%
===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors, including
existing Class A shareholders, certain retirement plans and participants
in certain fee-based programs. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares"--page 24.
(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 26 and "Shareholder
Services--Fee-Based Programs"--page 34.
(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 24.
(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. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply. See "Shareholder
Services--Fee-Based Programs" on page 34.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs" on page 34.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs" on page 34.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
20.
(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...................... $ 62 $ 83 $ 106 $ 171
Class B...................... $ 61 $ 84 $ 110 $ 219*
Class C...................... $ 31 $ 65 $ 111 $ 239
Class D...................... $ 65 $ 91 $ 119 $ 198
An investor would pay the
following expenses on the same
$1,000 investment assuming no
redemption at the end of the
period:
Class A...................... $ 62 $ 83 $ 106 $ 171
Class B...................... $ 21 $ 64 $ 110 $ 219*
Class C...................... $ 21 $ 65 $ 111 $ 239
Class D...................... $ 65 $ 91 $ 119 $ 198
</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 than 50
3
<PAGE>
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 that use the
Merrill Lynch Select Pricing SM System are referred to herein as "MLAM-advised
mutual funds."
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on 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 CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is most beneficial under his or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase
of Shares."
<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 four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- ---------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
(footnotes continued on the next page)
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. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply. 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, as well as 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 after
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 shares), Class C
shares have no conversion feature and, accordingly, an investor who
purchases Class C shares will be subject to distribution fees that
will be imposed on Class C shares for an indefinite period subject to
annual approval by the Fund's Board of Directors and regulatory
limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC
when they are redeemed. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived such purchases may be subject to a 1.0% CDSC
if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. 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
6
<PAGE>
sales charge reductions are not available with respect to the CDSCs imposed in
connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A
or Class D shares, because over time the accumulated ongoing account
maintenance and distribution fees on Class B or Class C shares may exceed the
initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors that previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other MLAM-
advised mutual funds, those previously purchased Class A shares, together with
Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for reduced initial sales charges
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class
C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
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, 1998 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,
----------------------------------------------------------------------------------------------------
1998++ 1997++ 1996++ 1995++ 1994++ 1993 1992 1991 1990
-------- -------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <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....... $ 17.59 $ 17.77 $ 15.63 $ 15.88 $ 15.32 $ 13.86 $ 10.84 $ 11.36 $ 12.20
-------- -------- -------- -------- ------- ------- ------- ------- -------
Investment income
(loss)--net............. (.03) .06 .24 .16 .10 .05 .10 .12 .22
Realized and unrealized
gain (loss) on
investments--net........ 7.20 3.01 2.72 1.09 1.87 1.43 3.00 (.49) (.82)
-------- -------- -------- -------- ------- ------- ------- ------- -------
Total from investment
operations.............. 7.17 3.07 2.96 1.25 1.97 1.48 3.10 (.37) (.60)
-------- -------- -------- -------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income
(loss)--net............. -- (.06) (.23) (.10) (.00)+++ (.02) (.08) (.15) (.24)
Realized gain on
investments--net........ (2.73) (3.19) (.59) (1.40) (1.41) (.00)+++ (.00)+++ (.00)+++ (.00)+++
-------- -------- -------- -------- ------- ------- ------- ------- -------
Total dividends and
distributions........... (2.73) (3.25) (.82) (1.50) (1.41) (.02) (.08) (.15) (.24)
-------- -------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of
year.................... $ 22.03 $ 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............... 43.18% 17.62% 19.56% 8.85% 13.14% 10.69% 28.71% (3.15)% (5.05)%
======== ======== ======== ======== ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.02% 1.10% 1.12% 1.15% 1.17% 1.28% 1.55% 1.88% 1.45%
======== ======== ======== ======== ======= ======= ======= ======= =======
Investment income
(loss)--net............. (.13)% .34% 1.43% 1.04% .62% .37% .83% 1.13% 1.62%
======== ======== ======== ======== ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $396,198 $223,492 $181,297 $106,506 $78,804 $70,920 $57,056 $44,818 $57,800
======== ======== ======== ======== ======= ======= ======= ======= =======
Portfolio turnover...... 67.02 % 97.87% 60.37% 59.79% 68.70% 42.25% 98.76% 73.06% 44.66%
======== ======== ======== ======== ======= ======= ======= ======= =======
Average commission rate
paid##.................. $ .0523 $ .0514 $ .0503 -- -- -- -- -- --
======== ======== ======== ======== ======= ======= ======= ======= =======
<CAPTION>
1989
--------
<S> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of year....... $ 11.77
--------
Investment income
(loss)--net............. .22
Realized and unrealized
gain (loss) on
investments--net........ .46
--------
Total from investment
operations.............. .68
--------
Less dividends and
distributions:
Investment income
(loss)--net............. (.23)
Realized gain on
investments--net........ (.02)
--------
Total dividends and
distributions........... (.25)
--------
Net asset value, end of
year.................... $ 12.20
========
TOTAL INVESTMENT RE-
TURN:*
Based on net asset value
per share............... 5.85%
========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.35%
========
Investment income
(loss)--net............. 1.78%
========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $87,167
========
Portfolio turnover...... 75.11%
========
Average commission rate
paid##.................. --
========
</TABLE>
- ----
* Total investment returns exclude the effects of sales loads.
++ Based on average shares outstanding.
+++ 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 YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------------------
1998++ 1997++ 1996++ 1995++ 1994++ 1993++ 1992++ 1991++
------ ------- -------- -------- -------- ------- ------- ------
<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 period..... $ 16.91 $ 17.21 $15.16 $ 15.49 $ 15.01 $ 13.70 $ 10.77 $11.29
-------- -------- -------- -------- -------- ------- ------- ------
Investment income
(loss)--net............. (.23) (.12) .07 .00 +++ (.06) (.09) (.03) (.00)+
Realized and unrealized
gain (loss) on
investments--net........ 6.90 2.90 2.64 1.06 1.83 1.40 2.98 (.47)
-------- -------- -------- -------- -------- ------- ------- ------
Total from investment
operations.............. 6.67 2.78 2.71 1.06 1.77 1.31 2.95 (.47)
-------- -------- -------- -------- -------- ------- ------- ------
Less dividends and
distributions:
Investment income--net.. -- -- (.07) (.00)+++ (.00)+++ (.00)+++ (.02) (.05)
Realized gain on
investments--net........ (2.55) (3.08) (.59) (1.39) (1.29) (.00)+++ (.00)+++ (.00)+++
-------- -------- -------- -------- -------- ------- ------- ------
Total dividends and
distributions........... (2.55) (3.08) (.66) (1.39) (1.29) -- (.02) (.05)
-------- -------- -------- -------- -------- ------- ------- ------
Net asset value, end of
period.................. $ 21.03 $ 16.91 $17.21 $ 15.16 $ 15.49 $ 15.01 $ 13.70 $10.77
======== ======== ======== ======== ======== ======= ======= ======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 41.72% 16.44% 18.37% 7.70% 12.03% 9.56% 27.41% (4.16)%
======== ======== ======== ======== ======== ======= ======= ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 2.05% 2.13% 2.15% 2.20% 2.19% 2.28% 2.51% 2.95%
======== ======== ======== ======== ======== ======= ======= ======
Investment income
(loss)--net............. (1.16)% (.68)% .44% .02% (.41)% (.65)% (.27)% (.04)%
======== ======== ======== ======== ======== ======= ======= ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $611,364 $337,716 $310,174 $237,359 $112,768 $76,182 $29,534 $3,783
======== ======== ======== ======== ======== ======= ======= ======
Portfolio turnover...... 67.02% 97.87% 60.37% 59.79% 68.70% 42.25% 98.76% 73.06%
======== ======== ======== ======== ======== ======= ======= ======
Average commission rate
paid##.................. $ .0523 $ .0514 $ .0503 -- -- -- -- --
======== ======== ======== ======== ======== ======= ======= ======
<CAPTION>
FOR THE
PERIOD
OCTOBER 21,
1988+
TO
MARCH 31,
1990 1989
---------- -----------
<S> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of period..... $12.15 $12.01
---------- -----------
Investment income
(loss)--net............. .07 .03
Realized and unrealized
gain (loss) on
investments--net........ (.79) .22
---------- -----------
Total from investment
operations.............. (.72) .25
---------- -----------
Less dividends and
distributions:
Investment income--net.. (.14) (.09)
Realized gain on
investments--net........ (.00)+++ (.02)
---------- -----------
Total dividends and
distributions........... (.14) (.11)
---------- -----------
Net asset value, end of
period.................. $11.29 $12.15
========== ===========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... (6.00)% 2.15%#
========== ===========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 2.49% 2.45%*
========== ===========
Investment income
(loss)--net............. .59% .63%*
========== ===========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $1,456 $ 906
========== ===========
Portfolio turnover...... 44.66% 75.11%
========== ===========
Average commission rate
paid##.................. -- --
========== ===========
</TABLE>
- ----
* Annualized
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average shares outstanding.
+++ 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>
FINANCIAL HIGHLIGHTS--(CONCLUDED)
<TABLE>
<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,
1998++ 1997++ 1996++ 1995++ 1998++ 1997++ 1996++ 1995++
------- ------- ------- ----------- -------- ------- ------- -----------
<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 period..... $ 16.77 $ 17.10 $ 15.10 $ 15.06 $ 17.56 $ 17.74 $ 15.61 $ 15.52
------- ------- ------- ------- -------- ------- ------- -------
Investment income
(loss)--net............. (.23) (.13) .06 .01 (.08) .01 .19 .07
Realized and unrealized
gain on investments--
net..................... 6.84 2.89 2.63 .65 7.18 3.02 2.73 .66
------- ------- ------- ------- -------- ------- ------- -------
Total from investment
operations.............. 6.61 2.76 2.69 .66 7.10 3.03 2.92 .73
------- ------- ------- ------- -------- ------- ------- -------
Less dividends and
distributions:
Investment income--net.. -- -- (.10) (.06) -- (.04) (.20) (.08)
Realized gain on
investments--net........ (2.55) (3.09) (.59) (.56) (2.69) (3.17) (.59) (.56)
------- ------- ------- ------- -------- ------- ------- -------
Total dividends and
distributions........... (2.55) (3.09) (.69) (.62) (2.69) (3.21) (.79) (.64)
------- ------- ------- ------- -------- ------- ------- -------
Net asset value, end of
period.................. $ 20.83 $ 16.77 $ 17.10 $ 15.10 $21.97 $ 17.56 $ 17.74 $ 15.61
======= ======= ======= ======= ======== ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 41.74% 16.39% 18.34% 4.82%# 42.80% 17.38% 19.26% 5.13%#
======= ======= ======= ======= ======== ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 2.06% 2.14% 2.16% 2.41%* 1.27% 1.35% 1.37% 1.61%*
======= ======= ======= ======= ======== ======= ======= =======
Investment income
(loss)--net............. (1.17)% (.70)% .36% .14%* (.39)% .07% 1.15% .95%*
======= ======= ======= ======= ======== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $70,159 $31,182 $26,920 $11,434 $114,183 $40,173 $24,795 $11,037
======= ======= ======= ======= ======== ======= ======= =======
Portfolio turnover...... 67.02 % 97.87% 60.37% 59.79% 67.02 % 97.87% 60.37% 59.79%
======= ======= ======= ======= ======== ======= ======= =======
Average commission rate
paid##.................. $ .0523 $ .0514 $ .0503 -- $ .0523 $ .0514 $ .0503 --
======= ======= ======= ======= ======== ======= ======= =======
</TABLE>
- ----
* Annualized
**
+ Total investment returns exclude the effects of sales loads.
Commencement of Operations.
++
Based on average shares outstanding.
# Aggregate total investment return.
##For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
10
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of capital
by investing in a diversified portfolio of securities, primarily common
stocks, of relatively small companies that 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. Because of its focus on small cap equity
securities, the Fund should be considered as a vehicle for diversification and
not as a complete investment program.
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. The definition of "small
companies" will change over time in response to market conditions; for the
Fund, "small companies" typically have total market capitalizations, at the
time of initial purchase by the Fund, in the same range as companies in the
Russell 2000
11
<PAGE>
Stock Index, a widely known small cap investment benchmark. Small companies
generally are little known to most individual investors although some may be
dominant in their respective industries. Underlying the Fund's 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
issuers involves risks not typically involved in domestic investment,
including fluctuations in foreign exchange
12
<PAGE>
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.
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.
13
<PAGE>
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 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.
14
<PAGE>
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 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."
15
<PAGE>
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.
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
16
<PAGE>
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.
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.
17
<PAGE>
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 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,
18
<PAGE>
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 seven individuals, six of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act. The Directors of the Fund are responsible for the overall
supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the Investment Company
Act.
The Directors of the Fund are:
Arthur Zeikel*--Chairman of the Investment Adviser and MLAM; Chairman and
Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of ML & Co.
Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).
M. Colyer Crum--James R. Williston Professor of Investment Management
Emeritus, Harvard Business School.
Edward H. Meyer--Chairman of the Board of Directors, President and Chief
Executive Officer of Grey Advertising Inc.
Jack B. Sunderland--President and Director of American Independent Oil
Company, Inc. (an energy company).
19
<PAGE>
J. Thomas Touchton--Managing Partner of The Witt-Touchton Company (a private
investment partnership).
Fred G. Weiss--Managing Director of FGW Associates and Director of Noven
Corporation (a pharmaceutical company).
- --------
* 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 Asset Management Group of ML & Co. (which
includes the Investment Adviser), acts as the investment adviser to more than
100 registered investment companies and provides investment advisory services
to individual and institutional accounts. As of May 1998, the Asset Management
Group had a total of approximately $489 billion in investment company and
other portfolio assets under management. This amount includes assets managed
for certain affiliates of the Investment Adviser.
The investment advisory agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the supervision of
the Board of Directors, the Investment Adviser is responsible for the actual
management of the Fund's portfolio. The responsibility for making decisions to
buy, sell or hold a particular security rests with the Investment Adviser,
subject to review by the Board of Directors. The Investment Adviser provides
the portfolio managers for the Fund, who consider analyses from various
sources, make the necessary investment decisions and place transactions
accordingly. The Investment Adviser also is obligated to perform certain
administrative and management services for the Fund and to provide all of the
office space, facilities, equipment and personnel necessary to perform its
duties under the Investment Advisory Agreement. The Investment Adviser has
access to the total securities research and economic facilities of Merrill
Lynch.
The Investment Adviser receives monthly compensation at the annual rate of
0.75% of the average daily net assets of the Fund. This fee is higher than
that of many other mutual funds, but the Fund believes it is justified by the
high degree of care that must be given to the initial selection and continuous
supervision of the types of portfolio securities in which the Fund invests.
For the fiscal year ended March 31, 1998, the Investment Adviser earned a fee
of $6,981,534 (based on average net assets of approximately $930.9 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, 1998, the amount of such
reimbursement was $98,897. For the fiscal year ended March 31, 1998, the ratio
of total expenses to average net assets was 1.02% for Class A shares, 2.05%
for Class B shares, 2.06% for Class C shares, and 1.27% 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
20
<PAGE>
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. For the fiscal year ended March 31, 1998, the Investment Adviser
paid no fees to MLAM U.K. pursuant to such arrangement. MLAM U.K. has offices
at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
Daniel V. Szemis is Senior Vice President and Portfolio Manager of the Fund.
Mr. Szemis has been First Vice President of the Investment Adviser since 1997
and was a Vice President from 1996 to 1997. 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).
TRANSFER AGENCY SERVICES
The Transfer Agent, a subsidiary of ML & Co., acts as the Fund's transfer
agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives 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.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts that close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For the 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, 1998, the Fund paid
the Transfer Agent $2,035,784 pursuant to the Transfer Agency Agreement.
21
<PAGE>
PURCHASE OF SHARES
The Distributor, an affiliate of each of 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 (i) for retirement plans, the minimum
initial purchase is $100 and the minimum subsequent purchase is $1, and (ii)
for shareholders who are participants in a Mutual Funds Adviser ("MFA")
program administered by Merrill Lynch, the minimum initial purchase is $250.
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.
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
22
<PAGE>
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. The proceeds from
the account maintenance fees are used to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) for providing continuing account
maintenance activities. 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 CDSC and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing 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
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
23
<PAGE>
(5) The conversion period for dividend reinvestment shares, and the conversion
and holding periods for certain retirement plans and certain fee-based
programs 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.
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 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.
The proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
account maintenance activities.
For the fiscal year ended March 31, 1998, the Fund sold 12,330,033 Class A
shares for aggregate net proceeds to the Fund of $257,288,064. The gross sales
charges for the sale of Class A shares of the Fund for that year were $36,202,
of which $2,430 and $33,772 were received by the Distributor and Merrill
Lynch, respectively. For the fiscal year ended March 31, 1998, the Distributor
received CDSCs of $10,209 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, 1998, the Fund sold 6,877,672
Class D shares for aggregate net proceeds to the Fund of $144,426,705. The
gross sales charges for the sale of Class D shares of the Fund for that year
were $418,634 of which $28,752 and $389,882 were received by the Distributor
and Merrill Lynch,
24
<PAGE>
respectively. For the fiscal year ended March 31, 1998, the Distributor
received no CDSCs with respect to redemptions within one year after purchase
of Class D shares purchased subject to a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
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 the program or branch has $3 million or more
initially invested in MLAM-advised mutual funds. Also eligible to purchase
Class A shares at net asset value are participants in certain investment
programs including TMASM Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services, collective investment trusts for
which Merrill Lynch Trust Company serves as trustee and purchases made in
connection with certain fee-based programs. In addition, Class A shares will
be offered at net asset value to ML & Co. and its subsidiaries and their
directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares
of certain MLAM-advised closed-end funds 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
25
<PAGE>
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 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 the Distributor and Merrill Lynch (pursuant to a sub-agreement)
for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares from the dealers' 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
26
<PAGE>
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.
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>
For the fiscal year ended March 31, 1998, the Distributor received CDSCs of
$558,202 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. Additional CDSCs payable to the Distributor may have been
waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
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 certain circumstances
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"))
27
<PAGE>
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 Class B CDSC also
is waived for any Class B shares which are purchased by a Merrill Lynch
rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the
time of redemption. Additional information concerning the waiver of the Class
B CDSC is set forth in the Statement of Additional Information. 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 Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs." For the fiscal year ended March 31, 1998, the Distributor
received CDSCs of $17,130 with respect to redemptions of Class C shares, all
of which were 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.
28
<PAGE>
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of
taxable and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa,
the Conversion Period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised
mutual funds held in that Class B Retirement Plan will be converted into Class
D shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate fund at net
asset value 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
29
<PAGE>
consultants in connection with the sale of the Class B and Class C shares. In
this regard, the purpose and function of the ongoing distribution fees and the
CDSC are the same as those of the initial sales charge with respect to the
Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and Class
C shares.
For the fiscal year ended March 31, 1998, the Fund paid the Distributor
$4,795,850 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $479.6
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, 1998, the Fund paid
the Distributor $493,922 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $49.4 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, 1998,
the Fund paid the Distributor $184,325 pursuant to the Class D Distribution
Plan (based on average daily net assets subject to such Class D Distribution
Plan of approximately $73.7 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, 1997, 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 $2,427,000 (.46% of Class B net assets at
that date). As of March 31, 1998, with respect to Class B shares, direct cash
revenues for the period since October 21, 1988 (commencement of operations)
exceeded direct cash expenses by $10,526,630 (1.72% of Class B net assets at
that date). As of March 31, 1998 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 $227,000, .40% of
Class C net assets at that date. As of March 31, 1998, with respect to Class C
shares, direct cash revenues for the period since October 21, 1994
(commencement of operations) exceeded direct cash expenses by $706,163 (1.01%
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
30
<PAGE>
the Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or
distribution of each class of shares separately. The initial sales charges,
the account maintenance fee, the distribution fee and/or the CDSCs received
with respect to one class will not be used to subsidize the sale of shares of
another class. Payments of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares."
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the 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 that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
REDEMPTION
A shareholder wishing to redeem shares may do so, without charge, by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of
shares for which certificates have been issued may be accomplished by writing
a letter as noted above accompanied by certificates for the shares to be
redeemed. Redemption requests
31
<PAGE>
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 it has assured itself that
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 that do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill
Lynch may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through the
Transfer Agent 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 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.
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<PAGE>
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.
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.
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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 the 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 that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period for the newly acquired shares of
the other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares
are held in a money market fund, however, will not count toward satisfaction
of the holding period requirement for reduction of any CDSC imposed on such
shares, if any, and, with respect to Class B shares, toward satisfaction of
the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the deferred sales charge schedule relating to the new Class B shares. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the deferred sales charge schedule relating to the Class B shares
of the MLAM-advised fund from which the exchange has been made.
Exercise of the exchange privilege is treated as a sale 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.
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Under specified circumstances, participants in certain Programs may deposit
other classes of shares which will be exchanged for Class A shares. Initial or
deferred sales charges otherwise due in connection with such exchanges may be
waived or modified, as may the Conversion Period applicable to the deposited
shares. Termination of participation in a Program may result in the redemption
of shares held therein or the automatic exchange thereof to another class at
net asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees.
Additional information regarding a specific Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in such Program's client agreement and from the Transfer
Agent at (800) MER-FUND 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 if the shareholder's account is maintained with 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 (provided that, in the event that a
payment on an account maintained at the Transfer Agent would amount to $10.00
or less, a shareholder will not receive such payment in cash and such payment
will automatically be reinvested in additional shares). The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution or
redemption checks. 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 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 shareholder whose shares are held within a
CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R)
or CBA(R) Systematic Redemption Program, subject to certain conditions. With
respect to redemptions of Class B and Class C shares pursuant to a systematic
withdrawal plan, the maximum number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares
of such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
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Charges--Class C Shares." Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares."
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be made
to an investor's Investment Account by pre-arranged charges of $50 or more to
his or her regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more ($1 for retirement 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.
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Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on
net investment income and any capital gains or losses on portfolio investments
over such periods) that would equate the initial amount invested to the
redeemable value of such investment at the end of each period. Average annual
total return will be computed assuming all dividends and distributions are
reinvested and taking into account all applicable recurring and nonrecurring
expenses, including any CDSC that would be applicable to a complete redemption
of the investment at the end of the specified period such as in the case of
Class B and Class C shares, and the maximum sales charge in the case of Class
A and Class D shares. Dividends paid by the Fund with respect to all shares,
to the extent any dividends are paid, will be calculated in the same manner at
the same time on the same day and will be in the same amount, except that
account maintenance fees, distribution charges and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by
that class. The Fund will include performance data for all classes of shares
of the Fund in any advertisement or information including performance data of
the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data
calculations of including or excluding the maximum applicable sales charges,
actual annual or annualized total return data generally will be lower than
average annual total return data since the average annual rates of return
reflect compounding; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. In advertisements directed to
investors whose purchases are subject to waiver of the CDSC in the case of
Class B and Class C shares (such as investors in certain retirement plans) or
reduced sales charges in the case of Class A and Class D shares, performance
data may take into account the reduced, and not the maximum, sales charge or
may not take into account the CDSC and therefore may reflect greater total
return since, due to the reduced sales charges or waiver of the CDSC, a lower
amount of expenses may be deducted. See "Purchase of Shares". The Fund's total
return may be expressed either as a percentage or as a dollar amount in order
to illustrate the effect of such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite 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.
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ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all of its net investment income,
if any. Dividends from such net investment income are paid semi-annually. All
net realized capital gains, if any, will be distributed to the Fund's
shareholders annually after the close of the Fund's fiscal year. The per share
dividends and distributions on each class of shares will be reduced as a
result of any account maintenance, distribution and transfer agency fees
applicable with respect to that class. See "Additional Information--
Determination of Net Asset Value." Dividends and distributions 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 Federal tax requirements that
certain percentages of its ordinary income and capital gains be distributed
during the year. Capital gains distributions will be automatically reinvested
in shares of the Fund unless the Shareholder elects to receive such dividends
in cash.
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 for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on
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the exchange designated by or under the authority of the Board of Directors as
the primary market. Long positions in 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. Short
positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. When the
Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last bid price. Any assets or liabilities expressed in terms
of foreign currencies are translated into U.S. dollars at the prevailing
market rates as obtained from one or more dealers. Other investments,
including futures contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith 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 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). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income
dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. 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.
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Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for
any shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming the shares were held as a capital asset).
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the
Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge paid to the
Fund on the exchanged shares reduces any sales charge the shareholder would
have owed upon the purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code
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sections and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law
varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
ORGANIZATION OF THE FUND
The Fund, a diversified, open-end investment company, was incorporated under
Maryland law on February 23, 1978. As of the date of this Prospectus, the Fund
has an authorized capital of 400,000,000 shares of Common Stock, par value
$0.10 per share, divided into four classes, designated Class A, Class B, Class
C and Class D Common Stock, each of which consists of 100,000,000 shares.
Shares of Class A, Class B, Class C and Class D Common Stock represent
interests in the same assets of the Fund and are identical in all respects
except that Class B, Class C and Class D shares bear certain expenses related
to the account maintenance associated with such shares and Class B and Class C
shares bear certain expenses related to the distribution of such shares. Each
class has exclusive voting rights with respect to matters relating to account
maintenance and/or 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.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and businesses organizations, the Fund could be
adversely affected if the computer systems used by the Investment Adviser or
other Fund service providers do not properly address this problem prior to
January 1, 2000. The Investment Adviser has established a dedicated group to
analyze these issues and to implement any systems modifications necessary to
prepare for the Year 2000. Currently, the
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Investment Adviser does not anticipate that the transition to the 21st Century
will have any material impact on its ability to continue to service the Fund
at current levels. In addition, the Investment Adviser has sought assurances
from the Fund's other service providers that they are taking all necessary
steps to ensure that their computer systems will accurately reflect the Year
2000, and the Investment Adviser will continue to monitor the situation. At
this time, however, no assurance can be given that the Fund's other service
providers have anticipated every step necessary to avoid any adverse effect on
the Fund attributable to the Year 2000 Problem.
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.
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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.
- - - .....................................
Dealer Name and Address
This form when completed should be
mailed to: By: .................................
Authorized Signature of Dealer
Merrill Lynch Special Value Fund, Inc.
c/o Merrill Lynch Financial [_][_][_] [_][_][_][_]
Data Services, Inc. Branch Code F/C No. .............
P.O. Box 45289 F/C Last Name
Jacksonville, Florida 32232-5289
[_][_][_] [_][_][_][_][_]
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 (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in Merrill
Lynch 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 THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: [_]
$.......... of (check one): [_] Class A, [_] Class B*, [_] Class C* or
[_] Class D shares in the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE):
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner..................................... Date..................
Signature of Co-Owner (if any).................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO 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.
* Annual withdrawal cannot exceed 10% of the value of shares of such class
held in the account at the time the election to join the Systematic Withdrawal
Plan is made.
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.
AUTHORIZATION TO HONOR ACH DEBITS
MERRILL LYNCH FINANCIAL DATA DRAWN BY MERRILL LYNCH FINANCIAL
SERVICES, INC. DATA SERVICES, INC.
You are hereby authorized to draw an
ACH debit each month on my bank
account for investment in Merrill
Lynch Special Value Fund, Inc., as To...............................Bank
indicated below: (Investor's Bank)
Amount of each ACH debit $........ Bank Address.........................
Account Number ................... City...... State...... Zip Code......
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 REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION 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 LAW-
FULLY 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.......................................... 11
Other Investment Policies and Practices................................... 14
Investment Restrictions................................................... 18
Management of the Fund..................................................... 19
Board of Directors........................................................ 19
Management and Advisory Arrangements...................................... 20
Code of Ethics............................................................ 21
Transfer Agency Services.................................................. 21
Purchase of Shares......................................................... 22
Initial Sales Charge Alternatives--Class A and Class D Shares............. 24
Deferred Sales Charge Alternatives--Class B and
Class C Shares........................................................... 26
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........................................................ 33
Fee-Based Programs........................................................ 34
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 35
Systematic Withdrawal Plans............................................... 35
Automatic Investment Plans................................................ 36
Portfolio Transactions and Brokerage....................................... 36
Performance Data........................................................... 36
Additional Information..................................................... 38
Dividends and Distributions............................................... 38
Determination of Net Asset Value.......................................... 38
Taxes..................................................................... 39
Organization of the Fund.................................................. 41
Year 2000 Issues.......................................................... 41
Shareholder Reports....................................................... 42
Shareholder Inquiries..................................................... 42
Authorization Form......................................................... 43
</TABLE>
Code #10055-0698
[LOGO] MERRILL LYNCH
Merrill Lynch
Special Value Fund, Inc.
[ART]
PROSPECTUS
June 30, 1998
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 that 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 June 30,
1998 (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 June 30, 1998.
<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 that 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, 1997 and 1998 was 97.87% and 67.02%,
respectively.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Other Investment Policies and Practices--Portfolio Strategies
Involving Options and Futures" in the Prospectus for information with respect
to various portfolio strategies involving options and futures. The Fund may
seek to increase its return through the use of options on portfolio securities
and to hedge its portfolio against adverse movements in the equity, debt and
currency markets. The Fund may write (i.e., sell) covered put and call options
on its portfolio securities, purchase put and call options on securities and
engage in transactions in stock index options, stock index futures and stock
futures and financial futures, and related options on such futures. The Fund
2
<PAGE>
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.
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
3
<PAGE>
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.
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.
4
<PAGE>
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.
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
5
<PAGE>
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 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.
6
<PAGE>
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.
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
7
<PAGE>
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 the Fund's shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law.
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.
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
8
<PAGE>
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.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio manager 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 (66)--President and Director(1)(2)--Chairman of the Investment
Adviser and MLAM (which terms as used herein include their corporate
predecessors) since 1997; President of the Investment Adviser and MLAM from
1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton Services")
since 1997 and Director thereof since 1993; President of Princeton Services
from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML
& Co.") since 1990.
Donald Cecil (71)--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 (66)--Director(2)--104 Westcliff Road, Weston, Massachusetts
02193. Currently James R. Williston Professor of Investment Management
Emeritus, Harvard Business School; James R. Williston Professor of Investment
Management, Harvard Business School, from 1971 to 1996; Director of Cambridge
Bancorp, Copley Properties, Inc. and Sun Life Assurance Company of Canada.
Edward H. Meyer (71)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Harman
International Industries, Inc. and Ethan Allen Interiors, Inc.
Jack B. Sunderland (69)--Director(2)--P.O. Box 7, West Cornwall, Connecticut
06796. President and Director of American Independent Oil Company, Inc. (an
energy company) since 1987; Member of Council on Foreign Relations since 1971.
9
<PAGE>
J. Thomas Touchton (59)--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).
Fred G. Weiss (56)--Director(2)--5141 Via de Amalfi Drive, Boca Raton,
Florida 33496. Managing Director of FGW Associates since 1997; Vice President,
Planning, Investment, and Development of Warner Lambert Co. from 1979 to 1997;
Director of Noven Corporation (a pharmaceutical company) since 1997.
Terry K. Glenn (57)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and MLAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of Merrill
Lynch Funds Distributor, Inc. ("MLFD" or the "Distributor") since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
Norman R. Harvey (64)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and MLAM since 1982; Senior Vice President of Princeton
Services since 1993.
Daniel V. Szemis (38)--Senior Vice President and Portfolio Manager(1)--First
Vice President of MLAM since 1997; Vice President of MLAM from 1996 to 1997;
Portfolio Manager with Prudential Mutual Fund Investment Management Advisors
from 1990 to 1996.
Donald C. Burke (38)--Vice President(1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.
Gerald M. Richard (49)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer thereof since 1984.
Thomas D. Jones, III (33)--Secretary(1)(2)--Vice President of the Investment
Adviser since 1998; Attorney with the Manager since 1992.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director or officer of certain other
investment companies for which the Investment Adviser or MLAM acts as
investment adviser.
At May 31, 1998, the Directors and officers of the Fund as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At 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 and Nominating 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
$32,023 for the fiscal year ended March 31, 1998.
10
<PAGE>
The following table sets forth, for the fiscal year ended March 31, 1998,
compensation paid by the Fund to the non-affiliated Directors and, for the
calendar year ended December 31, 1997, 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(1).................. $6,850 None $275,850
M. Colyer Crum(1)................ $6,100 None $115,600
Edward H. Meyer(1)............... $6,100 None $222,100
Jack B. Sunderland(1)............ $6,100 None $132,600
J. Thomas Touchton(1)............ $6,100 None $132,600
Fred G. Weiss(1)(2).............. $4,258 None $ 0
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Cecil (33 registered investment companies consisting of 33
portfolios); Mr. Crum (15 registered investment companies consisting of 15
portfolios); Mr. Meyer (33 registered investment companies consisting of
33 portfolios); Mr. Sunderland (18 registered investment companies
consisting of 30 portfolios); Mr. Touchton (18 registered investment
companies consisting of 30 portfolios) and Mr. Weiss (15 registered
investment companies consisting of 15 portfolios).
(2) Mr. Weiss was elected a Director of the Fund on February 3, 1998.
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 supervision
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.
11
<PAGE>
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, 1996, 1997 and
1998, the Investment Adviser earned fees of $3,704,781, $4,781,445 and
$6,981,534, 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 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, 1996, 1997 and 1998, the amount of such
reimbursement was $56,839, $73,232 and $98,897, 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. For the fiscal
years ended March 31, 1998, March 31, 1997 and March 31, 1996, the Investment
Adviser paid no advisory fees to MLAM U.K. pursuant to this arrangement.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the
Investment Company Act because of their ownership of its voting securities or
their power to exercise a controlling influence over its management or
policies. Similarly, the following entities may be considered "controlling
persons" of MLAM U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a
subsidiary of Merrill Lynch International Holdings, Inc., a subsidiary of
Merrill Lynch International, Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein, the
Investment Advisory Agreement and the sub-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.
12
<PAGE>
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."
The Merrill Lynch Select PricingSM System is used by more than 50 registered
investment companies advised by MLAM or its affiliate, the Investment Adviser.
Funds advised by MLAM or the Investment Adviser that 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, 1996, 1997 and 1998, gross sales
charges on the sale of Class A shares totaled $49,544, $29,571 and $36,202,
respectively, of which $3,362, $1,962 and $2,430, respectively, was received
by the Distributor and $46,182, $27,609 and $33,772, respectively, was paid to
Merrill Lynch as a selected dealer. For the fiscal years ended March 31, 1996,
1997 and 1998, the gross sales charges on the sale of the Fund's Class D
shares totaled $107,123, $117,411 and $418,634, respectively, of which the
Distributor received $7,030, $8,139 and $28,752, respectively and Merrill
Lynch received $100,093, $109,272 and $389,882, 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
13
<PAGE>
account although more than one beneficiary is involved. The term "purchase"
also includes purchases by any "company," as that term is defined in the
Investment Company Act, but does not include purchases by any such company
which has not been in existence for at least six months or which has no
purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders
of a company, policyholders of an insurance company, customers of either a
bank or broker-dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of other MLAM-advised mutual funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. 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
14
<PAGE>
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 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
15
<PAGE>
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; and fourth,
there must be a minimum purchase of $250 to be eligible for the investment
option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A Shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the above-
referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the fund in connection with 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
16
<PAGE>
following conditions are satisfied: first, the investor must purchase Class D
shares of the Fund with proceeds from a redemption of shares of the other
mutual fund and such shares of such other fund were subject to a sales charge
either at the time of purchase or on a deferred basis; and second, such
purchase of Class D shares must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of such shares of
the other mutual fund and such shares have been outstanding for a period of no
less than six months; and second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the redemption must
be maintained in the interim in cash or a money market fund.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may in
appropriate cases be adjusted to reduce possible adverse tax consequences to
the Fund 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
17
<PAGE>
under the Investment Company Act (each a "Distribution Plan") with respect to
the account maintenance and/or distribution fees paid by the Fund to the
Distributor with respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act.
Among other things, each Distribution Plan provides that the Distributor shall
provide and the Directors shall review quarterly reports of the disbursement
of the distribution fees paid to the Distributor. In their consideration of
each Distribution Plan, the Directors must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and its related class of shareholders. Each Distribution Plan further
provides that, so long as the Distribution Plan remains in effect, the
selection and nomination of Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the "Independent Directors"),
shall be committed to the discretion of the Independent Directors then in
office. In approving each Distribution Plan in accordance with Rule 12b-1, the
Independent Directors concluded that there is reasonable likelihood that such
Distribution Plan will benefit the Fund and its related class of shareholders.
Each Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Directors or by the vote of the holders
of a majority of the outstanding related class of voting securities of the
Fund. A Distribution Plan cannot be amended to increase materially the amount
to be spent by the Fund without the approval of the related class of
shareholders, and all material amendments are required to be approved by the
vote of Directors, including a majority of the 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.
18
<PAGE>
The following table sets forth comparative information as of March 31, 1998
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, 1998
---------------------------------------------------------------------------
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, 1998:
Under NASD Rule as
Adopted............... $480,283 $30,017 $4,707 $34,724 $14,354 $20,370 $4,585
Under Distributor's
Voluntary Waiver...... $480,283 $30,017 $2,401 $32,418 $14,354 $18,064 $4,585
Class C Shares, for the
period October 21, 1994
(commencement of
operations)
to March 31, 1998:
Under NASD Rule as
Adopted............... $ 74,024 $ 4,627 $ 624 $ 5,251 $ 869 $ 4,382 $ 526
</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. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares
in conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFA SM) program (the "MFA program").
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA program. 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.
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
19
<PAGE>
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.
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 any such time.
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, 1996, 1997
and 1998, the Distributor received CDSCs of $681,141, $609,907 and $558,202,
respectively, with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the Distributor with
respect to redemptions of Class B shares during the fiscal years ended March
31, 1996, 1997 and 1998 may have been waived or converted to a contingent
obligation in connection with a shareholder's participation in certain fee-
based programs. For the fiscal years ended March 31, 1996, 1997 and 1998, the
Distributor received CDSCs of $16,859, $27,419 and $17,130, 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 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.
20
<PAGE>
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, 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. For the fiscal year
ended March 31, 1998, the Fund paid brokerage commissions of $1,632,650 of
which $75,023 or 4.60% was paid to Merrill Lynch for effecting 5.45% of the
aggregate dollar amount of transactions in which the Fund paid brokerage
commissions.
The Fund has been informed by Merrill Lynch that it will in no way, at any
time, attempt to influence or control the placing by the Investment Adviser or
by the Fund of orders for brokerage transactions. Brokers and dealers,
including Merrill Lynch, who provide supplemental investment research (such as
securities and economic research and market forecasts) to the Investment
Adviser may receive orders for transactions by the Fund. Supplemental
investment research received by the Investment Adviser also may be used in
connection with other investment advisory accounts of the Investment Adviser
and its affiliates. Information so received will be in addition to and not in
lieu of the services required to be performed by the Investment Adviser under
the Investment Advisory Agreement. The expenses of the Investment Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information. Whether or not a particular broker-dealer sells shares of the
Fund neither qualifies nor disqualifies such broker-dealer to execute
transactions for the Fund.
The Fund also may invest in securities traded in the OTC market.
Transactions in the OTC market generally are principal transactions with
dealers and the costs of such transactions involve dealer spreads rather than
brokerage commissions. With respect to OTC transactions, the Fund, where
possible, deals directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and 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
21
<PAGE>
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 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
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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 for long positions and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors as the
primary market. Long positions in securities traded in the OTC market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC market are valued
at the last available ask price in the OTC market prior to the time of
valuation. Portfolio securities traded in the NASDAQ National Market System
are valued at the last sale price or, lacking any sales, at the closing bid
price. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. When the Fund writes an option, the amount of the premium received is
recorded on the books of the Fund as an asset and an equivalent liability. The
amount of the liability is subsequently valued to reflect the current market
value of the option written, based upon the last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market,
the last asked price. Options purchased by the Fund are valued at the 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, are stated at
market value. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith 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.
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
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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.
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
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<PAGE>
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
(provided that, in the event that a payment on an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder will not receive
such payment in cash and such payment will automatically be reinvested in
additional shares).
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained by Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if the shareholder's account
is maintained by the Transfer Agent 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. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution or
redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based on
cost or the current offering price, of $5,000 or more, and monthly withdrawals
are available for shareholders with shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount 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 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 shares in the Investment
Account are reinvested automatically in shares of the Fund. A shareholder's
Systematic Withdrawal Plan may be terminated at any time, without charge or
penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income. A
withdrawal may be a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals
are ordinarily disadvantageous to the shareholder because of sales charges and
tax liabilities. The Fund will not knowingly accept purchase orders for shares
of the Fund from investors who maintain a Systematic Withdrawal Plan unless
such purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly, bi-
monthly, quarterly, semi-annual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of
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<PAGE>
systematic redemptions will be posted to a shareholder's account three
business days after the date the shares are redeemed. All redemptions are made
at net asset value. A shareholder may elect to have his or her shares redeemed
on the first, second, third or fourth Monday of each month, in the case of
monthly redemptions, or of every other month in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the 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.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "--Contingent Deferred
Sales Charges--Class C Shares" in the Prospectus. Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last
Class B shares in an account to Class D shares, the systematic withdrawal plan
will automatically be applied thereafter to Class D shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares" in the Prospectus.
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
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<PAGE>
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 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
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<PAGE>
CDSC or, with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund that were acquired
as a result of an exchange for Class B or Class C shares of the Fund may, in
turn, be exchanged back into Class B or Class C shares, respectively, of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of the newly-acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Fund Class B
shares for two and a half years and three years later decide to redeem the
shares of Institutional Fund for cash. At the time of this redemption, the 2%
CDSC that would have been due had the Class B shares of the Fund been redeemed
for cash rather than exchanged for shares of Institutional Fund will be
payable. If, instead of such redemption, the shareholder exchanged such shares
for Class B shares of a fund that the shareholder 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 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."
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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 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). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income
dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. For this
purpose, the Fund will allocate dividends eligible for the dividends received
deduction among the Class A, Class B, Class C and Class D shareholders
according to a method (which it believes is consistent with the Commission
rule permitting the issuance and sale of multiple classes of stock) that is
based on the gross income allocable to Class A, Class B, Class C and Class D
shareholders during the taxable year, or such other method as the Internal
Revenue Service may prescribe. If the Fund pays a dividend in January which
was declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
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<PAGE>
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the
Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period of the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge paid to the
Fund on the exchanged shares reduces any sales charge the shareholder would
have owed upon purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is a non-
equity option or a regulated futures contract for a non-U.S. currency for
which the Fund elects to have gain or loss treated as ordinary gain or loss
under Code Section 988 (as described below), gain or loss from Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by the Fund may
alter the timing and character of distributions to shareholders. The mark-to-
market rules outlined above, however, will not apply to certain transactions
entered into by the Fund solely to reduce the risk of changes in price or
interest or currency exchange rates with respect to its investments.
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<PAGE>
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.
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.
31
<PAGE>
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales 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.
32
<PAGE>
Set forth below is total return information for the Class A, Class B, Class C
and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------- -------------------------
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,
1998..................... 35.67% $1,356.70 37.72% $1,377.20
Five Years ended March 31,
1998..................... 18.63% $2,349.70 18.71% $2,356.90
Ten Years ended March 31,
1998..................... 12.54% $3,258.60
Inception (October 21,
1988) to March 31,
1998*.................... 12.45% $3,027.50
</TABLE>
<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>
1998...................... 43.18% $1,431.80 41.72% $1,417.20
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, 1998........... 661.11% $7,611.10
Inception (October 21,
1988) to March 31,
1998*.................... 202.75% $3,027.50
</TABLE>
(Please see footnotes on following page)
33
<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,
1998..................... 40.74% $1,407.40 35.30% $1,353.00
Inception (October 21,
1994) to March 31,
1998**................... 23.13% $2,046.30 22.16% $1,991.30
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
YEAR ENDED MARCH 31,
--------------------
<S> <C> <C> <C> <C>
1998...................... 41.74% $1,417.40 42.80% $1,428.00
1997...................... 16.39% $1,163.90 17.38% $1,173.80
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,
1998**................... 104.63% $2,046.30 99.13% $1,991.30
</TABLE>
- --------
* Information as to Class B shares is presented only for the period October
21, 1988 to March 31, 1998. 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, 1998. 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.
34
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on February 23, 1978. As of the
date of this Statement of Additional Information, the Fund has an authorized
capital of 400,000,000 shares of Common Stock, par value of $0.10 per share,
divided into four classes, designated Class A, Class B, Class C and Class D
Common Stock, each of which consists of 100,000,000 shares. Each share of
Class A, Class B, Class C and Class D Common Stock represents an interest in
the same assets of the Fund and is identical in all respects except that the
Class B, Class C and Class D shares bear certain expenses related to the
account maintenance and/or distribution of such shares and have exclusive
voting rights with respect to matters relating to such account maintenance
and/or distribution expenditures (except that Class B shares have certain
voting rights with respect to Class D 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, 1998, is calculated as
set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Assets.................. $396,198,106 $611,363,727 $70,158,953 $114,183,258
============ ============ =========== ============
Number of Shares
Outstanding................ 17,983,361 29,073,279 3,368,566 5,196,347
============ ============ =========== ============
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)............... $ 22.03 $ 21.03 $ 20.83 $ 21.97
Sales Charge (for Class A
and Class D shares: 5.25%
of offering price (5.54% of
net asset value))*......... 1.22 ** ** 1.22
------------ ------------ ----------- ------------
Offering Price.............. $ 23.25 $ 21.03 $ 20.83 $ 23.19
============ ============ =========== ============
</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.
35
<PAGE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the independent Directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
The Bank of New York, 90 Washington Street, 12th Floor, New York, New York
10286, acts as custodian of the Fund's assets (the "Custodian"). The Custodian
is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484 (the "Transfer Agent"), acts as the Fund's
transfer agent. The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on March 31 of each year. The Fund sends to
its shareholders at least semi-annually, reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement and the
exhibits relating thereto, which the Fund has filed with the Commission,
Washington, D.C., under the Securities Act and the Investment Company Act, to
which reference is hereby made.
To the knowledge of the Fund, the following person or entity owned
beneficially 5% or more of the Fund's shares as of June 1, 1998.
<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
---- ------- ----------------
<S> <C> <C>
Merrill Lynch Trust Company P.O. Box 30532 51% Class A
FBO The Southern Company New Brunswick, NJ 08989
Employee Savings Plan
Attn: Neil J. Dorflinger
Acct # C12-89934R01
</TABLE>
36
<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, 1998, 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, 1998 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, 1998, 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 8, 1998
37
<PAGE>
Merrill Lynch Special Value Fund Inc. March 31, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Auto & Transportation
- ------------------------------------------------------------------------------------------------------------------------------------
252,500 Air Express International Corp. $ 4,472,800 $ 6,707,031 0.6%
431,300 Circle International Group, Inc. 11,191,474 11,429,450 1.0
1,676,400 +Envirosource, Inc. 6,185,721 3,876,675 0.3
428,500 +Landair Services, Inc. (d) 4,216,915 14,140,500 1.2
350,500 Meritor Automotive, Inc. 7,707,445 9,310,156 0.8
745,000 +Miller Industries, Inc. 7,231,255 5,447,813 0.4
434,800 Walbro Corp. (d) 8,254,004 5,326,300 0.4
-------------- -------------- ------
49,259,614 56,237,925 4.7
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary
- ------------------------------------------------------------------------------------------------------------------------------------
507,000 +APAC Teleservices, Inc. 6,926,423 6,559,313 0.5
1,317 Alfin, Inc. (Preferred)(a) 0 24,259 0.0
1,121,700 +Au Bon Pain Company, Inc. (Class A)(d) 7,525,064 9,464,344 0.8
128,300 +Axiom, Inc. 1,501,780 801,875 0.1
434,500 J. Baker, Inc. 3,619,080 3,421,688 0.3
21,200 +Boise Cascade Office Products Corp. 366,710 402,800 0.0
371,000 Callaway Golf Company 10,593,814 10,759,000 0.9
15,800 +The Cheesecake Factory 355,500 526,338 0.0
1,135,000 Danka Business Systems PLC (ADR)(b) 21,306,323 20,855,625 1.7
133,100 +Department 56, Inc. 2,953,023 5,057,800 0.4
132,000 Dover Downs Entertainment, Inc. 2,794,937 3,894,000 0.3
235,000 +Farah, Inc. 1,606,481 1,483,438 0.1
34,400 Fingerhut Companies, Inc. 658,330 892,250 0.1
130,100 +Global DirectMail Corp. 2,818,693 2,406,850 0.2
326,600 +HA-LO Industries, Inc. 4,476,002 11,410,588 1.0
830,000 Heilig-Meyers Company 12,066,876 11,671,875 1.0
295,400 +ITI Technologies, Inc. 4,273,172 7,680,400 0.7
34,900 +Metromail Corp. 542,695 1,208,413 0.1
1,111,600 +Micro Warehouse, Inc. 13,665,799 18,132,975 1.5
93,400 +New Horizons Worldwide, Inc. 1,205,232 1,225,875 0.1
700,500 +Norton McNaughton, Inc. (d) 10,056,577 3,371,156 0.3
1,284,800 +Paxson Communications Corporation 13,894,938 14,293,400 1.2
500 +QuickResponse Services, Inc. 17,205 26,750 0.0
543,300 +SITEL Corporation 5,075,810 6,927,075 0.6
506,500 +Sodak Gaming, Inc. 6,191,644 3,577,156 0.3
467,800 Unitog Company 10,972,169 10,817,875 0.9
439,200 +Viking Office Products, Inc. 8,648,861 10,156,500 0.9
651,600 +WMS Industries, Inc. 12,651,543 20,403,225 1.7
3,300 +West Teleservices Corp. 46,200 55,275 0.0
-------------- -------------- ------
166,810,881 187,508,118 15.7
- ------------------------------------------------------------------------------------------------------------------------------------
Energy
- ------------------------------------------------------------------------------------------------------------------------------------
222,200 +Barrett Resources Corp. 6,950,418 7,763,113 0.6
559,900 +Benton Oil & Gas Co. 8,510,720 6,193,894 0.5
385,000 +Forcenergy, Inc. 8,623,882 10,202,500 0.9
135,400 +Key Energy Group, Inc. 2,005,263 2,208,713 0.2
457,844 +Louis Dreyfus Natural Gas Corp. 7,397,649 8,355,653 0.7
140,000 +Plains Resources, Inc. 1,461,553 2,380,000 0.2
308,391 +Plains Resources, Inc. (c) 1,806,983 5,165,549 0.4
175,100 +Stone Energy Corporation 6,163,019 6,839,844 0.6
341,700 +Tom Brown, Inc. 4,564,569 7,645,537 0.7
-------------- -------------- ------
47,484,056 56,754,803 4.8
====================================================================================================================================
</TABLE>
38
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Services
- ------------------------------------------------------------------------------------------------------------------------------------
80,050 American National Insurance Co. $ 6,324,332 $ 7,814,881 0.7%
208,500 +The BISYS Group, Inc. 6,611,599 7,349,625 0.6
160,130 Charter One Financial, Inc. 2,619,886 10,718,702 0.9
111,500 +Civic Bancorp, Inc. 575,298 2,048,813 0.2
173,500 HCC Insurance Holdings, Inc. 2,877,363 3,990,500 0.3
147,000 National Data Corporation 5,553,865 6,109,688 0.5
344,000 PXRE Corp. 7,458,860 10,664,000 0.9
105,990 Reliastar Financial Corp. 1,347,361 4,882,164 0.4
1,400 Trenwick Group, Inc. 51,275 52,500 0.0
-------------- -------------- ------
33,419,839 53,630,873 4.5
- ------------------------------------------------------------------------------------------------------------------------------------
Healthcare
- ------------------------------------------------------------------------------------------------------------------------------------
272,835 +AXYS Pharmaceuticals, Inc. 2,547,239 2,319,098 0.2
143,200 +Biomatrix, Inc. 2,138,507 4,278,100 0.4
267,100 +COR Therapeutics, Inc. 2,579,398 3,305,363 0.3
273,700 +Cephalon, Inc. 2,738,179 3,831,800 0.3
188,800 +EndoSonics Corp. 1,764,585 1,958,800 0.2
424,000 +Genome Therapeutics Corp. 3,619,214 3,657,000 0.3
595,900 +HCIA, Inc. (d) 7,322,122 8,789,525 0.7
500,000 +Isolyser Company, Inc. 3,047,185 1,312,500 0.1
454,600 +Magainin Pharmaceuticals, Inc. 4,779,299 2,528,713 0.2
540,200 +Magellan Health Services, Inc. 13,710,500 14,045,200 1.2
704,500 +MedPartners, Inc. 7,375,356 7,221,125 0.6
538,000 +NABI, Inc. 3,708,502 1,647,625 0.1
347,400 +NeoRx Corp. 2,201,611 1,856,419 0.2
167,500 +Neurogen Corporation 2,228,092 2,575,313 0.2
236,700 +Ostex International, Inc. 2,734,502 591,750 0.0
274,400 +Pharmaceutical Product Development, Inc. 3,539,578 6,414,100 0.5
574,500 +Ramsay Health Care, Inc. (d) 3,830,632 1,795,313 0.2
300,850 +Scios, Inc. 1,387,073 3,666,609 0.3
93,000 +Sierra Health Services, Inc. 2,866,480 3,708,375 0.3
1,065,000 +VISX, Inc. (d) 24,162,305 26,625,000 2.2
568,300 +Vivus, Inc. 13,161,340 6,677,525 0.6
-------------- -------------- ------
111,441,699 108,805,253 9.1
- ------------------------------------------------------------------------------------------------------------------------------------
Integrated Oils
- ------------------------------------------------------------------------------------------------------------------------------------
176,800 +Basin Exploration, Inc. 3,031,324 3,646,500 0.3
- ------------------------------------------------------------------------------------------------------------------------------------
Materials & Processing
- ------------------------------------------------------------------------------------------------------------------------------------
468,100 +ACX Technologies, Inc. 9,970,461 11,205,144 0.9
500,000 Apogee Enterprises, Inc. 5,946,645 6,625,000 0.6
580,252 BHA Group, Inc. (Class A) (d) 7,083,104 10,372,005 0.9
42,700 +Cameron Ashley Building Products, Inc. 677,862 781,944 0.1
237,200 Castle (A.M.) & Company 3,984,960 5,485,250 0.5
329,500 +Citation Corp. 4,725,918 7,393,156 0.6
705,000 Commonwealth Industries, Inc. 12,360,443 12,293,437 1.0
16,700 Foamex International, Inc. 220,425 293,294 0.0
302,700 +Giant Cement Holding, Inc. 3,059,895 8,097,225 0.7
</TABLE>
39
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Materials & Processing (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
264,000 Inland Steel Industries, Inc. $ 7,692,626 $ 7,293,000 0.6%
938,600 +Insituform Technologies, Inc. (Class A) 6,994,439 10,500,587 0.9
98,900 +Novamerican Steel, Inc. 1,070,588 1,273,337 0.1
385,510 +Paxar Corp. 5,621,296 5,469,423 0.5
157,000 Quanex Corp. 4,307,020 4,719,812 0.4
208,900 +Ryerson Tull, Inc. (Class A) 2,807,419 4,021,325 0.3
585,000 +Shiloh Industries, Inc. 7,889,761 13,162,500 1.1
253,500 +Wolverine Tube, Inc. 7,470,047 10,171,687 0.8
846,677 +Zemex Corporation (d) 7,282,851 8,043,431 0.7
-------------- -------------- ------
99,165,760 127,201,557 10.7
- ------------------------------------------------------------------------------------------------------------------------------------
Miscellaneous
- ------------------------------------------------------------------------------------------------------------------------------------
425,000 +Dan River, Inc. (Class A) 6,396,243 8,075,000 0.7
528,000 +Figgie International, Inc. (Class A) 7,351,804 7,260,000 0.6
346,600 +MasTec, Inc. 8,453,253 10,917,900 0.9
1,609,700 Mercer International, Inc. (d) 21,053,577 15,795,181 1.3
982,650 +Metromedia International Group, Inc. 11,475,786 14,923,997 1.2
235,800 +Primark Corporation 6,336,889 10,080,450 0.9
147,900 +Waddell & Reed Financial, Inc. 3,449,048 3,845,400 0.3
-------------- -------------- ------
64,516,600 70,897,928 5.9
- ------------------------------------------------------------------------------------------------------------------------------------
Producer Durables
- ------------------------------------------------------------------------------------------------------------------------------------
171,300 AGCO Corp. 4,212,749 5,085,469 0.4
178,700 +Allen Telecom, Inc. 3,163,312 2,814,525 0.2
419,600 Applied Industrial Technologies, Inc. 8,937,144 11,302,975 1.0
586,200 +B.I., Inc. (d) 5,366,809 6,155,100 0.5
523,600 +Brown & Sharpe Manufacturing Company
(Class A) 7,040,642 6,217,750 0.5
131,600 +CUNO, Incorporated 1,809,500 2,895,200 0.2
808,800 +Comdial Corp. (d) 4,965,675 8,896,800 0.8
317,000 +DONCASTERS PLC (ADR)(b) 5,766,768 8,281,625 0.7
511,000 +ESCO Electronics Corporation 8,934,284 8,431,500 0.7
162,450 General Cable Corp. 3,411,450 7,371,169 0.6
107,100 Kennametal, Inc. 4,825,389 5,636,137 0.5
225,200 +Nu Horizons Electronics Corp. 1,738,264 1,460,281 0.1
149,600 Oakwood Homes Corp. 3,232,033 5,479,100 0.5
272,100 Ryland Group, Inc. 3,984,616 7,516,762 0.6
16,800 +Southern Energy Homes, Inc. 203,337 203,700 0.0
522,400 Stewart & Stevenson Services, Inc. 12,162,255 12,570,250 1.1
518,750 +TALX Corp. (d) 4,385,624 2,528,906 0.2
216,800 +Toll Brothers, Inc. 4,208,656 6,097,500 0.5
149,200 +Triumph Group, Inc. 3,752,560 6,620,750 0.6
-------------- -------------- ------
92,101,067 115,565,499 9.7
====================================================================================================================================
</TABLE>
40
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Shares Value Percent of
Sector* Held Stocks Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Technology
- ------------------------------------------------------------------------------------------------------------------------------------
508,400 +Alpha Industries, Inc. $ 3,385,459 $ 7,848,425 0.7%
497,100 +Anixter International, Inc. 7,849,509 9,165,281 0.8
629,700 +Ardent Software, Inc. (d) 5,920,189 9,130,650 0.8
434,600 +Bell Industries, Inc. 6,923,368 6,138,725 0.5
427,388 +Boole & Babbage, Inc. 1,352,577 10,470,994 0.9
442,100 +Brite Voice Systems, Inc. 5,650,961 4,255,212 0.3
473,300 +Business Objects S.A. (ADR)(b) 5,908,381 7,158,662 0.6
1,082,500 +CHS Electronics, Inc. 15,596,087 20,296,875 1.7
833,150 +C.P. Clare Corp. (d) 7,758,336 11,559,956 1.0
142,700 +Cylink Corporation 1,955,715 2,060,231 0.2
552,800 +DII Group, Inc. 6,041,762 11,885,200 1.0
684,600 +DSP Communications, Inc. 6,176,523 11,680,987 1.0
187,000 +Hadco Corporation 7,803,236 7,409,875 0.6
220,160 +Harbinger Corp. 4,402,009 8,311,040 0.7
65,400 +Harmonic Lightwaves, Inc. 999,966 1,054,575 0.1
536,000 +IKOS Systems, Inc. 4,698,851 3,618,000 0.3
26,200 +Identix, Inc. 224,010 222,700 0.0
512,700 +Learning Company, Inc. (The) 6,571,267 11,856,187 1.0
236,900 +MathSoft, Inc. 1,247,850 814,344 0.1
1,183,500 +Mentor Graphics Corporation 12,093,439 11,613,094 1.0
849,100 +Network Equipment Technologies, Inc. 12,073,349 13,797,875 1.1
661,550 +Phoenix Technologies Ltd. 9,038,406 7,938,600 0.7
541,600 +Planar Systems, Inc. (d) 6,312,648 6,905,400 0.6
277,000 +Software Spectrum, Inc. (d) 5,550,546 6,024,750 0.5
151,717 +Sterling Commerce, Inc. 3,430,396 7,035,876 0.6
134,700 +Storage Technology Corp. 2,591,422 10,245,619 0.8
1,178,800 +Structural Dynamics Research Corp. 22,796,679 29,322,650 2.4
1,093,500 +Sybase, Inc. 16,386,324 10,559,109 0.9
709,300 Texlon Corp. 9,253,708 18,796,450 1.6
55,000 +Wang Laboratories, Inc. 979,551 1,701,562 0.1
431,700 +Wonderware Corporation 7,272,884 10,306,837 0.8
-------------- -------------- ------
208,245,408 279,185,741 23.4
- ------------------------------------------------------------------------------------------------------------------------------------
Utilities
- ------------------------------------------------------------------------------------------------------------------------------------
524,800 +Applied Digital Access, Inc. 3,912,965 4,198,400 0.4
====================================================================================================================================
Total Stocks 879,389,213 1,063,632,597 89.2
====================================================================================================================================
</TABLE>
41
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial Paper** $ 25,000,000 Atlantic Asset Securitization Corp.,
5.55% due 4/14/1998 $ 24,949,896 $ 24,949,896 2.1%
20,000,000 Falcon Asset Securitization Corp., 5.60%
due 4/24/1998 19,928,445 19,928,445 1.7
24,526,000 General Motors Acceptance Corp., 6.13%
due 4/01/1998 24,526,000 24,526,000 2.0
17,638,000 Park Avenue Receivables Corp., 5.58% due
4/01/1998 17,638,000 17,638,000 1.5
20,000,000 Republic Industries, Inc., 5.56% due
4/02/1998 19,996,911 19,996,911 1.7
` 20,000,000 Riverwoods Funding Corp., 5.55% due
4/15/1998 19,956,833 19,956,833 1.7
====================================================================================================================================
Total Short-Term Securities 126,996,085 126,996,085 10.7
====================================================================================================================================
Total Investments $1,006,385,298 1,190,628,682 99.9
==============
Other Assets Less Liabilities 1,275,362 0.1
-------------- ------
Net Assets $1,191,904,044 100.0%
============== ======
====================================================================================================================================
</TABLE>
+ Non-income producing security.
* Holdings are classified into the economic sectors found in the Russell 2000
Index.
** Commercial Paper is traded on a discount basis; the interest rates shown are
the discount rates paid at the time of purchase by the Fund.
(a) 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.
(b) American Depositary Receipts (ADR).
(c) The security may be sold to "qualified institutional buyers" under Rule 144A
of the Securities Act of 1933.
(d) 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
Sector Affiliate Activity Cost Income
- --------------------------------------------------------------------------------
Auto & Landair Services, Inc. $(201,800) $(2,065,321) ++
Transportation
Auto & Walbro Corp. 44,800 917,412 $165,960
Transportation
Consumer Au Bon Pain Company, Inc. 390,700 2,868,609 ++
Discretionary (Class A)
Consumer Norton McNaughton, Inc. -- -- ++
Discretionary
Healthcare HCIA, Inc. 595,900 7,322,122 ++
Healthcare Ramsay Health Care, Inc. -- -- ++
Healthcare VISX, Inc. 596,200 12,667,726 ++
Materials & BHA Group, Inc. (Class A) 50,932 (28,157) ++
Processing
Materials & Zemex Corporation 16,601 -- ++
Processing
Miscellaneous Mercer International, Inc. 172,000 1,697,100 43,131
Producer Durables B.I., Inc. 183,200 1,300,217 ++
Producer Durables Comdial Corp. 27,500 175,312 ++
Producer Durables TALX Corp. 55,500 387,000 ++
Technology Ardent Software, Inc. 629,700 5,920,189 ++
Technology C.P. Clare Corp. 90,600 1,396,538 ++
Technology Planar Systems, Inc. 251,600 2,721,212 ++
Technology Software Spectrum, Inc. (96,400) (2,409,021) ++
- --------------------------------------------------------------------------------
++ Non-income producing security.
See Notes to Financial Statements.
42
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities as of March 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$1,006,385,298) (Note 1a).......... $1,190,628,682
Receivables:
Securities sold......................................................... $ 5,280,294
Capital shares sold..................................................... 4,510,129
Dividends............................................................... 6,940 9,797,363
--------------
Prepaid registration fees and other assets (Note 1e)....................... 126,244
--------------
Total assets............................................................... 1,200,552,289
--------------
===================================================================================================================================
Liabilities: Payables:
Securities purchased.................................................... 4,114,232
Capital shares redeemed................................................. 2,715,304
Investment adviser (Note 2)............................................. 762,524
Distributor (Note 2).................................................... 605,775 8,197,835
--------------
Accrued expenses and other liabilities..................................... 450,410
--------------
Total liabilities.......................................................... 8,648,245
--------------
===================================================================================================================================
Net Assets: Net assets................................................................. $1,191,904,044
==============
===================================================================================================================================
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized................................................................. $ 1,798,336
Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized................................................................. 2,907,328
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized................................................................. 336,857
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares
authorized................................................................. 519,635
Paid-in capital in excess of par........................................... 943,552,513
Undistributed realized capital gains on investments--net................... 58,545,991
Unrealized appreciation on investments--net................................ 184,243,384
--------------
Net assets................................................................. $1,191,904,044
==============
===================================================================================================================================
Net Asset Value: Class A--Based on net assets of $396,198,106 and 17,983,361 shares
outstanding....................................................... $ 22.03
==============
Class B--Based on net assets of $611,363,727 and 29,073,279 shares
outstanding....................................................... $ 21.03
==============
Class C--Based on net assets of $70,158,953 and 3,368,566 shares
outstanding....................................................... $ 20.83
==============
Class D--Based on net assets of $114,183,258 and 5,196,347 shares
outstanding....................................................... $ 21.97
==============
===================================================================================================================================
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Statement of Operations for the Year Ended March 31, 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Interest and discount earned ...................................................... $ 5,676,368
Income Dividends (net of $4,275 foreign withholding tax) ................................. 2,607,177
--------------
(Notes 1c & 1d): Total income ...................................................................... 8,283,545
--------------
==========================================================================================================================
Expenses: Investment advisory fees (Note 2) ................................................. 6,981,534
Account maintenance and distribution fees--Class B (Note 2) ....................... 4,795,850
Transfer agent fees--Class B (Note 2) ............................................. 1,099,578
Transfer agent fees--Class A (Note 2) ............................................. 666,546
Account maintenance and distribution fees--Class C (Note 2) ....................... 493,922
Registration fees (Note 1e) ....................................................... 202,784
Account maintenance fees--Class D (Note 2) ........................................ 184,325
Transfer agent fees--Class D (Note 2) ............................................. 151,674
Transfer agent fees--Class C (Note 2) ............................................. 117,986
Printing and shareholder reports .................................................. 110,193
Custodian fees .................................................................... 103,708
Accounting services (Note 2) ...................................................... 98,897
Professional fees ................................................................. 73,285
Directors' fees and expenses ...................................................... 32,023
Pricing fees ...................................................................... 822
Other ............................................................................. 12,567
--------------
Total expenses .................................................................... 15,125,694
--------------
Investment loss--net .............................................................. (6,842,149)
--------------
==========================================================================================================================
Realized & Realized gain on investments--net ................................................. 123,972,911
Unrealized Gain on Change in unrealized appreciation on investments--net ............................. 165,606,065
Investments--Net --------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations .............................. $ 282,736,827
==============
==========================================================================================================================
</TABLE>
See Notes to Financial Statements.
44
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
For the Year
Ended March 31,
--------------------------------
Increase (Decrease) in Net Assets: 1998 1997
=============================================================================================================================
<S> <C> <C> <C>
Operations: Investment loss--net ................................................ $ (6,842,149) $ (1,854,279)
Realized gain on investments--net ................................... 123,972,911 129,452,799
Change in unrealized appreciation on investments--net ............... 165,606,065 (31,593,968)
-------------- --------------
Net increase in net assets resulting from operations ................ 282,736,827 96,004,552
-------------- --------------
=============================================================================================================================
Dividends & Investment income--net:
Distributions to Class A .......................................................... -- (626,240)
Shareholders Class D .......................................................... -- (58,931)
(Note 1f): Realized gain on investments--net:
Class A .......................................................... (39,789,579) (37,231,113)
Class B .......................................................... (57,233,633) (59,362,677)
Class C .......................................................... (5,666,588) (5,770,673)
Class D .......................................................... (8,409,567) (5,290,682)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders ....................................... (111,099,367) (108,340,316)
-------------- --------------
=============================================================================================================================
Capital Shares Net increase in net assets derived from capital share transactions .. 387,703,762 101,712,227
Transactions -------------- --------------
(Note 4):
=============================================================================================================================
Net Assets: Total increase in net assets ........................................ 559,341,222 89,376,463
Beginning of year ................................................... 632,562,822 543,186,359
-------------- --------------
End of year ......................................................... $1,191,904,044 $ 632,562,822
============== ==============
=============================================================================================================================
</TABLE>
See Notes to Financial Statements.
45
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------
Class A++
The following per share data and ratios have been derived -------------------------------------------------------
from information provided in the financial statements. For the Year Ended March 31,
-------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ....... $ 17.59 $ 17.77 $ 15.63 $ 15.88 $ 15.32
Operating -------- -------- -------- -------- -------
Performance: Investment income (loss)--net ............ (.03) .06 .24 .16 .10
Realized and unrealized gain on
investments--net ......................... 7.20 3.01 2.72 1.09 1.87
-------- -------- -------- -------- -------
Total from investment operations ......... 7.17 3.07 2.96 1.25 1.97
-------- -------- -------- -------- -------
Less dividends and distributions:
Investment income--net ................ -- (.06) (.23) (.10) .00+
Realized gain on investments--net ..... (2.73) (3.19) (.59) (1.40) (1.41)
-------- -------- -------- -------- -------
Total dividends and distributions ........ (2.73) (3.25) (.82) (1.50) (1.41)
-------- -------- -------- -------- -------
Net asset value, end of year ............. $ 22.03 $ 17.59 $ 17.77 $ 15.63 $ 15.88
======== ======== ======== ======== =======
========================================================================================================================
Total Investment Based on net asset value per share ....... 43.18% 17.62% 19.56% 8.85% 13.14%
Return:* ======== ======== ======== ======== =======
========================================================================================================================
Ratios to Average Expenses ................................. 1.02% 1.10% 1.12% 1.15% 1.17%
Net Assets: ======== ======== ======== ======== =======
Investment income (loss)--net ............ (.13%) .34% 1.43% 1.04% .62%
======== ======== ======== ======== =======
========================================================================================================================
Supplemental Net assets, end of year (in thousands) ... $396,198 $223,492 $181,297 $106,506 $78,804
Data: ======== ======== ======== ======== =======
Portfolio turnover ....................... 67.02% 97.87% 60.37% 59.79% 68.70%
======== ======== ======== ======== =======
Average commission rate paid+++ .......... $ .0523 $ .0514 $ .0503 -- --
======== ======== ======== ======== =======
========================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales
loads.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding.
+++ 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.
46
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
- -------------------------------------------------------------------------------------------------------------------------
Class B++
The following per share data and ratios have been derived --------------------------------------------------------
from information provided in the financial statements. For the Year Ended March 31,
--------------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ....... $ 16.91 $ 17.21 $ 15.16 $ 15.49 $ 15.01
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net ............ (.23) (.12) .07 .00+ (.06)
Realized and unrealized gain on
investments--net ......................... 6.90 2.90 2.64 1.06 1.83
-------- -------- -------- -------- --------
Total from investment operations ......... 6.67 2.78 2.71 1.06 1.77
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ................ -- -- (.07) .00+ .00+
Realized gain on investments--net ..... (2.55) (3.08) (.59) (1.39) (1.29)
-------- -------- -------- -------- --------
Total dividends and distributions ........ (2.55) (3.08) (.66) (1.39) (1.29)
-------- -------- -------- -------- --------
Net asset value, end of year ............. $ 21.03 $ 16.91 $ 17.21 $ 15.16 $ 15.49
======== ======== ======== ======== ========
=========================================================================================================================
Total Investment Based on net asset value per share ....... 41.72% 16.44% 18.37% 7.70% 12.03%
Return:* ======== ======== ======== ======== ========
=========================================================================================================================
Ratios to Average Expenses ................................. 2.05% 2.13% 2.15% 2.20% 2.19%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net ............ (1.16%) (.68%) .44% .02% (.41%)
======== ======== ======== ======== =======
=========================================================================================================================
Supplemental Net assets, end of year (in thousands) ... $611,364 $337,716 $310,174 $237,359 $112,768
Data: ======== ======== ======== ======== ========
Portfolio turnover ....................... 67.02% 97.87% 60.37% 59.79% 68.70%
======== ======== ======== ======== ========
Average commission rate paid+++ .......... $ .0523 $ .0514 $ .0503 -- --
======== ======== ======== ======== ========
=========================================================================================================================
</TABLE>
* Total investment returns exclude the effects of sales
loads.
+ Amount is less than $.01 per share.
++ Based on average shares outstanding.
+++ 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.
47
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
- ---------------------------------------------------------------------------------------------------------
Class C++
----------------------------------------
For the
Period
The following per share data and ratios have been derived For the Year Oct. 21,
from information provided in the financial statements. Ended March 31, 1994+ to
---------------------------- March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ..... $ 16.77 $ 17.10 $ 15.10 $ 15.06
Operating ------- ------- ------- -------
Performance: Investment income (loss)--net ............ (.23) (.13) .06 .01
Realized and unrealized gain on
investments--net ......................... 6.84 2.89 2.63 .65
------- ------- ------- -------
Total from investment operations ......... 6.61 2.76 2.69 .66
------- ------- ------- -------
Less dividends and distributions:
Investment income--net ................ -- -- (.10) (.06)
Realized gain on investments--net ..... (2.55) (3.09) (.59) (.56)
------- ------- ------- -------
Total dividends and distributions ........ (2.55) (3.09) (.69) (.62)
------- ------- ------- -------
Net asset value, end of period ........... $ 20.83 $ 16.77 $ 17.10 $ 15.10
======= ======= ======= =======
=========================================================================================================
Total Investment Based on net asset value per share ....... 41.74% 16.39% 18.34% 4.82%#
Return:** ======= ======= ======= =======
=========================================================================================================
Ratios to Average Expenses ................................. 2.06% 2.14% 2.16% 2.41%*
Net Assets: ======= ======= ======= =======
Investment income (loss)--net ............ (1.17%) (.70%) .36% .14%*
======= ======= ======= =======
=========================================================================================================
Supplemental Net assets, end of period (in thousands) . $70,159 $31,182 $26,920 $11,434
Data: ======= ======= ======= =======
Portfolio turnover ....................... 67.02% 97.87% 60.37% 59.79%
======= ======= ======= =======
Average commission rate paid+++ .......... $ .0523 $ .0514 $ .0503 --
======= ======= ======= =======
=========================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ 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.
48
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Financial Highlights (concluded)
- ---------------------------------------------------------------------------------------------------------
Class D++
----------------------------------------
For the
Period
The following per share data and ratios have been derived For the Year Oct. 21,
from information provided in the financial statements. Ended March 31, 1994+ to
---------------------------- March 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ..... $ 17.56 $ 17.74 $ 15.61 $ 15.52
Operating ------- ------- ------- -------
Performance: Investment income (loss)--net ............ (.08) .01 .19 .07
Realized and unrealized gain on
investments--net ......................... 7.18 3.02 2.73 .66
------- ------- ------- -------
Total from investment operations ......... 7.10 3.03 2.92 .73
------- ------- ------- -------
Less dividends and distributions:
Investment income--net ................ -- (.04) (.20) (.08)
Realized gain on investments--net ..... (2.69) (3.17) (.59) (.56)
------- ------- ------- -------
Total dividends and distributions ........ (2.69) (3.21) (.79) (.64)
------- ------- ------- -------
Net asset value, end of period ........... $ 21.97 $ 17.56 $ 17.74 $ 15.61
======= ======= ======= =======
=========================================================================================================
Total Investment Based on net asset value per share ....... 42.80% 17.38% 19.26% 5.13%#
Return:** ======= ======= ======= =======
=========================================================================================================
Ratios to Average Expenses ................................. 1.27% 1.35% 1.37% 1.61%*
Net Assets: ======= ======= ======= =======
Investment income (loss)--net ............ (.39%) .07% 1.15% .95%*
======= ======= ======= =======
=========================================================================================================
Supplemental Net assets, end of period (in thousands) . $114,183 $40,173 $24,795 $11,037
Data: ======= ======= ======= =======
Portfolio turnover ....................... 67.02% 97.87% 60.37% 59.79%
======= ======= ======= =======
Average commission rate paid+++ .......... $ .0523 $ .0514 $ .0503 --
======= ======= ======= =======
=========================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales
loads.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ 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.
49
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
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
PricingSM 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.
o Financial futures contracts--The Fund may purchase or sell financial 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.
o Options--The Fund is authorized to write put and covered call options and
purchase put and call options. When the Fund writes an option, an amount equal
to the premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium paid (or
received) is added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund realizes a
gain or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
50
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
o Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters such contracts. Premium or discount is amortized over the life of
the contracts.
o Foreign currency options and futures--The Fund may purchase or sell listed or
over-the-counter foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend 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. Accord ingly, current year's permanent
book/tax differences of $6,842,149 have been reclassified between undistributed
net realized capital gains and accumulated net investment loss. 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 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.
51
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended March 31, 1998, MLFD earned underwriting discounts and direct
commissions and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
- --------------------------------------------------------------------------------
MLFD MLPF&S
- --------------------------------------------------------------------------------
Class A ............................... $ 2,430 $ 33,772
Class D ............................... $28,752 $389,882
- --------------------------------------------------------------------------------
For the year ended March 31, 1998, MLPF&S received contingent deferred sales
charges of $989,090 and $17,130 relating to transactions in Class B and Class C
Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of $10,209
relating to transactions subject to front-end sales charge waivers in Class A
Shares.
In addition, MLPF&S received $75,023 in commissions on the execution of
portfolio security transactions for the Fund for the year ended March 31, 1998.
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, 1998 were $748,299,027 and $564,122,193, respectively. Net
realized gains for the year ended March 31, 1998 and net unrealized gains as of
March 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments ............... $123,972,911 $184,243,384
------------ ------------
Total ............................... $123,972,911 $184,243,384
============ ============
- --------------------------------------------------------------------------------
As of March 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $181,993,284, of which $242,340,779 related to appreciated
securities and $60,347,495 related to depreciated securities. At March 31, 1998,
the aggregate cost of investments for Federal income tax purposes was
$1,008,635,398.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions was
$387,703,762 and $101,712,227 for the years ended March 31, 1998 and March 31,
1997, respectively.
Transactions in capital shares for each class were as follows:
- --------------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................................. 12,330,033 $ 257,288,064
Shares issued to shareholders
in reinvestment of
distributions ................................ 1,893,034 37,311,964
------------- -------------
Total issued ................................. 14,223,067 294,600,028
Shares redeemed .............................. (8,945,193) (182,429,269)
------------- -------------
Net increase ................................. 5,277,874 $ 112,170,759
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 B Shares for the Year Dollar
Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................................. 14,692,305 $ 296,696,571
Shares issued to shareholders
in reinvestment of
distributions ................................ 2,741,379 51,728,861
------------- -------------
Total issued ................................. 17,433,684 348,425,432
Automatic conversion
of shares .................................... (436,386) (8,419,272)
Shares redeemed .............................. (7,898,958) (154,918,900)
------------- -------------
Net increase ................................. 9,098,340 $ 185,087,260
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
Automatic conversion
of shares .................................... (99,241) (1,783,849)
Shares redeemed .............................. (7,614,216) (135,651,522)
------------- -------------
Net increase ................................. 1,952,629 $ 34,201,240
============= =============
- --------------------------------------------------------------------------------
52
<PAGE>
Merrill Lynch Special Value Fund, Inc. March 31, 1998
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................................. 3,631,060 $ 72,740,230
Shares issued to shareholders
in reinvestment of
distributions ................................ 279,505 5,227,949
------------- -------------
Total issued ................................. 3,910,565 77,968,179
Shares redeemed .............................. (2,401,343) (47,574,675)
------------- -------------
Net increase ................................. 1,509,222 $ 30,393,504
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended March 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................................. 1,075,754 $ 19,224,090
Shares issued to shareholders
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 D Shares for the Year Dollar
Ended March 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .................................. 6,877,672 $ 144,426,705
Automatic conversion
of shares .................................... 418,523 8,419,272
Shares issued to shareholders
in reinvestment of
distributions ................................ 388,550 7,643,351
------------- -------------
Total issued ................................. 7,684,745 160,489,328
Shares redeemed .............................. (4,776,420) (100,437,089)
------------- -------------
Net increase ................................. 2,908,325 $ 60,052,239
============= =============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended 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
============= =============
- --------------------------------------------------------------------------------
53
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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.................................................... 9
Directors and Officers................................................... 9
Compensation of Directors................................................ 10
Management and Advisory Arrangements...................................... 11
Purchase of Shares........................................................ 13
Initial Sales Charge Alternatives--Class A and Class D Shares............ 13
Reduced Initial Sales Charges............................................ 14
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 17
Distribution Plans....................................................... 17
Limitations on the Payment of Deferred Sales Charges..................... 18
Redemption of Shares...................................................... 19
Deferred Sales Charges--Class B and Class C Shares....................... 20
Portfolio Transactions and Brokerage...................................... 21
Determination of Net Asset Value.......................................... 22
Shareholder Services...................................................... 23
Investment Account....................................................... 23
Automatic Investment Plans............................................... 24
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 24
Systematic Withdrawal Plans.............................................. 25
Exchange Privilege....................................................... 26
Dividends, Distributions and Taxes........................................ 28
Dividends and Distributions.............................................. 28
Taxes.................................................................... 29
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 30
Special Rules for Certain Foreign Currency Transactions.................. 31
Performance Data.......................................................... 32
General Information....................................................... 35
Description of Shares.................................................... 35
Computation of Offering Price Per Share.................................. 35
Independent Auditors..................................................... 36
Custodian................................................................ 36
Transfer Agent........................................................... 36
Legal Counsel............................................................ 36
Reports to Shareholders.................................................. 36
Additional Information................................................... 36
Independent Auditors' Report.............................................. 37
Financial Statements...................................................... 38
</TABLE>
Code #10256-0698
[LOGO] MERRILL LYNCH
Merrill Lynch
Special Value Fund, Inc.
[Artwork]
STATEMENT OF
ADDITIONAL
INFORMATION
June 30, 1998
- -------------
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, 1998.
Contained in Part B:
Schedule of Investments, as of March 31, 1998.
Statement of Assets and Liabilities, as of March 31, 1998.
Statement of Operations for the year ended March 31, 1998.
Statements of Changes in Net Assets for each of the years in the two-
year period ended March 31, 1998.
Financial Highlights for each of the years in the five-year period
ended March 31, 1998.
(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.(d)
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).(e)
(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).(e)
(d) --Form of Class D Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(e)
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.(e)
(c) --Form of Class D Distribution Plan of the Registrant and Class D
Distribution Plan Sub-Agreement.(e)
</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.(f)
</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 Registrant's
Registration Statement onJuly 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. 23 to the Registrant's
Registration Statement onJuly 18, 1997.
(e) Previously filed with Post-Effective Amendment No. 20 to the Registrant's
Registration Statement on October 11, 1994.
(f) 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 APRIL 30, 1998*
-------------- ---------------
<S> <C>
Class A Common Stock, par value $0.10 per share............ 50,316
Class B Common Stock, par value $0.10 per share............ 59,447
Class C Common Stock, par value $0.10 per share............ 8,307
Class D Common Stock, par value $0.10 per share............ 9,438
</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 the investment adviser
for the following open-end registered investment companies: CBA Money Fund,
CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State 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 Puerto Rico Tax-Exempt 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., Corporate High Yield
Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings New
Jersey Insured Fund, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New
York Insured 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
C-3
<PAGE>
Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc. and Worldwide DollarVest, Inc.
MLAM acts as the investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch 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 Growth 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 Intermediate Government Bond Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Real
Estate Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Series
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch 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: 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 Advisors 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 and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665.
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, Inc. ("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 North Tower, World
Financial Center, 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 and Director or
Trustee, 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
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION BUSINESS, PROFESSION,
NAME WITH INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ----------------------- ----------------------
<C> <C> <S>
Arthur Zeikel............... Chairman Chairman of MLAM;
President of the
Investment Adviser and
MLAM from 1977 to 1997;
Chairman and Director
of Princeton Services;
President of Princeton
Services from 1993 to
1997; Executive Vice
President of ML & Co.
Jeffrey M. Peek............. President President of MLAM since
1997; President and
Director of Princeton
Services since 1997;
Executive Vice
President of ML & Co.;
Managing Director and
Co-Head of the
Investment Banking
Division of Merrill
Lynch since 1997;
Senior Vice President
and Director of Global
Securities and
Economics Division of
Merrill Lynch from 1995
to 1997.
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
Linda L. Federici........... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Vincent R. Giordano......... Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Elizabeth A. Griffin........ Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
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
Ronald M. Kloss............. Senior Vice President Senior Vice President of
MLAM; Senior Vice
President of Princeton
Services
Debra W. Landsman-Yaros..... Senior Vice President Senior Vice President of
FAM; Vice President of
MLFD; Senior Vice
President 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
Richard L. Reller........... Senior Vice President Senior Vice President of
MLAM; President of
Princeton Services;
Director of MLFD
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION BUSINESS, PROFESSION,
NAME WITH INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ----------------------- ----------------------
<C> <C> <S>
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
Gregory D. Upah............. Senior Vice President Senior Vice President of
MLAM; Senior Vice
President at Princeton
Services
Ronald L. Welburn........... 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 the
sub-adviser for the following registered investment companies: The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Consults International Portfolio, Merrill Lynch Convertible
Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch 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 Growth 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 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 Real
Estate 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., The Municipal Fund Accumulation
Program, Inc., and Worldwide DollarVest Fund, Inc. The address of each of
these registered investment companies is P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of MLAM U.K. is 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,
1996, 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 Chairman of the Investment
Adviser and FAM; President of
the Investment Adviser and FAM
from 1977 to 1997; Chairman
and Director of Princeton
Services; President of
Princeton Services from 1993
to 1997; Executive Vice
President of ML & Co.
Alan J. Albert.............. Senior Managing Vice President of the
Director Investment Adviser
Nicholas C.D. Hall.......... Director Director of Merrill Lynch
Europe PLC; General Counsel of
Merrill Lynch International
Private Banking Group
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<C> <C> <S>
Gerald M. Richard........... Senior Vice President Senior Vice President and
Treasurer of the Investment
Adviser 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.
(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
Richard L. Reller....... Director None
Thomas J. Verage........ 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
Debra W. Landsman- Vice President None
Yaros..................
Michelle T. Lau......... Vice President None
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, MLFDS, 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 the caption
C-7
<PAGE>
"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-8
<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 30th day of June,
1998.
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)
Gerald M. Richard* Treasurer (Principal Financial
- ------------------------------------ and Accounting
(GERALD M. RICHARD) Officer)
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)
Fred G. Weiss Director
- ------------------------------------
(FRED G. WEISS)
/s/ Gerald M. Richard
*By: _______________________________ June 30, 1998
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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> 001
<NAME> MERRILL LYNCH SPECIAL VALUE FUND, INC. CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 1006385298
<INVESTMENTS-AT-VALUE> 1190628682
<RECEIVABLES> 9797363
<ASSETS-OTHER> 126244
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1200552289
<PAYABLE-FOR-SECURITIES> 4114232
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4534013
<TOTAL-LIABILITIES> 8648245
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 949114669
<SHARES-COMMON-STOCK> 17983361
<SHARES-COMMON-PRIOR> 12705487
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 58545991
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 184243384
<NET-ASSETS> 396198106
<DIVIDEND-INCOME> 2607177
<INTEREST-INCOME> 5676368
<OTHER-INCOME> 0
<EXPENSES-NET> (15125694)
<NET-INVESTMENT-INCOME> (6842149)
<REALIZED-GAINS-CURRENT> 123972911
<APPREC-INCREASE-CURRENT> 165606065
<NET-CHANGE-FROM-OPS> 282736827
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (39789579)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12330033
<NUMBER-OF-SHARES-REDEEMED> (8945193)
<SHARES-REINVESTED> 1893034
<NET-CHANGE-IN-ASSETS> 559341222
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 52514596
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6981534
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15125694
<AVERAGE-NET-ASSETS> 328164022
<PER-SHARE-NAV-BEGIN> 17.59
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> 7.20
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (2.73)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.03
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH SPECIAL VALUE FUND, INC. CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 1006385298
<INVESTMENTS-AT-VALUE> 1190628682
<RECEIVABLES> 9797363
<ASSETS-OTHER> 126244
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1200552289
<PAYABLE-FOR-SECURITIES> 4114232
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4534013
<TOTAL-LIABILITIES> 8648245
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 949114669
<SHARES-COMMON-STOCK> 29073279
<SHARES-COMMON-PRIOR> 19974939
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 58545991
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 184243384
<NET-ASSETS> 611363727
<DIVIDEND-INCOME> 2607177
<INTEREST-INCOME> 5676368
<OTHER-INCOME> 0
<EXPENSES-NET> (15125694)
<NET-INVESTMENT-INCOME> (6842149)
<REALIZED-GAINS-CURRENT> 123972911
<APPREC-INCREASE-CURRENT> 165606065
<NET-CHANGE-FROM-OPS> 282736827
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (57233633)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 14692305
<NUMBER-OF-SHARES-REDEEMED> (8335344)
<SHARES-REINVESTED> 2741379
<NET-CHANGE-IN-ASSETS> 559341222
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 52514596
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6981534
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15125694
<AVERAGE-NET-ASSETS> 479584999
<PER-SHARE-NAV-BEGIN> 16.91
<PER-SHARE-NII> (.23)
<PER-SHARE-GAIN-APPREC> 6.90
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (2.55)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.03
<EXPENSE-RATIO> 2.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH SPECIAL VALUE FUND, INC. CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 1006385298
<INVESTMENTS-AT-VALUE> 1190628682
<RECEIVABLES> 9797363
<ASSETS-OTHER> 126244
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1200552289
<PAYABLE-FOR-SECURITIES> 4114232
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4534013
<TOTAL-LIABILITIES> 8648245
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 949114669
<SHARES-COMMON-STOCK> 3368566
<SHARES-COMMON-PRIOR> 1859344
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 58545991
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 184243384
<NET-ASSETS> 70158953
<DIVIDEND-INCOME> 2607177
<INTEREST-INCOME> 5676368
<OTHER-INCOME> 0
<EXPENSES-NET> (15125694)
<NET-INVESTMENT-INCOME> (6842149)
<REALIZED-GAINS-CURRENT> 123972911
<APPREC-INCREASE-CURRENT> 165606065
<NET-CHANGE-FROM-OPS> 282736827
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (5666588)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3631060
<NUMBER-OF-SHARES-REDEEMED> (2401343)
<SHARES-REINVESTED> 279505
<NET-CHANGE-IN-ASSETS> 559341222
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 52514596
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6981534
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15125694
<AVERAGE-NET-ASSETS> 49392256
<PER-SHARE-NAV-BEGIN> 16.77
<PER-SHARE-NII> (.23)
<PER-SHARE-GAIN-APPREC> 6.84
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (2.55)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.83
<EXPENSE-RATIO> 2.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH SPECIAL VALUE FUND, INC. CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 1006385298
<INVESTMENTS-AT-VALUE> 1190628682
<RECEIVABLES> 9797363
<ASSETS-OTHER> 126244
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1200552289
<PAYABLE-FOR-SECURITIES> 4114232
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4534013
<TOTAL-LIABILITIES> 8648245
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 949114669
<SHARES-COMMON-STOCK> 5196347
<SHARES-COMMON-PRIOR> 2288022
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 58545991
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 184243384
<NET-ASSETS> 114183258
<DIVIDEND-INCOME> 2607177
<INTEREST-INCOME> 5676368
<OTHER-INCOME> 0
<EXPENSES-NET> (15125694)
<NET-INVESTMENT-INCOME> (6842149)
<REALIZED-GAINS-CURRENT> 123972911
<APPREC-INCREASE-CURRENT> 165606065
<NET-CHANGE-FROM-OPS> 282736827
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (8409567)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7296195
<NUMBER-OF-SHARES-REDEEMED> (4776420)
<SHARES-REINVESTED> 388550
<NET-CHANGE-IN-ASSETS> 559341222
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 52514596
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6981534
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15125694
<AVERAGE-NET-ASSETS> 73729945
<PER-SHARE-NAV-BEGIN> 17.56
<PER-SHARE-NII> (.08)
<PER-SHARE-GAIN-APPREC> 7.18
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (2.69)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.97
<EXPENSE-RATIO> 1.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Special Value Fund, Inc.
We consent to the use in Post-Effective Amendment No. 24 to Registration
Statement No. 2-60836 of our report dated May 8, 1998 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
June 29, 1998
