<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 1997
SECURITIES ACT FILE NO. 2-77068
INVESTMENT COMPANY ACT FILE NO. 811-3450
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. 18
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 20
(Check appropriate box or boxes)
----------------
MERRILL LYNCH PHOENIX FUND, INC.
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH PHOENIX 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. COUNSEL FOR THE FUND:
BROWN & WOOD LLP
MERRILL LYNCH ASSET MANAGEMENT, L.P. ONE WORLD TRADE CENTER
P.O. BOX 9011
NEW YORK, NY 10048-0557
PRINCETON, NJ 08543-9011 ATTN: THOMAS R. SMITH, JR.
----------------
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 PHOENIX FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------ --------
<C> <S> <C>
PART A
Item 1. Cover Page.............. Cover Page
Item 2. Synopsis................ Not Applicable
Condensed Financial
Item 3. Information............ Financial Highlights
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
Securities............. Cover Page; Additional Information
Item 7. Purchase of Securities Cover Page; Merrill Lynch Select
Being Offered.......... Pricing(SM) System; Fee Table; Purchase
of Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Merrill Lynch Select Pricing(SM) System;
Repurchase............. Fee Table; Purchase of Shares;
Redemption of Shares
Item 9. Pending Legal
Proceedings............ Not Applicable
PART B
Item 10. Cover Page.............. Cover Page
Item 11. Table of Contents....... Back Cover Page
Item 12. General Information and
History................ Not Applicable
Item 13. Investment Objectives
and Policies........... Investment Objective and Policies
Item 14. Management of the Fund.. Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities............. Management of the Fund
Item 16. Investment Advisory and 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
Securities............. General Information
Item 19. Purchase, Redemption and
Pricing of Securities Purchase of Shares; Redemption of
Being Offered.......... Shares; Determination of Net Asset
Value; Shareholder Services
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
NOVEMBER 14, 1997
MERRILL LYNCH PHOENIX FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
Merrill Lynch Phoenix Fund, Inc. (the "Fund") is a diversified, open-end
investment company seeking long-term growth of capital by investing in a
diversified portfolio of equity and fixed income securities, including
municipal securities, of issuers in weak financial condition or experiencing
poor operating results that management of the Fund believes are undervalued
relative to management's assessment of the current or prospective condition of
such issuer. The investment policy of the Fund is based upon the belief that
the prices of securities of troubled issuers are often depressed to a greater
extent than warranted by the condition of the issuer and that, while investment
in such securities involves a high degree of risk, such investments offer the
opportunity for significant capital gains. Current income is not necessarily a
factor in the selection of investments. There can be no assurance that the
objective of the Fund will be realized. For more information on the Fund's
investment objective and policies, please see "Investment Objective and
Policies" on page 11. Investment in the Fund is speculative and involves a high
degree of risk and is designed for investors who do not require current income
and who can afford the accompanying risk. See "Special Considerations."
----------------
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 Pricing(SM) 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 which have entered into dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except that for retirement plans
the minimum initial purchase is $100 and the minimum subsequent purchase is $1,
and for participants in certain fee-based programs the minimum initial purchase
is $500 and the minimum subsequent purchase is $50. Merrill Lynch may charge
its customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and redemptions made directly through 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 SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated November 14, 1997 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing the
Fund at the above telephone number or address. The Commission maintains a web
site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information about 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 TRANS-
ACTION 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 pro-
ceeds, whichever 4.0% during the 1.0% for one
is lower)....... None(d) first year, year(f) None(d)
decreasing 1.0% annually
thereafter to 0.0% after
the fourth year(e)
Exchange Fee..... None None None None
ANNUAL FUND OPER-
ATING EXPENSES
(AS A PERCENTAGE
OF AVERAGE NET
ASSETS)
Investment Advi-
sory Fees(g).... 0.98% 0.98% 0.98% 0.98%
12b-1 Fees(h):
Account Mainte-
nance 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
Custodial Fees... 0.01% 0.01% 0.01% 0.01%
Shareholder Ser-
vicing
Costs(i)........ 0.19% 0.21% 0.23% 0.19%
Other............ 0.08% 0.09% 0.08% 0.09%
----- ---- ----- -----
Total Other Ex- 0.28% 0.31% 0.32% 0.29%
penses......... ----- ---- ----- -----
Total Fund Oper- 1.26% 2.29% 2.30% 1.52%
ating Expenses.. ===== ==== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 21 and "Shareholder
Services--Fee-Based Programs"--page 32.
(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 23.
(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 21.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 32.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 32.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 32.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
16.
(h) See "Purchase of Shares--Distribution Plans"--page 26.
(i) See "Management of the Fund--Transfer Agency Services"--page 18.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
---------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the
following expenses on a
$1,000 investment
including the maximum
$52.50 initial sales
charge (Class A and Class
D shares only) and
assuming (1) the Total
Fund Operating Expenses
for each class set forth
on page 2, (2) a 5%
annual return throughout
the periods and (3)
redemption at the end of
the period:
Class A................. $ 65 $ 90 $ 118 $ 197
Class B ................ $ 63 $ 92 $ 123 $ 243*
Class C ................ $ 33 $ 72 $ 123 $ 264
Class D................. $ 67 $ 98 $ 131 $ 224
An investor would pay the
following expenses on the
same $1,000 investment
assuming no redemption at
the end of the period:
Class A................. $ 65 $ 90 $ 118 $ 197
Class B ................ $ 23 $ 72 $ 123 $ 243*
Class C ................ $ 23 $ 72 $ 123 $ 264
Class D................. $ 67 $ 98 $ 131 $ 224
</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 RATE OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B 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.
("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 registered investment companies advised by Merrill Lynch Asset
Management, L.P. ("MLAM") or
3
<PAGE>
its affiliate, Fund Asset Management, L.P. ("FAM" or the "Investment
Adviser"). 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 the Class D shares, are imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges do not affect
the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares are calculated in the same manner at the same time and will
differ only to the extent that account maintenance and distribution fees and
any incremental transfer agency costs relating to a particular class are borne
exclusively by that class. 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 4 years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D Shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- ------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>
4
<PAGE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. Contingent deferred sales charges ("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
$1,000,000 or more may not be subject to an initial sales charge but, if
the initial sales charge is waived, may be subject to a 1.0% CDSC if
redeemed within one year. Such CDSC may be waived in connection with
certain fee-based programs. A .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 was 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 of the Fund. Investors who currently own Class A
shares of the Fund in a shareholder account are entitled to purchase
additional Class A shares of the Fund 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 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
redemptions to fund participation in certain fee-based programs.
Sales charges also are reduced under a right of accumulation that
takes into account the investor's holdings of all classes of all
MLAM-advised mutual funds. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%,
an ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class B shares, and a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in
connection with certain fee-based programs. Approximately eight years
after issuance, Class B shares will convert automatically into Class
D shares of the Fund, which are subject to an account maintenance fee
but no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the
5
<PAGE>
shares exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares will
occur at least once a month on the basis of the relative net asset values
of the shares of the two classes on the conversion date, without the
imposition of any sales load, fee or other charge. Conversion of Class B
shares to Class D shares will not be deemed a purchase or sale of the
shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares, and the conversion and holding periods for certain
retirement plans are modified as described under "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75%, of the Fund's average net
assets attributable to Class C shares. Class C shares are also subject
to a 1.0% CDSC if they are redeemed within one year of purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor who purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived such purchases may be subject to a CDSC of 1.0%
if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. The
schedule of initial sales charges and reductions for Class D shares is
the same as the schedule for Class A shares, except that there is no
waiver for purchases in connection with certain fee-based programs.
Class D shares also will be issued upon conversion of Class B shares
as described above under "Class B." See "Purchase of Shares--Initial
Sales Charge Alternatives--Class A and Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing (SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in
6
<PAGE>
connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A
or Class D shares, because over time the accumulated ongoing account
maintenance and distribution fees on Class B or Class C shares may exceed the
initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors who 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 that 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 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 conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the year ended July
31, 1997 and the independent auditors' report thereon are included in the
Statement of Additional Information. 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.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JULY 31,
--------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN 1997+ 1996+ 1995+ 1994 1993 1992 1991 1990 1989 1988
NET ASSET VALUE: -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year....... $ 13.37 $ 13.44 $ 13.31 $ 13.75 $ 11.40 $ 11.13 $ 12.37 $ 13.41 $ 13.55 $ 15.14
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.. .10 .13 .17 .03 .02 .06 .23 .37 .52 .38
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net..................... 3.46 .51 1.47 1.18 3.06 1.34 .55 (.47) 1.46 --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations.............. 3.56 .64 1.64 1.21 3.08 1.40 .78 (.10) 1.98 .38
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net.. (.06) (.13) (.11) -- (.03) (.09) (.40) (.51) (.33) (.42)
Realized gain on
investments--net........ (1.55) (.58) (1.40) (1.65) (.70) (1.04) (1.62) (.43) (1.79) (1.55)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions........... (1.61) (.71) (1.51) (1.65) (.73) (1.13) (2.02) (.94) (2.12) (1.97)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year.................... $ 15.32 $ 13.37 $ 13.44 $ 13.31 $ 13.75 $ 11.40 $ 11.13 $ 12.37 $ 13.41 $ 13.55
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset value
per share............... 29.78% 4.78% 13.91% 9.36% 28.96% 14.54% 10.35% (.93%) 17.48% 4.64%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... -- 1.24% 1.31% 1.22% 1.25% 1.35% 1.42% 1.32% 1.22% 1.17%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Expenses................ 1.26% 1.24% 1.31% 1.22% 1.25% 1.35% 1.42% 1.32% 1.35% 1.47%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income--net.. .77% .92% 1.40% .48% .28% .60% 2.22% 2.77% 4.60% 2.90%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands).......... $301,936 $279,351 $286,258 $255,856 $197,995 $140,323 $132,623 $151,027 $179,839 $118,890
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 81.46% 87.66% 70.36% 63.95% 67.57% 79.68% 72.12% 54.98% 43.45% 50.63%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Average commission rate
paid++.................. $ .0479 $ .0481 -- -- -- -- -- -- -- --
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----
+ Based on average number of shares outstanding during the year.
++ 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. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
* Total investment returns exclude the effects of sales loads.
8
<PAGE>
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JULY 31,
--------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN 1997+ 1996+ 1995+ 1994+ 1993 1992 1991 1990 1989++
NET ASSET VALUE: -------- -------- -------- -------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 12.99 $ 13.12 $ 13.02 $ 13.46 $ 11.25 $ 11.04 $ 12.26 $ 13.32 $ 11.96
-------- -------- -------- -------- -------- -------- ------- ------- --------
Investment income
(loss)--net............. (.03) (.01) .04 (.07) (.02) (.05) .11 .22 .34
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net..................... 3.35 .50 1.45 1.11 2.93 1.33 .56 (.44) 1.25
-------- -------- -------- -------- -------- -------- ------- ------- --------
Total from investment
operations.............. 3.32 .49 1.49 1.04 2.91 1.28 .67 (.22) 1.59
-------- -------- -------- -------- -------- -------- ------- ------- --------
Less dividends and
distributions:
Investment income--net.. -- (.04) (.02) -- -- (.03) (.27) (.41) (.14)
Realized gain on
investments--net........ (1.49) (.58) (1.37) (1.48) (.70) (1.04) (1.62) (.43) (.09)
-------- -------- -------- -------- -------- -------- ------- ------- --------
Total dividends and
distributions........... (1.49) (.62) (1.39) (1.48) (.70) (1.07) (1.89) (.84) (.23)
-------- -------- -------- -------- -------- -------- ------- ------- --------
Net asset value, end of
period.................. $ 14.82 $ 12.99 $ 13.12 $ 13.02 $ 13.46 $ 11.25 $ 11.04 $ 12.26 $ 13.32
======== ======== ======== ======== ======== ======== ======= ======= ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 28.48% 3.67% 12.83% 8.21% 27.66% 13.35% 9.14% (1.86%) 13.56%#
======== ======== ======== ======== ======== ======== ======= ======= ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... -- 2.26% 2.34% 2.24% 2.27% 2.37% 2.45% 2.36% 2.30%*
======== ======== ======== ======== ======== ======== ======= ======= ========
Expenses................ 2.29% 2.26% 2.34% 2.24% 2.27% 2.37% 2.45% 2.36% 2.37%*
======== ======== ======== ======== ======== ======== ======= ======= ========
Investment income
(loss)--net............. (.26%) (.11%) .37% (.51%) (.73%) (.46%) 1.19% 1.74% 4.11%*
======== ======== ======== ======== ======== ======== ======= ======= ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $337,022 $381,808 $414,886 $362,129 $209,534 $104,313 $79,848 $92,700 $109,003
======== ======== ======== ======== ======== ======== ======= ======= ========
Portfolio turnover...... 81.46% 87.66% 70.36% 63.95% 67.57% 79.68% 72.12% 54.98% 43.45%
======== ======== ======== ======== ======== ======== ======= ======= ========
Average commission rate
paid##.................. $.0479 $ .0481 -- -- -- -- -- -- --
======== ======== ======== ======== ======== ======== ======= ======= ========
</TABLE>
- ----
* Annualized.
**Total investment returns exclude the effects of sales loads.
# 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. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
+
Based on the average number of shares outstanding during the year.
++
Class B shares commenced operations on October 21, 1988.
9
<PAGE>
<TABLE>
<CAPTION>
CLASS C CLASS D
------------------------------- -----------------------------
FOR THE FOR THE
PERIOD PERIOD
OCTOBER 21, OCTOBER 21,
FOR THE YEAR 1994+ TO FOR THE YEAR 1994+ TO
ENDED JULY 31, JULY 31, ENDED JULY 31, JULY 31,
----------------- ----------- ---------------- -----------
INCREASE (DECREASE) IN 1997++ 1996++ 1995++ 1997++ 1996++ 1995++
NET ASSET VALUE: ------- ------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 12.92 $ 13.07 $ 12.31 $ 13.35 $ 13.43 $ 12.57
------- ------- ------- ------- ------- -------
Investment income
(loss)--net............. (.04) (.02) .03 .07 .09 .11
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions--net....... 3.33 51 1.21 3.45 .51 1.25
------- ------- ------- ------- ------- -------
Total from investment
operations.............. 3.29 .49 1.24 3.52 .60 1.36
------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment income--net.. -- (.06) (.05) (.04) (.10) (.07)
Realized gain on
investments--net........ (1.49) (.58) (.43) (1.54) (.58) (.43)
------- ------- ------- ------- ------- -------
Total dividends and
distributions........... (1.49) (.64) (.48) (1.58) (.68) (.50)
------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $ 14.72 $ 12.92 $ 13.07 $ 15.29 $ 13.35 $ 13.43
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 28.39% 3.69% 10.99%# 29.44% 4.50% 11.72%#
======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... -- 2.27% 2.39%* -- 1.48% 1.60%*
======= ======= ======= ======= ======= =======
Expenses................ 2.30% 2.27% 2.39%* 1.52% 1.48% 1.60%*
======= ======= ======= ======= ======= =======
Investment income
(loss)--net............. (.27%) (.12%) .34%* .54% .67% 1.11%*
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $14,448 $15,821 $11,775 $85,409 $48,873 $36,388
======= ======= ======= ======= ======= =======
Portfolio turnover...... 81.46% 87.66% 70.36% 81.46% 87.66% 70.36%
======= ======= ======= ======= ======= =======
Average commission rate
paid##.................. $.0479 $ .0481 -- $.0479 $ .0481 --
======= ======= ======= ======= ======= =======
</TABLE>
- ----
* Annualized.
**Total investment returns exclude the effects of sales loads.
# 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. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted into US
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
+ Commencement of operations.
++Based on the average number of shares outstanding during the year.
10
<PAGE>
SPECIAL CONSIDERATIONS
FINANCIAL AND MARKET RISKS
The Fund may invest in companies or institutions that have substantial
capital needs or negative net worth or that are involved in bankruptcy or
reorganization proceedings. The Fund may also invest in companies whose
earnings have been severely depressed by periods of unfavorable operating
conditions. Investments of this type involve a high degree of financial and
market risks that can result in substantial or at times even total losses.
Among the problems involved in investments in troubled issuers is the fact that
it frequently may be difficult to obtain information as to the conditions of
such issuers. The market prices of such securities are also subject to abrupt
and erratic market movements and above average price volatility, and the spread
between the bid and asked prices of such securities may be greater than
normally expected. It may take a number of years for the market price of such
securities to reflect their intrinsic value.
DISPOSITION OF PORTFOLIO SECURITIES
It is anticipated that many of the portfolio securities of the Fund may not
be widely traded, and that the Fund's position in such securities may be
substantial in relation to the market for the securities. As a result, the Fund
may experience time delays and incur costs and possible losses in connection
with the sale of such securities. In addition, through service on creditors'
committees or in other special situations the Fund may gain access to
information which would preclude it from trading in particular portfolio
securities. Accordingly, it would under certain circumstances be difficult for
the Fund to meet redemptions. The Fund may, when management deems it
appropriate, maintain a reserve in liquid assets which it considers adequate to
meet anticipated redemptions. In addition, the Fund will have limited authority
to borrow amounts up to 20% of its total assets as a temporary measure to meet
redemptions. The shares of the Fund may be redeemed at any time at their next
determined net asset value. See "Redemption of Shares". In light of the types
of securities in which the Fund invests, the Fund is not an appropriate
investment for investors seeking liquidity or short-term profits.
SUITABILITY
The economic benefit from an investment in the Fund depends upon many factors
beyond the control of the Fund, the Investment Adviser and its affiliates.
Because of its emphasis on securities involving a high degree of financial and
market risks, the Fund should be considered as a vehicle for diversification
and not as a balanced investment program. The suitability for any particular
investor of a purchase of shares of the Fund will depend upon, among other
things, such investor's investment objectives and such investor's ability to
accept speculative risks.
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 equity and fixed income securities,
including municipal securities, of issuers in weak financial condition or
experiencing poor operating results that management of the Fund believes are
undervalued
11
<PAGE>
relative to management's assessment of the current or prospective condition of
such issuers. The investment objective of the Fund is based upon the belief
that the pricing mechanism of the securities markets lacks perfect efficiency
so that the prices of securities of troubled issuers are often depressed to a
greater extent than warranted by the condition of the issuer and that, while
investment in such securities involves a high degree of risk, such investments
offer the opportunity for significant capital gains. Current income is not
necessarily a factor in the selection of investments. The investment objective
of the Fund described in this paragraph is a fundamental policy of the Fund and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940, as amended (the "Investment Company Act").
Investment in securities of issuers in weak financial condition or
experiencing poor operating results involves a high degree of financial and
market risk that can result in substantial or at times even total losses. The
Fund may invest in companies or institutions that have substantial capital
needs or negative net worth, or that are involved in bankruptcy or
reorganization proceedings. The Fund will also invest in companies whose
earnings have been severely depressed by periods of unfavorable operating
conditions. Among the problems involved in investments in troubled issuers is
the fact that it frequently may be difficult to obtain information as to the
condition of such issuers. The market prices of such securities are also
subject to abrupt and erratic market movements and above average price
volatility, and the spread between the bid and asked prices of such securities
may be greater than normally expected. It may take a number of years for the
market price of such securities to reflect their intrinsic value.
The Fund expects to invest in securities of issuers that are encountering a
variety of financial or earnings problems and representing distinct types of
risk. The Fund's investments in equity or fixed income securities of companies
or institutions in weak financial condition may include issuers with
substantial capital needs or negative net worth or issuers that are, have been
or may become involved in bankruptcy or reorganization proceedings. Issuers
experiencing poor operating results may include companies whose earnings have
been severely depressed by periods of unfavorable operating conditions or which
face special competitive or product obsolescence problems. Issuers with poor
operating results will not necessarily be in weak financial condition.
The Fund may invest in high yield bonds. High yield bonds, commonly referred
to as "junk bonds," are regarded as being predominantly speculative as to the
issuer's ability to make payments of principal and interest. Investment in such
securities involves substantial risk. High yield bonds may be issued by less
creditworthy companies or by larger, highly leveraged companies, and are
frequently issued in corporate restructurings such as mergers and leveraged
buy-outs. Such securities are particularly vulnerable to adverse changes in the
issuer's industry and in general economic conditions. High yield bonds
frequently are junior obligations of their issuers, so that in the event of the
issuer's bankruptcy, claims of the holders of high yield bonds will be
satisfied only after satisfaction of the claims of senior securityholders. In
an effort to minimize the risk of issuer default or bankruptcy, the Fund
diversifies its holdings among many issuers. However, there can be no assurance
that diversification will protect the Fund from widespread defaults brought
about by a sustained economic downturn. The Fund has no prescribed limit on the
ratings of the high yield bonds in which it may invest. It is conceivable that
a considerable portion of such bonds could be rated Caa, Ca or C by Moody's
Investors Service, Inc. or CCC, CC or C by Standard & Poor's Corporation
("Standard & Poor").
12
<PAGE>
Such ratings indicate the presence of speculative elements with respect to the
payment of principal or interest, or the imminent possibility or existence of a
default.
High yield bonds tend to be more volatile than higher-rated fixed income
securities, so that adverse economic events may have a greater impact on the
prices of high yield bonds than on higher-rated fixed-income securities. Like
higher-rated fixed-income securities, high yield bonds are generally purchased
and sold through dealers who make a market in such securities for their own
accounts. However, there are fewer dealers in the high yield bond market, which
may be less liquid than the market for higher-rated fixed-income securities,
even under normal economic conditions. Also, there may be significant
disparities in the prices quoted for high yield bonds by various dealers.
Adverse economic conditions or investor perceptions (whether or not based on
economic fundamentals) may impair the liquidity of this market, and may cause
the prices the Fund receives for its high yield bonds to be reduced, or the
Fund may experience difficulty in liquidating a portion of its portfolio. Under
such conditions, judgment may play a greater role in valuing certain of the
Fund's securities than in the case of securities trading in a more liquid
market.
The table below shows the dollar-weighted market value, by Standard & Poor's
rating category, of the bonds held by the Fund at July 31, 1997:
<TABLE>
<CAPTION>
% TOTAL
RATING ASSETS
------ -------
<S> <C>
B................................................................ 0%
CCC.............................................................. 55.2
C................................................................ 6.3
D................................................................ 14.5
Not Rated*....................................................... 24.0
----
100%
====
</TABLE>
- --------
* Bonds which are not rated by Standard & Poor's. Such bonds may be rated by
nationally recognized statistical rating organizations other than Standard &
Poor's, or may not be rated by any of such organizations. With respect to the
percentage of the Fund's assets invested in such securities, the Fund's
Investment Adviser believes that 0% are of comparable quality to bonds rated
B, 64% are of comparable quality to bonds rated CCC, and 3.6% are of
comparable quality to bonds rated D. This determination is based on the
Investment Adviser's own internal evaluation and does not necessarily reflect
how such securities would be rated by Standard & Poor's if it were to rate the
securities.
For a description of the above referenced ratings, see the appendix to the
Prospectus. The Fund has established no rating criteria for the fixed income
securities in which it may invest and such securities may not be rated at all
for creditworthiness. The above percentages are as of its most recent fiscal
year; the rating composition of the portfolio will change over time.
The Fund may also invest in fixed income securities issued by states,
municipalities, local governments and their agencies and authorities whose
interest is exempt from Federal income taxes. The Fund has established no
rating criteria for such fixed income securities. The prices of such tax-exempt
securities may
13
<PAGE>
be depressed for a variety of financial or political reasons, such as concern
as to the fiscal integrity of the issuer and pending litigation or legislation
that may affect future revenues of the issuer. Although the Fund may receive
tax-exempt income on such securities, it is not anticipated that any portion of
the dividends paid by the Fund will qualify for tax-exempt treatment.
The Fund may invest up to 20% of its total assets in equity and fixed income
securities of foreign issuers in weak financial condition or experiencing poor
operating results. In addition to the risks inherent in investing in troubled
issuers, investments in securities of foreign issuers involve certain other
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. 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. To the extent such investments
are subject to withholding or other taxes or to regulations relating to
repatriation of assets, the Fund's distributable income will be reduced. The
prices of securities in different countries are subject to different economic,
financial, political and social factors.
From time to time, the Fund may invest in securities the disposition of which
is subject to legal restrictions imposed by the Securities Act of 1933, as
amended (the "Securities Act"), on the resale of securities acquired in private
placements. If registration of such securities under the Securities Act is
required, such registration may not be readily accomplished, and if such
securities may be sold without registration, such resale may be permissible
only in limited quantities. In either event, the Fund may not be able to sell
its restricted securities at a time which, in the judgment of the Investment
Adviser, would be most opportune.
The Investment Adviser is responsible for the management of the Fund's
portfolio and makes portfolio decisions based upon its own research analysis
supplemented by research information provided by other sources. The basic
orientation of the Fund's investment policies is such that many of the
portfolio securities may have less than favorable research ratings from
research analysts. The Investment Adviser makes extensive use of investment
research information provided by unaffiliated brokers and dealers and of the
securities research and economic research facilities of Merrill Lynch. However,
it may at times be difficult to obtain information with respect to the types of
securities in which the Fund invests.
The portfolio securities of the Fund may not be widely traded. In order to
facilitate redemption of Fund shares, the Fund reserves the right to hold, when
management deems it appropriate, United States Government and Government agency
securities, bank money instruments, commercial paper and other money market
securities or cash in an amount it considers adequate to meet redemptions.
The Fund may invest up to 15% of its total assets in securities that lack an
established secondary trading market or otherwise are considered illiquid. The
Fund may purchase securities that are not registered ("restricted securities")
under the Securities Act, but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act. 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.
14
<PAGE>
The Board of Directors carefully monitors the Fund's investments in these
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. These
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.
Investment Restrictions. The Fund's investment activities are subject to
further restrictions that are described in the Statement of Additional
Information. Investment restrictions and policies which are fundamental
policies may not be changed without the approval of the holders of a majority
of the Fund's outstanding voting securities (which for this purpose and under
the Investment Company Act means the lesser of (a) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares). Among its
fundamental policies, the Fund may not invest more than 25% of its total
assets, taken at market value at the time of each investment, in the securities
of issuers in any particular industry (excluding the U.S. 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 restriction, the Fund may not borrow amounts in excess of 20% of
its total assets, taken at market value, and then only from banks as a
temporary measure for extraordinary or emergency purposes such as the
redemption of Fund shares. As a non-fundamental policy, the Fund will not
invest in securities which cannot readily be resold because of legal or
contractual restrictions or which are not otherwise readily marketable,
including repurchase agreements and purchase and sale contracts maturing in
more than seven days, if, regarding all such securities, more than 15% of its
total assets (or 10% of its total assets as presently required by certain state
laws) 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
continuously determines, based on the trading markets for the specific Rule
144A security, that it is liquid. The Board has determined that securities
which are freely tradeable in their primary market offshore should be deemed
liquid.
Investment in Foreign Issuers. It is anticipated that in the immediate
future, the Fund will invest not more than 25% of its total assets in the
securities of foreign issuers. Nevertheless, investors should note that
investment in securities of foreign issuers involves risks not typically
involved in domestic investment, including fluctuations in foreign exchange
rates, future political and economic development and the possible imposition of
exchange controls or other foreign or U.S. governmental laws or restrictions
applicable to such investments.
Lending of Portfolio Securities. The Fund may from time to time lend
securities (but not in excess of 20% of its total assets) from its portfolio to
brokers, dealers and financial institutions and receive collateral in cash or
securities issued or guaranteed by the United States Government which will be
maintained at all times in amounts equal to at least 100% of the current market
value of the loaned securities. Such cash collateral will be invested in short-
term securities, which will increase the current income of the Fund.
15
<PAGE>
Writing of Covered Call Options. The Fund may from time to time write, i.e.,
sell, covered call options on its portfolio securities and enter into closing
purchase transactions with respect to certain of such options. A call option is
considered covered where the writer of the option owns the underlying
securities. In return for the premium income realized from the sale of covered
call options, the Fund will give up the opportunity to profit from a price
increase in the underlying security above the option exercise price and it will
not be able to sell the underlying security until the option expires or is
exercised or 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. 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 price of the underlying security
during the option period. The Fund may not write options on underlying
securities exceeding 15% of its total assets, taken at market value.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Directors of the Fund are responsible for the overall supervision of
the operations of the Fund and perform the various duties imposed on the
directors of investment companies by the Investment Company Act.
The Directors of the Fund are:
Arthur Zeikel*--President of the Investment Adviser and its affiliate MLAM;
President and Director of Princeton Services, Inc. ("Princeton Services"); and
Executive Vice President of ML & Co.
Joe Grills--Member of the Committee of Investment of Employee Benefit Assets
of the Financial Executives Institute ("CIEBA"); Member of CIEBA's Executive
Committee; Member of the Investment Advisory Committees of the State of New
York Common Retirement Fund and the Howard Hughes Medical Institute; Director,
Duke Management Company, LaSalle Street Fund and Kimco Realty Corporation.
Walter Mintz--Special Limited Partner of Cumberland Associates (investment
partnership).
Robert S. Salomon, Jr.--Principal of STI Management (investment adviser).
Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate,
investments and consulting).
Stephen B. Swensrud--Chairman of Fernwood Advisers (financial consultants).
- --------
* 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, acts as the investment adviser to the Fund
and provides the Fund with management and investment
16
<PAGE>
advisory services. The Investment Adviser or an affiliate, MLAM, acts as the
investment adviser to more than 140 registered investment companies. The
Investment Adviser also offers portfolio management and portfolio analysis
services to individuals and institutions. As of September 30, 1997, the
Investment Adviser and MLAM had a total of approximately $272.5 billion in
investment company and other portfolio assets under management.
The investment advisory agreement with the Investment Adviser (the
"Investment Advisory Agreement") provides that, subject to the direction of the
Board of Directors of the Fund, the Investment Adviser is responsible for the
actual management of the Fund's portfolio and for the review of the Fund's
holdings in light of its own research analysis and analyses from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Investment Adviser, subject to review by the
Board of Directors. The Investment Adviser 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 is also obligated to perform certain administrative
and management services for the Fund and to provide all the office space,
facilities, equipment and personnel necessary to perform its duties under the
Investment Advisory Agreement. The Investment Adviser has access to the total
securities research and economic facilities of Merrill Lynch.
Under the terms of the Investment Advisory Agreement, the Fund pays the
Investment Adviser a monthly advisory fee at the annual rate of 1.0% of the
average daily net assets of the Fund. However, the Investment Adviser has
voluntarily agreed to waive a portion of its advisory fee so that such fee is
equal to 1.00% of average daily net assets not exceeding $500 million; 0.95% of
average daily net assets in excess of $500 million but not exceeding $1
billion; and 0.90% of average daily net assets in excess of $1 billion. 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 securities in which the
Fund invests. For the fiscal year ended July 31, 1997, the Fund paid to the
Investment Adviser a fee of $7,150,934 (based on average net assets of
approximately $726.4 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 July 31, 1997, the amount of such
reimbursement was $168,926. For the fiscal year ended July 31, 1997, the ratio
of total expenses to average net assets was 1.26%, 2.29%, 2.30% and 1.52% for
Class A, Class B, Class C and Class D shares, respectively.
The Investment Adviser has entered into a sub-advisory agreement (the "Sub-
Advisory Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML
& Co. and an affiliate of the Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund 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 that the
17
<PAGE>
Investment Adviser actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement.
Robert J. Martorelli is primarily responsible for the day-to-day management
of the Fund's portfolio. Mr. Martorelli is a Senior Vice President of the Fund
and has been a First Vice President of MLAM or its predecessors since 1997 and
a Vice President since 1987.
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 that at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement,
the Fund pays the Transfer Agent a 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 which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial interest of a person in the relevant share class on a recordkeeping
system, provided the recordkeeping system is maintained by a subsidiary of ML &
Co. For the fiscal year ended July 31, 1997, the total fee paid by the Fund to
the Transfer Agent was $1,476,716.
PURCHASE OF SHARES
The Distributor, an affiliate of the Investment Adviser, MLAM 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 price is
18
<PAGE>
$1,000 and the minimum subsequent purchase is $50, except that for retirement
plans the minimum initial purchase is $100 and the minimum subsequent purchase
is $1, and for participants in certain fee-based programs, the minimum initial
purchase is $500 and the minimum subsequent purchase is $50.
The Fund offers 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 ("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 the day the order is placed with the
Distributor, provided the order is received by the Distributor 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 on that day, such orders shall be deemed received on
the next business day. Any order may be rejected by the Distributor or the
Fund. The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class to the general public at any time in response to
conditions in the securities markets or otherwise and may thereafter resume
such offering from time to time. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently $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 contingent deferred sales charge 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
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges do not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and 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
19
<PAGE>
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 redeeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A .75%
sales charge for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are 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.
20
<PAGE>
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>
SALES LOAD SALES LOAD DISCOUNT TO
AS PERCENTAGE AS PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED 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 share 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 will be 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
million 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
continuing account maintenance activities.
For the fiscal year ended July 31, 1997, the Fund sold 3,245,516 Class A
shares for aggregate net proceeds to the Fund of $43,038,169. The gross sales
charges for the sale of Class A shares of the Fund for the year were $29,102,
of which $2,131 and $26,971 were received by the Distributor and Merrill
Lynch, respectively. For the fiscal year ended July 31, 1997, the Distributor
received no CDSCs with respect to redemptions within one year after purchase
of Class A shares purchased subject to a front-end sales charge waiver. For
the fiscal year ended July 31, 1997, the Fund sold 1,043,610 Class D shares
for aggregate net proceeds to the Fund of $13,805,556. The gross sales charges
for the sale of Class D shares of the Fund for the year were $66,255, of which
$5,253 and $61,002 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended July 31, 1997, the Distributor
received no CDSCs with respect to redemption 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)
21
<PAGE>
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 of the Fund 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 TMA(SM) Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services, collective investment trusts for
which Merrill Lynch Trust Company serves as trustee and 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 in their initial offerings who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions set forth in the Statement of Additional
Information are met (for closed-end funds that commenced operations prior to
October 21, 1994). In addition, 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. 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., and Class A shares are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate 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 sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
22
<PAGE>
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 the Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares from the dealer's own funds. The combination
of the CDSC and the ongoing distribution fee facilitates the ability of the
Fund to sell the Class B and Class C shares without a sales charge being
deducted at the time of purchase. 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. The proceeds from the ongoing account
maintenance fee are used to compensate Merrill Lynch for providing continuing
account maintenance activities. Class B shareholders of the Fund exercising the
exchange privilege described under "Shareholder Services--Exchange Privilege"
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares acquired as a
result of the exchange.
Contingent Deferred Sales Charge--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
23
<PAGE>
redemption or the cost of the shares being redeemed. Accordingly, no sales
charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge 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 TO
YEAR SINCE PURCHASE PAYMENT MADE CHARGE
-------------------------------- -------------
<S> <C>
0-1.......................................................... 4.0%
1-2.......................................................... 3.0%
2-3.......................................................... 2.0%
3-4.......................................................... 1.0%
4 and thereafter............................................. 0.0%
</TABLE>
For the fiscal year ended July 31, 1997, the Distributor received CDSCs of
$652,512 with respect to redemption of Class B shares. 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 CDSC will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another will be assumed to be made in
the same order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase) for shares
purchased on or after October 21, 1994.
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by
certain eligible 401(a) and eligible 401(k) plans and in connection with
certain group plans placing orders through the Merrill Lynch Blueprint SM
Program. The CDSC is also waived for any Class B shares which are purchased by
eligible 401(k) or eligible 401(a) plans which are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption. The Class B CDSC also is waived for any Class B shares
24
<PAGE>
that are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. The Class B CDSC
also is waived for any Class B shares that are purchased within qualifying
Employee Access(SM) Accounts. 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 "Shareholder 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 July 31, 1997, the Distributor
received CDSCs of $5,533 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 occupy 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 of Federal income
tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the
Fund held in the account on the Conversion Date will be converted to Class D
shares of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
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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 that 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 funds at net asset value per
share.
The Conversion Period also may be modified for retirement plan investors who
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 provides that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
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For the fiscal year ended July 31, 1997, the Fund paid the Distributor
$3,612,384 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $361.2
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 July 31, 1997, the Fund paid the
Distributor $149,517 pursuant to the Class C Distribution Plan (based on
average net assets subject to such Class C Distribution Plan of approximately
$15.0 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 July 31, 1997, the Fund paid the
Distributor $161,204 pursuant to the Class D Distribution Plan (based on
average net assets subject to such Class D Distribution Plan of approximately
$64.5 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 on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. 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, the 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, the
distribution fees and CDSCs and the expenses consist of financial consultant
compensation.
At December 31, 1996, for Class B shares, the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch, for the period since
the commencement of operations of Class B shares, exceeded fully allocated
accrual revenues for such period by approximately $2,497,000 (.65% of Class B
net assets at that date).
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 but not the account maintenance fee. 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 (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges) plus (2) interest on the unpaid balance at the
prime rate plus 1% (the unpaid balance being the maximum amount payable minus
amounts received from the payment of the distribution fee and the CDSCs). The
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") is
6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee and any CDSCs will be paid to the Fund rather than to the
Distributor, however, the Fund will continue
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<PAGE>
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 payments in excess of the amount
payable under the NASD formula will not be made.
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not
be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those
Class B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares."
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The 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 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 a written letter as noted above accompanied by
certificates for the shares to be redeemed. 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 signatures on the
notice must be guaranteed by a national bank or other bank which is a member of
the Federal Reserve System (not a savings bank) or by an "eligible guarantor
institution" (including, for example, Merrill Lynch branch offices and certain
other financial institutions) as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient. In certain instances,
the Transfer Agent may require additional documents such as, but not limited
to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.
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At various times the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares. Normally, this delay 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 request
for purchase is received by the dealer 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 of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE in order to obtain that
day's closing price.
The foregoing repurchase arrangements are for the convenience of shareholders
and do not involve a charge by the Fund (other than any applicable CDSC in the
case of Class B shares). Securities firms that do not have selected dealer
agreements with the Distributor 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
Fund's Transfer Agent are not subject to the processing fee. The Fund reserves
the right to reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure. A shareholder whose order for repurchase is rejected by the Fund,
however, may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Fund. 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 by calling the telephone number on the cover page of
this Prospectus or from the Distributor or Merrill Lynch. Certain of these
services are available only to U.S. investors. Included in the Fund's
shareholder services are the following:
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<PAGE>
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent showing any reinvestments of dividends and
capital gains distributions, and any other activity in the account since the
preceding statement. Shareholders also will receive separate confirmations for
each purchase or sale transaction other than reinvestments of dividends and
capital gains 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 shares 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
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
contingent deferred sales charge) so that the cash proceeds can be transferred
to the account at the new firm, or such shareholder must continue to maintain
a retirement account at Merrill Lynch for those shares.
Exchange Privilege. U.S. shareholders of each class of shares of the Fund
have an exchange privilege with certain other MLAM-advised mutual funds. There
is currently no limitation on the number of times a shareholder may exercise
the exchange privilege. The exchange privilege may be modified or terminated
in accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) 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.
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Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund 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 CDSC 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 CDSC
schedule relating to the Class B shares of the MLAM-advised mutual 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.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without sales charge, at the net asset value
per share next determined on the ex-dividend date of such dividend or
distribution. A shareholder may at any time, by written notification to Merrill
Lynch if the shareholder's account is maintained with Merrill Lynch or by
written notification or telephone call (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. 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
payments can also be directly deposited to the shareholder's bank account. No
CDSC will be imposed on redemptions of shares issued as a result of the
automatic reinvestment of dividends or capital gains distributions.
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Systematic Withdrawal Plans. A shareholder may elect to receive systematic
withdrawal payments from his Investment Account in the form of payments by
check or through automatic payment by direct deposit to his 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
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 plans) through the
CMA (R) or CBA (R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
(800) MER-FUND (637-3863).
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<PAGE>
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. With respect to 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.
The Fund has no obligation to deal with any broker in the execution of
transactions for its portfolio securities. 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, which
provide supplemental investment research to the Investment Adviser may receive
orders for transactions by the Fund. Supplemental investment research received
by the Investment Adviser may also 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 that broker-dealer to execute transactions for the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B
and Class C shares and the maximum sales charge in the case of Class A and
Class D shares. Dividends paid by the Fund with respect 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 the
account maintenance fees and distribution charges and any incremental transfer
agency costs relating to each class of shares will be borne exclusively by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the
Fund.
The Fund also may quote 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
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<PAGE>
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, and 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 reduced sales charges in the case of
Class A and Class D shares or waiver of the CDSC in the case of Class B and
Class C shares (such as investors in certain retirement plans), performance
data may take into account the reduced, and not the maximum, sales charge or
may not take into account the CDSC and therefore may reflect greater total
return since, due to the reduced sales charges or waiver of the CDSC, a lower
amount of expenses may be deducted. See "Purchase of Shares". The Fund's total
return may be expressed either as a percentage or as a dollar amount in order
to illustrate the effect of such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Value Line 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, 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. In addition, from time to time the Fund may include its risk-
adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income, if
any. Dividends from such net investment income will be paid semi-annually. All
net realized long- or short-term capital gains, if any, will be distributed to
the Fund's shareholders at least annually. The per share dividends and
distributions on each class of shares will be reduced as a result of any
account maintenance, distribution and transfer agency fees applicable to that
class. See "Additional Information--Determination of Net Asset Value" below.
Dividends and distributions may be automatically reinvested in shares of the
Fund, at the net asset value without sales charge. Shareholders may elect in
writing to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders as discussed below
whether they are reinvested in shares of the Fund or received in cash. 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 calendar year.
34
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily 15 minutes after the close of business on the NYSE (generally, 4:00
p.m., New York time) on each day during which the NYSE is open for trading.
Any assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation. The net asset
value per share is computed by dividing the sum of the value of the securities
held by the Fund plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the investment advisory fees
payable to the Investment Adviser and any account maintenance and/or
distribution fees payable to the Distributor, are accrued daily. The Fund
employs Merrill Lynch Securities Pricing(SM) Service ("MLSPS") an affiliate of
the Investment Adviser, to provide certain securities prices for the Fund.
During the fiscal year ended July 31, 1997, the Fund paid MLSPS $266 for such
service.
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 the Class D shares; moreover, the per share net
asset value of the Class D shares generally will be higher than the per share
net asset value of the Class B and Class C shares, reflecting the daily
expense accruals of the distribution and higher transfer agency fees
applicable with respect to the 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 differential between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter ("OTC") market
are valued at the last available bid 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. 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 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
35
<PAGE>
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 ("capital gain dividends") are taxable
to shareholders as long-term capital gains, regardless of the length of time
the shareholder has owned Fund shares. Recent legislation creates additional
categories of capital gains taxable at different rates. Although the
legislation does not explain how gain in these categories will be taxed to
shareholders of RICs, it authorizes regulations applying the new categories of
gain and the new rates to sales of securities by RICs. In the absence of
guidance, there is some uncertainty as to the manner in which the categories of
gain and related rates will be passed through to shareholders in capital gain
dividends. 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). Although the Fund may invest in certain municipal securities,
it is not anticipated that any portion of the dividends paid by the Fund will
qualify for tax-exempt treatment to shareholders.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends. It is
anticipated that IRS guidance permitting categories of gain and related rates
to be passed through to shareholders would also require this written notice to
designate the amounts of various categories of capital gain income in capital
gain dividends. A portion of the Fund's ordinary income dividends may be
eligible for the dividends received deduction allowed to corporations under the
Code, if certain requirements are met. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer
36
<PAGE>
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 such 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 foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on United States Government obligations. State law
varies as to whether dividend income attributable to United States Government
obligations is exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
37
<PAGE>
ORGANIZATION OF THE FUND
The Fund was incorporated under Maryland law on April 15, 1982. It has an
authorized capital of 300,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock. Class A and Class C each consist of 50,000,000 shares,
and Class B and Class D each consist 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 the Class B,
Class C and Class D shares bear certain expenses related to the account
maintenance associated with such shares, and Class B and Class C shares bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to account maintenance
and distribution expenditures, as applicable. See "Purchase of Shares." The
Fund has received an order from the Commission permitting the issuance and sale
of multiple classes of Common Stock. The Directors of the Fund may classify and
reclassify the shares of the Fund into additional classes of Common Stock at a
future date.
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 the 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 upon liquidation or
dissolution after satisfaction of outstanding liabilities. Except as noted
above, the Class B, Class C and Class D shares bear certain additional
expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
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.
38
<PAGE>
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
RATINGS OF CORPORATE BONDS
DESCRIPTION OF CORPORATE BOND RATINGS OF MOODY'S INVESTORS SERVICE, INC.:
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
39
<PAGE>
The modifier 1 indicates that the bond ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its rating category.
DESCRIPTION OF CORPORATE BOND RATINGS OF STANDARD & POOR'S RATINGS GROUP:
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small
degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB Bonds rated BB, B, CCC and CC are regarded, on balance, as
B predominately speculative with respect to the issuer's capacity to pay
CCC interest and repay principal in accordance with the terms of the
CC obligation. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C The C rating is reserved for income bonds on which no interest is
being paid.
D Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does
not rate a particular type of bond as a matter of policy.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
40
<PAGE>
MERRILL LYNCH PHOENIX FUND, INC. -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
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 (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 Phoenix 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........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
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 Phoenix 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.
41
<PAGE>
MERRILL LYNCH PHOENIX 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 UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
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 Phoenix 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 Merrill Lynch Phoenix Fund, Inc.
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 Phoenix 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 Phoenix Fund, Inc.
c/o Merrill Lynch Financial Data
Services, Inc. [ ][ ][ ][ ][ ][ ] ...............
P.O. Box 45289 F/C Last Name
Jacksonville, Florida 32232-5289 Branch Code F/C No.
[ ][ ][ ] [ ][ ][ ][ ][ ]
Dealer's Customer A/C No.
42
<PAGE>
MERRILL LYNCH PHOENIX FUND, INC. -- AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL PLAN OR THE
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
(Please Print)
[ ]
Name............................... Social Security Number or
Taxpayer Identification
Number
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 Phoenix 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 (CHECK ONE):
[_] $ of [_] 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 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 on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
........................................................................
Signature of Depositor................................. 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.
43
<PAGE>
MERRILL LYNCH PHOENIX 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 as described
below each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch Phoenix Fund, Inc. subject to the terms set forth below. In
the event that I am not eligible to purchase Class A shares, I understand that
Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
You are hereby authorized to draw an
ACH debit each month on my bank
account for investment in Merrill To...............................Bank
Lynch Phoenix Fund, Inc., as (Investor's Bank)
indicated below:
Bank Address.........................
City...... State...... Zip Code......
Amount of each ACH debit $........
As a convenience to me, I hereby
Account No. ...................... request and authorize you to pay and
charge to my account ACH debits
drawn on my account by and payable
to Merrill Lynch Financial Data
Please date and invest ACH debits on Services, Inc. I agree that your
the 20th of each month beginning rights in respect to each such debit
or as soon as possible thereafter. shall be the same as if it were a
(Month) check drawn on you and signed
personally by me. This authority is
to remain in effect until revoked by
I agree that you are drawing these me in writing. Until you receive
ACH debits voluntarily at my request such notice, you shall be fully
and that you shall not be liable for protected in honoring any such
any loss arising from any delay in debit. I further agree that if any
preparing or failure to prepare any such debit be dishonored, whether
such debit. If I change banks or with or without cause and whether
desire to terminate or suspend this intentionally or inadvertently, you
program, I agree to notify you shall be under no liability.
promptly in writing. I hereby
authorize you to take any action to
correct erroneous ACH debits of my ............ .....................
bank account or purchases of fund Date Signature of
shares including liquidating shares Depositor
of the Fund and crediting my bank
account. I further agree that if a ............ .....................
debit is not honored upon Bank Signature of Depositor
presentation, Merrill Lynch Financial Account (If joint account,
Data Services, Inc. is authorized to Number both must sign)
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
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.
44
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
INVESTMENT ADVISER
Fund Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
The Chase Manhattan Bank, N.A.
Global Securities Services
4 Chase MetroTech Center
18th Floor
Brooklyn, New York 11245
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
MERRILL LYNCH PHOENIX FUND, INC. IS NOT RELATED TO PHOENIX HOME LIFE MUTUAL
LIFE INSURANCE COMPANY OR ANY OF ITS SUBSIDIARIES OR AFFILIATES, INCLUDING THE
PHOENIX SERIES FUND.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE INVESTMENT ADVISER, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Merrill Lynch Select Pricing(SM) System.................................... 3
Financial Highlights....................................................... 8
Special Considerations..................................................... 11
Investment Objective and Policies.......................................... 11
Management of the Fund..................................................... 16
Board of Directors........................................................ 16
Management and Advisory Arrangements...................................... 16
Code of Ethics............................................................ 18
Transfer Agency Services.................................................. 18
Purchase of Shares......................................................... 18
Initial Sales Charge Alternatives--Class A and Class D Shares............. 21
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 23
Distribution Plans........................................................ 26
Limitations on the Payment of Deferred Sales Charges...................... 27
Redemption of Shares....................................................... 28
Redemption................................................................ 28
Repurchase................................................................ 29
Reinstatement Privilege--Class A and Class D Shares....................... 29
Shareholder Services....................................................... 29
Fee-Based Programs........................................................ 32
Portfolio Transactions and Brokerage....................................... 33
Performance Data........................................................... 33
Additional Information..................................................... 34
Dividends and Distributions............................................... 34
Determination of Net Asset Value.......................................... 35
Taxes..................................................................... 35
Organization of the Fund.................................................. 38
Shareholder Reports....................................................... 38
Shareholder Inquiries..................................................... 38
Appendix--Description of Corporate Bond Ratings............................ 39
Authorization Form......................................................... 41
</TABLE>
Merrill Lynch Phoenix Fund, Inc. is not related to Phoenix Home Life Mutual
Life Insurance Company or any of its subsidiaries or affiliates, including the
Phoenix Series Fund.
Code #10121-1197
[LOGO] MERRILL LYNCH
Merrill Lynch
Phoenix Fund, Inc.
[ART]
PROSPECTUS
November 14, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH PHOENIX FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Phoenix Fund, Inc. (the "Fund") is a diversified open-end
investment company seeking long-term growth of capital by investing in a
diversified portfolio of equity and fixed income securities, including
municipal securities, of issuers in weak financial condition or experiencing
poor operating results that management of the Fund believes are undervalued
relative to management's assessment of the current or prospective condition of
such issuer. The investment policy of the Fund is based upon the belief that
the prices of securities of troubled issuers are often depressed to a greater
extent than warranted by the condition of the issuer and that, while investment
in such securities involves a high degree of risk, such investments offer the
opportunity for significant capital gains. Current income is not necessarily a
factor in the selection of investments. There can be no assurance that the
objective of the Fund will be realized.
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.
----------------
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 November
14, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
----------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is November 14, 1997.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term growth of capital
by investing in a diversified portfolio of equity and fixed income securities,
including municipal securities, of issuers in weak financial condition or
experiencing poor operating results that management of the Fund believes are
undervalued relative to management's assessment of the current or prospective
condition of such issuers. Reference is made to "Investment Objective and
Policies" in the Prospectus for a discussion of the investment objective and
policies of the Fund.
The types of securities in which the Fund invests require active monitoring
and may, at times, require participation in bankruptcy or reorganization
proceedings by the Investment Adviser on behalf of the Fund. To the extent that
Fund Asset Management, L.P. (the "Investment Adviser" or "FAM") becomes
involved in such proceedings, the Fund may have a more active participation in
the affairs of the issuer than that assumed generally by an investor. The Fund,
however, will not make investments for the purpose of exercising day-to-day
management of any issuer's affairs.
Portfolio Turnover. Due to the fact that many of the securities in which the
Fund invests are unlikely to show significant short-term appreciation, it is
anticipated that the portfolio turnover rate ordinarily will be low as measured
by traditional standards; however, there may be periods when the portfolio
turnover rate will be relatively high. The Fund pays brokerage commissions in
connection with purchases and sales of portfolio securities. A high rate of
portfolio turnover results in correspondingly greater brokerage commission
expenses and may result in increased short-term capital gains or losses. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of U.S. Government securities and of all other securities whose
maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. The rates of
portfolio turnover for the Fund for the fiscal years ended July 31, 1996 and
1997 were 87.66% and 81.46%, respectively.
Investment Restrictions. In addition to the investment restrictions set forth
in the Prospectus, the Fund has adopted a number of fundamental and non-
fundamental investment policies and restrictions. The fundamental policies and
restrictions set forth below 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). Unless otherwise provided, all references
to the assets of the Fund below are in terms of current market value. The Fund
may not:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as amended
(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.
(The Fund may, however, from time to time have a controlling interest in a
particular issuer, be part of a group holding a controlling interest, or
serve on a creditor's committee or otherwise participate in bankruptcy or
reorganization proceedings).
2
<PAGE>
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 Fund's 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 borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the "Securities Act") in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
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. The Fund currently does not intend
to engage in short sales, except short sales "against the box".
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
3
<PAGE>
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.
d. Notwithstanding fundamental investment restriction (7) above, borrow
amounts in excess of 20% of its total assets, taken at market value, and
then only from banks as a temporary measure for extraordinary or emergency
purposes such as the redemption of Fund shares.
----------------
Lending of Portfolio Securities. Subject to investment restriction (5) above,
the Fund may from time to time lend securities from its portfolio to brokers,
dealers and financial institutions and receive collateral in cash or securities
issued or guaranteed by the United States Government which will be maintained
at all times in an amount equal to at least 100% of the current market value of
the loaned securities. Such cash collateral will be invested in short-term
securities, which will increase the current income of the Fund. Such loans will
be terminable at any time. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. The Fund may pay reasonable fees to persons unaffiliated with
the Fund for services in arranging such loans. With respect to the lending of
portfolio securities, there is the risk of failure by the borrower to return
the securities involved in such transactions.
Writing of Covered Call Options. The Fund may from time to time write, i.e.,
sell, covered call options on its portfolio securities and enter into closing
purchase transactions with respect to certain of such options. A call option is
considered covered where the writer of the option owns the underlying
securities. By writing a covered call option, the Fund, in return for the
premium income realized from the sale of the option, may give up the
opportunity to profit from a price increase in the underlying security above
the option exercise price. In addition, the Fund will not be able to sell the
underlying security until the option expires, is exercised or the Fund effects
a closing purchase transaction as described below. 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. If the option expires unexercised, the Fund realizes a
gain in the amount of the premium received for the option which may be offset
by a decline in the market price of the underlying security during the option
period. The Fund may not write covered options on underlying securities
exceeding 15% of the value of its total assets.
All options referred to herein and in the Fund's Prospectus are options
issued by The Options Clearing Corporation (the "Clearing Corporation") which
are currently traded on the Chicago Board Options Exchange, the American Stock
Exchange, the Philadelphia Stock Exchange, the Pacific Stock Exchange or the
NYSE. A call option gives the purchaser of an option the right to buy, and
obligates the writer (seller) to sell, the underlying security at the exercise
price during the option period. The option period normally ranges from three to
nine months from the date the option is written. For writing an option, the
Fund receives a premium, which is the price of such option on the exchange on
which it is traded. The exercise price of the option may be below, equal to or
above the current market value of the underlying security at the time the
option is written.
The writer may terminate its obligation prior to the expiration date of the
option by executing a closing purchase transaction which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase
4
<PAGE>
does not result in ownership of an option. A closing purchase transaction
ordinarily will be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security or to permit the writing of a new call option containing
different terms on such underlying security. The cost of such a liquidation
purchase plus transaction costs may be greater than the premium received on the
original option, in which case the Fund will have incurred a loss in the
transaction. An option may be closed out only on an exchange which provides
secondary market for an option of the same series and there is no assurance
that a secondary market will exist for any particular option. A covered option
writer unable to effect a closing purchase transaction will not be able to sell
the underlying security until the option expires or the underlying security is
delivered upon exercise, with the result that the writer will be subject to the
risk of market decline in the underlying security during such period. The Fund
will write an option on a particular security only if management believes that
a liquid secondary market will exist on an exchange for options of the same
series which will permit the Fund to make a closing purchase transaction in
order to close out its position.
Due to the relatively short time that exchanges have been dealing with
options, options involve risks of possible unforeseen events which can be
disruptive to the option markets or could result in the institution of certain
procedures, including restriction of certain types of orders.
Investment in Foreign Issuers. The Fund may invest up to 25% of its total
assets in 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. In
addition, foreign companies are not subject to accounting, auditing and
financial reporting standards and requirements comparable to those of U.S.
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 a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines
in value of such portfolio security or, if the Fund has entered into a contract
to sell the security, could result in possible liability to the purchaser. To
the extent such investments are subject to withholding or other taxes or to
regulations relating to repatriation of assets, the Fund's distributable income
will be reduced. The prices of securities in different countries may be subject
to different economic, financial, political and social factors.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch except pursuant to a
permissive order or otherwise in compliance with the provisions of the
Investment Company Act and the rules and regulations thereunder. Included among
such restricted transactions are purchases from or sales to Merrill Lynch of
securities in transactions in which it acts as principal and purchases of
securities from underwriting syndicates of which Merrill Lynch is a member.
5
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund, including
their ages and their principal occupations for at least the last five years is
set forth below. Unless otherwise noted, the address of each executive officer
and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (65)--President and Director(1)(2)--President of the Investment
Adviser (which term as used herein includes its corporate predecessors) since
1977; President of MLAM (which term as used herein includes its corporate
predecessors) since 1977; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch &
Co., Inc. ("ML & Co.") since 1990.
Joe Grills (62)--Director(2)--P.O. Box 98, Rapidan, Virginia 22733. Member of
the Committee of Investment of Employee Benefit Assets of the Financial
Executives Institute ("CIEBA") since 1986; member of CIEBA's Executive
Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of
International Business Machines Incorporated ("IBM") and Chief Investment
Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment
Advisory Committees of the State of New York Common Retirement Fund and the
Howard Hughes Medical Institute; Director, Duke Management Company since 1993;
Director, LaSalle Street Fund since 1995; Director, Kimco Realty Corporation
since January 1997.
Walter Mintz (68)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.
Robert S. Salomon, Jr. (61)--Director(2)--106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Director,
Common Fund and the Norwalk Community Technical College Foundation; Chairman
and CEO of Salomon Brothers Asset Management from 1992 until 1995; Chairman of
Salomon Brothers equity mutual funds from 1992 until 1995; Director of Stock
Research and U.S. Equity Strategist at Salomon Brothers from 1975 until 1991.
Melvin R. Seiden (67)--Director(2)--780 Third Avenue, Suite 2502, New York,
New York 10017. Director of Silbanc Properties, Ltd. (real estate, investments
and consulting) since 1987; Chairman and President of Seiden & de Cuevas, Inc.
(private investment firm) from 1964 to 1987.
Stephen B. Swensrud (64)--Director(2)--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Chairman of Fernwood Advisers (financial consultants)
since 1975.
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. (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.
6
<PAGE>
Robert J. Martorelli (40)--Senior Vice President--First Vice President of
MLAM since 1997; Vice President of MLAM from 1987 to 1997; Fund Analyst with
MLAM from 1985 to 1987 and Portfolio Manager since 1987; Senior Security
Analyst for First Investors Management Co., Inc. from 1983 to 1985; Senior
Analyst for the National Association of Insurance Commissioners from 1981 to
1983.
Donald C. Burke (37)--Senior 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 (48)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and MLAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Treasurer of the Distributor since
1984 and Vice President since 1981.
Robert Harris (45)--Secretary(1)(2)--First Vice President of MLAM since 1997;
Vice President of MLAM from 1984 to 1997; Attorney associated with MLAM since
1980; Secretary of the Distributor since 1982.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a director, officer or member of an advisory
board of certain other investment companies for which the Investment
Adviser or MLAM acts as investment adviser.
At October 31, 1997, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund and owned an aggregate of less than 1% of the outstanding shares of Common
Stock of ML & Co.
Pursuant to the terms of the Fund's investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement"), the Investment
Adviser pays all compensation of officers and employees of the Fund as well as
the fees of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates. The Fund pays each Director not
affiliated with the Investment Adviser an annual fee of $4,000, plus $1,000 for
each board meeting attended and actual out-of-pocket expenses relating to
attendance at such meetings, and each Audit Committee member an annual fee of
$4,000 plus $750 per audit Committee meeting attended. Fees and expenses paid
to the unaffiliated Directors aggregated $75,738 for the fiscal year ended July
31, 1997.
7
<PAGE>
The following table sets forth for the fiscal year ended July 31, 1997
compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
investment companies (including the Fund) advised by the Investment Adviser
and its affiliate, MLAM ("MLAM/FAM-Advised Funds") to the non-interested
Directors:
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
BENEFITS ACCRUED MLAM/FAM-ADVISED
COMPENSATION AS PART OF FUNDS PAID TO
DIRECTOR FROM THE FUND FUND EXPENSE DIRECTORS(1)
- -------- ------------- ---------------- ----------------
<S> <C> <C> <C>
Joe Grills..................... $15,000 None $164,000
Walter Mintz................... $15,000 None $164,000
Robert S. Salomon, Jr. ........ $15,000 None $187,167
Melvin R. Seiden............... $15,000 None $164,000
Stephen B. Swensrud............ $15,000 None $154,250
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows:
Joe Grills (19 registered investment companies consisting of 47
portfolios), Walter Mintz (18 registered investment companies consisting
of 37 portfolios), Robert S. Salomon (18 registered investment companies
consisting of 37 portfolios), Melvin R. Seiden (18 registered investment
companies consisting of 37 portfolios), Stephen B. Swensrud (21 registered
investment companies consisting of 52 portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
The Investment Advisory Agreement provides that, subject to the direction of
the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the Fund's portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Adviser, subject to review by the Board of Directors. The Investment Adviser
provides the portfolio managers for the Fund, who consider analyses from
various sources, make the necessary investment decisions and place
transactions accordingly. The Investment Adviser is also obligated to perform
certain administrative and management services for the Fund and is required to
provide all the office space, facilities, equipment and personnel necessary to
perform its duties under the Investment Advisory Agreement.
Securities held by the Fund may also 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
objectives or other factors, a particular security may be brought 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 they
act 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.
Under the terms of the Investment Advisory Agreement, the Fund pays the
Investment Adviser a monthly advisory fee at the annual rate of 1.0% of the
average daily net assets of the Fund. However, the
8
<PAGE>
Investment Adviser has voluntarily agreed to waive a portion of its advisory
fee so that such fee is equal to 1.00% of average daily net assets not
exceeding $500 million; 0.95% of average daily net assets in excess of $500
million but not exceeding $1 billion; and 0.90% of average daily net assets in
excess of $1 billion. This fee is higher than that of most 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 securities
in which the Fund invests. For the fiscal years ended July 31, 1995, 1996 and
1997, the total advisory fees paid by the Fund to the Investment Adviser were
$6,445,583, $7,444,413 and $7,150,934, respectively.
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,
shareholder reports, prospectuses and statements of additional information
(except to the extent paid by the Distributor), charges of the custodian and
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 nonrecurring expenses, and other expenses
properly payable by the Fund. The Distributor pays the promotional expenses of
the Fund incurred in connection with the continuous offering of shares by the
Fund. See "Purchase of Shares--Distribution Plans."
The Investment Adviser is a limited partnership, the partners of which are ML
& Co. and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Investment Adviser as defined under the Investment Company Act
because of their ownership of its voting securities or their power to exercise
a controlling influence over its management or policies. Similarly, the
following entities may be considered "controlling persons" of MLAM U.K.:
Merrill Lynch Europe Limited (MLAM U.K.'s parent), a subsidiary of ML
International Holdings, a subsidiary of Merrill Lynch International, Inc., a
subsidiary of ML & Co.
The Investment Adviser has entered into a sub-advisory agreement (the "Sub-
Advisory Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML
& Co. and an affiliate of the Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund 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 that the Investment Adviser actually receives for
providing services to the Fund pursuant to the Investment Advisory Agreement.
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 contracts 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.
9
<PAGE>
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) 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 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). Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege."
The Merrill Lynch Select Pricing(SM) 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 use the Merrill Lynch
Select Pricing(SM) System are referred to herein as "MLAM-advised mutual
funds".
The Fund has entered into separate Distribution Agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreements are subject to
the same renewal requirements and termination provisions as the Investment
Advisory Agreement described above.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A AND CLASS D SHARES
The gross sales charge for the sale of Class A shares for the fiscal year
ended July 31, 1997 was $29,102, of which the Distributor received $2,131 and
Merrill Lynch received $26,971 as a selected dealer. The gross sales charge
for the sale of Class A shares for the fiscal year ended July 31, 1996 was
$66,954, of which the Distributor received $4,330 and Merrill Lynch received
$62,624 as a selected dealer. The gross sales charge for the sale of Class A
shares for the fiscal year ended July 31, 1995 was $208,396, of which the
Distributor received $12,173 and Merrill Lynch received $196,223 as a selected
dealer. The gross sales charge for the sale of Class D shares for the fiscal
year ended July 31, 1997 was $66,255, of which the Distributor received $5,253
and Merrill Lynch received $61,002 as a selected dealer. The gross sales
charge for the sale of Class D shares for the fiscal year ended July 31, 1996
was $128,390 of which the Distributor received $9,917 and Merrill Lynch
received $118,473 as a selected dealer. For the period October 21, 1994
(commencement of
10
<PAGE>
operations) to July 31, 1995, the gross sales charge for the sale of Class D
shares was $163,110, of which the Distributor received $9,543 and Merrill
Lynch received $153,567 as a selected dealer, of which $1,717 was voluntarily
waived. 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 their own account and
single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company", as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment
adviser.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or the
Investment Adviser who purchased such closed-end fund shares prior to October
21, 1994 (the date the Merrill Lynch Select Pricing(SM) 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 or Class D Shares, if the
conditions set forth below are satisfied. Alternatively, closed-end fund
shareholders who purchased such shares on or after October 21, 1994 and wish
to reinvest the net proceeds from a sale of their closed-end fund shares are
offered Class A shares (if eligible to buy Class A shares) or Class D shares
of the Fund and other MLAM-advised mutual funds ("Eligible Class D Shares"),
if the following conditions are met. First, the sale of the closed-end fund
shares must be made through Merrill Lynch, and the net proceeds therefrom must
be immediately reinvested in Eligible Class A Shares. Second, the closed-end
fund shares must either have been acquired in the initial public offering or
be shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the above-
referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
11
<PAGE>
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of the Fund. This investment option is available only with
respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each
as defined in the eligible fund's prospectus) is applicable. Purchase orders
from eligible fund shareholders wishing to exercise this investment option will
be accepted only on the day that the related tender offer terminates and will
be effected at the net asset value of the designated class of the Fund on such
day.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. The 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 the 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, and
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
other MLAM-advised mutual funds made within a thirteen-month period starting
with the first purchase pursuant to a Letter of Intention in the form provided
in the Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's Transfer Agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides
plan-participant recordkeeping 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 and
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 purchased 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 thirteen-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intention must be at least five percent of the
dollar amount of such Letter. If a purchase during the term of such Letter
would otherwise be subject to a further reduced sales charge based on the right
of accumulation, the purchaser will be entitled on that purchase and subsequent
purchases to that further reduced percentage sales charge, but there will be no
12
<PAGE>
retroactive reduction of the sales charges on any previous purchase. The value
of any shares redeemed or otherwise disposed of by the purchaser prior to
termination or completion of the Letter of Intention will be deducted from the
total purchases made under such Letter. An exchange from a MLAM-advised money
market fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint(SM) 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. The
Blueprint program is directed to small investors, group IRAs and participants
in certain affinity groups such as credit unions, trade associations and
benefit plans. Investors placing orders to purchase Class A or Class D shares
of the Fund through Blueprint will acquire the Class A or Class D shares at
net asset value per share plus a sales charge calculated in accordance with
the Blueprint sales charge schedule (i.e., up to $300 at 4.25%, $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 D shares of the Fund
are being offered at net asset value per share plus a sales charge of 1/2 of
1% for corporate or group IRA programs placing orders to purchase their Class
A or Class D shares through Blueprint. Services, including the exchange
privilege, available to Class A and Class D investors through Blueprint,
however, may differ from those available to other investors in Class A or
Class D shares.
Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program (the "IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor has entered into a
Merrill Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of
an automatic investment plan. Additional information concerning purchases
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
Employee Access(SM) Accounts. 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. 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.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services
at net asset value.
13
<PAGE>
Purchase Privileges of Certain Persons. Directors of the Fund, members of the
Boards of other MLAM-advised investment companies, directors and employees of
ML&Co. and its subsidiaries (the term "subsidiaries", when used herein with
respect to Merrill Lynch & Co., Inc., includes MLAM, FAM and certain other
entities directly or indirectly wholly owned and controlled by Merrill Lynch &
Co., Inc.), 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 will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that he
or she will purchase Class D shares of the Fund with proceeds from a redemption
of a mutual fund that was sponsored by the financial consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in cash
or a money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such other fund were subject to a sales charge either at the time of
purchase or on a deferred basis; and second, such purchase of Class D shares
must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor 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
other mutual funds and that such shares have been outstanding for a period of
no less than six months; and second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.
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
14
<PAGE>
restricted as to transfer either by law or liquidity of market (except that the
Fund may acquire through such transactions restricted or illiquid securities to
the extent the fund does not exceed the applicable limits on acquisition of
such securities set forth under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, each Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the account
maintenance fees and/or 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 a
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 the 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
15
<PAGE>
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. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Fund will
not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance
fee. In certain circumstances the amount payable pursuant to the voluntary
maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
The following table sets forth comparative information as of July 31, 1997
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule and the Distributor's voluntary maximum for the period October 21,
1988 (commencement of operations) to July 31, 1997, with respect to Class B
shares, and under the NASD maximum sales charge rule for the period October
21, 1994 (commencement of operations) to July 31, 1997, with respect to Class
C shares.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1997
----------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B
Under NASD Rule as
Adopted................ $523,570 $32,723 $9,045 $ 41,768 $17,565 $24,203 $2,528
Under Distributor's
Voluntary Waiver....... $523,570 $32,723 $2,618 $ 35,341 $17,565 $17,776 $2,528
CLASS C
Under NASD Rule as
Adopted................ $ 20,373 $ 1,273 $ 219 $ 1,492 $ 276 $ 1,216 $ 108
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since October 21, 1988
(commencement of operations) and all eligible Class C shares sold since
October 21, 1994 (commencement of operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
16
<PAGE>
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to
July 6, 1993 under the distribution plan in effect at that time, at a 1.0%
rate, 0.75% of average daily net assets has been treated as a distribution
fee and 0.25% of average daily net assets has been deemed to have been a
service fee and not subject to the NASD maximum sales charge rule. See
"Purchase of Shares--Distribution Plans" in the Prospectus. 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 Funds Advisor ("MFA") program. The CDSC is booked as a contingent
obligation that may be payable if the shareholder terminates participation
in the MFA program.
(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 redeem shares or to receive payment with respect to any such
redemption may be suspended only for any period during which trading on the
NYSE is restricted as determined by the Commission or such Exchange is closed
(other than customary weekend and holiday closings), for any period during
which an emergency exists as defined by the Commission as a result of which
disposal of portfolio securities or determination of the net asset value of
the Fund is not reasonably practicable, and for such other periods as the
Commission may by order permit for the protection of shareholders of the Fund.
DEFERRED SALES CHARGE--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 on redemptions of Class B shares or 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 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 July 31, 1995, 1996 and 1997 the Distributor received CDSCs of
$594,796, $582,976 and $652,512, respectively, 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. Similarly, for the fiscal period October 21, 1994
(commencement of operations) to July 31, 1995, and for the fiscal years ended
July 31, 1996 and 1997, the
17
<PAGE>
Distributor received CDSCs of $3,586, $8,940 and $5,533, respectively, with
respect to redemptions of Class C shares, all of which were paid to Merrill
Lynch.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint").
Blueprint is directed to small investors, group IRAs and participants in
certain affinity groups such as trade associations and credit unions. Class B
shares of the Fund are offered through Blueprint only to members of certain
affinity groups. The CDSC is waived in connection with purchase orders placed
through Blueprint 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 Blueprint(SM) Program, P.O. Box
30441, New Brunswick, New Jersey 08989-0441.
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
placing the Fund's portfolio transactions. With respect to 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
companies in weak financial condition or experiencing poor operating results
in which the Fund may invest 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
less troubled 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, 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.
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 may also 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 with the Fund, and the expenses of the
Investment
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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.
For the fiscal year ended July 31, 1997, the Fund paid total brokerage
commissions of $2,610,331 none of which was paid to Merrill Lynch. For the
fiscal year ended July 31, 1996, the Fund paid total brokerage commissions of
$3,405,082, of which $77,335, or 2.3%, was paid to Merrill Lynch for effecting
3.3% of the aggregate dollar amount of transactions in which the Fund paid
brokerage commissions. For the fiscal year ended July 31, 1995, the Fund paid
total brokerage commissions of $2,381,162 of which $27,831, or 1.17%, was paid
to Merrill Lynch for effecting 0.96% of the aggregate dollar amount of
transactions in which the Fund paid brokerage commissions.
The Fund also may invest in securities traded in the over-the-counter market.
Transactions in the over-the-counter ("OTC") market are generally principal
transactions with dealers and the cost of such transactions involve dealer
spreads rather than brokerage commissions. With respect to OTC transactions,
the Fund, where possible, deals directly with the dealers who make a market in
the securities involved except in those circumstances where better prices and
execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as a
principal in the purchase and sale of securities unless a permissive order
allowing such transactions 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. See
"Investment Objective and Policies--Current Investment Restrictions". 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 and tender offer solicitation fees, by conducting such portfolio
transactions through affiliated entities, including Merrill Lynch. For example,
the 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 of Directors made a determination not to
seek such recapture. The Board of Directors will reconsider this matter from
time to time. The Investment Adviser has arranged for the 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 the 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
the aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of
its portfolio transactions executed on any such securities exchange of which it
is a member, appropriate consents have been obtained from the Fund and annual
statements as to aggregate compensation will be provided to the Fund.
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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
such Exchange 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 net asset value per share is
computed by dividing the sum of the value of the securities held by the Fund
plus any cash or other assets (including interest and dividends accrued but not
yet received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the investment advisory fees and any account maintenance
and/or distribution fees, are accrued daily. The per share net asset value of
the Class B, Class C and Class D shares generally will be lower than the per
share net asset value of the Class A shares reflecting the daily expense
accruals of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to the
Class D shares; moreover the per share net asset value of the Class B and Class
C shares generally will be lower than the per share net asset value of Class D
shares reflecting the daily expense accruals of the distribution fees and
higher transfer agency fees applicable with respect to the 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 differential between the
classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued,
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. 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. 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.
The Fund may, to the extent permitted by its investment restrictions, have
positions in portfolio securities for which market quotations are not readily
available. It may be difficult to determine precisely the fair market value for
such investments and there may be a range of values which are reasonable at any
particular time. Determination of fair value in such instances will be based
upon such factors as are deemed relevant under the circumstances, including the
financial condition and operating results of the issuer, recent third party
transactions (actual or proposed) relating to such securities and, in extreme
cases, the liquidation value of the issuer.
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SHAREHOLDER SERVICES
The Fund offers a number of shareholder services summarized below that are
designed to facilitate investment in its shares. A description of such services
is set forth below. Full details as to each of such services and copies of the
various plans described below can be obtained from the Fund, the Distributor or
Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive 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 capital gain distributions. These statements also will show any
other activity in the account since the previous statement. Shareholders also
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 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 upon the specific
request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders considering transferring their Class A shares from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the Class A 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
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 he or she is 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 can also be made through a service
known as the Automatic Investment Plan whereby the Fund is authorized through
preauthorized checks or automated clearinghouse debits of $50 or more to charge
the regular bank account
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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 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.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the ex-dividend date of the dividend or distribution. Shareholders
may elect in writing to receive either their dividends or capital gains
distributions, or both, in cash, in which event payment will be mailed or
direct deposited on or about the payment date.
Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) that they no longer wish to
have their dividends and/or capital gains distributions reinvested in shares of
the Fund or vice versa and, commencing ten days after the receipt by the
Transfer Agent of such notice, those instructions will be effected. 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 to such shareholder's
bank account 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 and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined as of 15 minutes after the close of business on 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 following business day. The check for the withdrawal payment
will be mailed or the direct deposit of 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.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original
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investment may be correspondingly reduced. 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,
bimonthly, quarterly, semiannual or annual basis through the CMA (R)/CBA (R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed. All
redemptions are made at net asset value. A shareholder may elect to have his or
her shares redeemed on the first, second, third or fourth Monday of each month,
in the case of monthly redemptions, or of every other month, in the case of
bimonthly redemptions. For quarterly, semiannual or annual redemptions, the
shareholder may select the month in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA (R)/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)/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; if an
investor wishes to change the amount being withdrawn in a systematic withdrawal
plan the investor should contact his or her Financial Consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well
as in other securities. Merrill Lynch charges an initial establishment fee and
an annual custodial fee for each account. Information with respect to these
plans is available upon request from Merrill Lynch. The minimum initial
purchase to establish any such plan is $100 and the minimum subsequent purchase
is $1.
Capital gains and ordinary income received in each of the plans referred to
above are exempt from Federal taxation until distributed from the plans.
Investors considering participation in any such plan should
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review specific tax laws relating thereto and should consult their attorneys
or tax advisers with respect to the establishment and maintenance of any such
plan.
EXCHANGE PRIVILEGE
U.S. Shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under the
Merrill Lynch Select Pricing(SM) 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, but does not hold Class A shares of the second fund in
his or her account at the time of the exchange and is not otherwise eligible
to acquire Class A shares of the second fund, the shareholder will receive
Class D shares of the second fund as a result of the exchange. Class D shares
also may be exchanged for Class A shares of a second 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 of 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
specifically designated below as available for exchange by holders of Class A,
Class B, Class C or Class D shares. 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 and 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 of the Fund
generally may be exchanged into the Class A or Class D shares of the other
funds or into shares of the Class A and Class D money market funds with a
reduced or without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively,
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("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 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 of the new Class B or
Class C shares. For example, an investor may exchange Class B shares of the
Fund for those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund")
after having held the Fund Class B shares for two and a half years. The 2% CDSC
that generally would apply to a redemption would not apply to the exchange.
Three years later the investor may decide to redeem the Class B shares of
Special Value Fund and receive cash. There will be no CDSC due on this
redemption, since by "tacking" the two and a half year holding period of Fund
Class B shares to the three year holding period for the Special Value Fund
Class B shares, the investor will be deemed to have held the new Special Value
Fund Class B shares for more than five years.
Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Investment Adviser or its affiliates, but the
period of time that Class B or Class C shares are held in a money market fund
will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
that were acquired as a result of an exchange for Class B or Class C shares of
the Fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any fund offering such shares, in which event the holding
period for Class B or Class C shares of the newly-acquired Fund will be
aggregated with previous holding periods for purposes of reducing the CDSC.
Thus, for example, an investor may exchange Class B shares of the Fund for
shares of Merrill Lynch Institutional Fund after having held the Class B shares
for two and a half years and three years later decide to redeem the shares of
Merrill Lynch Institutional Fund for cash. At the time of this redemption, the
2% CDSC that would have been due had the Class B shares of the Fund been
redeemed for cash rather than exchanged for shares of Merrill Lynch
Institutional Fund will be payable. If, instead of such redemption the
shareholder exchanged such shares for Class B shares of a fund that the
shareholder continued to hold for an additional two and a half years, any
subsequent redemption will not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their Merrill
Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income, if any.
Dividends from such investment income are paid semi-annually. All net realized
capital gains, if any, are distributed to the Fund's shareholders at least
annually. See "Shareholder Services--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 described below whether they are invested 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
the Class D shares. See "Determination of Net Asset Value."
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses ("capital gain dividends") are taxable
to shareholders as long-term capital gains, regardless of the length of time
the shareholder has owned Fund shares. Recent legislation creates additional
categories of capital gains taxable at different rates. Although the
legislation does not explain how gain in these categories will be taxed to
shareholders of RICs, it authorizes regulations applying the new categories of
gain and the new rates to sales of securities by RICs. In the absence of
guidance, there is some uncertainty as to the manner in which the categories of
gain and related rates will be passed through to the shareholders in capital
gain dividends. 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). Although the Fund may invest in certain municipal securities,
it is not anticipated that any portion of the dividends paid by the Fund will
qualify for tax-exempt treatment to shareholders.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income or capital gain dividends. It is
anticipated that IRS
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guidance permitting categories of gain and related rates to be passed through
to shareholders would also require this written notice to designate the amounts
of various categories of capital gain income in capital gain dividends. A
portion of the Fund's ordinary income dividends may be eligible for the
dividends received deduction allowed to corporations under the Code, if certain
requirements are met. For this purpose, the Fund will allocate dividends
eligible for the dividends received deduction among the Class A, Class B, Class
C and Class D shareholders according to a method (which it believes is
consistent with the Commission rule permitting the issuance and sale of
multiple classes of stock) that is based on the gross income allocable to the
Class A, Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe. If the Fund
pays a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by its shareholders on December 31 of the year in which
such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident shareholders are urged to consult
their own tax advisers concerning the applicability of the United States
withholding tax.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period 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 such 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.
27
<PAGE>
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.
The Fund may invest in high yield bonds as described in the Prospectus. Some
of these high yield bonds may be purchased at a discount and may therefore
cause the Fund to accrue income before amounts due under the obligations are
paid. In addition, a portion of the interest payments on such high yield bonds
may be treated as dividends for Federal income tax purposes; in such case, if
the issuer of such high yield bonds is a domestic corporation, dividend
payments by the Fund will be eligible for the dividends received deduction to
the extent of the deemed dividend portion of such interest payments.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Fund may write covered call options, purchase put options and enter into
forward foreign exchange contracts. Options 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 contract will be treated as
sold for its fair market value on the last day of the taxable year. Unless such
contract is a forward foreign exchange contract, or is a non-equity option or a
regulated futures contract for a non-U.S. currency for which the Fund elects to
have gain or loss treated as ordinary gain or loss under Code Section 988 (as
described below), gain or loss from Section 1256 contracts will be 60% long-
term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above,
however, will not apply to certain transactions entered into by the Fund solely
to reduce the risk of changes in price or interest or currency exchange rates
with respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's sales of securities and transactions in options 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 and forward
foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other
disposition of securities held for less than three months.
28
<PAGE>
Accordingly, the Fund may be restricted in effecting closing transactions
within three months after entering into an option contract. Under recently
enacted legislation, this requirement will no longer apply to the Fund after
its fiscal year ending July 31, 1998.
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 U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than the
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules 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 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 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 own tax advisors 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.
29
<PAGE>
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with a formula specified by the
Commission.
Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including the maximum sales charge in the case of
Class A and Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period in the case of
Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that, (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (2) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations. Aside from the impact on
the performance data calculations of including or excluding the maximum
applicable sales charge, actual annual or annualized total return data
generally will be lower than average annual total return data since the average
rates of return reflect compounding of return; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over a longer period of time.
Set forth below is total return information for the Class A, Class B, Class C
and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES* CLASS C SHARES** CLASS D SHARES**
-------------------------- -------------------------- -------------------------- --------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT
$1,000 AT THE END $1,000 AT THE END $1,000 AT THE END $1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year Ended
July 31, 1997.. 22.97% $1,229.70 24.49% $1,244.90 27.39% $1,273.90 22.64% $1,226.40
Five Years Ended
July 31, 1997.. 15.66% $2,070.00 15.73% $2,076.10
Ten Years Ended
July 31, 1997.. 12.29% $3,186.20
Inception
(October 21,
1988) to
July 31, 1997.. 12.73% $2,862.20
Inception
(October 21,
1994) to
July 31, 1997.. 15.11% $1,477.70 13.81% $1,431.80
</TABLE>
(Table continues on following page)
30
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES* CLASS C SHARES** CLASS D SHARES**
-------------------------- -------------------------- -------------------------- --------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT
$1,000 AT THE END $1,000 AT THE END $1,000 AT THE END $1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
------ ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<CAPTION>
YAR ENDED JULY 31,E
- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997............ 29.78% $1,297.80 28.48% $1,284.80 28.39% $1,283.90 29.44% $1,294.40
1996............ 4.78% $1,047.80 3.67% $1,036.70 3.69% $1,036.90 4.50% $1,045.00
1995............ 13.91% $1,139.10 12.83% $1,128.30
1994............ 9.36% $1,093.60 8.21% $1,082.10
1993............ 28.96% $1,289.60 27.66% $1,276.60
1992............ 14.54% $1,145.40 13.35% $1,133.50
1991............ 10.35% $1,103.50 9.14% $1,091.40
1990............ (0.93)% $ 990.70 (1.86)% $ 981.40
1989............ 17.48% $1,174.80
1988............ 4.64% $1,046.40
1987............ 30.34% $1,303.40
1986............ 25.45% $1,254.50
1985............ 29.44% $1,294.40
1984............ 2.88% $1,028.80
Inception
(November 1,
1982) to
July 31, 1983.. 28.83% $1,288.30
Inception
(October 21,
1988) to
July 31, 1989.. 13.56% $1,135.60
Inception
(October 21,
1994) to
July 31, 1995.. 10.99% $1,109.90 11.72% $1,117.20
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inception
(November 1,
1982) to July
31, 1997....... 793.79% $8,937.90
Inception
(October 21,
1988) to July
31, 1997....... 186.22% $2,862.20
Inception
(October 21,
1994) to July
31, 1997....... 47.77% $1,477.70 43.18% $1,431.80
</TABLE>
- --------
* Information as to Class B shares is presented only for the period October
21, 1988 to July 31, 1996. Prior to October 21, 1988, no Class B shares
were publicly issued.
** Information as to Class C and Class D shares is presented only for the
period October 21, 1994 to July 31, 1996. Prior to October 21, 1994, no
Class C or Class D shares were publicly issued.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of
Shares" and "Redemption of Shares," respectively, the total return data quoted
by the Fund in advertisements directed to such investors may take into account
the reduced, and not the maximum, sales charge or may not take into account
the CDSC and therefore may reflect greater total return since, due to the
reduced sales charge or the waiver of sales charges, a lower amount of
expenses may be deducted.
31
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Fund was incorporated under Maryland law on April 15, 1982. It has an
authorized capital of 300,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock. Class A and Class C each consist of 50,000,000 shares,
and Class B and Class D each consist of 100,000,000 shares. Class A, Class B,
Class C and Class D Common Stock represent an interest in the same assets of
the Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The Fund has received an order from the Commission permitting the issuance and
sale of multiple classes of Common Stock. The Board of Directors of the Fund
may classify and reclassify the shares of the Fund into additional classes of
Common Stock at a future date.
Shareholders are entitled to one vote for each full 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
of 1940 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 the meeting. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive or conversion
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
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 July 31, 1997, is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets................... $301,936,256 $337,022,174 $14,447,838 $85,408,440
============ ============ =========== ===========
Number of Shares
Outstanding................. 19,714,408 22,748,088 981,218 5,586,132
============ ============ =========== ===========
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)................ $ 15.32 $ 14.82 14.72 $ 15.29
Sales Charge (Class A and
Class D shares: 5.25% of
offering price (5.54% of net
asset value per share))*.... .85 ** ** .85
------------ ------------ ----------- -----------
Offering Price............... $ 16.17 $ 14.82 $ 14.72 $ 16.14
============ ============ =========== ===========
</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 upon redemption. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus and
"Redemption of Shares--Deferred Sales Charges--Class B and Class C Shares"
herein.
32
<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 ratification by the shareholders of the
Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
CUSTODIAN
The Chase Manhattan Bank, N.A., Global Securities Services, 4 Chase MetroTech
Center, 18th Floor, Brooklyn, New York 11245, 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 delivery of securities
and collecting interest on the Fund's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Fund's Transfer Agent (the
"Transfer Agent"). The Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening, maintenance and servicing of
shareholder accounts. See "Management of the Fund--Transfer Agency Services" in
the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on July 31 of each year. The Fund sends to
its shareholders at least semiannually reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
independent auditors, is sent to shareholders each year. After the end of each
year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Commission, Washington,
D.C., under the Securities Act and the Investment Company Act, to which
reference is hereby made.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on November 1, 1997.
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Phoenix Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Phoenix Fund, Inc. as of July 31,
1997, the related statements of operations for the year then ended and changes
in net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at July
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Phoenix Fund, Inc. as of July 31, 1997, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 5, 1997
34
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Amount/ Value Percent of
Industry Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Discount to Assets
Computer Services 654,700 Scitex Corp. Ltd. $ 6,834,755 $ 6,424,244 0.9%
Conglomerates 250,000 Hanson PLC Sponsored (ADR)* 10,190,365 6,328,125 0.8
Energy Related 700,000 McDermott International, Inc. 12,621,515 21,393,750 2.9
Leisure & 850,000 ++Viacom, Inc. (Class B) (Non-Voting) 25,116,186 26,243,750 3.6
Entertainment
Total Discount to Assets 54,762,821 60,389,869 8.2
Earning Turnarounds
Airlines 2,065,000 ++Mesa Air Group, Inc. (d) 15,219,287 11,292,969 1.5
Cable 1,600,000 ++Century Communications Corp. (d) 11,229,756 8,800,000 1.2
Computer & 450,000 ++Unisys Corp. 3,645,816 4,331,250 0.6
Peripherals
Computer Software 1,100,000 ++Mentor Graphics Corporation 10,874,845 11,550,000 1.6
Consumer Products 2,500,000 ++The Topps Co., Inc. (d) 14,435,385 9,062,500 1.2
Energy Related 400,000 ++Marine Drilling Co., Inc. 3,200,000 9,925,000 1.3
Gold 600,000 Placer Dome Inc. 9,886,838 10,200,000 1.4
Health Care 600,000 ++Humana, Inc. 11,564,931 14,625,000 2.0
1,300,000 ++NeoRx Corp. (d) 7,991,431 5,606,250 0.7
1,193,800 ++Perrigo Co. 12,307,962 15,519,400 2.1
Industrial Services 1,407,670 ++Anacomp, Inc. (d) 9,137,200 16,540,122 2.2
Leisure & 900,000 ++CST Entertainment Imaging, Inc. (a) 675,000 9,000 0.0
Entertainment
Retail 4,170,000 CML Group, Inc. (d) 23,882,945 14,855,625 2.0
450,000 ++Toys 'R' Us, Inc. 11,973,130 15,328,125 2.1
Semiconductor 1,650,000 ++Integrated Device Technology, Inc. 16,382,706 22,275,000 3.0
657,700 ++LTX Corp. 3,947,449 4,521,688 0.6
Steel 1,000,000 Birmingham Steel Corp. 15,537,099 18,187,500 2.5
Telecommunications 600,000 ++DSC Communications Corp. 11,020,016 17,662,500 2.4
Telecommunications 904,200 ++ANTEC Corporation 7,454,077 12,319,725 1.7
Equipment
Total Earning Turnarounds 200,365,873 222,611,654 30.1
Financial Restructuring
Energy Related 1,938,474 ++WRT Energy Corp.--Litigation Trust
Certificates (e) 370,839 0 0.0
1,938,474 ++WRT Energy Corp.--New Common Stock (e) 16,017,828 10,176,991 1.4
Retail 443,361 ++Zale Corp. Litigation Limited
Partnership Units 0 0 0.0
Textiles 305,706 ++The Bibb Co. (a) 2,100,882 2,159,049 0.3
$ 9,000,000 ++JPS Textile Group Inc., Subordinated
Debentures, 7% due 5/15/2000 990,000 1,057,500 0.1
$ 5,740,000 ++JPS Textile Group Inc., Subordinated
Notes, 10.25% due 6/01/1999 3,289,290 4,391,100 0.6
Total Financial Restructuring 22,768,839 17,784,640 2.4
</TABLE>
35
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Face Amount/ Value Percent of
Industry Shares Held Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
High Yield
Cable $ 754,545 Scott Cable, New 3rd Secured, Pay-in-
Kind Notes, 16% due 7/18/2002 (c) $ 293,272 $ 188,636 0.0%
$ 5,850,900 Scott Cable Trust Certificate, Pay-in-
Kind Notes, 15% due 3/18/2001 (c) 4,321,391 5,090,283 0.7
Consumer Products $12,220,000 Specialty Foods Corp., Senior Sub-
ordinated Notes, 11.25% due 8/15/2003 9,962,800 10,509,200 1.4
$ 2,500,000 Town & Country Corporation, Senior
Subordinated Notes, 13% due 5/31/1998 2,125,000 1,512,500 0.2
$ 6,600,000 U.S. Leather Inc., Senior Notes, 10.25%
due 7/31/2003 4,785,875 4,686,000 0.6
Home Builders $20,500,000 ++Baldwin Homes, Series B, 10.375% due
8/01/2003 8,541,125 9,122,500 1.3
Leisure & $10,500,000 Bally's Health & Tennis Corporation,
Entertainment Senior Subordinated Notes, 13% due
1/15/2003 8,450,000 11,025,000 1.5
Printing & $ 6,255,400 San Jacinto Holdings Inc., Senior
Publishing Subordinated Notes, 12% due 12/31/2002 4,048,512 4,378,780 0.6
Supermarkets $ 3,000,000 Farm Fresh Inc., Senior Notes, 12.25%
due 10/01/2000 2,400,000 2,460,000 0.3
$18,000,000 Grand Union Co., Senior Notes, 12% due
9/01/2004 9,143,063 8,460,000 1.2
Total High Yield 54,071,038 57,432,899 7.8
Operational Restructuring
Cable 850,000 ++Tele-Communications, Inc. (Class A) 11,295,192 14,503,125 2.0
1,019,500 ++U S West Media Group 18,705,714 22,492,719 3.0
Computer Hardware 1,500,000 ++Amdahl Corp. 11,611,657 17,718,750 2.4
500,000 ++Digital Equipment Corp. 17,213,510 20,593,750 2.8
Computer Software 2,585,000 ++Borland International, Inc. (d) 31,302,706 21,326,250 2.9
1,800,000 ++CompuServe Corporation 18,755,849 20,700,000 2.8
4,445,000 ++Computervision Corp. (d) 27,356,936 15,279,687 2.1
4,100,000 ++Novell Inc. 40,588,442 31,006,250 4.2
Energy Related 601,800 ++Oryx Energy Co. 7,698,802 14,856,937 2.0
Engineering 800,000 ++EMCOR Group, Inc. 6,875,703 12,200,000 1.7
Environmental 1,250,000 Laidlaw, Inc. (Non-Voting) (Class B)
(ADR)* 12,140,881 19,921,875 2.7
Financial Services 106,200 H&R Block, Inc. 3,969,161 4,068,788 0.6
Health Care 1,257,600 ++Pharmaceutical Product Development, Inc. 18,317,319 29,396,400 4.0
Pharmaceuticals 978,700 ++IVAX Corp. 9,428,465 9,175,312 1.2
Retail 400,000 ++Woolworth Corp. 4,009,000 11,325,000 1.5
Semiconductor 150,000 ++General Semiconductor, Inc. (b) 1,967,356 2,287,500 0.3
Steel 1,598,500 ++WHX Corp. (d) 14,627,431 14,386,500 1.9
Telecommunications 450,000 AT&T Corp. 16,978,773 16,565,625 2.2
Telecommunications 200,000 ++CommScope, Inc. (b) 2,688,720 3,200,000 0.4
Equipment 600,000 ++NextLevel Systems, Inc. (b) 9,935,147 11,962,500 1.6
Total Operational Restructuring 285,466,764 312,966,968 42.3
Total Investments 617,435,335 671,186,030 90.8
</TABLE>
36
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Face Amount Short-Term Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Commercial Paper** $15,000,000 Eureka Securitization Inc., 5.52% due
9/08/1997 $ 14,912,600 $ 14,912,600 2.0%
1,557,000 General Motors Acceptance Corp., 5.81%
due 8/01/1997 1,557,000 1,557,000 0.2
10,000,000 Goldman Sachs Group, 5.54% due
8/07/1997 9,990,767 9,990,767 1.4
16,000,000 Monsanto Company, 5.48% due 8/06/1997 15,987,822 15,987,822 2.2
15,000,000 Preferred Receivable Funding Corp.,
5.52% due 9/09/1997 14,910,300 14,910,300 2.0
Total Short-Term Investments 57,358,489 57,358,489 7.8
Total Investments $674,793,824 728,544,519 98.6
============
Other Assets Less Liabilities 10,270,189 1.4
------------ ------
Net Assets $738,814,708 100.0%
============ ======
<FN>
*American Depositary Receipts (ADR).
**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)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Security Act of 1933.
(b)Received in spin-off of General Instrument Corp.
(c)Represents a pay-in-kind security which may pay interest in
additional face.
(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:
<CAPTION>
Net Share Net Dividend
Industry Affiliate Activity Cost Income
<S> <S> <C> <C> <C>
Airlines Mesa Air Group, Inc. 495,000 $ 3,747,640 --
Cable Century Communications Corp. (400,000) (5,476,795) --
Computer Software Borland International, Inc. 416,600 2,800,382 --
Computer Software Computervision Corp. 1,895,000 12,058,217 --
Consumer Products The Topps Co., Inc. 900,000 3,630,318 --
Health Care NeoRx Corp. 200,800 958,151 --
Industrial Services Anacomp, Inc. -- -- --
Retail CML Group, Inc. 670,000 2,732,658 $35,000
Steel WHX Corp. 698,500 5,061,122 --
(e)Received in exchange for WRT Energy Corp., 13.875% Senior Notes
due 3/01/2002.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
37
<PAGE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of July 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$674,793,824)
(Note 1a) $ 728,544,519
Cash 2,300,023
Foreign cash (Note 1c) 257
Receivables:
Securities sold $ 20,075,711
Interest 1,872,992
Capital shares sold 531,282
Dividends 153,982 22,633,967
--------------
Prepaid registration fees and other assets (Note 1f) 81,430
--------------
Total assets 753,560,196
--------------
Liabilities: Payables:
Securities purchased 11,178,464
Capital shares redeemed 2,314,465
Investment adviser (Note 2) 596,233
Distributor (Note 2) 306,666 14,395,828
--------------
Accrued expenses and other liabilities 349,660
--------------
Total liabilities 14,745,488
--------------
Net Assets: Net assets $ 738,814,708
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 50,000,000
Consist of: shares authorized $ 1,971,441
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 2,274,809
Class C Shares of Common Stock, $0.10 par value, 50,000,000
shares authorized 98,122
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 558,613
Paid-in capital in excess of par 567,817,882
Undistributed investment income--net 1,664,384
Undistributed realized capital gains on investments and
foreign currency transactions--net 110,678,845
Unrealized appreciation on investments and foreign currency
transactions--net 53,750,612
--------------
Net assets $ 738,814,708
==============
Net Asset Value: Class A--Based on net assets of $301,936,256 and 19,714,408
shares outstanding $ 15.32
==============
Class B--Based on net assets of $337,022,174 and 22,748,088
shares outstanding $ 14.82
==============
Class C--Based on net assets of $14,447,838 and 981,218
shares outstanding $ 14.72
==============
Class D--Based on net assets of $85,408,440 and 5,586,132
shares outstanding $ 15.29
==============
See Notes to Financial Statements.
</TABLE>
38
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended July 31, 1997
<S> <S> <C> <C>
Investment Interest and discount earned $ 12,502,260
Income Dividends (net of $203,669 foreign withholding tax) 2,260,067
(Notes 1d & 1e): --------------
Total income 14,762,327
--------------
Expenses: Investment advisory fees (Note 2) $ 7,150,934
Account maintenance and distribution fees--Class B (Note 2) 3,612,384
Transfer agent fees--Class B (Note 2) 776,418
Transfer agent fees--Class A (Note 2) 541,805
Accounting services (Note 2) 168,926
Printing and shareholder reports 166,655
Account maintenance fees--Class D (Note 2) 161,204
Account maintenance and distribution fees--Class C (Note 2) 149,517
Transfer agent fees--Class D (Note 2) 124,648
Registration fees (Note 1f) 85,991
Directors' fees and expenses 75,738
Professional fees 72,795
Custodian fees 51,102
Transfer agent fees--Class C (Note 2) 33,845
Other 22,213
--------------
Total expenses 13,194,175
--------------
Investment income--net 1,568,152
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 117,056,545
(Loss) on Foreign currency transactions--net (50,384) 117,006,161
Investments & --------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 65,493,848
(Notes 1b, 1c, Foreign currency transactions--net (63) 65,493,785
1e & 3): -------------- --------------
Net realized and unrealized gain on investments and foreign
currency transactions 182,499,946
--------------
Net Increase in Net Assets Resulting from Operations $ 184,068,098
==============
See Notes to Financial Statements.
</TABLE>
39
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended
July 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 1,568,152 $ 2,504,634
Realized gain on investments and foreign currency transactions
--net 117,006,161 89,032,522
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 65,493,785 (61,421,781)
-------------- --------------
Net increase in net assets resulting from operations 184,068,098 30,115,375
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (1,322,009) (2,797,570)
Shareholders Class B -- (1,123,307)
(Note 1g): Class C -- (55,725)
Class D (167,328) (306,921)
Realized gain on investments--net:
Class A (32,459,002) (12,381,777)
Class B (43,674,101) (18,485,951)
Class C (1,814,737) (584,344)
Class D (5,849,564) (1,742,435)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (85,286,741) (37,478,030)
-------------- --------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (85,819,453) (16,090,922)
(Note 4): -------------- --------------
Net Assets: Total increase (decrease) in net assets 12,961,904 (23,453,577)
Beginning of year 725,852,804 749,306,381
-------------- --------------
End of year* $ 738,814,708 $ 725,852,804
============== ==============
<FN>
*Undistributed investment income--net (Note 1h) $ 1,664,384 $ 1,352,739
============== ==============
See Notes to Financial Statements.
</TABLE>
40
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996++ 1995++ 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.37 $ 13.44 $ 13.31 $ 13.75 $ 11.40
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .10 .13 .17 .03 .02
Realized and unrealized gain on
investments and foreign currency
transactions--net 3.46 .51 1.47 1.18 3.06
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.56 .64 1.64 1.21 3.08
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.06) (.13) (.11) -- (.03)
Realized gain on investments--net (1.55) (.58) (1.40) (1.65) (.70)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (1.61) (.71) (1.51) (1.65) (.73)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 15.32 $ 13.37 $ 13.44 $ 13.31 $ 13.75
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 29.78% 4.78% 13.91% 9.36% 28.96%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses 1.26% 1.24% 1.31% 1.22% 1.25%
Net Assets: ========== ========== ========== ========== ==========
Investment income--net .77% .92% 1.40% .48% .28%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $ 301,936 $ 279,351 $ 286,258 $ 255,856 $ 197,995
========== ========== ========== ========== ==========
Portfolio turnover 81.46% 87.66% 70.36% 63.95% 67.57%
========== ========== ========== ========== ==========
Average commission rate paid++++ $ .0479 $ .0481 -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding during the year.
++++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. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted in US dollars
using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the
rate shown.
See Notes to Financial Statements.
</TABLE>
41
<PAGE>
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996++ 1995++ 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 12.99 $ 13.12 $ 13.02 $ 13.46 $ 11.25
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income (loss)--net (.03) (.01) .04 (.07) (.02)
Realized and unrealized gain on
investments and foreign currency
transactions--net 3.35 .50 1.45 1.11 2.93
---------- ---------- ---------- ---------- ----------
Total from investment operations 3.32 .49 1.49 1.04 2.91
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net -- (.04) (.02) -- --
Realized gain on investments--net (1.49) (.58) (1.37) (1.48) (.70)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (1.49) (.62) (1.39) (1.48) (.70)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 14.82 $ 12.99 $ 13.12 $ 13.02 $ 13.46
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 28.48% 3.67% 12.83% 8.21% 27.66%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses 2.29% 2.26% 2.34% 2.24% 2.27%
Net Assets: ========== ========== ========== ========== ==========
Investment income (loss)--net (.26%) (.11%) .37% (.51%) (.73%)
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $ 337,022 $ 381,808 $ 414,886 $ 362,129 $ 209,534
========== ========== ========== ========== ==========
Portfolio turnover 81.46% 87.66% 70.36% 63.95% 67.57%
========== ========== ========== ========== ==========
Average commission rate paid++++ $ .0479 $ .0481 -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding during the year.
++++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. The
"Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted in US dollars
using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the
rate shown.
See Notes to Financial Statements.
</TABLE>
42
<PAGE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C++++ Class D++++
For the For the
The following per share data and ratios have Period Period
been derived from information provided in the Oct. 21, Oct. 21,
financial statements. For the Year 1994++ to For the Year 1994++ to
Ended July 31, July 31, Ended July 31, July 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1997 1996 1995
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 12.92 $ 13.07 $ 12.31 $ 13.35 $ 13.43 $ 12.57
Performance: -------- -------- -------- -------- -------- --------
Investment income (loss)
--net (.04) (.02) .03 .07 .09 .11
Realized and unrealized
gain on investments and
foreign currency
transactions--net 3.33 .51 1.21 3.45 .51 1.25
-------- -------- -------- -------- -------- --------
Total from investment
operations 3.29 .49 1.24 3.52 .60 1.36
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net -- (.06) (.05) (.04) (.10) (.07)
Realized gain on
investments--net (1.49) (.58) (.43) (1.54) (.58) (.43)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (1.49) (.64) (.48) (1.58) (.68) (.50)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 14.72 $ 12.92 $ 13.07 $ 15.29 $ 13.35 $ 13.43
======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 28.39% 3.69% 10.99%+++ 29.44% 4.50% 11.72%+++
======== ======== ======== ======== ======== ========
Ratios to Average Expenses 2.30% 2.27% 2.39%* 1.52% 1.48% 1.60%*
Net Assets: ======== ======== ======== ======== ======== ========
Investment income (loss)
--net (.27%) (.12%) .34%* .54% .67% 1.11%*
======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 14,448 $ 15,821 $ 11,775 $ 85,409 $ 48,873 $ 36,388
======== ======== ======== ======== ======== ========
Portfolio turnover 81.46% 87.66% 70.36% 81.46% 87.66% 70.36%
======== ======== ======== ======== ======== ========
Average commission rate
paid++++++ $ .0479 $ .0481 -- $ .0479 $ .0481 --
======== ======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995,
the Fund is required to disclose its average commission rate
rate per share for purchases and sales of equity securities.
The "Average Commission Rate Paid" includes commissions paid
in foreign currencies, which have been converted in US
dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the
rate shown.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Phoenix Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing(SM) System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. 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.
* 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 into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Options--The Fund is authorized to write covered call options
and purchase put options. When the Fund writes an option,
an amount equal to the premium received by the Fund is reflected
as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the
current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related
premium paid (or received) is added to (or deducted from) the basis
of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or
loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized)
44
<PAGE>
assets or liabilities expressed in foreign currencies into US dollars. Realized
and unrealized gains or losses from investments include the effects of foreign
exchange rates on investments.
NOTES TO FINANCIAL STATEMENTS (continued)
(d) 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 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.
(e) 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.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $232,830 have been reclassified from undistributed net realized
capital gains to undistributed net investment income. 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 based upon the average daily
value of the Fund's net assets at the following rates: 1.00% of
average daily net assets not exceeding $500 million; 0.95% of
average daily net assets in excess of $500 million but not exceeding
$1 billion; and 0.90% of average daily net assets in excess of $1
billion.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended July 31, 1997, 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:
45
<PAGE>
MLFD MLPF&S
Class A $2,131 $26,971
Class D $5,253 $61,002
For the year ended July 31, 1997, MLPF&S received contingent
deferred sales charges of $681,299 and $5,533 relating to
transactions in Class B and Class C Shares, respectively.
During the year ended July 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $266 for security
price quotations to compute the net asset value of the Fund.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended July 31, 1997 were $534,447,342 and $719,657,683,
respectively.
Net realized and unrealized gains (losses) as of July 31, 1997 were
as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $117,056,695 $ 53,750,695
Short-term investments (150) --
Foreign currency
transactions (50,384) (83)
------------ ------------
Total $117,006,161 $ 53,750,612
============ ============
As of July 31, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $51,853,408, of which $120,528,535 related
to appreciated securities and $68,675,127 related to depreciated
securities. At July 31, 1997, the aggregate cost of investments for
Federal income tax purposes was $676,691,111.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $85,819,453 and $16,090,922 for the years ended July 31, 1997
and July 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 3,245,516 $ 43,038,169
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,408,271 29,567,961
------------ ------------
Total issued 5,653,787 72,606,130
Shares redeemed (6,835,778) (90,944,050)
------------ ------------
Net decrease (1,181,991) $(18,337,920)
============ ============
Class A Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 4,419,265 $ 59,891,082
Shares issued to shareholders
in reinvestment of dividends
and distributions 740,876 9,936,546
------------ ------------
Total issued 5,160,141 69,827,628
Shares redeemed (5,561,880) (74,905,949)
------------ ------------
Net decrease (401,739) $ (5,078,321)
============ ============
Class B Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 3,717,624 $ 47,733,794
Shares issued to shareholders
in reinvestment of
distributions 3,291,225 39,178,069
------------ ------------
Total issued 7,008,849 86,911,863
Automatic conversion
of shares (2,540,026) (32,669,108)
Shares redeemed (11,110,883) (143,277,186)
------------ ------------
Net decrease (6,642,060) $(89,034,431)
============ ============
Class B Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 7,242,432 $ 96,582,253
Shares issued to shareholders
in reinvestment of dividends
and distributions 946,032 12,394,778
------------ ------------
Total issued 8,188,464 108,977,031
Automatic conversion
of shares (342,861) (4,498,278)
Shares redeemed (10,082,987) (132,916,921)
------------ ------------
Net decrease (2,237,384) $(28,438,168)
============ ============
46
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 240,282 $ 3,051,157
Shares issued to shareholders
in reinvestment of
distributions 136,318 1,613,090
------------ ------------
Total issued 376,600 4,664,247
Shares redeemed (619,861) (7,937,076)
------------ ------------
Net decrease (243,261) $ (3,272,829)
============ ============
Class C Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 692,164 $ 9,157,835
Shares issued to shareholders
in reinvestment of dividends
and distributions 32,179 419,140
------------ ------------
Total issued 724,343 9,576,975
Shares redeemed (400,702) (5,315,980)
------------ ------------
Net increase 323,641 $ 4,260,995
============ ============
Class D Shares for the Year Dollar
Ended July 31, 1997 Shares Amount
Shares sold 1,043,610 $ 13,805,556
Automatic conversion
of shares 2,467,989 32,669,108
Shares issued to shareholders
in reinvestment of dividends
and distributions 454,079 5,575,759
------------ ------------
Total issued 3,965,678 52,050,423
Shares redeemed (2,040,372) (27,224,696)
------------ ------------
Net increase 1,925,306 $ 24,825,727
============ ============
Class D Shares for the Year Dollar
Ended July 31, 1996 Shares Amount
Shares sold 2,067,920 $ 28,313,198
Automatic conversion
of shares 334,895 4,498,278
Shares issued to shareholders
in reinvestment of dividends
and distributions 105,562 1,413,741
------------ ------------
Total issued 2,508,377 34,225,217
Shares redeemed (1,557,098) (21,060,645)
------------ ------------
Net increase 951,279 $ 13,164,572
============ ============
47
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Management of the Fund.................................................... 6
Directors and Officers................................................... 6
Management and Advisory Arrangements..................................... 8
Purchase of Shares........................................................ 10
Alternative Sales Arrangements........................................... 10
Initial Sales Charge Alternative--Class A and Class D Shares............. 10
Reduced Initial Sales Charges............................................ 12
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 15
Distribution Plans....................................................... 15
Limitations on the Payment of Deferred Sales Charges..................... 16
Redemption of Shares...................................................... 17
Deferred Sales Charge--Class B and Class C Shares........................ 17
Portfolio Transactions and Brokerage...................................... 18
Determination of Net Asset Value.......................................... 20
Shareholder Services...................................................... 21
Investment Account....................................................... 21
Automatic Investment Plans............................................... 21
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 22
Systematic Withdrawal Plans.............................................. 22
Retirement Plans......................................................... 23
Exchange Privilege....................................................... 24
Dividends, Distributions and Taxes........................................ 26
Dividends and Distributions.............................................. 26
Taxes.................................................................... 26
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 28
Special Rules for Certain Foreign Currency Transactions.................. 29
Performance Data.......................................................... 30
General Information....................................................... 32
Description of Shares.................................................... 32
Computation of Offering Price Per Share.................................. 32
Independent Auditors..................................................... 33
Custodian................................................................ 33
Transfer Agent........................................................... 33
Legal Counsel............................................................ 33
Reports to Shareholders.................................................. 33
Additional Information................................................... 33
Independent Auditors' Report.............................................. 34
Financial Statements...................................................... 35
</TABLE>
Merrill Lynch Phoenix Fund, Inc. is not related to Phoenix Home Life Mutual
Life Insurance Company or any of its subsidiaries or affiliates, including the
Phoenix Series Fund.
Code # 10242-1197
[LOGO] MERRILL LYNCH
Merrill Lynch
Phoenix Fund, Inc.
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
November 14, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A)FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the ten-year period
ended July 31, 1997.
Contained in Part B:
Schedule of Investments, as of July 31, 1997.
Statement of Assets and Liabilities as of July 31, 1997.
Statement of Operations for the year ended July 31, 1997.
Statements of Changes in Net Assets for each of the years in the two-
year period ended July 31, 1997.
Financial Highlights for each of the years in the five-year period
ended July 31, 1997.
(B)EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Articles of Incorporation of Registrant, dated April 13, 1982.(a)
--Articles of Amendment to Articles of Incorporation of Registrant,
(b) dated October 3, 1988.(a)
--Articles of Amendment to Articles of Incorporation of Registrant,
(c) dated October 17, 1994.(a)
(d) --Articles Supplementary, dated October 18, 1995, to Articles of
Incorporation of Registrant.(f)
2 --By-Laws of Registrant.(a)
3 --None.
4(a) --Portions of the Articles of Incorporation and By-Laws of Registrant
defining the rights of holders of shares of common stock of
Registrant.(b)
5(a) --Investment Advisory Agreement between Registrant and Fund Asset
Management, L.P.(a)
(b) --Supplement to Investment Advisory Agreement between Registrant and
Fund Asset Management, L.P.(d)
(c) --Form of Sub-Advisory Agreement between Fund Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.(h)
6(a) --Form of Class A Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(d)
(b) --Form of Class B Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(a)
(c) --Form of Class C Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(d)
(d) --Form of Class D Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc. (including Form of Selected
Dealers Agreement).(d)
(e) --Merrill Lynch Mutual Fund Adviser Agreement.(c)
7 --None.
8 --Form of Custody Agreement between Registrant and The Chase Manhattan
Bank, N.A.(e).
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc. (now known as Merrill Lynch Financial Data Services,
Inc.).(a)
(b) --Agreement among Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Merrill Lynch Asset Management, Inc. and the Registrant relating to
use by the Registrant of the Merrill Lynch name.(a)
10 --None.
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --None.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
14 --None
15(a) --Class C Distribution Plan and Class C Distribution Plan Sub-
Agreement of Registrant.(f)
(b) --Class D Distribution Plan and Class D Distribution Plan Sub-
Agreement of Registrant.(f)
(c) --Amended and Restated Class B Distribution Plan of Registrant.(c)
16(a) --Schedule for computation of each performance quotation for Class A
shares provided in the Registration Statement in response to Item
22.(a)
(b) --Schedule for computation of each performance quotation for Class B
shares provided in the Registration Statement in response to Item
22.(a)
(c) --Schedule for computation of each performance quotation for Class C
shares provided in the Registration Statement in response to Item
22.(f)
(d) --Schedule for computation of each performance quotation for Class D
shares provided in the Registration Statement in response to Item
22.(f)
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.(g)
</TABLE>
- --------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") phase-in requirements.
(b) Reference is made to Article III, Article V, Article VI (sections 2, 3, 4
and 5), Article VII, Article VIII, and Article X of the Registrant's
Articles of Incorporation, previously filed as Exhibit (1), to the
Registration Statement, and to Article II, Article III (sections 1, 3, 5, 6
and 17), Article VI, Article VII, Article XII, Article XIII, Article XIV
and Article XV of the Registrant's By-Laws previously filed as Exhibit (2)
to the Registration Statement.
(c) Filed on EDGAR on November 24, 1993 as an Exhibit to Post-Effective
Amendment No. 13 to the Registrant's Registration Statement under the
Securities Act of 1933.
(d) Filed on EDGAR as an exhibit to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A, filed October 11, 1994.
(e) Filed on EDGAR as an exhibit to Post-Effective Amendment No. 15 to the
Registrant's Registration Statement on Form N-1A, filed on October 14,
1994.
(f) Filed on EDGAR as an exhibit to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A, filed on November 28,
1995.
(g) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Merrill Lynch New York Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust filed on
January 25, 1996.
(h) Filed on EDGAR as an exhibit to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A, filed on November 27,
1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS SEPTEMBER 30, 1997*
-------------- -------------------
<S> <C>
Class A Common Stock, par value $0.10 per share...... 11,833
Class B Common Stock, par value $0.10 per share...... 24,686
Class C Common Stock, par value $0.10 per share...... 1,556
Class D Common Stock, par value $0.10 per share...... 6,292
</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.
C-2
<PAGE>
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.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or
any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or non-party
independent directors, after review of the facts, that such officer or director
is not guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or
purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
The Registrant may indemnify or purchase insurance to the extent provided in
Article VI of the By-Laws on behalf of an employee or agent who is not an
officer or director of the Registrant.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940 may be concerned, Article VI of
the Registrant's By-Laws provides that such payments will be made only on the
following conditions: (i) the advances must be limited to amounts used, or to
be used, for the preparation or presentation of a defense to the action,
including costs connected with the preparation of a settlement; (ii) advances
may be made only upon receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the amount to which
it is ultimately determined that he is entitled to receive from the Registrant
by reason of indemnification; and (iii) (a) such promise must be secured by a
surety bond, other suitable insurance or an equivalent form of security which
assures that any repayments may be obtained by the Registrant without delay or
litigation, which bond, insurance or other form of security must be provided by
the recipient of the advance, or (b) a majority of a quorum of the Registrant's
disinterested, non-party Directors, or an independent legal counsel in a
written opinion, shall determine, based upon a review of readily available
facts, that the recipient of the advance ultimately will be found entitled to
indemnification.
In Section 9 of the Class A, Class B, Class C and Class D Shares Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended (the
"Act") against certain types of civil liabilities arising in connection with
the Registration Statement or Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the 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 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of
C-3
<PAGE>
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 Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Fund Asset Management, L.P. ("FAM" or the "Manager") 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 Emerging Tigers Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
Municipal Fund Accumulation Program, Inc. and for the following closed-end
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Debt Strategies Fund, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings Florida Insured Fund, 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 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., Taurus MuniCalifornia Holdings, Inc.,
Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Manager,
acts as investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch 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
Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch
Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch
Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch 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 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 for the following closed-end registered investment
C-4
<PAGE>
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 Advisory Trust.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, MLAM and 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 the Fund's transfer agent, Merrill Lynch Financial Data Services ("MLFDS")
is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
July 31, 1995 for his own account or in the capacity of director, officer,
partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard is
Treasurer and Mr. Glenn is Executive Vice President of substantially all of the
investment companies described in the first two paragraphs of this Item 28, and
Messrs. Giordano, Harvey, Kirstein and Monagle are directors or officers of one
or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<C> <C> <S>
ML & Co. ................... Limited Partner Financial Services Holding
Company; Limited Partner of
MLAM
Princeton Services, Inc..... General Partner General Partner of MLAM
Arthur Zeikel............... President President of MLAM; President
and Director of Princeton
Services; Executive Vice
President of ML & Co.
Terry K. Glenn.............. Executive Vice Executive Vice President of
President MLAM; Executive Vice
President and Director of
Princeton Services; President
and Director of MLFD;
Director of MLFDS; President
of Princeton Administrators,
L.P.
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
and Princeton Services
Michael J. Hennewinkel...... 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
Philip L. Kirstein.......... Senior Vice Senior Vice President, General
President, General Counsel and Secretary of
Counsel and MLAM; Senior Vice President,
Secretary General Counsel, Director and
Secretary of Princeton
Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<C> <C> <S>
Ronald M. Kloss............. Senior Vice President Senior Vice President and
and Controller Controller of MLAM; Senior
Vice President and
Controller of Princeton
Services
Debra Landsman-Yaros........ Senior Vice President Senior Vice President of
MLAM; Vice President of
MLFD; Senior Vice President
of Princeton Services
Stephen M. M. Miller........ Senior Vice President Executive Vice President of
Princeton Administrators;
Senior Vice President of
Princeton Services
Joseph T. Monagle Jr........ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
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; Senior Vice President
of Princeton Services;
Director of MLFD
Gerald M. Richard........... Senior Vice President Senior Vice President and
and Treasurer Treasurer of MLAM; Senior
Vice President and
Treasurer of Princeton
Services; Vice President
and Treasurer of MLFD
Gregory Upah................ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of 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 sub-
adviser for the following registered investment companies: Corporate High Yield
Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income Fund
Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth
Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults
International Portfolio, Merrill Lynch 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 Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill
Lynch Phoenix Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Short-
Term Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill
Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill
Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc.,
Merrill Lynch World Income Fund, Inc., and Worldwide DollarVest Fund, Inc. The
address of each of these investment companies is P.O. Box 9011, Princeton, New
Jersey 08543-9011. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London
EC2Y 9HA, England.
Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since July 1, 1995, for his
or her own account or in the capacity of director, officer, partner or trustee.
In addition,
C-6
<PAGE>
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(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------- ----------------------------------
<C> <C> <S>
Arthur Zeikel............... Director and Chairman President of the Manager and
FAM; President and Director
of Princeton Services,
Director of MLFD; Executive
Vice President of ML & Co.
Alan J. Albert.............. Senior Managing Vice President of the Manager
Director
Nicholas C. D. Hall......... Director Director of Merrill Lynch
Europe PLC; General Counsel
of Merrill Lynch
International Private
Banking Group
Gerald M. Richard........... Senior Vice President Senor Vice President and
Treasurer of the Manager and
FAM; Senior Vice President
and Treasurer of Princeton
Services; Vice President and
Treasurer of MLFD
Carol Ann Langham........... Company Secretary None
Debra Anne Searle........... Assistant Company
Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each of
the open-end 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 MLFD 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. Crook,
Aldrich, Brady, Breen, Fatseas and Wasel is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
<TABLE>
<CAPTION>
POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ----------------------- -----------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Richard L. Reller....... Director None
Thomas J. Verage........ First Vice President and 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-7
<PAGE>
(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, Merrill Lynch
Financial Data Services, Inc., 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 "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 contracts.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to 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 13th day of
November, 1997.
Merrill Lynch Phoenix Fund, Inc.
/s/ Arthur Zeikel
By: _________________________________
(ARTHUR ZEIKEL, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to its Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
President and
/s/ Arthur Zeikel Director
(Principal Executive Officer)
November 13,
- ------------------------------------- 1997
(ARTHUR ZEIKEL)
Treasurer (Principal Financial
Gerald M. Richard* and Accounting
Officer)
- -------------------------------------
(GERALD M. RICHARD)
Joe Grills* Director
- -------------------------------------
(JOE GRILLS)
Walter Mintz* Director
- -------------------------------------
(WALTER MINTZ)
Melvin R. Seiden* Director
- -------------------------------------
(MELVIN R. SEIDEN)
Robert S. Salomon, Jr.* Director
- -------------------------------------
(ROBERT S. SALOMON, JR.)
Stephen B. Swensrud* Director
- -------------------------------------
(STEPHEN B. SWENSRUD)
/s/ Arthur Zeikel November 13,
*By: ________________________________ 1997
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
11 --Consent of Deloitte & Touche LLP, independent auditors for
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 PHOENIX FUND, INC. - CLASS A SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 674793824
<INVESTMENTS-AT-VALUE> 728544519
<RECEIVABLES> 22633967
<ASSETS-OTHER> 2381710
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 753560196
<PAYABLE-FOR-SECURITIES> 11178464
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3567024
<TOTAL-LIABILITIES> 14745488
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 572720867
<SHARES-COMMON-STOCK> 19714408
<SHARES-COMMON-PRIOR> 20896399
<ACCUMULATED-NII-CURRENT> 1664384
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 110678845
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 53750612
<NET-ASSETS> 301936256
<DIVIDEND-INCOME> 2260067
<INTEREST-INCOME> 12502260
<OTHER-INCOME> 0
<EXPENSES-NET> (13194175)
<NET-INVESTMENT-INCOME> 1568152
<REALIZED-GAINS-CURRENT> 117006161
<APPREC-INCREASE-CURRENT> 65493785
<NET-CHANGE-FROM-OPS> 184068098
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1322009)
<DISTRIBUTIONS-OF-GAINS> (32459002)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3245516
<NUMBER-OF-SHARES-REDEEMED> (6835778)
<SHARES-REINVESTED> 2408271
<NET-CHANGE-IN-ASSETS> 12961904
<ACCUMULATED-NII-PRIOR> 1352739
<ACCUMULATED-GAINS-PRIOR> 77702918
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7150934
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13194175
<AVERAGE-NET-ASSETS> 285742276
<PER-SHARE-NAV-BEGIN> 13.37
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> 3.46
<PER-SHARE-DIVIDEND> (.06)
<PER-SHARE-DISTRIBUTIONS> (1.55)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.32
<EXPENSE-RATIO> 1.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH PHOENIX FUND, INC. - CLASS B SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 674793824
<INVESTMENTS-AT-VALUE> 728544519
<RECEIVABLES> 22633967
<ASSETS-OTHER> 2381710
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 753560196
<PAYABLE-FOR-SECURITIES> 11178464
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3567024
<TOTAL-LIABILITIES> 14745488
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 572720867
<SHARES-COMMON-STOCK> 22748088
<SHARES-COMMON-PRIOR> 29390148
<ACCUMULATED-NII-CURRENT> 1664384
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 110678845
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 53750612
<NET-ASSETS> 337022174
<DIVIDEND-INCOME> 2260067
<INTEREST-INCOME> 12502260
<OTHER-INCOME> 0
<EXPENSES-NET> (13194175)
<NET-INVESTMENT-INCOME> 1568152
<REALIZED-GAINS-CURRENT> 117006161
<APPREC-INCREASE-CURRENT> 65493785
<NET-CHANGE-FROM-OPS> 184068098
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (43674101)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3717624
<NUMBER-OF-SHARES-REDEEMED> (13650909)
<SHARES-REINVESTED> 3291225
<NET-CHANGE-IN-ASSETS> 12961904
<ACCUMULATED-NII-PRIOR> 1352739
<ACCUMULATED-GAINS-PRIOR> 77702918
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7150934
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13194175
<AVERAGE-NET-ASSETS> 361238420
<PER-SHARE-NAV-BEGIN> 12.99
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> 3.35
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.49)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.82
<EXPENSE-RATIO> 2.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH PHOENIX FUND, INC. - CLASS C SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 674793824
<INVESTMENTS-AT-VALUE> 728544519
<RECEIVABLES> 22633967
<ASSETS-OTHER> 2381710
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 753560196
<PAYABLE-FOR-SECURITIES> 11178464
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3567024
<TOTAL-LIABILITIES> 14745488
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 572720867
<SHARES-COMMON-STOCK> 981218
<SHARES-COMMON-PRIOR> 1224479
<ACCUMULATED-NII-CURRENT> 1664384
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 110678845
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 53750612
<NET-ASSETS> 14447838
<DIVIDEND-INCOME> 2260067
<INTEREST-INCOME> 12502260
<OTHER-INCOME> 0
<EXPENSES-NET> (13194175)
<NET-INVESTMENT-INCOME> 1568152
<REALIZED-GAINS-CURRENT> 117006161
<APPREC-INCREASE-CURRENT> 65493785
<NET-CHANGE-FROM-OPS> 184068098
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (1814737)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 240282
<NUMBER-OF-SHARES-REDEEMED> (619861)
<SHARES-REINVESTED> 136318
<NET-CHANGE-IN-ASSETS> 12961904
<ACCUMULATED-NII-PRIOR> 1352739
<ACCUMULATED-GAINS-PRIOR> 77702918
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7150934
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13194175
<AVERAGE-NET-ASSETS> 14951720
<PER-SHARE-NAV-BEGIN> 12.92
<PER-SHARE-NII> (.04)
<PER-SHARE-GAIN-APPREC> 3.33
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.49)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.72
<EXPENSE-RATIO> 2.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH PHOENIX FUND, INC. - CLASS D SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 674793824
<INVESTMENTS-AT-VALUE> 728544519
<RECEIVABLES> 22633967
<ASSETS-OTHER> 2381710
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 753560196
<PAYABLE-FOR-SECURITIES> 11178464
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3567024
<TOTAL-LIABILITIES> 14745488
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 572720867
<SHARES-COMMON-STOCK> 5586132
<SHARES-COMMON-PRIOR> 3660826
<ACCUMULATED-NII-CURRENT> 1664384
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 110678845
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 53750612
<NET-ASSETS> 85408440
<DIVIDEND-INCOME> 2260067
<INTEREST-INCOME> 12502260
<OTHER-INCOME> 0
<EXPENSES-NET> (13194175)
<NET-INVESTMENT-INCOME> 1568152
<REALIZED-GAINS-CURRENT> 117006161
<APPREC-INCREASE-CURRENT> 65493785
<NET-CHANGE-FROM-OPS> 184068098
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (167328)
<DISTRIBUTIONS-OF-GAINS> (5849564)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3511599
<NUMBER-OF-SHARES-REDEEMED> (2040372)
<SHARES-REINVESTED> 454079
<NET-CHANGE-IN-ASSETS> 12961904
<ACCUMULATED-NII-PRIOR> 1352739
<ACCUMULATED-GAINS-PRIOR> 77702918
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7150934
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13194175
<AVERAGE-NET-ASSETS> 64481642
<PER-SHARE-NAV-BEGIN> 13.35
<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> 3.45
<PER-SHARE-DIVIDEND> (.04)
<PER-SHARE-DISTRIBUTIONS> (1.54)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.29
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Phoenix Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 18 to Registration
Statement No. 2-77068 of our report dated September 5, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Princeton, New Jersey
November 14, 1997
