<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1998
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. [ ]
POST-EFFECTIVE AMENDMENT NO. 19 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 21 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH PHOENIX FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD,
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(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:
<TABLE>
<S> <C>
MICHAEL J. HENNEWINKEL, ESQ. COUNSEL FOR THE FUND:
MERRILL LYNCH ASSET BROWN & WOOD LLP
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.
</TABLE>
------------------------
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> 2
PROSPECTUS
NOVEMBER 3, 1998
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 12. 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 (the
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD") 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 $250 and the
minimum subsequent purchase is $50. Merrill Lynch may charge its customers a
processing fee (presently $5.35) for confirming purchases and repurchases.
Purchases and redemptions made directly through Financial Data Services, Inc.
("FDS" or 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 3, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing the
Fund at the above telephone number or address. The Commission maintains a web
site (http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
------------------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
<PAGE> 3
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)....... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments............................. None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............. None(d) 4.0% during the first year, 1.0% for None(d)
decreasing 1.0% annually thereafter one
to 0.0% after the fourth year(e) year(f)
Exchange Fee................................ None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(g)................. 0.99% 0.99% 0.99% 0.99%
12b-1 Fees(h):
Account Maintenance Fees.................. None 0.25% 0.25% 0.25%
Distribution Fees......................... None 0.75% 0.75% None
(Class B shares convert to Class D
shares automatically after
approximately eight years and cease
being subject to distribution fees)
Other Expenses
Shareholder Servicing Costs(i)............ 0.18% 0.21% 0.22% 0.19%
Other..................................... 0.07% 0.06% 0.06% 0.08%
-------- ----- ----- ------
Total Other Expenses.................... 0.25% 0.27% 0.28% 0.27%
-------- ----- ----- ------
Total Fund Operating Expenses................. 1.24% 2.26% 2.27% 1.51%
-------- ----- ----- ------
-------- ----- ----- ------
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and participants in certain
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 22 and "Shareholder
Services -- Fee-Based Programs" -- page 34.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 24.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans 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 22.
(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. A 0.75% sales
charge for 401(k) purchases over $1,000,000 will apply. See "Shareholder
Services -- Fee-Based Programs" -- page 34.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 34.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 34.
(g) See "Management of the Fund-Management and Advisory Arrangements" -- page
17.
(h) See "Purchase of Shares -- Distribution Plans" -- page 27.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 19.
2
<PAGE> 4
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..................................... $64 $90 $117 $195
Class B..................................... $63 $91 $121 $241*
Class C..................................... $33 $71 $122 $261
Class D..................................... $67 $98 $131 $223
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of the period:
Class A..................................... $64 $90 $117 $195
Class B..................................... $23 $71 $121 $241*
Class C..................................... $23 $71 $122 $261
Class D..................................... $67 $98 $131 $223
</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 its affiliate, Fund Asset Management, L.P. ("FAM" or the
"Investment Adviser"). Funds advised by MLAM 3
<PAGE> 5
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 FEATURE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales No No No
charge(2)(3)
- ------------------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to
years, D Shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing eight years(5)
1.0%
annually to 0.0%(4)
- ------------------------------------------------------------------------------------------------------------
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. 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.
(Footnotes continued on next page)
4
<PAGE> 6
(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 0.75% sales charge for 401(k) purchases over
$1,000,000 will apply. See "Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans 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. A
0.75% sales charge for 401(k) purchases over $1,000,000 will apply.
Sales charges also are reduced under a right of accumulation that takes
into account the investor's holdings of all classes of all MLAM-advised
mutual funds. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25%, an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class B shares, as well as a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with certain fee-based programs. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the
5
<PAGE> 7
imposition of any sales load, fee or other charge. Conversion of Class
B shares to Class D shares will not be deemed a purchase or sale of the
shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares, and the conversion and holding periods for certain
retirement plans are modified as described under "Purchase of Shares --
Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares."
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75%, of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
1.0% CDSC if they are redeemed within one year after purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B shares), Class C shares have no
conversion feature and, accordingly, an investor who purchases Class C
shares will be subject to distribution fees that will be imposed on
Class C shares for an indefinite period subject to annual approval by
the Fund's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. The maximum initial sales charge of 5.25% is reduced
for purchases of $25,000 and over. Purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales
charge is waived such purchases may be subject to a 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. A 0.75% sales
charge for 401(k) purchases over $1,000,000 will apply. The schedule of
initial sales charges and reductions for Class D shares is the same as
the schedule for Class A shares, except that there is no waiver for
purchases by retirement plans and participants in connection with
certain fee-based programs. Class D shares also will be issued upon
conversion of Class B shares as described above under "Class B." See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares."
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the CDSCs imposed in connection with purchases of Class B or Class C
shares. Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
6
<PAGE> 8
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> 9
FINANCIAL HIGHLIGHTS
The Financial Highlights table is intended to help you understand the
Fund's financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements, are included in the
Fund's annual report to shareholders, which is available upon request.
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------
FOR THE YEAR ENDED JULY 31,
--------------------------------------------------------------------------
1998+ 1997+ 1996+ 1995+ 1994 1993 1992
Increase (Decrease) in Net Asset Value: -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $ 15.32 $ 13.37 $ 13.44 $ 13.31 $ 13.75 $ 11.40 $ 11.13
-------- -------- -------- -------- -------- -------- --------
Investment income -- net.............................. .12 .10 .13 .17 .03 .02 .06
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net................. 1.33 3.46 .51 1.47 1.18 3.06 1.34
-------- -------- -------- -------- -------- -------- --------
Total from investment operations....................... 1.45 3.56 .64 1.64 1.21 3.08 1.40
-------- -------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net.............................. (.11) (.06) (.13) (.11) -- (.03) (.09)
Realized gain on investments -- net................... (3.17) (1.55) (.58) (1.40) (1.65) (.70) (1.04)
-------- -------- -------- -------- -------- -------- --------
Total dividends and distributions...................... (3.28) (1.61) (.71) (1.51) (1.65) (.73) (1.13)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of year........................... $ 13.49 $ 15.32 $ 13.37 $ 13.44 $ 13.31 $ 13.75 $ 11.40
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share..................... 10.98% 29.78% 4.78% 13.91% 9.36% 28.96% 14.54%
======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement......................... 1.24% 1.26% 1.24% 1.31% 1.22% 1.25% 1.35%
======== ======== ======== ======== ======== ======== ========
Expenses............................................... 1.24% 1.26% 1.24% 1.31% 1.22% 1.25% 1.35%
======== ======== ======== ======== ======== ======== ========
Investment income -- net............................... .83% .77% .92% 1.40% .48% .28% .60%
======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................. $283,005 $301,936 $279,351 $286,258 $255,856 $197,995 $140,323
======== ======== ======== ======== ======== ======== ========
Portfolio turnover..................................... 81.20% 81.46% 87.66% 70.36% 63.95% 67.57% 79.68%
======== ======== ======== ======== ======== ======== ========
<CAPTION>
CLASS A
------------------------------
FOR THE YEAR ENDED JULY 31,
------------------------------
1991 1990 1989
Increase (Decrease) in Net Asset Value: -------- -------- --------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $ 12.37 $ 13.41 $ 13.55
-------- -------- --------
Investment income -- net.............................. .23 .37 .52
Realized and unrealized gain (loss) on investments and
foreign currency transactions -- net................. .55 (.47) 1.46
-------- -------- --------
Total from investment operations....................... .78 (.10) 1.98
-------- -------- --------
Less dividends and distributions:
Investment income -- net.............................. (.40) (.51) (.33)
Realized gain on investments -- net................... (1.62) (.43) (1.79)
-------- -------- --------
Total dividends and distributions...................... (2.02) (.94) (2.12)
-------- -------- --------
Net asset value, end of year........................... $ 11.13 $ 12.37 $ 13.41
======== ======== ========
TOTAL INVESTMENT RETURN:*
Based on net asset value per share..................... 10.35% (.93%) 17.48%
======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement......................... 1.42% 1.32% 1.22%
======== ======== ========
Expenses............................................... 1.42% 1.32% 1.35%
======== ======== ========
Investment income -- net............................... 2.22% 2.77% 4.60%
======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)................. $132,623 $151,027 $179,839
======== ======== ========
Portfolio turnover..................................... 72.12% 54.98% 43.45%
======== ======== ========
</TABLE>
- ---------------
+ Based on average shares outstanding.
* Total investment returns exclude the effects of sales loads.
8
<PAGE> 10
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------
FOR THE YEAR ENDED JULY 31,
--------------------------------------------------------------------------
1998+ 1997+ 1996+ 1995+ 1994+ 1993 1992
Increase (Decrease) in Net Asset Value: -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 14.82 $ 12.99 $ 13.12 $ 13.02 $ 13.46 $ 11.25 $ 11.04
-------- -------- -------- -------- -------- -------- --------
Investment income (loss) -- net................ (.03) (.03) (.01) .04 (.07) (.02) (.05)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net........................... 1.28 3.35 .50 1.45 1.11 2.93 1.33
-------- -------- -------- -------- -------- -------- --------
Total from investment operations................ 1.25 3.32 .49 1.49 1.04 2.91 1.28
-------- -------- -------- -------- -------- -------- --------
Less dividends and distributions:
Investment income -- net....................... (.01) -- (.04) (.02) -- -- (.03)
Realized gain on investments -- net............ (3.13) (1.49) (.58) (1.37) (1.48) (.70) (1.04)
-------- -------- -------- -------- -------- -------- --------
Total dividends and distributions............... (3.14) (1.49) (.62) (1.39) (1.48) (.70) (1.07)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period.................. $ 12.93 $ 14.82 $ 12.99 $ 13.12 $ 13.02 $ 13.46 $ 11.25
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............. 9.84% 28.48% 3.67% 12.83% 8.21% 27.66% 13.35%
======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.................. 2.26% 2.29% 2.26% 2.34% 2.24% 2.27% 2.37%
======== ======== ======== ======== ======== ======== ========
Expenses........................................ 2.26% 2.29% 2.26% 2.34% 2.24% 2.27% 2.37%
======== ======== ======== ======== ======== ======== ========
Investment income (loss) -- net................. (.18%) (.26%) (.11%) .37% (.51%) (.73%) (.46%)
======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $286,396 $337,022 $381,808 $414,886 $362,129 $209,534 $104,313
======== ======== ======== ======== ======== ======== ========
Portfolio turnover.............................. 81.20% 81.46% 87.66% 70.36% 63.95% 67.57% 79.68%
======== ======== ======== ======== ======== ======== ========
<CAPTION>
CLASS B
----------------------------
FOR THE YEAR ENDED JULY 31,
----------------------------
1991 1990 1989++
Increase (Decrease) in Net Asset Value: ------- ------- --------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 12.26 $ 13.32 $ 11.96
------- ------- --------
Investment income (loss) -- net................ .11 .22 .34
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net........................... .56 (.44) 1.25
------- ------- --------
Total from investment operations................ .67 (.22) 1.59
------- ------- --------
Less dividends and distributions:
Investment income -- net....................... (.27) (.41) (.14)
Realized gain on investments -- net............ (1.62) (.43) (.09)
------- ------- --------
Total dividends and distributions............... (1.89) (.84) (.23)
------- ------- --------
Net asset value, end of period.................. $ 11.04 $ 12.26 $ 13.32
======= ======= ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............. 9.14% (1.86%) 13.56%#
======= ======= ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.................. 2.45% 2.36% 2.30%
======= ======= ========
Expenses........................................ 2.45% 2.36% 2.37%*
======= ======= ========
Investment income (loss) -- net................. 1.19% 1.74% 4.11%*
======= ======= ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........ $79,848 $92,700 $109,003
======= ======= ========
Portfolio turnover.............................. 72.12% 54.98% 43.45%
======= ======= ========
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
+ Based on the average shares outstanding.
++ Class B shares commenced operations on October 21, 1988.
9
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C++ CLASS D++
----------------------------------------- -----------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR OCTOBER 21, FOR THE YEAR OCTOBER 21,
ENDED JULY 31, 1994+ TO ENDED JULY 31, 1994+ TO
--------------------------- JULY 31, --------------------------- JULY 31,
1998 1997 1996 1995 1998 1997 1996 1995
Increase (Decrease) in Net Asset Value: ------- ------- ------- ----------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 14.72 $ 12.92 $ 13.07 $ 12.31 $ 15.29 $ 13.35 $ 13.43 $ 12.57
------- ------- ------- ------- ------- ------- ------- -------
Investment income (loss) -- net......... (.03) (.04) (.02) .03 .08 .07 .09 .11
Realized and unrealized gain on
investments and foreign currency
transactions -- net................... 1.29 3.33 .51 1.21 1.33 3.45 .51 1.25
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations......... 1.26 3.29 .49 1.24 1.41 3.52 .60 1.36
------- ------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
Investment income -- net................ (.02) -- (.06) (.05) (.09) (.04) (.10) (.07)
Realized gain on investments -- net..... (3.13) (1.49) (.58) (.43) (3.16) (1.54) (.58) (.43)
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and distributions........ (3.15) (1.49) (.64) (.48) (3.25) (1.58) (.68) (.50)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period........... $ 12.83 $ 14.72 $ 12.92 $ 13.07 $ 13.45 $ 15.29 $ 13.35 $ 13.43
======= ======= ======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....... 9.90% 28.39% 3.69% 10.99%# 10.70% 29.44% 4.50% 11.72%#
======= ======= ======= ======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses................................. 2.27% 2.30% 2.27% 2.39%* 1.51% 1.52% 1.48% 1.60%*
======= ======= ======= ======= ======= ======= ======= =======
Investment income (loss) -- net.......... (.19%) (.27%) (.12%) .34%* .59% .54% .67% 1.11%*
======= ======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $11,316 $14,448 $15,821 $11,775 $89,691 $85,409 $48,873 $36,388
======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover....................... 81.20% 81.46% 87.66% 70.36% 81.20% 81.46% 87.66% 70.36%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
+ Commencement of operations.
++ Based on the average shares outstanding.
10
<PAGE> 12
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 the risks of investing in such speculative securities,
including the risk of a loss of principal.
11
<PAGE> 13
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. 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
12
<PAGE> 14
Moody's Investors Service, Inc. or CCC, CC or C by Standard & Poor's ("Standard
& Poor"). 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, 1998:
<TABLE>
<CAPTION>
% TOTAL
RATING ASSETS
------ -------
<S> <C>
B........................................................... 1.26%
CCC......................................................... 2.23
C........................................................... .48
D........................................................... 6.57
Not Rated*.................................................. 2.22
-----
12.76%
=====
</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 1.5% are of comparable quality to bonds rated
B, .72% are of comparable quality to bonds rated CCC, and 0% 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 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.
13
<PAGE> 15
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.
Certain European countries have agreed to enter into the European Economic
and Monetary Union ("EMU") in an effort to, among other things, reduce barriers
between countries, increase competition among companies, reduce government
subsidies in certain industries, and reduce or eliminate currency fluctuations
among these countries. Among other things, EMU establishes a single common
European currency (the "euro") that will be introduced on January 1, 1999 and is
expected to replace the existing national currencies of all EMU participants by
July 1, 2002. Upon introduction of the euro, certain securities (beginning with
government and corporate bonds) will be redenominated in the euro, and,
thereafter, will be listed, trade and make dividend and other payments only in
euros. Although EMU is generally expected to have a beneficial effect, it could
negatively affect the Fund in a number of situations, including as follows:
- If the euro, or EMU as a whole, does not take effect as planned, the
Fund's investments could be adversely affected. For example, sharp
currency fluctuations, exchange rate volatility, and other
disruptions of the markets could occur.
- Withdrawal from EMU by a participating country could also have a
negative effect on the Fund's investments, for example, if
securities redenominated in euros are transferred back into that
country's national currency.
- Computer, accounting, and trading systems must be capable of
recognizing the euro as a distinct currency. Like other investment
companies and business organizations, the Fund could be adversely
affected if the systems used by the Investment Adviser, the Fund's
other service providers, or entities with which the Fund or its
service providers do business do not properly address this issue
prior to euro conversion over the first weekend of 1999 (January 1
through January 3). These issues may negatively affect the
operations of the companies the Fund invests in as well.
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.
14
<PAGE> 16
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.
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.
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"), such as 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.
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
15
<PAGE> 17
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.
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* -- Chairman of the Investment Adviser and its affiliate
MLAM; Chairman and Director of Princeton Services, Inc. ("Princeton
Services"); 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, the
16
<PAGE> 18
Howard Hughes Medical Institute and the Virginia Retirement System;
Director and Vice Chairman, Duke Management Company; Director, LaSalle
Street Fund and Kimco Realty Corporation; Director of Hotchkis and Wiley
Mutual Funds.
WALTER MINTZ -- Special Limited Partner of Cumberland Associates
(investment partnership).
ROBERT S. SALOMON, JR. -- Principal of STI Management (investment adviser);
Trustee of The Common Fund.
MELVIN R. SEIDEN -- Director of Silbanc Properties, Ltd. (real estate,
investments and consulting).
STEPHEN B. SWENSRUD -- Chairman of Fernwood Advisors (investment adviser);
Principal of Fernwood Associates (financial consultant).
- ---------------
* 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 advisory services. The
Merrill Lynch Asset Management Group (which includes the Investment Adviser)
acts as the investment adviser to more than 100 registered investment companies
and offers portfolio management services to individuals and institutions. As of
September 1998, the Asset Management Group had a total of approximately $467.2
billion in investment company and other portfolio assets under management. This
amount includes assets managed for certain affiliates of the Investment Adviser.
The Fund has entered into an investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement"). 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
17
<PAGE> 19
Fund invests. For the fiscal year ended July 31, 1998, the Fund paid to the
Investment Adviser a fee of $7,181,685 (based on average net assets of
approximately $728.6 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, 1998, the amount of such
reimbursement was $134,288. For the fiscal year ended July 31, 1998, the ratio
of total expenses to average net assets was 1.24%, 2.26%, 2.27% and 1.51% 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 Investment Adviser actually receives for
providing services to the Fund pursuant to the Investment Advisory Agreement.
MLAM U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England. For
the fiscal year ended July 31, 1998, the Investment Adviser did not pay any fees
to MLAM U.K. pursuant to the sub-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 since 1997 and a Vice President from
1987 to 1997.
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).
18
<PAGE> 20
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 Transfer
Agent receives 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, 1998, the total
fee paid by the Fund to the Transfer Agent was $1,414,037.
PURCHASE OF SHARES
The Distributor, an affiliate of the Investment Adviser, MLAM and Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("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 $1,000 and the minimum subsequent purchase is
$50, except that (i) for retirement plans the minimum initial purchase is $100
and the minimum subsequent purchase is $1, and (ii) for shareholders who are
participants in certain fee-based programs, the minimum initial purchase is $250
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
19
<PAGE> 21
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 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.
20
<PAGE> 22
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 D Shares
at a rate of 4.0% during the automatically after
first year, decreasing 1.0% approximately eight years(5)
annually to 0.0%(4)
- ------------------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- ------------------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
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. Certain Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but instead
may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC may be
waived in connection with certain fee-based programs. A 0.75% sales charge
for 401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans and certain fee-based
programs were modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have a ten-year conversion
period. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
21
<PAGE> 23
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 AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------ -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $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, 1998, the Fund sold 3,072,942 Class A
shares for aggregate net proceeds to the Fund of $42,892,690. The gross sales
charges for the sale of Class A shares of the Fund for the year were $25,889, of
which $2,034 and $23,855 were received by the Distributor and Merrill Lynch,
respectively. For the fiscal year ended July 31, 1998, 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, 1998, the Fund sold 1,131,275 Class D shares for aggregate net
proceeds to the Fund of $15,753,197. The gross sales charges for the sale of
Class D shares of the Fund for the year were $28,559, of which $1,809 and
$26,750 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal year ended July 31, 1998, 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.
22
<PAGE> 24
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares 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.
23
<PAGE> 25
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
which declines each year, while Class C shares are subject only to a one year
1.0% CDSC. On the other hand, approximately eight years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and a distribution fee of 0.75% of net assets as discussed below under
"Distribution Plans." The proceeds from the account maintenance fees are used to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for
providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) that are paid from the dealers' own funds.
These expenses relate 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 such shares. The
combination of the CDSC and the ongoing distribution fee facilitates the ability
of the Fund to sell the Class B and Class C shares without a sales charge being
deducted at the time of purchase. Approximately eight years after issuance,
Class B shares will convert automatically into Class D shares of the Fund, which
are subject to an account maintenance fee but no distribution fee; Class B
shares of certain other MLAM-advised mutual funds into which exchanges may be
made convert into Class D shares automatically after approximately ten years. If
Class B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services --
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
24
<PAGE> 26
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
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
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
------------ -----------------
<S> <C>
0-1.................................................... 4.0%
1-2.................................................... 3.0%
2-3.................................................... 2.0%
3-4.................................................... 1.0%
4 and thereafter....................................... 0.0%
</TABLE>
For the fiscal year ended July 31, 1998, the Distributor received CDSCs of
$244,931 with respect to redemption of Class B shares, all of which were paid to
Merrill Lynch. Additional CDSCs payable to the Distributor may have been waived
or converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The 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 certain
circumstances in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan or following the
death or disability (as defined in the Internal Revenue Code of 1986, as amended
(the "Code")) 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
25
<PAGE> 27
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
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 AccessSM
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, 1998, the
Distributor received CDSCs of $2,715 with respect to redemption of Class C
shares, all of which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
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
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received by the Transfer Agent at least one week prior to the Conversion Date,
the related Class B shares will convert to Class D shares on the next scheduled
Conversion Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired. See "Shareholder Services -- Exchange Privilege"
in the Statement of Additional Information.
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
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<PAGE> 29
regard, the purpose and function of the ongoing distribution fees and the CDSC
are the same as those of the initial sales charge with respect to the Class A
and Class D shares of the Fund in that the deferred sales charges provide for
the financing of the distribution of the Fund's Class B and Class C shares.
For the fiscal year ended July 31, 1998, the Fund paid the Distributor
$3,221,900 pursuant to the Class B Distribution Plan (based on average net
assets subject to such Class B Distribution Plan of approximately $322.2
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, 1998, the Fund paid the
Distributor $131,376 pursuant to the Class C Distribution Plan (based on average
net assets subject to such Class C Distribution Plan of approximately $13.1
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended July 31, 1998, the Fund paid the
Distributor $228,418 pursuant to the Class D Distribution Plan (based on average
net assets subject to such Class D Distribution Plan of approximately $90.3
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, 1997, 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 $386,000 (.13% of Class B net assets
at that date).
At December 31, 1997, for Class C shares, the fully allocated accrual
expenses incurred by the Distributor and Merrill Lynch, for the period since the
commencement of operations of Class C shares, exceeded fully allocated accrual
revenues for such period by approximately $115,000 (.93% of Class C net assets
at that date).
With respect to Class B shares, as of July 31, 1998, direct cash revenues,
for the period since commencement of operations, exceeded direct cash expenses
by $16,434,799 (5.73% of Class B net assets at that date). With respect to Class
C shares, as of July 31, 1998, direct cash revenues, for the period since
commencement of operations, exceeded direct cash expenses by $317,760 (2.80% of
Class C net assets at that date).
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<PAGE> 30
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
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, without charge, by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Financial Data Services,
Inc., 4800 Deer Lake
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<PAGE> 31
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.
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, the NYSE closes at 4:00 p.m., Eastern 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
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<PAGE> 32
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:
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.
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EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds and Summit Cash Reserves
Fund ("Summit"), a Merrill Lynch-sponsored money market fund specifically
designated as available for exchange by holders of Class A, Class B, Class C and
Class D shares of MLAM-advised mutual funds. There is currently no limitation on
the number of times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated in accordance with the rules of
the Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his or her account at the time of the exchange and is not otherwise eligible
to acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund 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 and Class D shares are exchangeable for Class A shares of, and
Class B and Class C shares are exchangeable for Class B shares of Summit. Class
A shares of Summit have an exchange privilege back into Class A or Class D
shares of MLAM-advised mutual funds; Class B shares of Summit have an exchange
privilege back into Class B or Class C shares of MLAM-advised mutual funds and,
in the event of such an exchange, the period of time that Class B shares of
Summit are held will count toward satisfaction of the holding period requirement
for purposes of reducing any CDSC and toward satisfaction of any Conversion
Period with respect to Class B shares. Class B shares of Summit will be subject
to a distribution fee at an annual rate of 0.75% of average daily net assets of
such Class B shares. This exchange privilege does not apply with respect to
certain Merrill Lynch fee-based programs, for which alternative exchange
arrangements may exist. See your Merrill Lynch Financial Consultant for further
information.
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Prior to October 12, 1998, exchanges from the Fund and other MLAM-advised
mutual funds into a money market fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit. Shareholders who exchanged
shares of a MLAM-advised mutual fund for shares of such other money market funds
and subsequently wish to exchange those money market fund shares for shares of
the Fund will be subject to the CDSC schedule applicable to such Fund shares, if
any. The holding period for those money market fund shares will not count toward
satisfaction of the holding period requirement for reduction of the CDSC imposed
on such shares, if any, and, with respect to Class B shares, toward satisfaction
of the Conversion Period. However, the holding period for Class B or Class C
shares received in exchange for such money market fund shares will be aggregated
with the holding period for the original shares for purposes of reducing the
CDSC or satisfying 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.
The exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for Class
A shares of the same fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one year holding period does not apply to shares acquired
through reinvestment of dividends. Upon termination of participation in the MFA
program, Class A shares will be re-exchanged for the class of shares originally
held. For purposes of computing any CDSC that may be payable upon redemption of
Class B or Class C shares so reacquired, or the Conversion Period for Class B
shares so reacquired, the holding period for the Class A shares will be "tacked"
to the holding period for the Class B or Class C shares originally held. The
Fund's exchange privilege is also modified with respect to purchases of Class A
and Class D shares by non-retirement plan investors under the MFA program.
First, the initial allocation of assets is made under the MFA program. Then, any
subsequent exchange under the MFA program of Class A or Class D shares of a
MLAM-advised mutual fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
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 by telephone (1-800-MER-FUND) to the Transfer Agent
if the shareholder's account is maintained with the Transfer Agent, elect to
have subsequent dividends or both dividends and capital gains distributions paid
in cash rather
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<PAGE> 35
than reinvested, in which event payment will be mailed on or about the payment
date (provided that, in the event that a payment on an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder will not receive
such payment in cash and such payment will automatically be reinvested in
additional shares). The Fund is not responsible for any failure of delivery to
the shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. Cash 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.
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
and 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 be
applied thereafter to Class D shares if the shareholder so elects. 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. An investor whose shares of the Fund are
held within a CMA(R) or CBA(R) account may arrange to have periodic investments
made in the Fund in amounts of $100 ($1 for retirement plans) or more 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
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<PAGE> 36
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).
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
35
<PAGE> 37
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 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 Index, the Value Line Composite Index, the Dow Jones Industrial
Average, other market indices 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. When comparing its performance to a market index, the
Fund may refer to various statistical measures derived from the historic
performance of the Fund and the index, such as standard deviation and beta. In
addition, from time to time the Fund may include the Fund's risk-adjusted
performance ratings assigned by Morningstar Publications, Inc. in advertising or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.
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<PAGE> 38
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 (provided that, in
the event that a payment on an account maintained at the Transfer Agent would
amount to $10.00 or less, a shareholder will not receive such payment in cash
and such payment will automatically be reinvested in additional shares).
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.
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, the
NYSE closes at 4:00 p.m., Eastern 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, 1998, the Fund paid MLSPS $279 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.
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<PAGE> 39
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 for long positions and
the last available ask price for short positions. In cases where securities are
traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Long positions in securities traded in the over-the-counter ("OTC")
market are valued at the last available bid price in the OTC market prior to the
time of valuation. Short positions in securities traded in the OTC market are
valued at the last available ask price in the OTC market prior to the time of
valuation. 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 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. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
created additional categories of capital gains taxable at different rates.
Additional legislation eliminates the highest 28% category for most sales of
capital assets occurring after December 31, 1997. Generally not later than 60
days after the close of its taxable year, the Fund will provide its shareholders
with a written notice designating the amounts of any ordinary income dividends
or capital gain dividends as well as the amounts of capital gain dividends in
the different categories of capital gain referred to above. 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. 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
38
<PAGE> 40
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.
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.
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<PAGE> 41
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.
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
40
<PAGE> 42
receive separate copies of each report and communication for each of the
shareholder's related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
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 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.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the Year
1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by the Investment Adviser or other Fund
service providers do not properly address this problem prior to January 1, 2000.
The Investment Adviser has established a dedicated group to analyze these issues
and to implement any systems modifications necessary to prepare for the Year
2000. Currently, the Investment Adviser does not anticipate that the transition
to the Year 2000 will have any material impact on its ability to continue to
service the Fund at current levels. In addition, the Investment Adviser has
sought assurances from the Fund's other service providers that they are taking
all necessary steps to ensure that their computer systems will accurately
reflect the Year 2000, and the Investment Adviser will continue to monitor the
situation. At this time, however, no assurance can be given that the Fund's
other service providers have anticipated every step necessary to avoid any
adverse effect on the Fund attributable to the Year 2000 Problem.
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<PAGE> 43
APPENDIX
DESCRIPTION OF LONG-TERM OBLIGATION RATINGS
DESCRIPTION OF LONG-TERM DEBT 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.
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<PAGE> 44
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 LONG-TERM ISSUE CREDIT RATINGS OF STANDARD & POOR'S ("S&P"):
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment is extremely strong.
AA An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment is
very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation. The B
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event
of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are continued.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality
and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
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<PAGE> 45
D An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of
similar action if payments on an obligation are jeopardized.
Plus (+) or Minus(-): The ratings from AAA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
c The letter c indicates that the holder's option to tender the security
for purchase may be canceled under certain prestated conditions
enumerated in the tender option documents.
L The letter L indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
federally insured and interest is adequately collateralized. In the case
of certificates of deposit, the letter L indicates that the deposit,
combined with other deposits being held in the same right and capacity,
will be honored for principal and accrued pre-default interest up to the
federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor
insured institution, upon maturity.
p The letter p indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by
the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment
on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with respect to
such likelihood and risk.
* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming
investments and cash flows.
N.R. Not rated.
Obligations of issuers outside the United States and its territories are
rated on the same basis as domestic long-term and short-term issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
44
<PAGE> 46
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,
a division of
Princeton 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
Global Securities Services
4 Chase MetroTech Center
18th Floor
Brooklyn, New York 11245
TRANSFER AGENT
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> 47
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table........................................ 2
Merrill Lynch Select Pricing(SM) System.......... 3
Financial Highlights............................. 8
Special Considerations........................... 11
Financial and Market Risks....................... 11
Disposition of Portfolio Securities.............. 11
Suitability...................................... 11
Investment Objective and Policies................ 12
Management of the Fund........................... 16
Board of Directors............................. 16
Management and Advisory Arrangements........... 17
Code of Ethics................................. 18
Transfer Agency Services....................... 19
Purchase of Shares............................... 19
Initial Sales Charge Alternatives -- Class A
and Class D Shares........................... 22
Deferred Sales Charge Alternatives -- Class B
and Class C Shares........................... 24
Distribution Plans............................. 27
Limitations on the Payment of Deferred Sales
Charges...................................... 29
Redemption of Shares............................. 29
Redemption..................................... 29
Repurchase..................................... 30
Reinstatement Privilege -- Class A and Class D
Shares....................................... 30
Shareholder Services............................. 31
Investment Account............................. 31
Exchange Privilege............................. 32
Automatic Reinvestment of Dividends and Capital
Gains Distributions.......................... 33
Systematic Withdrawal Plans.................... 34
Automatic Investment Plans..................... 34
Fee-Based Programs............................. 34
Portfolio Transactions and Brokerage............. 35
Performance Data................................. 35
Additional Information........................... 37
Dividends and Distributions.................... 37
Determination of Net Asset Value............... 37
Taxes.......................................... 38
Organization of the Fund....................... 40
Shareholder Reports............................ 40
Shareholder Inquiries.......................... 41
Year 2000 Issues............................... 41
Appendix -- Description of Long-Term Obligation
Ratings...................................... 42
</TABLE>
Code #10121-1198
[MERRILL LYNCH LOGO]
MERRILL LYNCH
PHOENIX FUND, INC.
PROSPECTUS
November 3, 1998
Distributor:
Merrill Lynch
Funds Distributor
This Prospectus should be
retained for future reference.
[MERRILL LYNCH ARTWORK]
<PAGE> 48
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 3, 1998 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
------------------------
FUND ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is November 3, 1998.
<PAGE> 49
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, 1997 and 1998 were
81.46% and 81.20%, 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> 50
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
3
<PAGE> 51
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
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 does
4
<PAGE> 52
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> 53
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Information about the Directors and executive officers and portfolio
manager 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 Director, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (66) -- President and Director(1)(2) -- Chairman of the
Investment Adviser and MLAM (which terms as used herein include their corporate
predecessors) since 1997; President of the Investment Adviser and MLAM from 1977
to 1997; Chairman of Princeton Services, Inc. ("Princeton Services") since 1997
and Director thereof since 1993; President of Princeton Services from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since
1990.
JOE GRILLS (63) -- 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 1992
and elected Vice Chairman in May 1998; Director, LaSalle Street Fund since 1995;
Director, Hotchkis and Wiley Mutual Funds since 1996; Director, Kimco Realty
Corporation since January 1997; Member of the Investment Advisory Committee of
the Virginia Retirement System since 1998.
WALTER MINTZ (69) -- 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. (62) -- Director(2) -- 106 Dolphin Cove Quay,
Stamford, Connecticut 06902. Principal of STI Management (investment adviser)
since 1994; Trustee, The Common Fund since 1980; Chairman and CEO of Salomon
Brothers Asset Management from 1992 until 1995; Chairman of Salomon Brothers
equity mutual funds from 1992 until 1995; Monthly columnist with Forbes Magazine
since 1992; Director of Stock Research and U.S. Equity Strategist at Salomon
Brothers from 1975 until 1991.
MELVIN R. SEIDEN (68) -- 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 (65) -- Director(2) -- 24 Federal Street, Suite 400,
Boston, Massachusetts 02110. Chairman of Fernwood Advisors (investment adviser)
since 1996; Principal, Fernwood Associates (financial consultant) since 1975.
TERRY K. GLENN (58) -- 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 Princeton
Funds Distributor, Inc. ("PFD") since 1986 and Director thereof since 1991;
President of Princeton Administrators, L.P. since 1988.
6
<PAGE> 54
NORMAN R. HARVEY (65) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and MLAM since 1982; Senior Vice President
of Princeton Services since 1993.
ROBERT J. MARTORELLI (41) -- 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 (38) -- Vice President(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation
of MLAM since 1990.
GERALD M. RICHARD (49) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Investment Adviser and MLAM since 1984; Treasurer of PFD since
1984 and Vice President thereof since 1981; Senior Vice President and Treasurer
of Princeton Services since 1993.
ROBERT HARRIS (46) -- 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 PFD 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 September 30, 1998, 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 (each a "non-affiliated Director") 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. The Fund also pays members of
its Audit Committee, which consists of all of the non-affiliated Directors, an
additional $4,000 per year plus $750 per Audit Committee meeting attended. For
the fiscal year ended July 31, 1998, fees and expenses paid to the
non-affiliated Directors aggregated $74,917.
The following table sets forth compensation earned by non-affiliated
Directors from the Fund for the fiscal year ended July 31, 1998 and the
aggregate compensation paid to non-affiliated Directors from all
7
<PAGE> 55
registered investment companies advised by the Investment Adviser and its
affiliate, MLAM ("MLAM/ FAM-Advised Funds") for the calendar year ended December
31, 1997:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM-ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
DIRECTOR FROM THE FUND PART OF FUND EXPENSE DIRECTORS(1)
-------- ------------- --------------------- ----------------
<S> <C> <C> <C>
Joe Grills............................... $15,000 None $171,500
Walter Mintz............................. $15,000 None $159,500
Robert S. Salomon, Jr.................... $15,000 None $159,500
Melvin R. Seiden......................... $15,000 None $159,500
Stephen B. Swensrud...................... $15,000 None $175,500
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows: Joe
Grills (22 registered investment companies consisting of 55 portfolios),
Walter Mintz (20 registered investment companies consisting of 41
portfolios), Robert S. Salomon (20 registered investment companies
consisting of 41 portfolios), Melvin R. Seiden (20 registered investment
companies consisting of 41 portfolios), Stephen B. Swensrud (23 registered
investment companies consisting of 56 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 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
8
<PAGE> 56
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, 1996, 1997 and 1998, the total advisory fees
paid by the Fund to the Investment Adviser were $7,444,413, $7,150,934 and
$7,181,685, 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 PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch
International Holdings, Inc., a subsidiary of Merrill Lynch International, Inc.,
a subsidiary of ML & Co.
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.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
9
<PAGE> 57
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 "Select Pricing
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, 1998 was $25,889, of which the Distributor received $2,034 and
Merrill Lynch received $23,855. 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. 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. The gross sales charge for the sale of Class D shares for the fiscal
year ended July 31, 1998 was $28,559, of which the Distributor received $1,809
and Merrill Lynch received $26,750. 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. 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. 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
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<PAGE> 58
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
Select Pricing 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 Select
Pricing 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 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
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<PAGE> 59
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 Select Pricing 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 Select Pricing 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 Select Pricing 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 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 the Summit Cash Reserves 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 12
<PAGE> 60
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.
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.
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<PAGE> 61
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 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 Select
Pricing Fund. Minimum purchase requirements may be waived or varied for such
plans. Additional information regarding purchases by
14
<PAGE> 62
employer-sponsored retirement or savings plans and certain other arrangements is
available toll-free from Merrill Lynch Business Financial Services at
1-800-237-7777.
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 Merrill Lynch Funds
Distributor ("the Distributor"), a division of Princeton Funds Distributor, Inc.
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 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
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<PAGE> 63
(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, 1998
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and the Distributor's voluntary maximum for the period October 21, 1988
(commencement of operations) to July 31, 1998, 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, 1998, with respect to Class C shares.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1998
---------------------------------------------------------------------------------------
(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......... $551,053 $34,441 $11,394 $45,835 $20,318 $25,517 $2,148
Under Distributor's Voluntary
Waiver........................... $551,053 $34,441 $ 2,755 $37,196 $20,318 $16,878 $2,148
CLASS C
Under NASD Rule as Adopted......... $ 21,556 $ 1,347 $ 338 $1,685 $ 377 $ 1,308 $ 85
</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.
(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.
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<PAGE> 64
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days 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.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at any such time.
DEFERRED SALES 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, 1996, 1997 and
1998 the Distributor received CDSCs of $582,976, $652,512 and $244,931,
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 years ended July 31, 1996, 1997 and 1998, the Distributor received CDSCs
of $8,940, $5,533 and $2,715, 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
17
<PAGE> 65
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 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, 1998, the Fund paid total brokerage
commissions of $2,154,678 of which $16,710 or 0.78% was paid to Merrill Lynch
for effecting 1.15% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. 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.
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
18
<PAGE> 66
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 Fund may not purchase
securities during the existence of any underwriting syndicate of which Merrill
Lynch is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures approved by the Board of Directors
of the Fund that either comply with rules adopted by the Commission or with
interpretations of the Commission staff. Rule 10f-3 under the Investment Company
Act sets forth conditions under which the Fund may purchase securities from an
underwriting syndicate of which Merrill Lynch is a member. The rule sets forth
requirements relating to, among other things, the terms of an issue of
securities purchased by the Fund, the amount of securities which may be
purchased in any one issue and the assets of the Fund which may be invested in a
particular issue.
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.
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, the NYSE closes at 4:00 p.m., Eastern 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
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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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued,
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Long positions in securities traded in the OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Securities that are traded in both the OTC market and on a stock exchange are
valued according to the broadest and most representative market. Short positions
in securities traded in the OTC market are valued at the last available ask
price in the OTC market prior to 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.
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.
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INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and 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 U.S. 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 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. An investor whose shares of the Fund are
held within a CMA(R) or CBA(R) account may arrange to have periodic investments
made in the Fund in amounts of $100 ($1 for retirement accounts) or more through
the CMA(R) or CBA(R) Automated Investment Program.
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AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund as of the
close of business on the NYSE on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date
(provided that, in the event that a payment on an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder will not receive
such payment in cash and such payment will automatically be reinvested in
additional shares). 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.
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) if the shareholder's account
is maintained with the Transfer Agent, that they no longer wish to have their
dividends and/or capital gains distributions reinvested in shares of the Fund or
vice versa and, commencing ten days after the receipt by the Transfer Agent of
such notice, those instructions will be effected.
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
the 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, the NYSE closes at 4:00 p.m. Eastern 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 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
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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) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R)/CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.
With respect to redemption 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 be applied thereafter to Class D shares if the
shareholder so elects. 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 Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market mutual fund specifically designated as available
for exchange by holders of Class A, Class B, Class C and Class D shares of
Select Pricing Funds. 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. Before
effecting an exchange, shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Exercise of the
exchange privilege is treated as a sale of the exchanged shares and a purchase
of the acquired shares for Federal income tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second Select
Pricing 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 Select Pricing 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 D shares are
exchangeable with shares of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
Class A shares of Summit ("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 charges paid with respect to such Class A or Class D
shares in the initial purchase and any subsequent exchange. Class A or Class D
shares issued pursuant to dividend reinvestment are sold on a no-load basis in
each of the funds offering Class A or Class D shares. For purposes of the
exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Each Select Pricing Fund with
Class B or 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, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the
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payment of any CDSC that might otherwise be due on redemption of the outstanding
shares. Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares acquired through use
of the exchange privilege. In addition, Class B shares of the Fund acquired
through use of the exchange privilege will be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares of the fund from which the exchange has been made. For purposes of
computing the CDSC 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 or Class C shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after
having held the Fund's 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 Special Value Fund Class B shares for
more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares
are exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any conversion period with respect to Class B shares. Class B
shares of Summit will be subject to a distribution fee at an annual rate of
0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchanged Select
Pricing Fund shares for shares of such other money market funds and subsequently
wish to exchange those money market fund shares for shares of the Fund will be
subject to the CDSC schedule applicable to such Fund shares, if any. The holding
period for those money market fund shares will not count toward satisfaction of
the holding period requirement for reduction of the CDSC imposed on such shares,
if any, and, with respect to Class B shares, toward satisfaction of the
conversion period. However, the holding period for Class B or Class C shares
received in exchange for such money market fund shares will be aggregated with
the holding period for the original Select Pricing Fund shares for purposes of
reducing the CDSC or satisfying the conversion period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA program, i.e., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment
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of dividends. Upon termination of participation in the MFA program, Class A
shares will be re-exchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon redemption of Class B or
Class C shares so reacquired, or the conversion period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held. The Fund's
exchange privilege is also modified with respect to purchases of Class A and
Class D shares by non-retirement plan investors under the MFA program. First,
the initial allocation of assets is made under the MFA program. Then, any
subsequent exchange under the MFA program of Class A or Class D shares of a
Select Pricing Fund for Class A or Class D shares of the Fund will be made
solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other Select Pricing Fund and
the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and shareholders
of the other Select Pricing Funds with shares for which certificates have not
been issued, may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares to the general
public at any time and may thereafter 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. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
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."
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TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains which it distributes to Class
A, Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
created additional categories of capital gains taxable at different rates.
Additional legislation eliminates the highest 28% category for most sales of
capital assets occurring after December 31, 1997. Generally not later than 60
days after the close of its taxable year, the Fund will provide its shareholders
with a written notice designating the amounts of any ordinary income dividends
or capital gain dividends as well as the amounts of capital gain dividends in
the different categories of capital gain referred to above. 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. 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.
27
<PAGE> 75
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.
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
28
<PAGE> 76
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.
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
29
<PAGE> 77
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.
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.
30
<PAGE> 78
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES* CLASS C SHARES**
---------------------------- ---------------------------- ----------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT HYPOTHETICAL INVESTMENT
$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
------ ------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
One Year Ended July 31, 1998....... 5.16% $1,051.60 6.33% $1,063.30 9.02% $1,090.20
Five Years Ended July 31, 1998..... 12.24% $1,781.40 12.30% $1,786.20
Ten Years Ended July 31, 1998...... 12.95% $3,379.50
Inception (October 21, 1988) to
July 31, 1998.................... 12.43% $3,143.80
Inception (October 21, 1994) to
July 31, 1998.................... 13.70% $1,623.90
1998............................... 10.98% $1,109.80 9.84% $1,098.40 9.90% $1,099.00
1997............................... 29.78% $1,297.80 28.48% $1,284.80 28.39% $1,283.90
1996............................... 4.78% $1,047.80 3.67% $1,036.70 3.69% $1,036.90
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
Inception (November 1, 1982) to
July 31, 1998.................... 891.94% $9,919.40
Inception (October 21, 1988) to
July 31, 1998.................... 214.38% $3,143.80
Inception (October 21, 1994) to
July 31, 1998.................... 62.39% $1,623.90
<CAPTION>
CLASS D SHARES**
----------------------------
EXPRESSED REDEEMABLE
AS A VALUE OF A
PERCENTAGE HYPOTHETICAL
BASED ON A $1,000
HYPOTHETICAL INVESTMENT
$1,000 AT THE END
PERIOD INVESTMENT OF THE PERIOD
------ ------------ -------------
<S> <C> <C>
One Year Ended July 31, 1998....... 4.89% $1,048,90
Five Years Ended July 31, 1998.....
Ten Years Ended July 31, 1998......
Inception (October 21, 1988) to
July 31, 1998....................
Inception (October 21, 1994) to
July 31, 1998.................... 12.97% $1,585.00
1998............................... 10.70% $1,107.00
1997............................... 29.44% $1,294.40
1996............................... 4.50% $1,045.00
1995...............................
1994...............................
1993...............................
1992...............................
1991...............................
1990...............................
1989...............................
1988...............................
1987...............................
1986...............................
1985...............................
1984...............................
Inception (November 1, 1982) to
July 31, 1983....................
Inception (October 21, 1988) to
July 31, 1989....................
Inception (October 21, 1994) to
July 31, 1995.................... 11.72% $1,117.20
Inception (November 1, 1982) to
July 31, 1998....................
Inception (October 21, 1988) to
July 31, 1998....................
Inception (October 21, 1994) to
July 31, 1998.................... 58.50% $1,585.00
</TABLE>
- ---------------
* Information as to Class B shares is presented only for the period October 21,
1988 to July 31, 1998. Prior to October 21, 1988, no Class B shares were
publicly issued.
** Information as to Class C and Class D shares is presented only for the period
October 21, 1994 to July 31, 1998. Prior to October 21, 1994, no Class C or
Class D shares were publicly issued.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under "Purchase of
31
<PAGE> 79
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.
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.
32
<PAGE> 80
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, 1998, is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Assets.......................... $283,005,115 $286,396,286 $11,315,816 $89,690,910
============ ============ =========== ===========
Number of Shares Outstanding........ 20,985,805 22,154,170 882,195 6,668,556
============ ============ =========== ===========
Net Asset Value Per Share (net
assets divided by number of shares
outstanding)...................... $ 13.49 $ 12.93 $ 12.83 $ 13.45
Sales Charge (Class A and Class D
shares: 5.25% of offering price
(5.54% of net asset value per
share))*.......................... .75 ** ** .75
------------ ------------ ----------- -----------
Offering Price...................... $ 14.24 $ 12.93 $ 12.83 $ 14.20
============ ============ =========== ===========
</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.
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, 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
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.
33
<PAGE> 81
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 October 1, 1998.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated by reference in
this Statement of Additional Information to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling 1-800-456-4587 Ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
34
<PAGE> 82
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.................... 9
Initial Sales Charge Alternative --
Class A and Class D Shares....... 10
Reduced Initial Sales Charges....... 11
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements..................... 14
Distribution Plans.................. 15
Limitations on the Payment of
Deferred Sales Charges........... 15
Redemption of Shares.................. 16
Deferred Sales Charge -- Class B and
Class C Shares................... 17
Portfolio Transactions and
Brokerage........................... 18
Determination of Net Asset Value...... 19
Shareholder Services.................. 20
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............................... 27
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............................ 33
Independent Auditors................ 33
Custodian........................... 33
Transfer Agent...................... 33
Legal Counsel....................... 33
Reports to Shareholders............. 34
Additional Information.............. 34
Financial Statements.................. 34
</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 # 10242-1198
[MERRILL LYNCH LOGO]
MERRILL LYNCH
PHOENIX FUND, INC.
STATEMENT OF
ADDITIONAL
INFORMATION
November 3, 1998
Distributor:
Merrill Lynch
Funds Distributor
[MERRILL LYNCH ARTWORK]
<PAGE> 83
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, 1998*.
Incorporated by reference in Part B:
Schedule of Investments, as of July 31, 1998*.
Statement of Assets and Liabilities as of July 31, 1998*.
Statement of Operations for the year ended July 31, 1998*.
Statements of Changes in Net Assets for each of the years in the
two-year period ended July 31, 1998*.
Financial Highlights for each of the years in the five-year period
ended July 31, 1998*.
- ---------------
* Included in the Registrant's Annual Report to shareholders filed with the
Securities and Exchange Commission for the fiscal year ended July 31, 1998
pursuant to Rule 30b2-1 under the Investment Company Act of 1940, as amended
("the Investment Company Act").
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
1(a) -- Articles of Incorporation of Registrant, dated April 13,
1982.(a)
(b) -- Articles of Amendment to Articles of Incorporation of
Registrant, dated October 3, 1988.(a)
(c) -- Articles of Amendment to Articles of Incorporation of
Registrant, 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.(e)
</TABLE>
C-1
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
9(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill
Lynch Financial Data Services, Inc. (now known as 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.
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 PricingSM 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.
C-2
<PAGE> 85
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
TITLE OF CLASS AT SEPTEMBER 30, 1998*
-------------- ----------------------
<S> <C>
Class A Common Stock, par value $0.10 per share............. 21,320
Class B Common Stock, par value $0.10 per share............. 22,248
Class C Common Stock, par value $0.10 per share............. 1,329
Class D Common Stock, par value $0.10 per share............. 9,138
</TABLE>
- ---------------
* The number of holders shown in the table includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Class A, Class B, Class C
and Class D Distribution Agreements.
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.
C-3
<PAGE> 86
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 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 Corporate High Yield Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
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 registered investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II,
Inc., Debt Strategies Fund III, 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 Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida Insured
Fund II, MuniHoldings Florida Insured Fund III, MuniHoldings Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey Insured Fund
II, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York Insured Fund,
Inc., MuniHoldings New York Insured Fund II, 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. 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.,
C-4
<PAGE> 87
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 Holdings, Inc., Merrill Lynch
Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch
Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a
division of MLAM); and for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch
Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch
World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio, two
investment portfolios of EQ Advisors Trust.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2665 and
the address of Hotchkis & Wiley Funds is 725 South Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400. The address of the Investment Adviser, MLAM and
Princeton Services, Inc. ("Princeton Services"), and Princeton Administrators,
L.P. ("Princeton Administrators") is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Princeton Funds Distributor, Inc. ("PFD") and Merrill
Lynch Funds Distributor ("MLFD") is P.O. Box 9081, Princeton, New Jersey
08543-9081. The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is North Tower,
World Financial Center, 250 Vesey Street, New York, New York 10281-1201. The
address of the Fund's transfer agent, Financial Data Services ("FDS") is 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since July 31, 1996 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Richard is Treasurer and Mr. Glenn is Executive Vice President of 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
---- ------------------ ----------------------------------
<S> <C> <C>
ML & Co......................... Limited Partner Financial Services Holding
Company; Limited Partner of MLAM
Princeton Services, Inc. ....... General Partner General Partner of MLAM
Arthur Zeikel................... Chairman Chairman of MLAM; President of FAM
and MLAM from 1977 to 1997;
Chairman and Director of
Princeton Services; President of
Princeton Services from 1993 to
1997; Executive Vice President
of ML & Co.
</TABLE>
C-5
<PAGE> 88
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<S> <C> <C>
Jeffrey M. Peek................. President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.; Managing Director and
Co-Head of the Investment
Banking Division of Merrill
Lynch (in 1997); Senior Vice
President and Director of the
Global Securities and Economics
Division of Merrill Lynch (from
1995 to 1997).
Terry K. Glenn.................. Executive Vice President Executive Vice President of MLAM;
Executive Vice President and
Director of Princeton Services;
President and Director of PFD;
Director of FDS; President of
Princeton Administrators.
Linda L. Federici............... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Vincent R. Giordano............. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Elizabeth A. Griffin............ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Norman R. Harvey................ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Michael J. Hennewinkel.......... Senior Vice President, Senior Vice President, Secretary
Secretary and General and General Counsel of MLAM since
Counsel since 1998; 1998; Senior Vice President of
Senior Vice President MLAM prior thereto; Senior Vice
prior thereto President of Princeton Services
Philip L. Kirstein.............. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Ronald M. Kloss................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services
Debra W. Landsman-Yaros......... Senior Vice President Senior Vice President of MLAM;
Vice President of PFD; 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
Brian A. Murdock................ Senior Vice President Senior Vice President of MLAM;
since 1998; Vice Senior Vice President of
President prior Princeton Services; Director of
thereto PFD
</TABLE>
C-6
<PAGE> 89
<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------
<S> <C> <C>
Michael L. Quinn................ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services; Managing
Director and First Vice
President of Merrill Lynch from
1989 to 1995
Gerald M. Richard............... Senior Vice President Senior Vice President and
and Treasurer Treasurer of MLAM; Senior Vice
President and Treasurer of
Princeton Services; Vice
President and Treasurer of PFD
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: The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Americas Income Fund Inc., Merrill Lynch Asset Builder Program, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill
Lynch Consults International Portfolio, Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Developing Capital Markets, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund Inc., Merrill Lynch Fund For Tomorrow,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund
for Investment and Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series
Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds,
Inc., Merrill Lynch World Income Fund, Inc., The Municipal Fund Accumulation
Program, Inc., and Worldwide DollarVest Fund, Inc. The address of each of these
registered investment companies is P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y
9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since July 1,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition,
C-7
<PAGE> 90
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>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION(S) WITH MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- -------------------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel.................. Director and Chairman Chairman of the FAM and MLAM;
President of FAM and MLAM from
1977 to 1997; Chairman and
Director of Princeton Services,
President of Princeton Services
from 1993 to 1997; Executive
Vice President of ML & Co.
Alan J. Albert................. Senior Managing Director Vice President of MLAM
Nicholas C. D. Hall............ Director Director of Merrill Lynch Europe
PLC; General Counsel of Merrill
Lynch International Private
Banking Group
Gerald M. Richard.............. Senior Vice President Senior Vice President and
Treasurer of the FAM and MLAM;
Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
PFD
Carol Ann Langham.............. Company Secretary None
Debra Anne Searle.............. Assistant Company Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered 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. MLFD also acts as the
principal underwriter for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
C-8
<PAGE> 91
<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
Brian A. Murdock.................... Director None
Thomas J. Verage.................... First Vice President and Director 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-Yaros............. Vice President None
Michelle T. Lau..................... Vice President None
Gerald M. Richard................... Vice President and Treasurer Treasurer
Salvatore Venezia................... Vice President None
William Wasel....................... Vice President None
Robert Harris....................... Secretary None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536 and its transfer agent, 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) The 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-9
<PAGE> 92
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 3rd day of November,
1998.
MERRILL LYNCH PHOENIX FUND, INC.
By: /s/ ARTHUR ZEIKEL
------------------------------------
(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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARTHUR ZEIKEL President and Director (Principal November 3, 1998
- ------------------------------------------ Executive Officer)
(Arthur Zeikel)
GERALD M. RICHARD* Treasurer (Principal Financial 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)
*By:/s/ ARTHUR ZEIKEL November 3, 1998
------------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-10
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ------
<S> <C> <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> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Phoenix Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 19 to Registration Statement No. 2-77068 of our report dated September 16,
1998 appearing in the annual report to shareholders of the Merrill Lynch Phoenix
Fund, Inc. for the year ended July 31, 1998, and to the reference to us under
the caption "Financial Highlights" in the Prospectus, which is a part of such
Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
October 28, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000701960
<NAME> MERRILL LYNCH PHOENIX FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 692933038
<INVESTMENTS-AT-VALUE> 682399517
<RECEIVABLES> 3610845
<ASSETS-OTHER> 32151
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 686042513
<PAYABLE-FOR-SECURITIES> 12742895
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2891491
<TOTAL-LIABILITIES> 15634386
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 589548469
<SHARES-COMMON-STOCK> 20985805
<SHARES-COMMON-PRIOR> 19714408
<ACCUMULATED-NII-CURRENT> 2209139
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 89184115
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10533596)
<NET-ASSETS> 283005115
<DIVIDEND-INCOME> 5801927
<INTEREST-INCOME> 9347884
<OTHER-INCOME> 0
<EXPENSES-NET> (12705065)
<NET-INVESTMENT-INCOME> 2444746
<REALIZED-GAINS-CURRENT> 135548116
<APPREC-INCREASE-CURRENT> (64284208)
<NET-CHANGE-FROM-OPS> 73708654
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2071936)
<DISTRIBUTIONS-OF-GAINS> (63710745)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3072942
<NUMBER-OF-SHARES-REDEEMED> (6083241)
<SHARES-REINVESTED> 4281696
<NET-CHANGE-IN-ASSETS> (68406581)
<ACCUMULATED-NII-PRIOR> 1664384
<ACCUMULATED-GAINS-PRIOR> 110678845
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7181685
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12705065
<AVERAGE-NET-ASSETS> 302956119
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