<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1996
SECURITIES ACT FILE NO. 2-80150
INVESTMENT COMPANY ACT FILE NO. 811-3595
================================================================================
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. 18 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 19 /X/
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH HEALTHCARE FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH HEALTHCARE 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>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET
ONE WORLD TRADE CENTER MANAGEMENT
NEW YORK, NY 10048-0557 P.O. BOX 9011
ATTENTION: THOMAS R. SMITH, JR., ESQ. PRINCETON, NJ 08543-9011
FRANK P. BRUNO, ESQ.
</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.
------------------------
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF STOCK
UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT
COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST
RECENT FISCAL YEAR WAS FILED ON JUNE 25, 1996.
================================================================================
<PAGE> 2
MERRILL LYNCH HEALTHCARE FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
------------------------
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- ---------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................... Cover Page
Item 2. Synopsis................................. Fee Table; Alternative Sales
Arrangements; Risk Factors and Special
Considerations
Item 3. Condensed Financial Information.......... Financial Highlights; Performance Data
Item 4. General Description of Registrant........ Investment Objective and Policies;
Additional Information
Item 5. Management of the Fund................... Fee Table; Management of the Company;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance............................ Not Applicable
Item 6. Capital Stock and Other Securities....... Cover Page; Additional Information
Item 7. Purchase of Securities Being Offered..... Cover Page; Fee Table; Merrill Lynch
Select PricingSM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase................. Fee Table; Merrill Lynch Select
PricingSM System; Shareholder Services;
Purchase of Shares; Redemption of
Shares
Item 9. Pending Legal Proceedings................ Not Applicable
PART B
Item 10. Cover Page............................... Cover Page
Item 11. Table of Contents........................ Back Cover Page
Item 12. General Information and History.......... Not Applicable
Item 13. Investment Objectives and Policies....... Investment Objective and Policies
Item 14. Management of the Fund................... Management of the Company
Item 15. Control Persons and Principal Holders of
Securities............................. Management of the Company
Item 16. Investment Advisory and Other Services... Management of the Company; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices.............................. Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities....... General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............... Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information
Item 20. Tax Status............................... Dividends, Distributions and Taxes
Item 21. Underwriters............................. Purchase of Shares
Item 22. Calculation of Performance Data.......... Performance Data
Item 23. Financial Statements..................... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
AUGUST 26, 1996
MERRILL LYNCH HEALTHCARE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Healthcare Fund, Inc. (the "Company") is a non-diversified,
open-end investment company seeking long-term capital appreciation through
worldwide investment in equity securities of companies that, in the opinion of
management, derive or are expected to derive a substantial portion of their
sales from products and services in healthcare. The Company will pursue its
investment objective by investing in a global portfolio of securities of
companies in various stages of development. It is presently contemplated that
the Company's assets will be primarily invested in the United States, Japan and
Western Europe. Until the Company changed its investment objective on April 27,
1992, the Company was known as Sci/Tech Holdings, Inc. For more information on
the Company's investment objective and policies, please see "Investment
Objective and Policies" on page 13.
------------------------
Pursuant to the Merrill Lynch Select PricingSM System, the Company offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select PricingSM System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the
Company's transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Company
that is relevant to making an investment in the Company. This Prospectus should
be retained for future reference. A statement containing additional information
about the Company, dated August 26, 1996 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Company at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Company 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 1.0% for one None(d)
year, decreasing 1.0% year
annually thereafter to
0.0% after the fourth
year
Exchange Fee............................. None None None None
ANNUAL COMPANY OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Investment Advisory Fees(e).............. 1.00% 1.00% 1.00% 1.00%
12b-1 Fees(f):
Account Maintenance Fees............... None 0.25% 0.25% 0.25%
Distribution Fees...................... None 0.75% 0.75% None
(Class B shares
convert to Class D
shares automatically
after approximately
eight years and cease
being subject to
distribution fees)
Other Expenses:
Custodial Fees...................... 0.03% 0.03% 0.03% 0.03%
Shareholder Servicing Costs(g)...... 0.30% 0.32% 0.31% 0.27%
Other............................... 0.20% 0.20% 0.18% 0.20%
----- ----- ----- -----
Total Other Expenses............ 0.53% 0.55% 0.52% 0.50%
----- ----- ----- -----
Total Company Operating Expenses......... 1.53% 2.55% 2.52% 1.75%
===== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain investment
programs. See "Purchase of Shares--Initial Sales Charge Alternatives--Class
A and Class D Shares"--page 25.
(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 27.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A or Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares"--page 25.
(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 which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase.
(e) See "Management of the Company--Advisory and Management Arrangements"--page
21.
(f) See "Purchase of Shares--Distribution Plans"--page 30.
(g) See "Management of the Company--Transfer Agency Services"--page 22.
2
<PAGE> 5
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
Company 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..................................................... $67 $ 98 $132 $225
Class B..................................................... $66 $ 99 $136 $270*
Class C..................................................... $36 $ 78 $134 $286
Class D..................................................... $69 $105 $142 $248
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of the period:
Class A..................................................... $67 $ 98 $132 $225
Class B..................................................... $26 $ 79 $136 $270*
Class C..................................................... $26 $ 78 $134 $286
Class D..................................................... $69 $105 $142 $248
</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 Company will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
directly through the Company's transfer agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares".
MERRILL LYNCH SELECT PRICINGSM SYSTEM
The Company offers four classes of shares under the Merrill Lynch Select
PricingSM 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 PricingSM System is used by more than 50
mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Investment Adviser") or its affiliate, Fund Asset Management, L.P. ("FAM").
Funds advised by MLAM or FAM which utilize the Merrill Lynch Select PricingSM
System are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Company represents
an identical interest in the investment portfolio of the Company and has the
same rights, except that Class B, Class C and Class D shares bear the expenses
of the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees
3
<PAGE> 6
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 Company and,
accordingly, such charges will not affect the net asset value of any other class
or have any impact on investors choosing another sales charge option. Dividends
paid by the Company for each class of shares will be calculated in the same
manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Each class
has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Company. 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 PricingSM 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 PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
===========================================================================================================
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
-----------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales
charge(2)(3) No No No
-----------------------------------------------------------------------------------------------------------
B CDSC for a period of four years,
at a rate of 4.0% during the
first year, decreasing 1.0% B shares convert to D shares
annually to 0.0% 0.25% 0.75% automatically after approximately
eight years(4)
-----------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
-----------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% No No
===========================================================================================================
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC for one year. A 0.75% sales charge for 401(k) purchases over $1,000,000
will apply. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and 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 Company 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.
4
<PAGE> 7
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 Company are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding Class
A shares. Investors who currently own Class A shares of the Company in
a shareholder account are entitled to purchase additional Class A
shares of the Company in that account. Other eligible investors include
certain retirement plans and participants in certain investment
programs. In addition, Class A shares will be offered at net asset
value to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries
(the term "subsidiaries", when used herein with respect to ML & Co.,
includes MLAM, FAM 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 is 5.25%, which is reduced for
purchases of $25,000 and over, and waived for purchases by certain
retirement plans in connection with certain investment programs.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but if the initial sales charge is waived, such purchases may be
subject to a CDSC of 1.0% if the shares are redeemed within one year
after purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Company's average net assets
attributable to Class B shares, and a CDSC if they are redeemed within
four years of purchase. Approximately eight years after issuance, Class
B shares will convert automatically into Class D shares of the Company,
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 Company are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
Automatic conversion of Class B shares into Class D shares will occur
at least once a month on the basis of the relative net asset values of
the shares of the two classes on the conversion date, without the
imposition of any sales load, fee or other charge. Conversion of Class
B shares to Class D shares will not be deemed a purchase 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, is 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 Company's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC if they are redeemed within one year of purchase. Although Class C
shares are subject to a 1.0% CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Company's Board of
Directors and regulatory limitations.
5
<PAGE> 8
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
Company's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchases may be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares, except that there is no waiver for purchases by
retirement plans in connection with certain investment programs. Class
D shares also will be issued upon conversion of Class B shares as
described above under "Class B". See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D 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 Company 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
6
<PAGE> 9
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 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
forego 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> 10
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Company by
Deloitte & Touche LLP, independent auditors. Financial statements and the
independent auditors' report thereon for the fiscal year ended April 30, 1996,
are included in the Statement of Additional Information. Further information
about the performance of the Company is contained in the Company's most recent
annual report to shareholders which may be obtained, without charge, by calling
or by writing the Company at the telephone number or address on the front cover
of this Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------
FOR THE
FIVE-
MONTH FOR THE
PERIOD YEAR
FOR THE YEAR ENDED APRIL 30, ENDED ENDED
--------------------------------------------------- APRIL 30, NOV. 30,
1996+ 1995+ 1994+ 1993 1992+++ 1991
--------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 3.81 $ 3.87 $ 3.59 $ 3.63 $ 9.19 $ 7.94
--------- --------- --------- --------- --------- ---------
Investment income (loss)--net................. (.01) (.01) (.02) .02 -- .03
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net........................... 1.67 .22 .31 (.06) .88 2.08
--------- --------- --------- --------- --------- ---------
Total from investment operations............... 1.66 .21 .29 (.04) .88 2.11
--------- --------- --------- --------- --------- ---------
Less dividends and distributions:
Return of capital--net........................ -- -- -- -- (3.97) --
Investment income--net........................ -- -- (.01) -- -- (.03)
Realized gain on investments--net............. (.20) (.27) -- -- (2.47) (.83)
--------- --------- --------- --------- --------- ---------
Total dividends and distributions.............. (.20) (.27) (.01) -- (6.44) (.86)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period................. $ 5.27 $ 3.81 $ 3.87 $ 3.59 $ 3.63 $ 9.19
========= ========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............. 44.01% 6.47% 8.19% (1.10%) 10.96%# 29.44%
========= ========= ========= ========= ========= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses....................................... 1.53% 1.79% 1.55% 1.85% 1.56%* 1.61%
========= ========= ========= ========= ========= =========
Investment income (loss)--net.................. (.23%) (.21%) (.48%) .48% (.16%)* .27%
========= ========= ========= ========= ========= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....... $ 132,083 $ 69,650 $ 70,753 $ 63,528 $ 61,132 $ 125,979
========= ========= ========= ========= ========= =========
Portfolio turnover............................. 133.50% 196.91% 133.58% 103.06% 147.63% 206.29%
========= ========= ========= ========= ========= =========
Average commission rate paid##................. $ .0977 -- -- -- -- --
========= ========= ========= ========= ========= =========
<CAPTION>
FOR THE
EIGHT-
MONTH
PERIOD
ENDED FOR THE YEAR ENDED MARCH 31,
NOV. 30, ---------------------------------------------
1990++ 1990 1989 1988 1987
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 9.13 $ 9.61 $ 10.55 $ 13.75 $ 11.97
--------- --------- --------- --------- ---------
Investment income (loss)--net................. .05 .05 .15 .05 .07
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net........................... (.75) .96 (.12) .11 2.34
--------- --------- --------- --------- ---------
Total from investment operations............... (.70) 1.01 .03 .16 2.41
--------- --------- --------- --------- ---------
Less dividends and distributions:
Return of capital--net........................ -- -- -- -- --
Investment income--net........................ (.08) (.07) (.15) (.01) (.10)
Realized gain on investments--net............. (.41) (1.42) (.82) (3.35) (.53)
--------- --------- --------- --------- ---------
Total dividends and distributions.............. (.49) (1.49) (.97) (3.36) (.63)
--------- --------- --------- --------- ---------
Net asset value, end of period................. $ 7.94 $ 9.13 $ 9.61 $ 10.55 $ 13.75
========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share............. (8.75%)# 11.36% 0.36% 2.02% 20.76%
========= ========= ========= ========= =========
RATIOS TO AVERAGE NET ASSETS:
Expenses....................................... 1.77%* 1.61% 1.46% 1.41% 1.44%
========= ========= ========= ========= =========
Investment income (loss)--net.................. .62%* .78% 1.07% .48% .50%
========= ========= ========= ========= =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....... $ 114,852 $ 140,635 $ 170,742 $ 238,606 $ 296,637
========= ========= ========= ========= =========
Portfolio turnover............................. 159.11% 122.57% 113.85% 107.52% 92.42%
========= ========= ========= ========= =========
Average commission rate paid##................. -- -- -- -- --
========= ========= ========= ========= =========
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effect of sales loads.
+ Calculation is based on the average number of shares outstanding during the
period.
++ The Company changed its fiscal year from March 31 to November 30.
+++ The Company changed its fiscal year from November 30 to April 30.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Company is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
8
<PAGE> 11
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------
FOR THE FOR THE
YEAR ENDED FIVE-MONTH
APRIL 30, PERIOD++++ FOR THE
-------------------------------------------- ENDED YEAR ENDED
1996+ 1995+ 1994+ 1993+ APRIL 30, 1992+ NOV. 30, 1991
-------- ------- ------- ------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 3.43 $ 3.55 $ 3.31 $ 3.38 $ 9.01 $ 7.84
-------- ------- ------- ------- ------- -------------
Investment loss--net.............. (.05) (.04) (.05) (.01) (.02) (.03)
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............... 1.49 .19 .29 (.06) .83 2.03
-------- ------- ------- ------- ------- -------------
Total from investment operations... 1.44 .15 .24 (.07) .81 2.00
-------- ------- ------- ------- ------- -------------
Less dividends and distributions:
Return of capital--net............ -- -- -- -- (3.97) --
Investment income--net............ -- -- -- -- -- --
Realized gain on
investments--net................ (.20) (.27) -- -- (2.47) (.83)
-------- ------- ------- ------- ------- -------------
Total dividends and
distributions..................... (.20) (.27) -- -- (6.44) (.83)
-------- ------- ------- ------- ------- -------------
Net asset value, end of period..... $ 4.67 $ 3.43 $ 3.55 $ 3.31 $ 3.38 $ 9.01
========== ======== ======== ======== ================ ==============
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................. 42.46% 5.29% 7.25% (2.07%) 10.26%# 28.30%
========== ======== ======== ======== ================ ==============
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... 2.55% 2.85% 2.56% 2.89% 2.58%* 2.63%
========== ======== ======== ======== ================ ==============
Expenses........................... 2.55% 2.85% 2.56% 2.89% 2.58%* 2.63%
========== ======== ======== ======== ================ ==============
Investment loss--net............... (1.24%) (1.29%) (1.52%) (.41%) (1.02%)* (.79%)
========== ======== ======== ======== ================ ==============
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).................... $207,413 $79,485 $63,692 $33,071 $ 5,356 $ 6,007
========== ======== ======== ======== ================ ==============
Portfolio turnover................. 133.50% 196.91% 133.58% 103.06% 147.63% 206.29%
========== ======== ======== ======== ================ ==============
Average commission rate paid##..... $ .0977 -- -- -- -- --
========== ======== ======== ======== ================ ==============
<CAPTION>
FOR THE
FOR THE PERIOD
EIGHT-MONTH+++ FOR THE OCT. 21,
PERIOD ENDED YEAR ENDED 1988++ TO
NOV. 30, 1990 MARCH 31, 1990+ MARCH 31, 1989+
-------------- --------------- ---------------
<S> <<C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VA
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 9.05 $ 9.57 $ 10.24
------- ------- -------
Investment loss--net.............. (.01) (.06) (.02)
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions--net............... (.75) .97 (.06)
------- ------- -------
Total from investment operations... (.76) .91 (.08)
------- ------- -------
Less dividends and distributions:
Return of capital--net............ -- -- --
Investment income--net............ (.04) (.01) (.06)
Realized gain on
investments--net................ (.41) (1.42) (.53)
------- ------- -------
Total dividends and
distributions..................... (.45) (1.43) (.59)
------- ------- -------
Net asset value, end of period..... $ 7.84 $ 9.05 $ 9.57
================= ================= =================
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................. (9.37%)# 10.23% 2.43%#
================= ================= =================
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... 2.82%* 2.60% 2.38%*
================= ================= =================
Expenses........................... 2.82%* 2.68% 2.38%*
================= ================= =================
Investment loss--net............... (.36%)* (.31%) (.33%)*
================= ================= =================
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands).................... $ 3,222 $ 2,412 $ 342
================= ================= =================
Portfolio turnover................. 159.11% 122.57% 113.85%
================= ================= =================
Average commission rate paid##..... -- -- --
================= ================= =================
</TABLE>
- ---------------
+ Calculation is based on the average number of shares outstanding during the
period.
++ Commencement of Operations.
+++ The Company changed its fiscal year from March 31 to November 30.
++++ The Company changed its fiscal year from November 30 to April 30.
* Annualized.
** Total investment returns exclude the effect of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Company is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
9
<PAGE> 12
<TABLE>
<CAPTION>
CLASS C++ CLASS D++
-------------------------------------- --------------------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED OCTOBER 21, 1994+ ENDED OCTOBER 21, 1994+
APRIL 30, 1996 TO APRIL 30, 1995 APRIL 30, 1996 TO APRIL 30, 1995
-------------- ------------------- -------------- -------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $ 3.43 $ 3.27 $ 3.72 $ 3.61
------ ------- ------ -------
Investment loss--net....................... (.05) (.04) (.02) (.02)
Realized and unrealized gain on investments
and foreign currency transactions--net... 1.50 .20 1.63 .13
------ ------- ------ -------
Total from investment operations............ 1.45 .16 1.61 .11
------ ------- ------ -------
Less distributions from realized gain on
investments--net........................... (.20) -- (.20) --
------ ------- ------ -------
Net asset value, end of period.............. $ 4.68 $ 3.43 $ 5.13 $ 3.72
============== ==================== ============== ====================
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......... 42.76% 4.89%# 43.74% 3.05%#
============== ==================== ============== ====================
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................... 2.52% 3.28%* 1.75% 2.44%*
============== ==================== ============== ====================
Investment loss--net........................ (1.19%) (2.13%)* (.44%) (1.23%)*
============== ==================== ============== ====================
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $ 20,761 $ 1,816 $ 21,564 $ 4,386
============== ==================== ============== ====================
Portfolio turnover.......................... 133.50% 196.91% 133.50% 196.91%
============== ==================== ============== ====================
Average commission rate paid##.............. $ .0977 -- $ .0977 --
============== ==================== ============== ====================
</TABLE>
- ---------------
+ Commencement of Operations.
++ Calculation is based on the average number of shares outstanding during the
period.
* Annualized.
** Total investment returns exclude the effect of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Company is
required to disclose its average commission rate per share for purchases and
sales of equity securities.
10
<PAGE> 13
RISK FACTORS AND SPECIAL CONSIDERATIONS
International Investments. Investments on an international basis involve
certain risks not typically involved in domestic investments, 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 applicable to such investments. Securities
prices in different countries are subject to different economic, financial,
political and social factors. Since the Company may invest heavily in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments so far
as U.S. investors are concerned. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of the Company's
assets denominated in that currency and the Company's yield on such assets. The
rates of exchange between the dollar and other currencies are determined by
forces of supply and demand in the foreign exchange markets. These forces are,
in turn, affected by the international balance of payments, the level of
interest and inflation rates and other economic and financial conditions,
government intervention, speculation and other factors. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resources, self-sufficiency and balance of payments position.
Also, many of the securities held by the Company will not be registered with the
Commission nor will the issuers thereof be subject to the reporting requirements
of such agency.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investments in those countries.
There may be less publicly available information about foreign companies than
about U.S. companies, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to those
to which U.S. companies are subject. In addition, certain foreign investments
may be subject to foreign withholding taxes. See "Additional
Information--Taxes".
Foreign financial markets, while generally growing in trading volume,
typically have substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The foreign markets also have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the
Company are uninvested and no return is earned thereon. The inability of the
Company to make intended security purchases due to settlement problems could
cause the Company to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems either could result
in losses to the Company due to subsequent declines in value of the portfolio
security or, if the Company has entered into a contract to sell the security,
could result in possible liability to the purchaser. Brokerage commissions and
other transaction costs on foreign securities exchanges are generally higher
than in the United States. There is generally less governmental supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
11
<PAGE> 14
Investments in Healthcare. Healthcare oriented investment companies such
as the Company, as with other sector funds, may be subject to rapidly changing
asset inflows and outflows. Moreover, the Company's investments in securities of
healthcare related companies present certain risks that may not exist to the
same degree as in other types of investments. While the Company will invest in
the securities of entities in several different industries considered by
management of the Company to be healthcare related, many of those entities share
common characteristics which may affect an investment in the Company. For
example, industries throughout the healthcare field include many smaller and
less seasoned companies. These types of companies may present greater
opportunities for capital appreciation, but may also involve greater risks. Such
companies may have limited product lines, markets, or financial resources, or
may depend on a limited management group. In addition, the securities of smaller
companies may be subject to more volatile market movements than the securities
of larger, more established companies. The companies in which the Company
invests are also strongly affected by worldwide scientific or technological
developments and are companies whose products may rapidly fall into
obsolescence. Even though such companies may be involved in different aspects of
the more general healthcare area, the Company's focus on this area increases the
degree to which it may be affected by new developments. Many of such companies
may offer products or services that are subject to governmental regulation and
may, therefore, be affected adversely by governmental policies.
A number of legislative proposals concerning healthcare have been
introduced in the U.S. Congress in recent years or have been reported to be
under consideration. These proposals span a wide range of topics, including cost
controls, national health insurance, incentives for competition in the provision
of health care services, tax incentives and penalties related to health care
insurance premiums, and promotion of prepaid healthcare plans. The Company is
unable to predict the effect of any of these proposals, if enacted.
Other Considerations. The operating expense ratio of the Company can be
expected to be higher than that of an investment company investing exclusively
in U.S. securities since the expenses of the Company, such as custodial costs
and advisory fees, are higher. The Company operates as a non-diversified
investment company. See "Investment Objective and Policies--Other Investment
Practices--Non-Diversified Status". To the extent that the Company assumes large
positions in the securities of a small number of issuers, the Company's total
return may fluctuate to a greater degree than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers. Other special considerations are that the Company may invest up to
15% (10% to the extent required by certain state laws) of its total assets in
illiquid securities (including venture capital investments), that certain
foreign investments may be subject to foreign withholding taxes and that the
Company may invest more than 5% of its assets in securities issued or guaranteed
by certain foreign governments.
12
<PAGE> 15
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Company is to seek long-term capital
appreciation through worldwide investment in equity securities of companies
that, in the opinion of management, derive or are expected to derive a
substantial portion of their sales from products and services in healthcare. The
Company will pursue this objective by investing in a global portfolio of
securities of companies in various stages of development. The Company may,
however, for defensive purposes, invest in non-convertible fixed income
securities, including money market securities. Current income from dividends and
interest will not be an important consideration in selecting portfolio
securities. There can be no assurance that the investment objective of the
Company will be realized. The investment objective of the Company described in
the first sentence of this paragraph is a fundamental policy of the Company and
may not be changed without the approval of the holders of a majority of the
Company's outstanding voting securities.
The investment objective of the Company is based upon the belief that
advances in healthcare are providing companies throughout the world with
opportunities to develop innovative products and services and that investment in
such companies offers significant long-term growth possibilities. While the
Company will seek investments that have a healthcare orientation, it will
maintain a flexible approach as to the types of industries in which it will
invest, and it will not invest more than 25% of its total assets in any one
industry. The Company will invest in companies that are substantially engaged in
the design, manufacture or sale of products or services used for or in
connection with healthcare or medicine. Such companies may be in a variety of
industries and may include pharmaceutical companies; companies that design,
manufacture, sell or supply medical, dental and optical products, hardware or
services; companies involved in biotechnology, medical, diagnostic and
biochemical research and development; and companies involved in the ownership
and/or operation of healthcare facilities. The Company may invest up to 15% (10%
to the extent required by certain state laws) of its total assets (together with
all other illiquid investments) in venture capital investments in new and early
stage companies whose securities are illiquid. The Company will not, however,
invest in securities of issuers having a record, together with predecessors, of
less than three years of continuous operation if more than 5% of the Company's
total assets, taken at market value, would be invested in such securities.
The Company will invest in a global portfolio of securities of companies
located throughout the world. While there are no prescribed limits on geographic
asset distribution, based upon the public market values and anticipated
scientific innovations, it is presently contemplated that a majority of the
Company's assets will be invested at all times in the securities of issuers
domiciled in the United States, Japan and Western Europe. Western European
countries include, among others, the United Kingdom, Germany, The Netherlands,
Switzerland, Sweden, France, Italy, Belgium, Norway, Denmark, Finland, Portugal,
Austria and Spain. Under certain adverse investment conditions, the Company may
restrict the securities markets in which its assets will be invested and may
increase the proportion of assets invested in the U.S. securities markets.
Investment emphasis will be on equities, primarily common stocks and, to a
lesser extent, securities convertible into common stocks and rights to subscribe
for common stocks. The Company anticipates that under normal conditions at least
65% of its total assets will be invested in healthcare companies. The Company
reserves the right, as a temporary defensive measure and to provide for
redemptions, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and other types of securities, the issuers of which may not be
involved in healthcare, including non-convertible preferred stocks and
investment grade debt securities and government and money market securities, in
such proportions as, in the opinion of the Investment Adviser,
13
<PAGE> 16
prevailing market or economic conditions warrant. The Company also may invest in
securities subject to repurchase agreements with banks or securities firms if
the underlying securities are those which otherwise qualify for investment by
the Company and if, as a result thereof, not more than 15% (10% to the extent
required by certain state laws) of its total assets would be invested in
illiquid securities, including repurchase agreements maturing in more than seven
days. The Company may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. The Company may invest in unsponsored ADRs. The issuers of
unsponsored ADRs are not obligated to disclose material information in the
United States, and therefore, there may not be a correlation between such
information and the market value of such ADRs.
HEDGING TECHNIQUES
The Company may engage in various portfolio strategies to hedge its
portfolio against investment, interest rate and currency risks. These strategies
include the use of options on portfolio securities, stock index options, stock
index futures, financial futures, currency futures, options on such futures and
forward foreign exchange transactions. The Company may enter into such
transactions only in connection with its hedging strategies. While the net asset
value of the Company's shares will fluctuate and no assurance can be given that
the Company's hedging transactions will be effective, the Investment Adviser
believes that the ability of the Company to engage in these hedging transactions
will enhance the Company's ability to reduce the volatility of the net asset
value of its shares. Furthermore, the Company will only engage in hedging
activities from time to time and may not necessarily be engaging in hedging
activities when movements in the equity markets, interest rates or currency
exchange rates occur. Reference is made to the Statement of Additional
Information for further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Option, Futures and Currency Transactions"),
the Investment Adviser believes that, because the Company will only engage in
these transactions for hedging purposes, the options and futures portfolio
strategies of the Company will not subject the Company to the risks frequently
associated with the speculative use of options and futures transactions. Tax
requirements may limit the Company's ability to engage in the hedging
transactions and strategies described below.
Set forth below is a description of the hedging instruments that the
Company may utilize with respect to investment, interest rate and currency
risks.
Writing Covered Call Options. The Company is authorized to purchase and
write (i.e., sell) covered call options on the securities in which it may invest
and to enter into closing purchase transactions with respect to certain of such
options. A covered call option is an option where the Company, in return for a
premium, gives another party a right to buy specified securities owned by the
Company at a specified future date and price set at the time of the contract. By
writing covered call options, the Company gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price.
In addition, the Company's ability to sell the underlying security will be
limited while the option is in effect unless the Company effects a closing
purchase transaction. A closing purchase transaction cancels out the Company's
position as the writer of an option by means of an offsetting purchase of an
identical option
14
<PAGE> 17
prior to the expiration of the option it has written. Covered call options serve
as a partial hedge against the price of the underlying security declining.
Purchasing Put Options. The Company is authorized to purchase put options
to hedge against a decline in the market value of its securities. By buying a
put option the Company has a right to sell the underlying security at the stated
exercise price, thus limiting the Company's risk of loss through a decline in
the market value of the security until the put expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Company's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. The
Company will not purchase put options on securities (including stock index
options discussed below) if as a result of such purchase, the aggregate cost of
all outstanding options on securities held by the Company would exceed 5% of the
market value of the Company's total assets.
Stock Index Options and Futures and Financial Futures. The Company is
authorized to engage in transactions in stock index options and futures and
financial futures and related options on such futures. The Company may purchase
or write put and call options on stock indices to hedge against the risks of
market-wide stock price movements in the securities in which the Company
invests. Options on indices are similar to options on securities except that on
exercise or assignment, the parties to the contract pay or receive an amount of
cash equal to the difference between the closing value of the index and the
exercise price of the option times a specified multiple. The Company may invest
in stock index options based on a broad market index, e.g., the S&P 500 Index,
or on a narrow index representing an industry or market segment, e.g., the AMEX
Oil & Gas Index.
The Company may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Company may effect transactions in stock index futures contracts
in connection with equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Company in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions".
The Company is authorized to sell futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Company's securities portfolio that might otherwise result. When the Company is
not fully invested in the securities markets and anticipates a significant
market advance, it would be able to purchase futures in order to gain rapid
market exposure that may in part or entirely offset increases in the cost of
securities that the Company intends to purchase. As such purchases are made, an
equivalent amount of futures contracts will be terminated by offsetting sales.
The Company does not consider purchases of futures contracts to be a speculative
practice under these circumstances. It is anticipated that, in a substantial
majority of these transactions, the Company will purchase such securities upon
termination of the long futures position, whether the long position is the
purchase of a futures contract or the
15
<PAGE> 18
purchase of a call option or the writing of a put option on a future, but under
unusual circumstances (e.g., the Company experiences a significant amount of
redemptions), a long futures position may be terminated without the
corresponding purchase of securities.
The Company also is authorized to purchase and write call and put options
on futures contracts and stock indices in connection with its hedging
activities. Generally, these strategies would be utilized under the same market
and market sector conditions (i.e., conditions relating to specific types of
investments) in which the Company enters into futures transactions. The Company
may purchase put options or write call options on futures contracts and stock
indices rather than selling the underlying futures contract in anticipation of a
decrease in the market value of its securities. Similarly, the Company can
purchase call options, or write put options on futures contracts and stock
indices, as a substitute for the purchase of such futures to hedge against the
increased cost resulting from an increase in the market value of securities
which the Company intends to purchase.
The Company is also authorized to engage in options and futures
transactions on U.S. and foreign exchanges and in options in the
over-the-counter markets ("OTC options"). In general, exchange traded contracts
are third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) with standardized strike
prices and expiration dates. OTC options transactions are two-party contracts
with prices and terms negotiated by the buyer and seller. See "Restrictions on
OTC Options" below for information as to restrictions on the use of OTC options.
The Company is authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions could be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Company, sold by
the Company but not yet delivered, or committed or anticipated to be purchased
by the Company. As an illustration, the Company may use such techniques to hedge
the stated value in U.S. dollars of an investment in a yen denominated security.
In such circumstances, for example, the Company can purchase a foreign currency
put option enabling it to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Company may also sell a call option
which, if exercised, requires it to sell a specified amount of yen for dollars
at a specified price by a future date (a technique called a "spread"). By
selling such a call option in this illustration, the Company gives up the
opportunity to profit without limit from increases in the relative value of the
yen to the dollar. The Investment Adviser believes that "spreads" of the type
which may be utilized by the Company constitute hedging transactions and are
consistent with the policies described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade or
futures exchanges. The Company will not speculate in foreign currency options,
futures or related options. Accordingly, the Company will not hedge a currency
substantially in excess of the market value of securities which it has committed
or anticipates to purchase which are denominated in such currency, and in the
case of securities which have been sold by the Company but not yet delivered,
the proceeds thereof in its denominated currency. The Company will not incur
potential net liabilities of more than 20% of its total assets from foreign
currency options, futures or related options.
16
<PAGE> 19
Forward Foreign Exchange Transactions. The Company has authority to deal
in forward foreign exchange between currencies of the different countries in
which it will invest and multinational currency units as a hedge against
possible variations in the foreign exchange rates between these currencies. This
is accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
The Company's dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Company accruing in connection with the
purchase and sale of its portfolio securities, the sale and redemption of shares
of the Company or the payment of dividends and distributions by the Company.
Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency. The
Company will not attempt to hedge all of its foreign portfolio positions. If the
Company enters into a position hedging transaction, its custodian will place
cash or liquid debt or equity securities in a separate account of the Company in
an amount equal to the value of the Company's total assets committed to the
consummation of such forward contract. If the value of the securities placed in
the separate account declines, additional cash or liquid debt or equity
securities will be placed in the account so that the value of the account will
equal the amount of the Company's commitment with respect to such contracts.
Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission ("CFTC") applicable to the Company provide
that the futures trading activities described herein will not result in the
Company being deemed a "commodity pool" as defined under such regulations if the
Company adheres to certain restrictions. In particular, the Company may purchase
and sell futures contracts and options thereon (i) for bona fide hedging
purposes and (ii) for non-hedging purposes, if the aggregate initial margin and
premiums required to establish positions in such contracts and options does not
exceed 5% of the liquidation value of the Company's portfolio, after taking into
account unrealized profits and unrealized losses on any such contracts and
options.
When the Company purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Company's custodian so that the
amount so segregated, plus the amount of initial and variation margin held in
the account of its broker, equals the market value of the futures contract,
thereby ensuring that the use of such futures is unleveraged.
Restrictions on OTC Options. The Company will engage in OTC options,
including over-the-counter stock index options, over-the-counter foreign
currency options and options on foreign currency futures, only with member banks
of the Federal Reserve System and primary dealers in U.S. Government securities
or with affiliates of such banks or dealers which have capital of at least $50
million or whose obligations are guaranteed by an entity having capital of at
least $50 million.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Company has adopted an investment policy pursuant to
which it will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transaction, the sum of the market value of
OTC options currently outstanding which are held by the Company, the market
value of the underlying securities covered by OTC call options currently
outstanding which were sold by the Company and margin deposits on the Company's
existing OTC options on futures contracts exceeds 15% (10% to the extent
required by certain state laws) of the total assets of the Company, taken at
market value, together with all other assets of the Company which are illiquid
or are not otherwise readily marketable. However, if the OTC option is sold by
the Company to a primary U.S.
17
<PAGE> 20
Government securities dealer recognized by the Federal Reserve Bank of New York
and the Company has the unconditional contractual right to repurchase such OTC
option from the dealer at a predetermined price, then the Company will treat as
illiquid such amount of the underlying securities as is equal to the repurchase
price less the amount by which the option is "in-the-money" (i.e., current
market value of the underlying security minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money". This policy as to OTC options is
not a fundamental policy of the Company and may be amended by the Board of
Directors of the Company without the approval of the Company's shareholders.
However, the Company will not change or modify this policy prior to the change
or modification by the Commission staff of its position.
Risk Factors in Option, Futures and Currency Transactions. Utilization of
options and futures transactions to hedge the portfolio involves the risk of
imperfect correlation in movements in the price of options and futures and
movements in the price of the securities or currencies which are the subject of
the hedge. If the price of the options or futures moves more or less than the
price of the hedged securities or currencies, the Company will experience a gain
or loss which will not be completely offset by movements in the price of the
subject of the hedge. The successful use of options and futures also depends on
the Investment Adviser's ability to predict correctly price movements in the
market involved in a particular options or futures transaction. To compensate
for imperfect correlations, the Company may purchase or sell stock index options
or futures contracts in a greater dollar amount than the hedged securities if
the volatility of the hedged securities is historically greater than the
volatility of the stock index options or futures contracts. Conversely, the
Company may purchase or sell fewer stock index options or futures contracts if
the volatility of the price of the hedged securities is historically less than
that of the stock index options or futures contracts. The risk of imperfect
correlation generally tends to diminish as the maturity date of the stock index
option or futures contract approaches.
The Company intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures. However, there can be no assurance
that a liquid secondary market will exist at any specific time. Thus, it may not
be possible to close an options or futures position. The inability to close
options and futures positions also could have an adverse impact on the Company's
ability to effectively hedge its portfolio. There is also the risk of loss by
the Company of margin deposits or collateral in the event of bankruptcy of a
broker with whom the Company has an open position in an option, a futures
contract or related option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written in one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum number
of contracts which any person may trade on a particular trading day. The
Investment Adviser does not believe that these trading and position limits will
have any adverse impact on the portfolio strategies for hedging the Company's
portfolio.
Because the Company will engage in the options and futures transactions
described above solely in connection with its hedging activities, the Investment
Adviser does not believe that such options and futures transactions necessarily
will have any significant effect on the Company's portfolio turnover.
18
<PAGE> 21
OTHER INVESTMENT PRACTICES
Portfolio Transactions. In executing portfolio transactions, the
Investment Adviser seeks to obtain the best net results for the Company, taking
into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Investment Adviser generally seeks reasonably
competitive commission rates, the Company does not necessarily pay the lowest
commission or spread available. The Company has no obligation to deal with any
broker or group of brokers in execution of transactions in portfolio securities.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the
Company will endeavor to achieve the best net results in effecting its portfolio
transactions. The Company may pay brokerage commissions to a broker (i) which is
an affiliated person of the Company, (ii) to a broker which is an affiliated
person of such an affiliated person and (iii) to a broker an affiliated person
of which is an affiliated person of the Company, its Investment Adviser or the
Distributor. The Investment Adviser may allocate brokerage transactions in a
manner that takes into account the sale of investment company securities.
Portfolio Turnover. Generally, the Company does not purchase securities
for short-term trading profits. However, the Company may dispose of securities
without regard to the time they have been held when such actions, for defensive
or other reasons, appear advisable to the Investment Adviser. While it is not
possible to predict portfolio turnover rates with any certainty, at present it
is anticipated that the Company's annual portfolio turnover rate, under normal
circumstances, will be less than 150%. (The portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the particular fiscal year by the monthly average of the value of the
portfolio securities owned by the Company during the particular fiscal year.)
High portfolio turnover involves correspondingly greater transaction costs in
the form of dealer spreads and brokerage commissions, which are borne directly
by the Company.
Non-Diversified Status. The Company is classified as non-diversified
within the meaning of the Investment Company Act of 1940 (the "Investment
Company Act"), which means that the Company is not limited by such Act in the
proportion of its assets that it may invest in the securities of a single
issuer. The Company's investments will be limited, however, in order to qualify
as a "regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"). To qualify, the Company must comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of the
Company's total assets will be invested in the securities of a single issuer and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities of
a single issuer, and the Company will not own more than 10% of the outstanding
voting securities of a single issuer. Foreign government securities (unlike U.S.
Government securities) are not exempt from the diversification requirements of
the Code and are considered obligations of a single issuer. A fund which elects
to be classified as "diversified" under the Investment Company Act must satisfy
the foregoing 5% and 10% requirements with respect to 75% of its total assets.
To the extent that the Company assumes large positions in the securities of a
small number of issuers, the Company's net asset value may fluctuate to a
greater extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers, and the
Company may be more susceptible to any single economic, political or regulatory
occurrence than a diversified company.
Lending of Portfolio Securities. The Company may from time to time lend
securities from its portfolio, with a value not exceeding 10% of its total
assets, to banks, brokers and other financial institutions and receive
19
<PAGE> 22
collateral in cash or securities issued or guaranteed by the U.S. 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. During the period of such a loan,
the Company receives the income on both the loaned securities and the collateral
and thereby increases its yield.
INVESTMENT RESTRICTIONS
The Company has adopted the following restrictions and policies relating to
the investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of the
Company's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). Among its fundamental policies,
the Company 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 or
instrumentalities). Investment restrictions and policies that are non-
fundamental policies may be changed by the Board of Directors without
shareholder approval. As a non-fundamental policy, the Company may not borrow
amounts in excess of 10% 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 Company shares. In addition, the Company will not
purchase securities while borrowings are outstanding except to exercise prior
commitments and to exercise subscription rights. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Company.
Such leveraging or borrowing increases the Company's exposure to capital risk,
and borrowed funds are subject to interest costs which will reduce net income.
As a non-fundamental policy, the Company will not 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, including repurchase agreements 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 Company
may purchase without regard to this limitation securities that are not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
but that can be offered and sold to "qualified institutional buyers" under Rule
144A under the Securities Act, provided that the Company's Board of Directors
continuously determines, based on the trading markets for the specific Rule 144A
security, that it is liquid. The Board of Directors may adopt guidelines and
delegate to the Investment Adviser the daily function of determining and
monitoring liquidity of restricted securities. The Board has determined that
securities which are freely tradeable in their primary market offshore should be
deemed liquid. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations.
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
The Board of Directors of the Company consists of six individuals, five of
whom are not "interested persons" of the Company as defined in the Investment
Company Act. The Board of Directors of the Company is responsible for the
overall supervision of the operations of the Company and performs the various
duties imposed on the directors of investment companies by the Investment
Company Act.
20
<PAGE> 23
The Directors of the Company are:
ARTHUR ZEIKEL*--President of the Investment Adviser and its affiliate, FAM;
President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and Director of the Distributor.
DONALD CECIL--Special Limited Partner of Cumberland Partners (an investment
partnership).
EDWARD H. MEYER--Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President of
Arnhold and S. Bleichroeder, Inc.
RICHARD R. WEST--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.
EDWARD D. ZINBARG--Former Executive Vice President of The Prudential
Insurance Company of America.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Company.
ADVISORY AND MANAGEMENT ARRANGEMENTS
MLAM acts as the investment adviser to the Company. The Investment Adviser
is owned and controlled by ML & Co., a financial services holding company and
the parent of Merrill Lynch. The Investment Adviser or its affiliate, FAM, acts
as the investment adviser to more than 130 registered investment companies. As
of July 31, 1996, the Investment Adviser and FAM had a total of approximately
$207.3 billion in investment company and other portfolio assets under
management, including accounts of certain affiliates of the Investment Adviser.
Subject to the direction of the Directors, the Investment Adviser is
responsible for the actual management of the Company's portfolio and constantly
reviews the Company's holdings in light of its own research analysis and that
from other relevant sources. The responsibility for making decisions to buy,
sell or hold a particular security rests with the Investment Adviser. The
Investment Adviser performs certain of the other administrative services and
provides office space, facilities, equipment and personnel for management of the
Company.
Under the investment advisory agreement, as compensation for its services
to the Company, the Investment Adviser receives monthly compensation at the
annual rate of 1.0% of the Company's average daily net assets. This fee is
higher than that paid by most mutual funds, but the Investment Adviser believes
it is justified by the special investment focus of the Company. For the fiscal
year ended April 30, 1996, the Investment Adviser earned investment advisory
fees of $2,441,908 (based on average net assets of approximately $242.4
million). At July 31, 1996, the Company's net assets were approximately $347.4
million. At such level, the annual advisory fee would aggregate approximately
$3.5 million.
Jordan C. Schreiber, Vice President of the Company, is the Company's
Portfolio Manager. Mr. Schreiber has been a Vice President and Portfolio Manager
of the Investment Adviser and its predecessor since 1983. Mr. Schreiber has been
primarily responsible for the management of the Company's portfolio since 1983.
The Company pays certain expenses incurred in its operations, including,
among other things, taxes; expenses for legal and auditing services; and costs
of printing proxies, stock certificates, shareholder reports, prospectuses and
statements of additional information. Also, accounting services are provided to
the Company
21
<PAGE> 24
by the Investment Adviser, and the Company reimburses the Investment Adviser for
its costs in connection with such services on a semi-annual basis. For the
fiscal year ended April 30, 1996, the reimbursement of the Investment Adviser
for accounting services aggregated $77,879. For the same fiscal period, the
ratio of total expenses to average net assets was 1.53% for Class A shares,
2.55% for Class B shares, 2.52% for Class C shares and 1.75% for Class D shares.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Investment Company Act which incorporates the Code of Ethics
of the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Company within
periods of trading by the Company in the same (or equivalent) security (15 or 30
days depending upon the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a wholly-owned subsidiary of ML & Co., acts as the Company'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 $11.00 per Class A or Class D shareholder account and $14.00 per Class
B or Class C shareholder account, nominal miscellaneous fees (e.g., account
closing fees) and is entitled to reimbursement for out-of-pocket expenses
incurred by it under the Transfer Agency Agreement. For the fiscal year ended
April 30, 1996, the Company paid the Transfer Agent $753,966 pursuant to the
Transfer Agency Agreement. At July 31, 1996, the Company had 30,305 Class A
shareholder accounts, 27,100 Class B shareholder accounts, 4,095 Class C
shareholder accounts and 2,608 Class D shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $798,773, plus miscellaneous and out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the distributor of the shares of the Company. Shares of the
Company are offered continuously for sale by the Distributor and other eligible
securities dealers (including Merrill Lynch). Shares of the Company may be
purchased from securities dealers or by mailing a purchase order directly to the
Transfer Agent. The minimum initial purchase is $1,000, and the minimum
subsequent purchase is $50, except that for retirement plans, the minimum
initial purchase is $100, and the minimum subsequent purchase is $1.
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<PAGE> 25
The Company is offering its shares in four classes at a public offering
price equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
PricingSM System, as described below. The applicable offering price for purchase
orders is based upon the net asset value of the Company next determined after
receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE") (generally, 4:00 P.M., New York time), which
includes orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value determined as of
15 minutes after the close of business on the NYSE on that day provided the
Distributor in turn receives the order from the securities dealer prior to 30
minutes after the close of business on the NYSE on that day. If the purchase
orders are not received by the Distributor prior to 30 minutes after the close
of business on the NYSE, such orders shall be deemed received on the next
business day. The Company or the Distributor may suspend the continuous offering
of the Company's shares of any class at any time in response to conditions in
the securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the Company.
Neither the Distributor nor the dealers are permitted to withhold placing orders
to benefit themselves by a price change. Merrill Lynch may charge its customers
a processing fee (presently $4.85) to confirm a sale of shares to such
customers. Purchases directly through the Transfer Agent are not subject to the
processing fee.
Shares of the Company may be purchased by residents of Wisconsin only if
such investors have (i) a net worth (exclusive of home, home furnishings and
automobiles) of not less than $100,000 or (ii) a net worth (as computed above)
of not less than $30,000 and an annual gross income of not less than $30,000.
The Company issues four classes of shares under the Merrill Lynch Select
PricingSM 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 Company with the investment thereafter being
subject to a CDSC and ongoing distribution fees. A discussion of the factors
that investors should consider in determining the method of purchasing shares
under the Merrill Lynch Select PricingSM System is set forth under "Merrill
Lynch Select PricingSM System" on page 3.
Each Class A, Class B, Class C and Class D share of the Company represents
identical interests in the investment portfolio of the Company and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Company and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Company
for each class of shares will be calculated in the same manner at the same time
and will differ only to the extent that account maintenance and distribution
fees and any incremental transfer agency costs relating to a particular class
are borne exclusively by that class. Class B, Class C and Class D shares each
have exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
23
<PAGE> 26
and/or distribution fees are paid. See "Distribution Plans" below. Each class
has different exchange privileges. See "Shareholder Services--Exchange
Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Company. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
===============================================================================================
ACCOUNT
MAINTENANCE DISTRIBUTION
CLAS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
-----------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales No No No
charge(2)(3)
-----------------------------------------------------------------------------------------------
B CDSC for a period of four years, at 0.25% 0.75% B shares convert to D
a rate of 4.0% during the first shares automatically after
year, decreasing 1.0% annually to approximately eight
0.0% years(4)
-----------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 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 in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead may be subject to a 1.0%
CDSC for one year. A 0.75% sales charge for 401(k) purchases over $1,000,000
will apply.
(4) The conversion period for dividend reinvestment shares and 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 Company 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.
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<PAGE> 27
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 SALES LOAD AS DISCOUNT TO
PERCENTAGE OF PERCENTAGE* OF SELECTED DEALERS
OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE 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 made on or after October 21, 1994, and on Class A
purchases by certain retirement plan investors in connection with certain
investment programs. If the sales charge is waived, in connection with a
purchase of $1,000,000 or more, such purchases may be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Class A
purchases made prior to October 21, 1994, might have been subject to a CDSC
if the shares were redeemed within one year of purchase at the following
rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on purchases of
$2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to $5,000,000; and
0.25% on purchases of more than $5,000,000 in lieu of paying an initial sales
charge. The charge 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 $1,000,000 or more of Class A
or Class D shares by certain employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Company will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. During
the fiscal year ended April 30, 1996, the Company sold 10,277,222 Class A shares
for aggregate net proceeds of $49,677,305. The gross sales charges for the sale
of Class A shares of the Company for that year were $30,539, of which $2,062 and
$28,477 were received by the Distributor and Merrill Lynch, respectively. During
such period, the Distributor received no CDSCs with respect to redemption within
one year after purchase of Class A shares purchased subject to front-end sales
charge waivers. During the fiscal year ended April 30, 1996, the Company sold
5,979,086 Class D shares for aggregate net proceeds of $28,807,012. The gross
sales charges for the sale of Class D shares of the Company for that year were
$261,644, of which $17,137 and $244,507 were received by the Distributor and
Merrill Lynch, respectively. During such period, the Distributor received no
CDSCs with respect to redemption within one year after purchase of Class D
shares purchased subject to front-end sales charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Company in a shareholder account, including participants in the Merrill Lynch
BlueprintSM
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<PAGE> 28
Program, are entitled to purchase additional Class A shares of the Company in
that account. Certain employer sponsored retirement or savings plans, including
eligible 401(k) plans, may purchase Class A shares of the Company at net asset
value provided such plans meet the required minimum number of eligible employees
or required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMASM Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services, collective investment trusts for which Merrill Lynch Trust
Company serves as trustee and certain purchases made in connection with the
Merrill Lynch Mutual Fund Adviser ("MFA") program. In addition, Class A shares
are 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 Company. 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 Company also may purchase Class A shares of the Company if certain
conditions set forth in the Statement of Additional Information are met. In
addition, Class A shares of the Company 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
Company and certain other MLAM-advised mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain
employer-sponsored retirement or savings plans, and to Employee Access
Accounts(SM) available through qualified employers which provide such plans.
Class A and Class D shares are offered at net asset value to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest in shares of the Company 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
BlueprintSM Program.
Additional information concerning these reduced initial sales charges, is
set forth in the Statement of Additional Information.
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<PAGE> 29
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one-year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Company 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".
Class B and Class C shares are sold without an initial sales charge so that
the Company will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Company in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Company to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. The proceeds from account maintenance fees are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Company, 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
Company are exchanged for Class B shares of another MLAM-advised mutual fund,
the conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Company
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to the Company's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in
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<PAGE> 30
net asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
--------------------------------------------------------------- ----------------
<S> <C>
0-1...................................................... 4.00%
1-2...................................................... 3.00
2-3...................................................... 2.00
3-4...................................................... 1.00
4 and thereafter......................................... 0.00
</TABLE>
During the fiscal year ended April 30, 1996, the Distributor received CDSCs of
$331,285 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the MFA program, the time
period that such Class A shares are held in the MFA program will be included in
determining the holding period of Class B shares reacquired upon termination of
participation in the MFA program (see "Shareholder Services--Exchange
Privilege").
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase for shares purchased after
October 21, 1994).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans. The CDSC also is waived for any Class B shares which
are purchased by eligible 401(k) or eligible 401(a) plans which are rolled over
into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in
such account at the time of redemption. The Class B CDSC also is waived for any
Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan
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<PAGE> 31
managed by the MLAM Private Portfolio Group and held in such account at the time
of redemption. Additional information concerning the waiver of the Class B CDSC
is set forth in the Statement of Additional Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. During the fiscal year ended April 30,
1996, the Distributor received CDSCs of $8,074 with respect to redemptions of
Class C shares, all of which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions.
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 Company. 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 Company 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
Company held in the account on the Conversion Date will be converted to Class D
shares of the Company.
Share certificates for Class B shares of the Company to be converted must
be delivered to the Transfer Agent at least one week prior to the Conversion
Date applicable to those shares. In the event such certificates are not received
by the Transfer Agent at least one week prior to the Conversion Date, the
related Class B shares will convert to Class D shares on the next scheduled
Conversion Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
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<PAGE> 32
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
The Conversion Period is also modified for retirement plan investors who
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (See "Shareholder Services -- Exchange
Privilege"), then the holding period for such Class A shares will be "tacked" to
the holding period for the Class B shares originally held for purposes of
calculating the Conversion Period of Class B shares acquired upon termination of
participation in the MFA program.
DISTRIBUTION PLANS
The Company 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 Company to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Company 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 Company attributable to shares
of the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Company 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 Company 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 Company,
including payments to financial consultants for selling Class B and Class C
shares of the Company. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Company in that the deferred sales charges provide for the
financing of the distribution of the Company's Class B and Class C shares.
For the fiscal year ended April 30, 1996, the Company paid the Distributor
$1,266,179 pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of approximately $126.4
million), all of which was paid to Merrill Lynch for providing account
maintenance and
30
<PAGE> 33
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended April 30, 1996, the Company paid the Distributor
$83,101 pursuant to the Class C Distribution Plan (based on average net assets
subject to the Class C Distribution Plan of approximately $8.3 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 April 30, 1996, the Company paid the Distributor
$27,054 pursuant to the Class D Distribution Plan (based on average net assets
subject to the Class D Distribution Plan of approximately $10.8 million) all of
which was paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares. At July 31, 1996, the net assets of the Company
subject to the Class B Distribution Plan aggregated approximately $187.2
million. At this asset level, the annual fees payable pursuant to the Class B
Distribution Plan would aggregate approximately $1.9 million. At July 31, 1996,
the net assets of the Company subject to the Class C Distribution Plan
aggregated approximately $20.2 million. At this asset level, the annual fees
payable pursuant to the Class C Distribution Plan would aggregate approximately
$202,467. At July 31, 1996, the net assets of the Company subject to the Class D
Distribution Plan aggregated approximately $19.3 million. At this asset level,
the annual fee payable pursuant to the Class D Distribution Plan would aggregate
approximately $48,354.
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, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation.
As of December 31, 1995, with respect to Class B shares, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for the
period since October 21, 1988 (commencement of operations) exceeded fully
allocated accrual revenues for such period by approximately $1,631,000 (1.13% of
Class B net assets at that date). As of April 30, 1996, with respect to Class B
shares, direct cash revenues for the period since October 21, 1988 (commencement
of operations) exceeded direct cash expenses by $1,292,380 (0.62% of Class B net
assets at that date). Similar fully allocated accrual data for Class C shares is
not presented because such revenues and expenses for the period from October 21,
1994 (commencement of operations) to December 31, 1995 are de minimis. As of
April 30, 1996, with respect to Class C shares, direct cash revenues for the
period since October 21, 1994 (commencement of operations) exceeded direct cash
expenses by $29,417 (0.14% of Class C net assets at that date).
The Company 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 Company 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
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<PAGE> 34
of shares separately. The initial sales charges, the account maintenance fee,
the distribution fee and/or the CDSCs received with respect to one class will
not be used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
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 Company, the maximum sales charge rule
limits the aggregate of distribution fee payments and CDSCs payable by the
Company to (1) 6.25% of eligible gross sales of Class B shares and Class C
shares, computed separately (defined to exclude shares issued pursuant to
dividend reinvestments and exchanges) plus (2) interest on the unpaid balance
for the respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on the
unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving interest charges at any
time. To the extent payments would exceed the voluntary maximum, the Company
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Company rather than to the
Distributor; however, the Company will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
REDEMPTION OF SHARES
The Company is required to redeem for cash all shares of the Company on
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper notice
of redemption. Except for any CDSC which may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Company at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares deposited
with the Transfer Agent may be accomplished by a written letter requesting
redemption. Proper notice of redemption in the case of shares for which
certificates have been issued may be accomplished by a written letter as noted
above accompanied by certificates for the shares to be
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<PAGE> 35
redeemed. The redemption request 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 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 Company may be requested to redeem shares for which it
has not yet received good payment. The Company 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 U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Company also will repurchase shares through a shareholder's listed
securities dealer. The Company 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 orders by the dealer, provided that the
request for repurchase is received by the dealer prior to the close of business
on the NYSE (generally, 4:00 P.M., New York time) on the day received and such
request is received by the Company 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 Company 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 Company (other than any
applicable CDSC). Securities firms which do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Company. Merrill
Lynch may charge its customers a processing fee (presently $4.85) to confirm a
repurchase of shares to such customers. Repurchases directly through the
Transfer Agent are not subject to the processing fee. The Company reserves the
right to reject any order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through the repurchase
procedure. However, a shareholder whose order for repurchase is rejected by the
Company may redeem shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Company at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
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<PAGE> 36
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch financial consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Company offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Company. Certain of such services are not available to investors who place
purchase orders for the Company's shares through the Merrill Lynch BlueprintSM
Program. Full details as to such services, copies of the various plans described
below and instructions as to how to participate in the various services or
plans, or to change options with respect thereto, can be obtained from the
Company, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his or her 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 will 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 Company, 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. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Company, 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.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his or her Investment Account in the
form of payments by check or through automatic payment by direct deposit to his
or her bank account on either a monthly or quarterly basis. A Class A or Class D
shareholder whose shares are held within a CMA(R), CBA(R) or Retirement Account
may
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elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or
annual basis through the Systematic Redemption Program, subject to certain
conditions.
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 prearranged
charges of $50 or more to his or her regular bank account. Investors who
maintain CMA(R) accounts may arrange to have periodic investments made in the
Company in their CMA(R) accounts or in certain related accounts in amounts of
$100 or more through the CMA(R) Automated Investment Program.
Automatic Reinvestment of Dividends and Distributions. All dividends and
capital gains distributions are automatically reinvested in full and fractional
shares of the Company, without sales charge, at the net asset value per share
next determined after the close of the NYSE on the ex-dividend date of such
dividend or distribution. A shareholder may at any time, by written notification
to Merrill Lynch if the shareholder's account is maintained with Merrill Lynch
or by written notification or telephone call (1-800-MER-FUND) to the Transfer
Agent if the shareholder's account is maintained with the Transfer Agent, elect
to have subsequent dividends, or both dividends and capital gains distributions,
paid in cash rather than reinvested, in which event payment will be mailed on or
about the payment date. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed on redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions. The Automated Investment Program is not available to shareholders
whose shares are held in a brokerage account with Merrill Lynch (other than a
CMA(R) account).
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Company have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Company for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of the
second fund in his account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second fund.
If the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.
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.
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<PAGE> 38
Shares of the Company which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Company. 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 Company is "tacked" to the holding period for the newly acquired
shares of the other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Company exercising the exchange privilege will
continue to be subject to the Company'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 Company acquired through use of the exchange privilege will be
subject to the Company'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 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
Company'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 Company 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 Company being acquired in the
exchange under the MFA program.
PERFORMANCE DATA
From time to time the Company may include its average annual total return
for various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with a
formula specified by the Commission.
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<PAGE> 39
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B and
Class C shares and the maximum sales charge in the case of Class A and Class D
shares. Dividends paid by the Company with respect to all shares, to the extent
any dividends are paid, will be calculated in the same manner at the same time
on the same day and will be in the same amount, except that account maintenance
and distribution fees and any incremental transfer agency costs relating to each
class of shares will be borne exclusively by that class. The Company will
include performance data for all classes of shares of the Company in any
advertisement or information including performance data of the Company.
The Company also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements distributed 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 is deducted. See
"Purchase of Shares". The Company'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 Company at the beginning of
each specified period.
Total return figures are based on the Company's historical performance and
are not intended to indicate future performance. The Company's total return will
vary depending on market conditions, the securities comprising the Company's
portfolio, the Company'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 Company will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
On occasion, the Company may compare its performance to the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other industry
publications. In addition, from time to time the Company may include the
Company'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 Company's relative performance for any future period.
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ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Company's intention to distribute all of its net investment
income, if any. Dividends from such net investment income will be paid at least
annually. All net realized long- or short-term capital gains, if any, will be
distributed to the Company'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".
Dividends and distributions may be reinvested automatically in shares of the
Company at net asset value without a sales charge. Shareholders may elect in
writing to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders as discussed below
whether they are reinvested in shares of the Company or received in cash.
Gains or losses attributable to foreign currency gains or losses from
certain forward contracts may increase or decrease the amount of the Company's
income available for distribution to shareholders. If such losses exceed other
income during a taxable year, (a) the Company would not be able to make any
ordinary dividend distributions, and (b) all or a portion of distributions made
before the losses were realized would be recharacterized as a return of capital
to shareholders, rather than as an ordinary dividend, reducing each
shareholder's tax basis in Company shares for Federal income tax purposes. See
"Additional Information--Taxes".
TAXES
The Company intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Company (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 Company intends to distribute substantially
all of such income.
Dividends paid by the Company from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Company shares. Any loss upon
the sale or exchange of Company shares held for six months or less, however,
will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. Distributions in excess of the Company's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares, and after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Company. Not later than 60 days after the close of its
taxable year, the Company will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Company'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 Company pays a dividend in January which
was declared in the previous October, November or December to shareholders of
record on a
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<PAGE> 41
specified date in one of such months, then such dividend will be treated for tax
purposes as being paid by the Company 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% U.S. 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 U.S. withholding tax.
Dividends and interest received by the Company may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Company. If more than 50% in value of the Company's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Company will be eligible, and intends, to file an election
with the Internal Revenue Service pursuant to which shareholders of the Company
will be required to include their proportionate shares of such withholding taxes
in their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them, and deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Company's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Company will report annually to its shareholders
the amount per share of such withholding 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 Company or who, to the Company'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 Company'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 Company 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 Company shares, and resulting in a capital gain for any
shareholder who received a distribution greater than such shareholder's basis in
Company 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
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<PAGE> 42
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 Company on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Company will be
disallowed if other Company shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
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
Company.
DETERMINATION OF NET ASSET VALUE
Net asset value of the shares of all classes of the Company are determined
once daily as of 15 minutes after the close of business on the NYSE (generally,
4:00 P.M., New York time), on each day during which the NYSE is open for
trading. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation.
The net asset value is computed by dividing the value of the securities
held by the Company 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. Expenses,
including the fee payable to the Investment Adviser and any account maintenance
and/or distribution fees payable to the Distributor, are accrued daily. The per
share net asset value of Class A shares generally will be higher than the per
share net asset value of shares of the other classes, reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; in addition, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and Class
C shares, reflecting the daily expense accruals of the distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares. It
is expected, however, that the per share net asset value of the classes will
tend to converge (although not necessarily meet) immediately
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after the payment of dividends or distributions, which will differ by
approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Securities
which are traded both in the OTC market and on a stock exchange are valued
according to the broadest and most representative market. When the Company
writes an option, the amount of the premium received is recorded on the books of
the Company 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 Company are valued at their last sale price in the case
of exchange-traded options or, in the case of options traded in the OTC market,
the last bid price. Other investments, including futures contracts and related
options, are stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Company.
ORGANIZATION OF THE COMPANY
Until April 27, 1992, the Company was known as Sci/Tech Holdings, Inc.
("Sci/Tech"), a Merrill Lynch sponsored diversified, open-end investment
company. Sci/Tech invested primarily in the equity securities of companies
engaged in science and technology. After receiving the approval of its
shareholders, Sci/Tech transferred all of its technology oriented securities and
certain other assets (and certain of its liabilities) in exchange for all the
shares of Merrill Lynch Technology Fund, Inc. ("Technology Fund") (other than
shares held by Technology Fund's investment adviser representing Technology
Fund's seed capital), which Sci/Tech distributed pro rata to its shareholders
(the "Reorganization"). As part of the Reorganization, Sci/Tech shareholders
approved a change in its investment objective and certain other matters.
The Company was incorporated under Maryland law on October 29, 1982. As of
the date of this Prospectus, it has an authorized capital of 400,000,000 shares
of Common Stock, par value $0.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock, each of which
consists of 100,000,000 shares. Shares of Class A, Class B, Class C and Class D
Common Stock represent interests in the same assets of the Company and are
identical in all respects except that Class B, Class C and Class D shares bear
certain expenses related to the account maintenance associated with such shares,
and Class B and Class C shares bear certain expenses related to the distribution
of such shares. Each class has exclusive voting rights with respect to matters
relating to account maintenance and distribution expenditures, as applicable.
See "Purchase of Shares". The Company has received an order from the Commission
permitting the issuance and sale of multiple classes of Common Stock. The
Directors of the Company may classify and reclassify the shares of the Company
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 matters submitted to a shareholder vote. The Company
does not intend to hold meetings of shareholders in any year in which the
Investment Company Act
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does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive rights. Shares
have the conversion rights described in this Prospectus. Each share of Common
Stock is entitled to participate equally in dividends and distributions declared
by the Company and in the net assets of the Company upon liquidation or
dissolution after satisfaction of outstanding liabilities, except that as noted
above, the Class B, Class C and Class D shares bear certain additional expenses.
Shareholders may, in accordance with Maryland law, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Directors at
the request of 25% of the outstanding shares of the Company. A Director may be
removed at a special meeting of shareholders by a vote of a majority of the
votes entitled to be cast for the election of Directors.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch financial consultant or Merrill Lynch Financial
Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Company at the address or
telephone number set forth on the cover page of this Prospectus.
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MERRILL LYNCH HEALTHCARE FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
of Merrill Lynch Healthcare Fund, Inc. and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1. .................................. 4. ................................
2. ................................... 5. ................................
3. ................................... 6. ................................
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
.............................................. Date...........................
(Zip Code)
<TABLE>
<CAPTION>
<S> <C>
Occupation ............................................ Name and Address of Employer...........................
.......................................................
........................................................ .......................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(In the case of co-owner, a joint tenancy with rights of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTION
<TABLE>
<S> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: / / Check
or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Healthcare Fund, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (check one): / / checking / / savings
Name on your account............................................................
Bank Name.......................................................................
Bank Number .............................. Account Number.......................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor .........................................................
Date............................................................................
(if joint account, both must sign)
NOTE: If direct deposit to bank account is selected, your blank, unsigned check
marked "VOID" or a deposit slip from your savings account should accompany this
application.
A-1
<PAGE> 46
MERRILL LYNCH HEALTHCARE FUND, INC. -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
--------------------------------------------------------------
--------------------------------------------------------------
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed under "Additional
Information--Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)
......................, 19.....
Date of initial purchase
Dear Sir/Madam:
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Healthcare Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds Distributor,
Inc. acts as distributor over the next 13 month period which will equal or
exceed:
/ / $25,000 / / $50,000 / / $100,000
/ / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Healthcare Fund,
Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Healthcare Fund, Inc. held as security.
<TABLE>
<S> <C>
By:.................................................. ...............................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ........................................... (2) Name.........................................
Account Number ..................................... Account Number...................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
- --- Branch Office, Address, Stamp
- ---
- -
- -
- -
- -
- ---
- ---
This form when completed should be mailed to:
Merrill Lynch Healthcare Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
Shareholder's signature.
................................................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer A/C No.
</TABLE>
A-2
<PAGE> 47
MERRILL LYNCH HEALTHCARE FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL PLAN OR THE
AUTOMATIC INVESTMENT PLAN ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
<TABLE>
<S> <C>
-------------------------------------
Name of Owner.....................................................
-------------------------------------
Social Security No.
or Taxpayer Identification Number
Name of Co-Owner (if any).........................................
Address...........................................................
.................................................................. Account Number.......................
(if existing account)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Name of Owner.....................................................
Name of Co-Owner (if any).........................................
Address...........................................................
..................................................................
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (See terms and
conditions in the Statement of Additional Information)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Healthcare
Fund, Inc. at cost or current offering price. Withdrawals to be made either
(check one) / / Monthly on the 24th day of each month, or / / Quarterly on the
24th day of March, June, September and December. If the 24th falls on a weekend
or holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ________________ or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / /
$________ or / / ____% of the current value of / / Class A or / / Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of..........................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print)......................................................
Address.........................................................................
.........................................................................
Signature of Owner
................................................................................
Date............................................................................
Signature of Co-Owner (if any)..................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .......................... Account Number .........................
Bank Address....................................................................
....................................................................
Signature of Depositor ............................ Date.......................
Signature of Depositor..........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHALL ACCOMPANY THIS APPLICATION.
A-3
<PAGE> 48
MERRILL LYNCH HEALTHCARE FUND, INC. -- AUTHORIZATION FORM (PART 2) --
(CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares
/ / Class C shares / / Class D shares
of Merrill Lynch Healthcare Fund, Inc. subject to the terms set forth below. In
the event that I am not eligible to purchase Class A shares, I understand that
Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Healthcare Fund, Inc., as indicated below:
Amount of each check or ACH debit $..........................................
Account Number...............................................................
Please date and invest ACH debits on the 20th of each month
beginning ________________ or as soon thereafter as possible.
(month)
I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such check or debit. If I change banks or desire to
terminate or suspend this program, I agree to notify you promptly in writing. I
hereby authorize you to take any action to correct erroneous ACH debits of my
bank account or purchases of fund shares including liquidating shares of the
fund and credit my bank account. I further agree that if a check or debit is not
honored upon presentation, Merrill Lynch Financial Data Services, Inc. is
authorized to discontinue immediately the Automatic Investment Plan and to
liquidate sufficient shares held in my account to offset the purchase made with
the returned check or dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN
BY MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City .......... State .......... Zip............................................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account Signature of Depositor
Number (If joint account, both must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
A-4
<PAGE> 49
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
The Chase Manhattan Bank, N.A.
Global Securities Services
4 Chase MetroTech Center, 18th Floor
Brooklyn, New York 11245
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 50
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE 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 COMPANY, 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 PricingSM
System............................. 3
Financial Highlights................. 8
Risk Factors and Special
Considerations..................... 11
Investment Objective and Policies.... 13
Hedging Techniques................. 14
Other Investment Practices......... 19
Investment Restrictions............ 20
Management of the Company............ 20
Board of Directors................. 20
Advisory and Management
Arrangements.................... 21
Code of Ethics..................... 22
Transfer Agency Services........... 22
Purchase of Shares................... 22
Initial Sales Charge Alternatives--
Class A and Class D Shares...... 25
Deferred Sales Charge
Alternatives--
Class B and Class C Shares...... 27
Distribution Plans................. 30
Limitations on the Payment of
Deferred Sales Charges.......... 32
Redemption of Shares................. 32
Redemption......................... 32
Repurchase......................... 33
Reinstatement Privilege--
Class A and Class D Shares...... 33
Shareholder Services................. 34
Exchange Privilege................. 35
Performance Data..................... 36
Additional Information............... 38
Dividends and Distributions........ 38
Taxes.............................. 38
Determination of Net Asset Value... 40
Organization of the Company........ 41
Shareholder Reports................ 42
Shareholder Inquiries.............. 42
Authorization Form................... A-1
Code #10166-0896
</TABLE>
[LOGO TYPE]
MERRILL LYNCH
HEALTHCARE FUND, INC.
PROSPECTUS
August 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 51
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH HEALTHCARE FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------------
Merrill Lynch Healthcare Fund, Inc. (the "Company") is a non-diversified,
open-end investment company seeking long-term capital appreciation through
worldwide investment in equity securities of companies that, in the opinion of
management, derive or are expected to derive a substantial portion of their
sales from products and services in healthcare. The Company will pursue its
investment objective by investing in a global portfolio of securities of
companies in various stages of development. It is presently contemplated that
the Company's assets will be primarily invested in the United States, Japan and
Western Europe. Until the Company changed its investment objective on April 27,
1992, the Company was known as Sci/Tech Holdings, Inc.
Pursuant to the Merrill Lynch Select PricingSM System, the Company offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select PricingSM System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
-------------------------
This Statement of Additional Information of the Company is not a prospectus
and should be read in conjunction with the Prospectus of the Company, dated
August 26, 1996 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Company at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
-------------------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
-------------------------
The date of this Statement of Additional Information is August 26, 1996
<PAGE> 52
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Company is to seek long-term capital
appreciation through worldwide investment in equity securities of companies
that, in the opinion of management, derive or are expected to derive a
substantial portion of their sales from products and services in healthcare.
Reference is made to "Investment Objective and Policies" in the Prospectus for a
discussion of the investment objective and policies of the Company.
HEALTHCARE
The Company will invest in companies that are substantially engaged in the
design, manufacture or sale of products or services used for or in connection
with healthcare or medicine. Such companies may be in a variety of industries
and may include pharmaceutical companies; companies that design, manufacture,
sell or supply medical, dental and optical products, hardware or services;
companies involved in biotechnology, medical diagnostic, and biochemical
research and development; and companies involved in the ownership and/or
operation of healthcare facilities. While rapid changes in healthcare present
attractive opportunities for investment in companies in this field, such
companies may face the risk that their products or services may not prove to be
commercially successful or may be rendered obsolete by further scientific and
technological developments. The value of the Company's investment in a company
whose products are not commercially successful or are rendered obsolete may
decrease substantially. See "Risk Factors and Special Considerations" in the
Prospectus.
INTERNATIONAL DIVERSIFICATION
The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce risk
for the Company's portfolio as a whole. This negative correlation also may
offset unrealized gains the Company has derived from movements in a particular
market. To the extent the various markets move independently, total portfolio
volatility is reduced when the various markets are combined into a single
portfolio. Of course, movements in the various securities markets may be offset
by changes in foreign currency exchange rates. Exchange rates frequently move
independently of securities markets in a particular country. As a result, gains
in a particular securities market may be affected by changes in exchange rates.
TYPES OF PORTFOLIO COMPANIES
The Company will attempt to maximize opportunity and reduce risk by
investing in a portfolio of companies in different stages of development.
Portfolio companies will range from large, well-established companies to
medium-sized companies and smaller, less seasoned companies in an earlier stage
of development.
Investments in larger companies present certain advantages attributable to
their greater financial resources: more extensive research and development,
manufacturing, marketing and service capabilities, more stability and greater
depth of management and technical personnel. Investments in smaller, less
seasoned companies may present greater opportunities for growth but also involve
greater risks than customarily are associated with more established companies.
The securities of smaller companies may be subject to more abrupt or erratic
market movements than larger, more established companies. These companies may
have
2
<PAGE> 53
limited product lines, markets or financial resources, or they may be dependent
upon a limited management group. Their securities may be traded only in the
over-the-counter market ("OTC") or on a regional securities exchange and may not
be traded every day or in the volume typical of trading on a national securities
exchange. As a result, the disposition by the Company of portfolio securities to
meet redemptions or otherwise may require the Company to sell these securities
at a discount from market prices or during periods when such disposition is not
desirable or to make many small sales over a lengthy period of time.
The Company may invest up to 15% (10% to the extent required by certain
state laws) of its total assets (together with all other illiquid investments)
in venture capital investments in new and early-stage companies whose securities
are not publicly traded. Venture capital investments may present significant
opportunities for capital appreciation but involve a high degree of business and
financial risk that can result in substantial losses and should be considered as
speculative investments. The Company's venture capital investments may include
limited partnership interests. The disposition of U.S. venture capital
investments normally will be restricted under Federal securities laws.
Generally, restricted securities may be sold only in privately negotiated
transactions or in public offerings registered under the Securities Act of 1933,
as amended (the "Securities Act"). The Company also may be subject to
restrictions contained in the securities laws of other countries in disposing of
portfolio securities. As a result, the Company may be unable to dispose of such
investments at times when such disposition ordinarily would be deemed
appropriate due to investment or liquidity considerations. Alternatively, the
Company may be forced to dispose of such investments at less than their fair
market value. Where registration is required, the Company may be obligated to
pay part or all of the expenses of such registration. Market quotations may not
be readily available for such securities and, for purposes of determining the
offering and redemption prices of Company shares, these investments will be
valued at fair value. See "Determination of Net Asset Value".
OTHER FACTORS
The Company may invest in securities subject to repurchase agreements with
banks or securities firms, which are instruments under which the purchaser
(i.e., the Company) acquires a debt security and the seller agrees, at the time
of sale, to repurchase the obligation at a mutually agreed upon time and price,
thereby determining the yield during the purchaser's holding period. The
underlying securities are limited to those which otherwise qualify for
investment by the Company. In the event of default by the seller under a
repurchase agreement, the Company may suffer time delays and incur costs or
losses in connection with the disposition of the underlying securities. The
Company will not enter into a repurchase agreement if, as a result thereof, more
than 15% (10% to the extent required by certain state laws) of its total assets
would be invested in illiquid securities, including repurchase agreements
maturing in more than seven days.
The Company may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs are
receipts issued globally, typically by banking institutions, and evidence a
similar ownership arrangement. Generally, ADRs, in registered form, are designed
for use in the U.S. securities markets and EDRs, in bearer form, are designed
for use in European securities markets. GDRs are tradeable both in the U.S. and
Europe and are designed for use throughout the world. The Company may invest in
unsponsored ADRs. The issuers of
3
<PAGE> 54
unsponsored ADRs are not obligated to disclose material information in the U.S.
and, therefore, there may not be a correlation between such information and the
market value of such ADRs.
While it is the policy of the Company generally not to engage in trading
for short-term gains, the Investment Adviser will effect portfolio transactions
without regard to holding period if, in its judgment, such transactions are
advisable in light of a change in circumstances of a particular company or
within a particular industry or in general market, economic or financial
conditions. As a result of the investment policies described in the Prospectus,
under certain market conditions the Company's portfolio turnover may be higher
than that of other investment companies; however, it is extremely difficult to
predict portfolio turnover rates with any degree of accuracy. The portfolio
turnover rate is calculated by dividing the lesser of the Company'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. For the fiscal years ended April
30, 1995 and 1996 the Company's portfolio turnover rate was 196.91% and 133.50%,
respectively. The Company is subject to the Federal income tax requirement that
less than 30% of the Company's gross income be derived from gains from the sale
or other disposition of securities held for less than three months. See
"Investment Objective and Policies--Other Investment Practices--Portfolio
Turnover" in the Prospectus.
HEDGING TECHNIQUES
Reference is made to the discussion under the caption "Investment Objective
and Policies--Hedging Techniques" in the Prospectus for information with respect
to various portfolio strategies involving options and futures. The Company may
seek to hedge its portfolio against movements in the equity markets, interest
rates and exchange rates between currencies through the use of options and
futures transactions and forward foreign exchange transactions. The Company has
authority to write (i.e., sell) covered call options on its portfolio
securities, purchase put options on securities and engage in transactions in
stock index options, stock index futures and financial futures, and related
options on such futures. The Company may also deal in forward foreign exchange
transactions and forward currency options and futures and related options on
such futures. The Company is authorized to enter into such options and futures
transactions either on exchanges or in the OTC markets. Each of such portfolio
strategies is described in the Prospectus. Although certain risks are involved
in options and futures transactions (as discussed in the Prospectus and below),
the Investment Adviser believes that, because the Company will only engage in
these transactions for hedging purposes, the options and futures portfolio
strategies of the Company will not subject the Company to the risks frequently
associated with the speculative use of options and futures transactions. While
the Company's use of hedging strategies is intended to reduce the volatility of
the net asset value of its shares, the net asset value of the Company's shares
will fluctuate. There can be no assurance that the Company's hedging
transactions will be effective. The following is further information relating to
portfolio strategies involving options and futures the Company may utilize.
Hedging Investment and Interest Rate Risks. The Company may write (i.e.,
sell) covered call options on the equity securities in which it may invest and
may enter into closing purchase transactions with respect to certain of such
options. Covered call options serve as a partial hedge against the decline in
price of the underlying security. A covered call option is an option where the
Company, in return for a premium, gives another party a right to buy specified
securities owned by the Company at a specified future date and price set at the
time of the contract. By writing covered call options, the Company gives up the
opportunity, while the option is in effect, to profit from any price increase in
the underlying security above the option exercise price.
4
<PAGE> 55
In addition, the Company's ability to sell the underlying security will be
limited while the option is in effect unless the Company effects a closing
purchase transaction. A closing purchase transaction cancels out the Company'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. The
writer of a covered call option has no control over when he may be required to
sell his securities since he may be assigned an exercise notice at any time
prior to the termination of his obligation as a writer. If an option expires
unexercised, the writer realizes a gain in the amount of the premium. Such a
gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security.
The Company may also purchase put options to hedge against a decline in the
market value of its equity holdings. By buying a put, the Company has a right to
sell the underlying security at the exercise price, thus limiting the Company's
risk of loss through a decline in the market value of the security until the put
option expires. The amount of any appreciation in the value of the underlying
security will be offset partially by the amount of the premium paid for the put
option and any related transaction costs. Prior to its expiration, a put option
may be sold in a closing sale transaction and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the put option plus the related transaction cost. A closing sale transaction
cancels out the Company's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option it
has purchased.
The Company also may engage in transactions in stock index options and
futures, financial futures in U.S. and foreign agency and government securities
and corporate debt securities, and related options on such futures. A futures
contract is an agreement between two parties to buy and sell a security or, in
the case of an index-based futures contract, to make and accept a cash
settlement for a set price on a future date. A majority of transactions in
futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction. Futures contracts have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is typically between 2% and 15% of the value of the
futures contract, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring the performance
of both the purchaser and seller under the futures contract. Subsequent payments
to and from the broker, called "variation margin", are required to be made on a
daily basis as the price of the futures contracts fluctuates, making the long
and short positions in the futures contracts more or less valuable, a process
known as "mark-to-market". At any time prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
which will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
The Company has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its strategy
of investing in futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Company and commodities brokers with
respect to initial and variation margin. Section 18(f) of
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<PAGE> 56
the Investment Company Act prohibits an open-end investment company such as the
Company from issuing a "senior security" other than a borrowing from a bank. The
staff of the Securities and Exchange Commission has in the past indicated that a
futures contract may be a "senior security" under the Investment Company Act.
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions involves the risk of imperfect correlation in movements
in the prices of options and futures contracts and movements in the prices of
the securities or currencies which are the subject of the hedge. If the price of
the options and futures contract moves more or less than the prices of the
hedged securities or currencies, the Company will experience a gain or loss
which will not be completely offset by movements in the prices of the securities
or currencies which are the subject of the hedge. The successful use of options
and futures also depends on the Investment Adviser's ability to predict
correctly price movements in the market involved in a particular options or
futures transaction.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Company will enter into an option or futures transaction on an
exchange only if there appears to be a liquid secondary market for such options
or futures. However, there can be no assurance that a liquid secondary market
will exist for any particular call or put option or futures contract at any
specific time. Thus, it may not be possible to close an option or futures
position. In the case of a futures position or an option on a futures position
written by the Company, in the event of adverse price movements, the Company
would continue to be required to make daily cash payments of variation margin.
In such situations, if the Company has insufficient cash, it may have to sell
portfolio securities to meet daily variation margin requirements at a time when
it may be disadvantageous to do so. In addition, the Company may be required to
take or make delivery of the currency underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the Company's ability to effectively hedge its portfolio. There is
also the risk of loss by the Company of margin deposits in the event of
bankruptcy of a broker with whom the Company has an open position in a futures
contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Company intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying currency (whether or not covered) which may
be written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose other sanctions or restrictions. The Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Company's portfolio.
Hedging Foreign Currency Risks. Generally, the foreign exchange
transactions of the Company will be conducted on a spot, i.e., cash, basis at
the spot rate then prevailing for purchasing or selling currency in the foreign
exchange market. This rate under normal market conditions differs from the
prevailing exchange rate in an amount generally less than 1/10 of 1% due to the
costs of converting from one currency to another. However, the Company has
authority to deal in forward foreign exchange between currencies of Far Eastern,
European and Western Pacific countries and the dollar as a hedge against
possible variations in the foreign exchange rate between these currencies. This
is accomplished through contractual agreements to purchase or
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to sell a specified currency at a specified future date and price set at the
time of the contract. The Company's dealings in forward foreign exchange will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Company
accruing in connection with the purchase and sale of its portfolio securities,
the sale and redemption of shares of the Company or the payment of dividends and
distributions by the Company. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Company will not speculate in forward foreign
exchange. All dealings in forward exchange will be limited to contracts
involving currencies of Far Eastern, European and Western Pacific countries and
the dollar. The Company may not position hedge with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. If the Company enters into a
position hedging transaction, its custodian will place cash or liquid equity or
debt securities in a separate account of the Company in an amount equal to the
value of the Company's total assets committed to the consummation of such
forward contract. If the value of the securities placed in the separate account
declines, additional cash or liquid debt or equity securities will be placed in
the account so that the value of the account will equal the amount of the
Company's commitment with respect to such contracts. The Company will not
attempt to hedge all of its portfolio positions and will enter into such
transaction only to the extent, if any, deemed appropriate by the Investment
Adviser. The Company will not enter into a position hedging commitment if, as a
result thereof, the Company would have more than 15% of the value of its assets
committed to such contracts. The Company will not enter into a forward contract
with a term of more than one year.
As discussed in the Prospectus, the Company may also purchase or sell
listed or OTC foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the price of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Company to hedge against a devaluation that is so
generally anticipated that the Company is not able to contract to sell the
currency at a price above the devaluation level it anticipates. It is possible
that, under certain circumstances, the Company may have to limit its currency
transactions to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"); in this regard, the Company
presently intends to limit its gross income from currency hedging transactions
to less than 10% of its gross income in any taxable year until such time as the
Company determines that income from the transaction is not subject to this
restriction. The cost to the Company of engaging in foreign currency
transactions varies with such factors as the currencies involved, the length of
the contract period and the market conditions then prevailing. Since
transactions in foreign currency exchange usually are conducted on a principal
basis, no fees or commissions are involved.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such as
the Company. If such restrictions should be reinstituted, it might become
necessary for the Company to invest all or substantially all of its assets in
U.S. securities. In such event, the Company would review its investment
objective and investment policies to determine whether changes are appropriate.
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The Company's ability and decisions to purchase or sell portfolio
securities may be affected by laws or regulations relating to the convertibility
and repatriation of assets. Because the shares of the Company are redeemable on
a daily basis in U.S. dollars, the Company intends to manage its portfolio so as
to give reasonable assurance that it will be able to obtain U.S. dollars to the
extent necessary to meet anticipated redemptions. Under present conditions, it
is not believed that these considerations will have any significant effect on
its portfolio strategy.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus, the
Company has adopted a number of fundamental and non-fundamental restrictions and
policies relating to the investment of its assets and its activities. The
fundamental policies set forth below may not be changed without the approval of
the holders of a majority of the Company's outstanding voting securities (which
for this purpose and under the Investment Company Act means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares).
Under the fundamental investment restrictions, the Company may not:
1. 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).
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Company 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.
4. 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 Company 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 Company's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Company 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 Company may, to the
extent permitted by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes (currently, Ohio regulations prohibit
any borrowing in excess of 33 1/3% of the Company's total assets), (iii)
the Company may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the
Company may purchase securities on margin to the extent permitted by
applicable law. The Company may not pledge its assets other than to secure
such borrowings or, to the extent permitted by the Company'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.
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7. Underwriter securities of other issuers except insofar as the
Company technically may be deemed an underwriter under the Securities Act
of 1933, as amended (the "Securities Act"), in selling portfolio
securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Company may do so in accordance with applicable law and
the Company's Prospectus and Statement of Additional Information, as they
may be amended from time to time, and without registering as a commodity
pool operator under the Commodity Exchange Act.
In addition, the Company has adopted non-fundamental restrictions which may
be changed by the Board of Directors. Under the non-fundamental investment
restrictions, the Company may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Company currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Company
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Company's shares are registered or qualified for sale
require a lower limitation, the Company will observe such limitation. As of
the date hereof, therefore, the Company will not invest more than 10% of
its total assets in securities which are subject to this investment
restriction (c). Securities purchased in accordance with Rule 144A under
the Securities Act (a "Rule 144A security") and determined to be liquid by
the Company's Board of Directors are not subject to the limitations set
forth in this investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Company's net assets. Included within such limitation, but not to
exceed 2% of the Company's net assets, are warrants which are not listed on
the New York Stock Exchange (the "NYSE") or American Stock Exchange or a
major foreign exchange. For purposes of this restriction, warrants acquired
by the Company in units or attached to securities may be deemed to be
without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Company's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Company, the officers and general
partner of the Investment Adviser, the directors of such general partner or
the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
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g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Company may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Company's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 10% 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 Company shares. In addition,
the Company will not purchase securities while borrowings are outstanding
except to exercise prior commitments and to exercise subscription rights.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Company has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Company, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Company
and margin deposits on the Company's existing OTC options on futures contracts
exceeds 10% of the net assets of the Company, taken at market value, together
with all other assets of the Company which are illiquid or are not otherwise
readily marketable. However, if the OTC option is sold by the Company to a
primary U.S. Government securities dealer recognized by the Federal Reserve Bank
of New York and the Company has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Company will treat as illiquid such amount of the underlying securities as is
equal to the repurchase price less the amount by which the option is
"in-the-money" (i.e., current market value of the underlying securities minus
the option's strike price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a multiple of the premium
received for the option, plus the amount by which the option is "in-the-money".
This policy as to OTC options is not a fundamental policy of the Company and may
be amended by the Board of Directors of the Company without the approval of the
Company's shareholders. However, the Company will not change or modify this
policy prior to the change or modification by the Commission staff of its
position.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Company, the Company is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions and
Brokerage". Without such an exemptive order, the Company would be prohibited
from engaging in portfolio transactions with Merrill Lynch or any of its
affiliates acting as principal and from purchasing securities in public
offerings which are not registered under the Securities Act in which such firm
or any of its affiliates participate as an underwriter or dealer.
The investment restrictions set forth in the Prospectus contain an
exception that permits the Company to purchase securities pursuant to the
exercise of subscription rights, subject to the condition that such purchase
will not result in the Company ceasing to be a diversified investment company
within the meaning of the Code. Japanese and European corporations frequently
issue additional capital stock by means of subscription rights offerings to
existing shareholders at a price substantially below the market price of the
shares. The
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failure to exercise such rights would result in the Company's interest in the
issuing company being diluted. The market for such rights is not well developed,
and accordingly, the Company may not always realize full value on the sale of
rights. Therefore, the exception applies in cases where the limits set forth in
the investment restrictions in the Prospectus would otherwise be exceeded by
exercising rights or have already been exceeded as a result of fluctuations in
the market value of the Company's portfolio securities with the result that the
Company would otherwise be forced either to sell securities at a time when it
might not otherwise have done so or to forego exercising the rights.
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Company,
including their ages and their principal occupations for at least the last five
years, is set forth below. Unless otherwise noted, the address of each executive
officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64)--President and Director(1)(2)--President of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1977; President of Fund Asset Management, L.P. ("FAM")
(which term as used herein includes its corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since
1990; Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor")
since 1977.
DONALD CECIL (69)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER (69)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY (65)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; former Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Partner, Small
Cities Cablevision, Inc.
RICHARD R. WEST (58)--Director(2)--Box 604, Genoa, Nevada 89411. Professor
of Finance since 1984, Dean from 1984 to 1993 and currently Dean Emeritus of New
York University Leonard N. Stern School of Business Administration; Director of
Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company), Smith-Corona Corporation (manufacturer of typewriters and word
processors) and Alexander's, Inc. (real estate company).
EDWARD D. ZINBARG (61)--Director(2)--5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Executive Vice President of the Prudential Insurance Company
of America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
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TERRY K. GLENN (55)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and FAM since 1983; Executive Vice President
and Director of Princeton Services since 1993; President of the Distributor
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
NORMAN R. HARVEY (62)--Senior Vice President(1)(2)--Senior Vice President
of the Investment Adviser and FAM since 1982.
PHILIP L. KIRSTEIN (50)--Senior Vice President(1)(2)--Senior Vice President
and General Counsel of the Investment Adviser and FAM since 1984; Senior Vice
President, General Counsel, Director and Secretary of Princeton Services since
1993; Secretary of the Investment Adviser since 1984; Secretary of FAM since
1982; Director of the Distributor.
JORDAN C. SCHREIBER (66)--Vice President(1)--Vice President and Portfolio
Manager of the Investment Adviser since 1983.
DONALD C. BURKE (36)--Vice President(1)(2)--Vice President and Director of
Taxation of the Investment Adviser since 1990.
GERALD M. RICHARD (47)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and FAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer since 1984.
ROBERT HARRIS (44)--Secretary(1)(2)--Vice President of the Investment
Adviser since 1984 and attorney associated with the Investment Adviser since
1980; Secretary of the Distributor since 1982.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Company.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, FAM, acts as investment adviser or manager.
At July 31, 1996, the Directors and officers of the Company as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of the
Company. At such date, Mr. Zeikel, a Director and officer of the Company, and
the other officers of the Company owned less than 1% of the outstanding shares
of common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Company pays each Director not affiliated with the Investment Adviser
(each, a "non-affiliated Director") a fee of $3,500 per year plus $500 per
meeting attended, together with such Director's actual out-of-pocket expenses
relating to attendance at meetings. The Company also compensates members of its
Audit and Nominating Committee (the "Committee"), which consists of all the
non-affiliated Directors, at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. Fees and expenses paid to the non-affiliated Directors for the
fiscal year ended April 30, 1996, aggregated $22,048.
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The following table sets forth for the fiscal year ended April 30, 1996,
compensation paid by the Company to the non-affiliated Directors and for the
calendar year ended December 31, 1995, the aggregate compensation paid by all
registered investment companies advised by the Investment Adviser and its
affiliate, FAM ("MLAM/FAM Advised Funds") to the non-affiliated Directors:
<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT FROM COMPANY AND
BENEFITS ACCRUED OTHER MLAM/FAM
COMPENSATION AS PART OF ADVISED FUNDS PAID
NAME OF DIRECTOR FROM COMPANY COMPANY'S EXPENSES TO DIRECTOR(1)
- ----------------------------------------------- ------------ ------------------ ------------------
<S> <C> <C> <C>
Donald Cecil................................... $4,875 None $271,850
Edward H. Meyer................................ $4,250 None $239,225
Charles C. Reilly.............................. $4,250 None $269,600
Richard R. West................................ $4,250 None $294,600
Edward D. Zinbarg.............................. $4,250 None $155,063
</TABLE>
- ---------------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (36 registered investment companies consisting of 36 portfolios); Mr.
Meyer (36 registered investment companies consisting of 36 portfolios); Mr.
Reilly (41 registered investment companies consisting of 54 portfolios); Mr.
West (41 registered investment companies consisting of 54 portfolios) and
Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
ADVISORY AND MANAGEMENT ARRANGEMENTS
Reference is made to "Management of the Company--Advisory and Management
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Company.
Securities held by the Company also may be held by, or be appropriate
investments for, other funds or other investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Securities may be held
by, or be appropriate investments for, the Company as well as other clients of
the Investment Adviser or its affiliates. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Investment Adviser for the Company or other funds for which it
acts as investment adviser or for its other 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 its affiliates during the same period
may increase the demand for securities being purchased or supply of securities
being sold, there may be an adverse effect on price.
The Company has entered into an Investment Advisory Agreement with the
Investment Adviser. As discussed in the Prospectus, the Company will pay the
Investment Adviser a fee for its services at the annual rate of 1.0% of the
Company's average daily net assets. For the fiscal years ended April 30, 1994,
1995 and 1996, the investment advisory fees paid by the Company to the
Investment Adviser aggregated $1,200,254, $1,323,449 and $2,441,908,
respectively.
The State of California imposes limitations on the expenses of the Company.
These expense limitations require that the Investment Adviser reimburse the
Company in an amount necessary to prevent the ordinary operating expenses of the
Company (excluding interest, taxes, distribution fees, brokerage fees and
commissions and extraordinary charges such as litigation costs) from exceeding
2.5% of the Company's first $30
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million of average daily net assets, 2.0% of the next $70 million of average
daily net assets and 1.5% of the remaining average daily net assets. The
Investment Adviser's obligation to reimburse the Company is limited to the
amount of the investment advisory fee. No fee payment will be made to the
Investment Adviser during any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation applicable at the time of such
payment. For the fiscal years ended April 30, 1996, 1995 and 1994, no
reimbursement was necessary. Effective January 1, 1997, provided certain
conditions are met, the State of California will exempt securities issued by
registered open-end investment companies from registration in California and
this expense limitation will no longer apply to such open-end investment
companies.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay compensation of and furnish
office space for officers and employees of the Company connected with investment
and economic research, trading and investment management of the Company, as well
as the fees of all Directors of the Company who are affiliated persons of the
Investment Adviser or any of its affiliates. The Company pays all other expenses
incurred in its operation including, among other things, taxes; expenses for
legal and auditing services; costs of printing proxies, stock certificates,
shareholders' reports and prospectuses and statements of additional information
(except to the extent paid by the Distributor); charges of the custodian, any
sub-custodian and transfer agent; expenses of redemption of shares; Commission
fees; expenses of registering the shares under Federal, state or foreign laws;
fees and expenses of unaffiliated Directors; accounting and pricing costs
(including the daily calculation of net asset value); insurance; interest;
brokerage costs; litigation and other extraordinary or non-recurring expenses;
and other expenses properly payable by the Company. Accounting services are
provided to the Company by the Investment Adviser, and the Company reimburses
the Investment Adviser for its costs in connection with such services on a
semiannual basis. For the fiscal years ended April 30, 1994, 1995 and 1996, the
amount of such reimbursement was $35,660, $108,303 and $77,879, respectively. As
required by the Company's distribution agreements, its underwriters will pay
certain promotional expenses of the Company incurred in connection with the
offering of its shares. Certain expenses in connection with the distribution of
Class B, Class C and Class D shares will be financed by the Company pursuant to
a distribution plan in compliance with Rule 12b-1 under the Investment Company
Act. 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.
Duration and Termination. Unless earlier terminated as described herein,
the Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Company or by a majority
of the outstanding shares of the Company and (b) by a majority of the Directors
who are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of the Company.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Company shares.
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The Company 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 Company represents identical interests
in the investment portfolio of the Company 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. Each class has different exchange
privileges. See "Shareholder Services-- Exchange Privilege".
The Merrill Lynch Select Pricing(SM) System is used by more than 50 mutual
funds advised by the Investment Adviser or its affiliate, FAM. Funds advised by
the Investment Adviser or FAM which utilize the Merrill Lynch Select Pricing(SM)
System are referred to herein as "MLAM-advised mutual funds".
The Company has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Company (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 Company. 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 ALTERNATIVES--CLASS A AND CLASS D SHARES
The Company sells its Class A and Class D shares through the Distributor
and Merrill Lynch, as dealers. During the fiscal year ended April 30, 1994, the
Company sold 6,174,049 Class A shares for aggregate net proceeds to the Company
of $23,817,331. The gross sales charges for the sale of Class A shares for that
year were $211,071, of which $195,475 was received by Merrill Lynch and $15,596
was received by the Distributor. During the fiscal year ended April 30, 1995,
the Company sold 5,713,906 Class A shares for aggregate net proceeds to the
Company of $20,654,552. The gross sales charges for the sale of Class A shares
for that year were $85,949, of which $81,092 was received by Merrill Lynch and
$4,857 was received by the Distributor. During the fiscal year ended April 30,
1996, the Company sold 10,277,222 Class A shares for aggregate net proceeds to
the Company of $49,677,305. The gross sales charges for the sale of Class A
shares for that year were $30,539 of which $28,477 was received by Merrill Lynch
and $2,062 was received by the Distributor. During the fiscal period October 21,
1994 (commencement of operations) to April 30, 1995, the Company sold 1,239,834
Class D shares for aggregate net proceeds to the Company of $4,397,052. The
gross sales charges for the sale of Class D shares for that period were $27,764,
of which $25,916 was received by Merrill Lynch and $1,848 was received by the
Distributor. During the fiscal year ended April 30, 1996, the Company sold
5,979,086 Class D shares for aggregate net proceeds to the Company of
$28,807,012. The gross sales charges for the sale of Class D shares for that
year were $261,644, of which $244,507 was received by Merrill Lynch and $17,137
was received by the Distributor.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
15
<PAGE> 66
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Code) although more than one beneficiary is involved. The term "purchase"
also includes purchases by any "company", as that term is defined in the
Investment Company Act, but does not include purchases by any such company which
has not been in existence for at least six months or which has no purpose other
than the purchase of shares of the Company or shares of other registered
investment companies at a discount. The term "purchase" 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. The term "purchase" also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees, by means of a payroll
deduction plan or otherwise, of shares of the Company. Purchases by such a
company or non-qualified employee benefit plan will qualify for the quantity
discounts discussed above only if the Company and the Distributor are able to
realize economies of scale in sales effort and sales related expense by means of
the company, employer or plan making the Company's Prospectus available to
individual investors or employees and forwarding investments by such persons to
the Company and by any such employer or plan bearing the expense of any payroll
deduction plan.
Closed-End Fund Investment Option. Class A shares of the Company and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or its
affiliate, FAM, who purchased such closed-end fund shares prior to October 21,
1994 (the date the Merrill Lynch Select PricingSM System commenced operations)
and wish to reinvest the net proceeds from a sale of their closed-end fund
shares of common stock in Eligible Class A Shares, if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994, and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class D shares of the
Company and other MLAM-advised mutual funds ("Eligible Class D Shares"), if the
following conditions are met. First, the sale of the closed-end fund shares must
be made through Merrill Lynch, and the net proceeds therefrom must be
immediately reinvested in Eligible Class A or Class D shares. Second, the
closed-end fund shares must either have been acquired in the initial public
offering or be shares representing dividends from shares of common stock
acquired in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth, there
must be a minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Company. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Company 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 Company, except that shareholders
already owning Class A shares of the Company 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
16
<PAGE> 67
and reinvest the proceeds immediately in the designated class of shares of the
Company. 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 Company 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 Company subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Company and of other MLAM-advised mutual funds. For any such
right of accumulation to be made available, the Distributor must be provided at
the time of purchase, by the purchaser or the purchaser's securities dealer,
with sufficient information to permit confirmation of qualification, and
acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.
Letter of Intention. Reduced sales charges are applicable to a purchase
aggregating $25,000 or more of Class A or Class D shares of the Company or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Company's transfer agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares, but 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 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
Company and of other MLAM-advised mutual funds presently held, at cost or
maximum offering price (whichever is higher), on the date of the first purchase
under the Letter of Intention, may be included as a credit toward the completion
of such Letter, but the reduced sales charge applicable to the amount covered by
such Letter will be applied only to new purchases. If the total amount of shares
purchased does not equal the amount stated in the Letter of Intention (minimum
of $25,000), the investor will be notified and must pay, within 20 days of the
expiration of such Letter, the difference between the sales charge on the Class
A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to five percent of the intended amount will be held in escrow
during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the reduced percentage sales charge
which would be applicable to a single purchase equal to the total dollar value
of the shares then being purchased under such Letter, but there will be no
retroactive reduction of the sales charges on any previous purchase.
17
<PAGE> 68
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-advised
money market fund into the Company that creates a sales charge will count toward
computing a new or existing Letter of Intention from the Company.
Merrill Lynch BlueprintSM Program. Class D shares of the Company are
offered to participants in the Merrill Lynch BlueprintSM Program ("Blueprint").
In addition, participants in Blueprint who own Class A shares of the Company may
purchase additional Class A shares of the Company through Blueprint. Blueprint
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 Company through
Blueprint will acquire the Class A or Class D shares at net asset value plus a
sales charge calculated in accordance with the Blueprint sales charge schedule
(i.e., up to $300 at 4.25%, $300.01 up to $5,000 at 3.25% plus $3, and $5,000.01
or more at the standard sales charge rates disclosed in the Prospectus). Class A
or Class D shares of the Company are offered at net asset value plus a sales
charge of 1/2 of 1% for corporate or group IRA programs placing orders to
purchase their Class A or Class D shares through Blueprint. Services, including
the exchange privilege, available to Class A 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 participants
in Blueprint through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer-sponsored retirement and savings plans
whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA
Rollover Program.
Orders for purchases and redemptions of Class A or Class D shares of the
Company 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 fees and transaction charges, is available from Merrill
Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box
30441, New Brunswick, New Jersey 08989-0441.
TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts
to which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Employee Access AccountsSM. Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through qualified employers
that provide employer-sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
Purchase Privilege of Certain Persons. Directors of the Company, members
of the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries", when used herein with respect to
ML & Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and employees and
any trust, pension, profit-sharing or other benefit plan for such persons may
purchase Class A shares of the Company at net asset value.
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<PAGE> 69
Class D shares of the Company are offered at net asset value, without 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 it
will purchase Class D shares of the Company 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 Company, and the
proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Company are also offered at net asset value, without
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, if the following conditions are satisfied:
first, the investor must purchase Class D shares of the Company with proceeds
from a redemption of shares of such other mutual fund and such fund was 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 Company will be 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 Company with proceeds from the redemption of such
shares of the 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 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 Company which might result from
an acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Company. 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 which (i) meet the
investment objectives and policies of the Company; (ii) are acquired for
investment and not for resale (subject to the understanding that the disposition
of the Company's portfolio securities shall at all times remain within its
control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Company may acquire through such
transactions restricted or illiquid securities to the extent the Company 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.
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<PAGE> 70
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 contingent deferred sales charge
("CDSC") upon redemption, based on similar criteria. Such Class B shares will
convert into Class D shares approximately ten years after the plan purchases the
first share of any MLAM-advised mutual fund. Minimum purchase requirements may
be waived or varied for such plans. Additional information regarding purchases
by employer-sponsored retirement or savings plans and certain other arrangements
is available toll-free from Merrill Lynch Business Financial Services at (800)
237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Company to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Company 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 Company, as defined in the Investment Company Act
(the "Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is
reasonable likelihood that such Distribution Plan will benefit the Company 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 Company. A Distribution Plan cannot be amended
to increase materially the amount to be spent by the Company 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 Company preserve copies of each
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of such Distribution Plan or such report, the
first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("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
Company, the maximum sales charge
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<PAGE> 71
rule limits the aggregate of distribution fee payments and CDSCs payable by the
Company to (1) 6.25% of eligible gross sales of Class B shares and Class C
shares, computed separately (defined to exclude shares issued pursuant to
dividend reinvestments and exchanges), plus (2) interest on the unpaid balance
for the respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received from the
payment of the distribution fee and the CDSC). In connection with the Class B
shares, the Distributor has voluntarily agreed to waive interest charges on the
unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Company
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Company rather than to the
Distributor; however, the Company 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 April 30,
1996, with respect to the Class B and Class C shares of the Company indicating
the maximum allowable payments that can be made under the NASD maximum sales
charge rule and with respect to Class B shares the Distributor's voluntary
maximum.
DATA CALCULATED AS OF APRIL 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD OCTOBER 21, 1988
(COMMENCEMENT OF
OPERATIONS) TO APRIL
30, 1996:
Under NASD Rule as
Adopted............ $ 146,685 $ 9,168 $1,201 $10,369 $2,809 $ 7,560 $ 1,556
Under Distributor's
Voluntary Waiver... $ 146,685 $ 9,168 $ 733 $9,901 $2,809 $ 7,092 $ 1,556
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO APRIL
30, 1996:
Under NASD Rule as
Adopted............ $ 12,229 $ 764 $ 30 $ 794 $ 73 $ 721 $ 156
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during period
indicated other than shares acquired through dividend reinvestment and the
exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, 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
7, 1993, under the distribution plan in effect at that time, at the 1.00%
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.
(footnotes continued on following page)
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<PAGE> 72
(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 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 Company shares.
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 periods during
which trading on the NYSE is restricted, as determined by the Commission, or the
NYSE 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 Company is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of shareholders
of the Company.
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
Company at such time.
DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives-- Class B and Class C Shares", while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account ("IRA") or
other retirement plan or following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are: (a) any partial or
complete redemption in connection with a tax-free distribution following
retirement under a tax-deferred retirement plan or attaining age 59 1/2 in the
case of an IRA or other retirement plan, or part of a series of equal periodic
payments (not less frequently than annually) made for the life or life
expectancy or any redemption resulting from the tax-free return of an excess
contribution to an IRA; or (b) any partial or complete redemption following the
death or disability (as defined in the Code) of a Class B shareholder (including
one who owns the Class B shares as joint tenant with his or her spouse) provided
the redemption is requested within one year of the death or initial
determination of disability. For the fiscal years ended April 30, 1994, 1995 and
1996, the Distributor received CDSCs with respect to the redemption of Class B
shares of $161,790, $209,909 and $331,285, respectively, all of which were paid
to Merrill Lynch. Similarly, for the fiscal period October 21, 1994
(commencement of operations) to April 30, 1995 and for the fiscal year ended
April 30, 1996, the Distributor received CDSCs of $151 and $8,074, respectively,
with respect to the redemption of Class C shares, all of which were paid to
Merrill Lynch.
Merrill Lynch BlueprintSM Program. Class B shares are offered to certain
participants in BlueprintSM. 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 Company are offered through Blueprint only
to members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B investors through Blueprint, however, may differ
from those available to other investors in Class B shares. Orders for purchases
and redemptions of Class B shares of the Company 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
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<PAGE> 73
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 the Blueprint automatic investment
plan. Additional information concerning these Blueprint programs, including any
annual fees or transaction charges, is available from Merrill Lynch, Pierce,
Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box 30441, New
Brunswick, New Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Other Investment
Practices" in the Prospectus.
Subject to policies established by the Board of Directors of the Company,
the Investment Adviser is primarily responsible for the execution of the
Company's portfolio transactions and the allocation of brokerage. In executing
such transactions, the Investment Adviser seeks to obtain the best net results
for the Company, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. While the Investment Adviser generally seeks
reasonably competitive commission rates, the Company does not necessarily pay
the lowest commission or spread available. The Company has no obligation to deal
with any broker or group of brokers in the execution of transactions in
portfolio securities. Subject to obtaining the best price and execution, brokers
who provide supplemental investment research to the Investment Adviser may
receive orders for transactions by the Company. 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, and the expenses of
the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. It is possible that certain of the
supplementary investment research so received will primarily benefit one or more
other investment companies or other accounts for which investment discretion is
exercised. Conversely, the Company may be the primary beneficiary of the
research or services received as a result of portfolio transactions effected for
such other accounts or investment companies. In addition, consistent with the
Rules of Fair Practice of the NASD and policies established by the Directors of
the Company, the Investment Adviser may consider sales of shares of the Company
as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Company.
The Company anticipates that its brokerage transactions involving
securities of companies domiciled in countries other than the United States will
be conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the
Company will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Foreign equity securities may be held by the Company in the form of ADRs,
EDRs, GDRs or securities convertible into foreign equity securities. ADRs, EDRs
and GDRs may be listed on stock exchanges or traded in OTC markets. ADRs, like
other securities traded in the United States, as well as GDRs traded in the
United States, will be subject to negotiated commission rates.
The Company may invest in securities traded in the OTC markets and intends
to deal directly with the dealers who make markets in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Under the Investment Company Act, persons affiliated with the Company
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are prohibited from dealing with the Company as principal in the purchase and
sale of securities. Since transactions in the OTC market usually involve
transactions with dealers acting as principal for their own account, the Company
will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. See "Investment Objective and
Policies--Investment Restrictions".
The Board of Directors has considered the possibility of seeking to
recapture, for the benefit of the Company, brokerage commissions and other
expenses of possible portfolio transactions by conducting portfolio transactions
through affiliated entities. For example, brokerage commissions received by
affiliated brokers could be offset against the advisory fee paid by the Company.
After considering all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement disclosing 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 Company 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 Company, and annual statements as to aggregate compensation
will be provided to the Company.
For the fiscal year ended April 30, 1994, the Company paid total brokerage
commissions of $326,782, of which $39,566, or 12.1%, was paid to Merrill Lynch
for effecting 19.3% of the aggregate amount of transactions in which the Company
paid brokerage commissions. For the fiscal year ended April 30, 1995, the
Company paid total brokerage commissions of $673,208, of which $116,455, or
17.3%, was paid to Merrill Lynch for effecting 20.7% of the aggregate amount of
transactions in which the Company paid brokerage commissions. For the fiscal
year ended April 30, 1996, the Company paid total brokerage commissions of
$908,590, of which $236,344, or 26.0%, was paid to Merrill Lynch for effecting
24.3% of the aggregate dollar amount of transactions in which the Company paid
brokerage commissions.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Company is determined once daily
Monday through Friday as of 15 minutes after the close of business on the NYSE
(generally, 4:00 P.M., New York time), on each day during which the NYSE is open
for trading. The NYSE is not open on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
Net asset value is computed by dividing the value of the securities held by
the Company 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. Expenses, including the
fee payable to the Investment Adviser and any account maintenance and/or
distribution fees, are accrued daily. The per share net asset value of Class B,
Class C and Class D shares generally will be lower than the per share net asset
value of Class A shares reflecting the daily expense accruals of the account
maintenance, distribution
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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 Class D shares; moreover, the per share net asset
value of Class B and Class C shares generally will be lower than the per share
net asset value of Class D shares reflecting the daily expense accruals of the
distribution fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Company. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differentials between the classes.
Portfolio securities, including ADRs, EDRs or GDRs, which are traded on
stock exchanges, are valued at the last sale price (regular way) on the exchange
on which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market. Securities traded in the OTC
market are valued at the last available bid price in the OTC market prior to the
time of valuation. Portfolio securities which are traded both in the OTC market
and on a stock exchange are valued according to the broadest and most
representative market. When the Company writes an option, the amount of the
premium received is recorded on the books of the Company 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 Company are
valued at their last sale price in the case of exchange-traded options or, in
the case of options traded in the OTC market, the last bid price. Other
investments, including futures contracts and related options, are stated at
market value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company. Such valuations and
procedures will be reviewed periodically by the Board of Directors.
Securities and assets for which market quotations are not readily available
(including venture capital investments, which are subject to limitations as to
their sale) are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company. Such valuations and
procedures will be reviewed periodically by the Board of Directors. The fair
market value for venture capital investments for which no market exists cannot
be precisely determined. There is a range of values which is reasonable for such
investments at any particular time. In the early stages of development, venture
capital investments will typically be valued based upon their original cost to
the Company (the "cost method"). The cost method will be utilized until
significant developments affecting the portfolio company provide a basis for use
of an appraisal valuation (the "appraisal method"). The appraisal method will be
based upon such factors affecting the portfolio company as earnings and net
worth, the market prices for similar securities of comparable companies and an
assessment of the company's future prospects. In the case of unsuccessful
operations, the appraisal may be based upon liquidation value. Valuations based
on the appraisal method are necessarily subjective. The Company will also use
third party transactions (actual or proposed) in the portfolio company's
securities as the basis of valuation (the "private market method"). The private
market method will only be used with respect to actual transactions or actual
firm offers by sophisticated, independent investors.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of the NYSE. The values of such
securities used in computing the net asset value of the Company's shares are
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determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE which will not be reflected in the computation of the Company's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Directors.
SHAREHOLDER SERVICES
The Company offers a number of shareholder services described below which
are designed to facilitate investment in its shares. Certain of such services
are not available to investors who place orders for the Company's shares through
the Merrill Lynch BlueprintSM Program. 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 Company, the Distributor or Merrill
Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his or her investment account at any time by mailing a check
directly to the Company's transfer agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Company's 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 Company, 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 be issued
certificates for his shares, and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. Shareholders
considering transferring a tax-deferred retirement account such as an individual
retirement account from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the retirement account is
to be transferred will not take delivery of shares of the Company, a shareholder
must either redeem the shares (paying any applicable CDSC) so that
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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 also can be made through a service
known as the Automatic Investment Plan whereby the Company is authorized through
preauthorized checks or automated clearing house debits of $50 or more to charge
the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. An investor
whose shares of the Company are held within a CMA(R) or CBA(R) account may
arrange to have periodic investments made in the Company in amounts of $100 or
more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated
Investment Program.
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 automatically be reinvested in additional shares of the
Company. Such reinvestment will be at the net asset value of the shares of the
Company as of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect to receive their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Company or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Company having a value, based upon cost or the
current offering price, of $5,000 or more and monthly withdrawals are available
for shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined as of
15 minutes after the close of business on the NYSE (generally 4:00 P.M., New
York time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the NYSE is not open for business on
such date, the Class A or Class D shares will be redeemed at the close of
business on the 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
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and distributions on all Class A or Class D shares in the Investment Account are
reinvested automatically in Class A or Class D shares of the Company,
respectively. A shareholder's Systematic Withdrawal Plan may be terminated at
any time, without charge or penalty, by the shareholder, the Company, the
Company's transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchase of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Company will not knowingly
accept purchase orders for Class A or Class D shares of the Company from
investors who maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Periodic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bimonthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Company shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the CMA(R) or CBA(R) Systematic Redemption Program, eligible
shareholders should contact their Merrill Lynch financial consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Company have an exchange
privilege with certain other MLAM-advised mutual funds listed below. Under the
Merrill Lynch Select PricingSM System, Class A shareholders may exchange Class A
shares of the Company for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as a
result of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other MLAM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Company is "tacked" to the holding period of the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain
MLAM-advised money market funds as follows: Class A shares may be
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exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund (available only for exchanges within certain
retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch
U.S. Treasury Money Fund; Class B, Class C and Class D shares may be exchanged
for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charge paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and Class D shares acquired through dividend reinvestment shall be
deemed to have been sold with a sales charge equal to the sales charge
previously paid on the Class A or Class D shares on which the dividend was paid.
Based on this formula, Class A and Class D shares of the Company generally may
be exchanged into the Class A or Class D shares of the other funds or into
shares of the Class A and Class D money market funds with or without a reduced
sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Company exercising the exchange privilege will
continue to be subject to the Company'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 Company acquired
through use of the exchange privilege will be subject to the Company's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares of the fund from which the exchange has been made. For purposes of
computing the sales charge that may be payable on a disposition of the new Class
B or Class C shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or Class C shares.
For example, an investor may exchange Class B shares of the Company for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Company 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 Company Class B shares to the three
year holding period for the Special Value Fund Class B shares, the investor will
be deemed to have held the new Class B shares for more than five years.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("MFA") program. Such
retirement plans may exchange Class B,
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Class C or Class D shares that have been held for at least one year for Class A
shares of the same fund on the basis of relative net asset values in connection
with the commencement of participation in the MFA program, i.e., no CDSC will
apply. The one-year holding period does not apply to shares acquired through
reinvestment of dividends. Upon termination of participation in the MFA program,
Class A shares will be re-exchanged for the class of shares originally held. For
purposes of computing any CDSC that may be payable upon redemption of Class B or
Class C shares so reacquired, or the Conversion Period for Class B shares so
reacquired, the holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held.
Shareholders also may exchange shares of the Company into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired as
a result of an exchange for Class B or Class C shares of the Company may, in
turn, be exchanged back into Class B or Class C shares, respectively, of any
fund offering such shares, in which event the holding period for Class B or
Class C shares of the Company will be aggregated with previous holding periods
for purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Company for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Company Class B shares for two and
a half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Company been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and a half years,
any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Company of the exchange.
Shareholders of the Company, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Company
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 Company reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
continuous offering of their shares at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Company intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Company (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 Company intends to distribute substantially
all of such income.
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Dividends paid by the Company from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Company shares. Any loss upon
the sale or exchange of Company shares held for six months or less, however,
will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. Distributions in excess of the Company's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares, and after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Company. Not later than 60 days after the close of its
taxable year, the Company will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Company'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 Company 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's rule permitting the issuance and sale of
multiple classes of stock) that is based on the gross income allocable to Class
A, Class B, Class C and Class D shareholders during the taxable year, or such
other method as the Internal Revenue Service may prescribe. If the Company 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 Company
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% U.S. 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 U.S. withholding tax.
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 Company or who, to the Company'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.
Dividends and interest received by the Company may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Company. If more than 50% in value of the Company's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Company will be eligible, and intends, to file an election
with the Internal Revenue Service pursuant to which shareholders of the Company
will be required to include their proportionate shares of such withholding taxes
in their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them and
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deduct such proportionate shares in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their U.S. income taxes.
No deductions for foreign taxes, however, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to U.S. withholding tax
on the income resulting from the Company's election described in this paragraph
but may not be able to claim a credit or deduction against such U.S. tax for the
foreign taxes treated as having been paid by such shareholder. The Company will
report annually to its shareholders the amount per share of such withholding
taxes. For this purpose, the Company will allocate foreign taxes and foreign
source income among the Class A, Class B, Class C and Class D shareholders
according to a method similar to that described above for the allocation of
dividends eligible for the dividends received deduction.
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 Company on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Company will be
disallowed if other Company 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 Company 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 Company's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Company will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirements.
TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS
The Company may write, purchase or sell options, futures and forward
foreign exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non-equity option
or a regulated futures contract for a non-U.S. currency for which the Company
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Company may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to
32
<PAGE> 83
certain transactions entered into by the Company 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
Company 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 Company's sales of securities and transactions in options,
futures and forward foreign exchange contracts. Under Section 1092, the Company
may be required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and certain closing transactions in options, futures
and forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Company's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Company may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Company 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 Company.
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 Company may elect capital
gain or loss treatment for such transactions. Regulated futures contracts, as
described above, will be taxed under Code Section 1256 unless application of
Section 988 is elected by the Company. In general, however, Code Section 988
gains or losses will increase or decrease the amount of the Company'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 Company 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 Company shares and resulting in a capital gain for
any shareholder who received a distribution greater than such shareholder's
basis in Company shares (assuming the shares were held as a capital asset).
These rules and the mark-to-market rules described above, however, will not
apply to certain transactions entered into by the Company solely to reduce the
risk of currency fluctuations with respect to its investments.
33
<PAGE> 84
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own 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
Company.
PERFORMANCE DATA
From time to time the Company 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
Company'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 Company 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 charge will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over longer periods of time.
34
<PAGE> 85
Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Company for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES*
-------------------------------------- --------------------------------------
REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A PERCENTAGE HYPOTHETICAL AS A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
- ---------------------------------- ------------------ ----------------- ------------------ -----------------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
One Year Ended April 30, 1996..... 36.45 % $ 1,364.50 38.46 % $ 1,384.60
Five Years Ended April 30, 1996... 11.96 % $ 1,759.10 12.00 % $ 1,762.40
Ten Years Ended April 30, 1996.... 10.05 % $2,605.90
Inception (October 21, 1988) to
April 30, 1996.................. 11.57 % $2,280.40
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
Year Ended April 30, 1996......... 44.01 % $1,440.10 42.46 % $1,424.60
Year Ended April 30, 1995......... 6.47 % $1,064.70 5.29 % $1,052.90
Year Ended April 30, 1994......... 8.19 % $1,081.90 7.25 % $1,072.50
Year Ended April 30, 1993......... (1.10)% $ 989.00 (2.07)% $ 979.30
Year Ended April 30, 1992......... 13.17 % $1,131.70 11.88 % $1,118.80
Year Ended April 30, 1991......... 17.10 % $1,171.00 15.75 % $1,157.50
Year Ended April 30, 1990......... 7.46 % $1,074.60 6.57 % $1,065.70
Year Ended April 30, 1989......... (0.25)% $ 997.50
Year Ended April 30, 1988......... 3.20 % $1,032.00
Year Ended April 30, 1987......... 14.36 % $1,143.60
Year Ended April 30, 1986......... 45.01 % $1,450.10
Year Ended April 30, 1985......... (6.31)% $ 936.90
Year Ended April 30, 1984......... 6.00 % $1,060.00
Inception (October 21, 1988) to
April 30, 1989.................. 4.89 % $1,048.90
Inception (April 1, 1983) to
April 30, 1983.................. 1.75 % $1,017.50
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
Inception (April 1, 1983) to
April 30, 1996.................. 281.84 % $3,818.40
Inception (October 21, 1988) to
April 30, 1996.................. 128.04 % $2,280.40
</TABLE>
35
<PAGE> 86
<TABLE>
<CAPTION>
CLASS C SHARES** CLASS D SHARES**
-------------------------------------- --------------------------------------
REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A PERCENTAGE HYPOTHETICAL AS A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
- ---------------------------------- ------------------ ----------------- ------------------ -----------------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended April 30, 1996..... 41.76 % $1,417.60 36.19 % $1,361.90
Inception (October 21, 1994) to
April 30, 1996.................. 30.29 % $1,497.50 24.87 % $1,403.40
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
One Year Ended April 30, 1996..... 42.76 % $1,427.60 43.74 % $1,437.40
Inception (October 21, 1994) to
April 30, 1995.................. 4.89 % $1,048.90 3.05 % $1,030.50
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
Inception (October 21, 1994) to
April 30, 1996.................. 49.75 % $1,497.50 40.34 % $1,403.40
</TABLE>
- ---------------
* Information as to Class B shares is presented only for the period October 21,
1988 to April 30, 1996. Prior to October 21, 1988, no Class B shares were
publicly issued.
** Information as to Class C and Class D shares is presented for the period
October 21, 1994 to April 30, 1996. Prior to October 21, 1994, no Class C or
Class D shares were publicly issued.
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares, applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Company in advertisements directed to such investors may take into account a
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 the waiver of sales charges, a lower amount of expenses may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company, previously known as Sci/Tech Holdings, Inc., was incorporated
under Maryland law on October 29, 1982. At the date of this Statement of
Additional Information, the Company has an authorized capital of 400,000,000
shares of Common Stock, par value of $0.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock, each of which
consists of 100,000,000 shares. Each share of Class A, Class B, Class C and
Class D Common Stock represents an interest in the
36
<PAGE> 87
same assets of the Company and is identical in all respects except that the
Class B, Class C and Class D shares bear certain expenses related to the account
maintenance and/or distribution of such shares and have exclusive voting rights
with respect to matters relating to such account maintenance and/or distribution
expenditures. The Company has received an order from the Commission permitting
the issuance and sale of multiple classes of Common Stock. The Board of
Directors of the Company may classify and reclassify the shares of the Company
into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Company does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon 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 Company. Voting rights for Directors are
not cumulative. Shares issued are fully paid and nonassessable and have no
preemptive rights. Redemption and conversion rights are discussed elsewhere
herein and in the Prospectus. Each share is entitled to participate equally in
dividends and distributions declared by the Company and in the net assets of the
Company upon liquidation or dissolution after satisfaction of outstanding
liabilities. Stock certificates are issued by the transfer agent only on
specific request. Certificates for fractional shares are not issued in any case.
Shareholders may cause a meeting of shareholders to be held for the purpose of
voting on the removal of Directors at the request of 25% of the outstanding
shares of the Company. A Director may be removed at a special meeting of
shareholders by a vote of a majority of the votes entitled to be cast for the
election of Directors.
COMPUTATION OF OFFERING PRICE PER SHARE
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Company based on the value of the Company's
net assets on April 30, 1996, and its shares outstanding on that date is set
forth below. Information is not provided for Class C or Class D shares since no
Class C or Class D shares were publicly offered prior to the date of this
Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets................................ $132,082,857 $207,412,885 $20,761,603 $21,563,631
============ ============ =========== ===========
Number of Shares Outstanding.............. 25,046,900 44,376,140 4,439,592 4,202,978
============ ============ =========== ===========
Net Asset Value per Share (net assets
divided by number of shares
outstanding)............................ $5.27 $4.67 $4.68 $5.13
Sales Charge (Class A and Class D shares:
5.25% of offering price; 5.54% of net
asset value)*........................... .29 ** ** .28
----- ----- ----- -----
Offering Price............................ $5.56 $4.67 $4.68 $5.41
===== ===== ===== =====
</TABLE>
- ---------------
*Rounded to the nearest one-hundredth percent; assumes the 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.
37
<PAGE> 88
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Company. The selection of
independent auditors is subject to approval by the independent Directors of the
Company. The independent auditors are responsible for auditing the annual
financial statements of the Company.
CUSTODIAN
The Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, 18th Floor,
Global Securities Services, Brooklyn, New York 11245 (the "Custodian"), acts as
the custodian of the Company's assets. Under its contract with the Company, the
Custodian is authorized to establish separate accounts in foreign currencies and
to cause foreign securities owned by the Company to be held in its offices
outside the United States and with certain foreign banks and securities
depositories. The Custodian is responsible for safeguarding and controlling the
Company's cash and securities, handling the receipt and delivery of securities
and collecting interest and dividends on the Company's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Company'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 Company--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 Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on April 30 of each year. The Company
sends to its shareholders at least semi-annually reports showing the Company'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 the information set forth in the Registration Statement and the exhibits
relating thereto, which the Company has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
Categories in the Schedule of Investments contained in the Financial
Statements herein have been adopted by the Investment Adviser and are deemed
appropriate with respect to a specialized sector fund such as the Company.
38
<PAGE> 89
Under a separate agreement, Merrill Lynch has granted the Company the right
to use the "Merrill Lynch" name and has reserved the right to withdraw its
consent to the use of such name by the Company at any time or to grant the use
of such name to any other company, and the Company has granted Merrill Lynch,
under certain conditions, the use of any other name it might assume in the
future, with respect to any corporation organized by Merrill Lynch.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Company, no person or entity owned beneficially 5%
or more of the Company's common stock on July 31, 1996.
39
<PAGE> 90
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Healthcare Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Healthcare Fund, Inc. as of April
30, 1996, the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for the periods presented. These financial
statements and the financial highlights are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at April
30, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Healthcare Fund, Inc. as of April 30, 1996, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
June 6, 1996
40
<PAGE> 91
Merrill Lynch Healthcare Fund, Inc., April 30, 1996
- -------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MIDDLE Value Percent of
EAST Industries Shares Held Investments Cost (Note 1a) Net Assets
===================================================================================================================================
<S> <S> <C> <S> <C> <C> <C>
Israel Pharmaceutical-- 80,000 Teva Pharmaceuticals Industries,
Diversified Inc. (ADR)* $ 3,067,500 $ 3,580,000 0.9%
Investments in Israel 3,067,500 3,580,000 0.9
===================================================================================================================================
Total Investments in the Middle East 3,067,500 3,580,000 0.9
===================================================================================================================================
NORTH
AMERICA
===================================================================================================================================
Canada Biotechnology 15,000 +Biochem Pharma, Inc. 496,407 680,625 0.2
------------------------------------------------------------------------------------------------------------------------
Medical Specialties 159,000 +ISG Technologies, Inc. 787,206 701,007 0.2
------------------------------------------------------------------------------------------------------------------------
Investments in Canada 1,283,613 1,381,632 0.4
===================================================================================================================================
United Biotechnology 195,000 +Amgen, Inc. 11,808,758 11,188,125 2.9
States 100,000 +Emisphere Technologies Inc. 975,690 1,325,000 0.4
190,000 +Genzyme Corp. 13,460,640 10,687,500 2.8
80,000 +Gilead Sciences Inc. 2,124,875 2,440,000 0.6
125,000 +Imclone Systems, Inc. 1,506,250 1,656,250 0.4
80,000 +Matrix Pharmaceutical Inc. 1,074,375 2,080,000 0.6
125,000 +Neurex Corp. 2,843,750 2,906,250 0.8
135,000 +PerSeptive Biosystems, Inc. 1,186,250 928,125 0.2
------------ ------------ ------
34,980,588 33,211,250 8.7
------------------------------------------------------------------------------------------------------------------------
Diagnostics 21,100 Diagnostic Products Corporation 769,226 883,562 0.2
100,000 +Epitope Inc. 1,450,124 1,850,000 0.5
163,000 +NeoPath, Inc. 3,915,501 3,708,250 1.0
------------ ------------ ------
6,134,851 6,441,812 1.7
------------------------------------------------------------------------------------------------------------------------
Health Care Cost 30,000 Cardinal Health, Inc. 1,888,050 1,882,500 0.5
Containment 220,000 Caremark International, Inc. 4,254,578 6,077,500 1.6
200,000 +Coram Healthcare Corp. 1,047,500 1,025,000 0.3
100,000 +FHP International Corporation 2,862,500 2,950,000 0.8
100,000 +HEALTHSOUTH Corp. 3,376,616 3,712,500 1.0
400,000 +Healthcare Compare Corp. 17,419,431 18,850,000 4.9
500,000 +IBAH Inc. 3,213,385 4,312,500 1.1
60,000 +Medaphis Corporation 1,344,250 2,760,000 0.7
60,000 +Medpartners/Mullikin Inc. 1,761,059 1,732,500 0.5
30,000 Olsten Corporation (The) 801,150 911,250 0.2
70,000 +OrNda HealthCorp. 1,154,875 1,925,000 0.5
107,500 +Parexel International Corp. 3,355,963 5,240,625 1.4
150,000 +Tenet Healthcare Corp. 2,690,814 3,075,000 0.8
200,000 +Walsh International, Inc. (a) 2,839,250 2,450,000 0.6
------------ ------------ ------
48,009,421 56,904,375 14.9
------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 92
Merrill Lynch Healthcare Fund, Inc, April 30, 1996
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
NORTH
AMERICA Value Percent of
(concluded)Industries Shares Held Investments Cost (Note 1a) Net Assets
===================================================================================================================================
<S> <S> <C> <S> <C> <C> <C>
United Medical 200,000 Baxter International, Inc. $ 8,964,312 $ 8,850,000 2.3%
States Specialties 75,000 +Boston Scientific Corp. 1,999,113 3,234,375 0.9
(concluded) 63,000 +Cardiometrics, Inc. 504,000 385,875 0.1
100,000 +Conceptus Inc. 1,400,000 1,887,500 0.5
225,000 +Endosonics Corp. 3,294,739 3,853,125 1.0
250,000 +Fresenius USA Inc. 4,277,159 5,000,000 1.3
62,500 +InControl, Inc. 875,000 953,125 0.3
200,000 +Integra Lifesciences Corp. 1,650,000 2,400,000 0.6
155,000 +KeraVision, Inc. 2,578,755 2,441,250 0.6
35,000 +Laser Industries Ltd. 386,288 538,125 0.1
100,000 Medtronic, Inc. 3,644,813 5,312,500 1.4
200,000 +Nellcor Puritan Bennet, Inc. 10,953,980 9,750,000 2.6
95,000 +Optical Sensors, Inc. 1,187,500 1,223,125 0.3
280,000 +ReSound Corp. 3,240,312 3,430,000 0.9
35,000 +Saint Jude Medical, Inc. 1,181,250 1,273,125 0.3
295,000 +VISX, Incorporated 6,959,177 9,956,250 2.6
30,000 +VOXEL 178,125 174,375 0.1
200,000 +Ventritex, Inc. 3,590,630 3,100,000 0.8
------------ ------------ ------
56,865,153 63,762,750 16.7
------------------------------------------------------------------------------------------------------------------------
Pharmaceutical-- 155,000 American Home Products Corporation 14,613,673 16,352,500 4.3
Consumer 70,000 Johnson & Johnson Co. 4,475,526 6,475,000 1.7
100,000 Warner-Lambert Co. 11,062,498 11,175,000 2.9
------------ ------------ ------
30,151,697 34,002,500 8.9
------------------------------------------------------------------------------------------------------------------------
Pharmaceutical-- 266,500 Collagen Corporation 5,191,481 5,396,625 1.4
Diversified 50,000 +R.P. Scherer Corporation 1,999,850 1,975,000 0.5
------------ ------------ ------
7,191,331 7,371,625 1.9
------------------------------------------------------------------------------------------------------------------------
Pharmaceutical-- 100,000 Lilly (Eli) & Co. 6,571,910 5,900,000 1.5
Prescription 70,000 Merck & Co., Inc. 4,399,825 4,235,000 1.1
180,000 Pfizer, Inc. 9,738,086 12,397,500 3.3
200,000 Pharmacia & Upjohn Inc. 8,098,880 7,650,000 2.0
30,000 Rhone-Poulenc Rorer Inc. 1,859,787 1,860,000 0.5
75,000 +U.S. Bioscience, Inc. 749,288 1,406,250 0.4
------------ ------------ ------
31,417,776 33,448,750 8.8
------------------------------------------------------------------------------------------------------------------------
Investments in the United States 214,750,817 235,143,062 61.6
===================================================================================================================================
Total Investments in North America 216,034,430 236,524,694 62.0
===================================================================================================================================
PACIFIC
BASIN
===================================================================================================================================
Japan Pharmaceutical-- 150,000 Eisai Co. Ltd. 2,888,996 2,969,871 0.8
Diversified
------------------------------------------------------------------------------------------------------------------------
Pharmaceutical-- 250,000 Sankyo Company, Ltd. 5,712,923 6,073,649 1.6
Prescription
</TABLE>
42
<PAGE> 93
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------
Investments in Japan 8,601,919 9,043,520 2.4
===================================================================================================================================
Total Investments in the Pacific Basin 8,601,919 9,043,520 2.4
===================================================================================================================================
WESTERN
EUROPE
===================================================================================================================================
Finland Pharmaceutical-- 40,000 Orion-yhtymae OY (Class B) 1,227,607 1,098,538 0.3
Diversified
------------------------------------------------------------------------------------------------------------------------
Investments in Finland 1,227,607 1,098,538 0.3
===================================================================================================================================
France Pharmaceutical-- 80,000 Sanofi SA 4,929,426 6,440,776 1.7
Diversified
------------------------------------------------------------------------------------------------------------------------
Pharmaceutical-- 80,000 Synthelabo SA 5,026,754 6,226,084 1.6
Prescription
------------------------------------------------------------------------------------------------------------------------
Investments in France 9,956,180 12,666,860 3.3
===================================================================================================================================
Germany Medical Specialties 10,000 Fresenius AG (Preferred) 1,576,828 1,545,988 0.4
------------------------------------------------------------------------------------------------------------------------
Pharmaceutical-- 10,000 Bayer AG 3,187,142 3,215,916 0.8
Consumer
------------------------------------------------------------------------------------------------------------------------
Pharmaceutical-- 51,800 Hoechst AG 16,277,430 17,422,100 4.6
Diversified
------------------------------------------------------------------------------------------------------------------------
Investments in Germany 21,041,400 22,184,004 5.8
===================================================================================================================================
Ireland Pharmaceutical-- 140,000 +Elan Corporation PLC (ADR)* 5,014,994 9,257,500 2.4
Diversified
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in Ireland 5,014,994 9,257,500 2.4
===================================================================================================================================
Sweden Pharmaceutical-- 240,000 Astra AB 'B' Free 8,890,264 10,583,039 2.8
Prescription
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in Sweden 8,890,264 10,583,039 2.8
===================================================================================================================================
Switzer- Pharmaceutical-- 20,800 Ciba-Geigy AG (Registered) 16,364,367 24,055,217 6.3
land Consumer
- -----------------------------------------------------------------------------------------------------------------------------------
Pharmaceutical-- 1,000 Roche Holdings AG 6,459,518 7,837,079 2.1
Prescription 17,000 Sandoz AG (Registered) 13,608,094 18,500,803 4.8
------------ ------------ ------
20,067,612 26,337,882 6.9
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in Switzerland 36,431,979 50,393,099 13.2
===================================================================================================================================
United Pharmaceutical-- 100,000 SmithKline Beecham Corporation PLC (ADR)* 4,789,313 5,400,000 1.4
Kingdom Diversified
- -----------------------------------------------------------------------------------------------------------------------------------
Pharmaceutical-- 100,000 +Glaxo Wellcome PLC 1,204,032 1,209,700 0.3
Prescription
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in the United Kingdom 5,993,345 6,609,700 1.7
===================================================================================================================================
Total Investments in Western Europe 88,555,769 112,792,740 29.5
===================================================================================================================================
</TABLE>
43
<PAGE> 94
Merrill Lynch Healthcare Fund, Inc, April 30, 1996
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT-TERM Face Value Percent of
SECURITIES Amount Investments Cost (Note 1a) Net Assets
===================================================================================================================================
<S> <C> <S> <C> <C> <C>
Commercial $ 12,182,000 Associates Corporation of North America,
Paper** 5.36% due 6/01/1996 $ 12,182,000 $ 12,182,000 3.2%
5,000,000 Transamerica Corporation, 5.32% due
6/14/1996 4,990,394 4,990,394 1.3
8,000,000 Windmill Funding Corporation, 5.30% due
6/28/1996 7,968,200 7,968,200 2.1
------------ ------------ -----
25,140,594 25,140,594 6.6
-----------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities 25,140,594 25,140,594 6.6
==================================================================================================================================
Total Investments $341,400,212 387,081,548 101.4
============
Liabilities in Excess of Other Assets (5,260,572) (1.4)
------------ -----
Net Assets $381,820,976 100.0%
============ =====
==================================================================================================================================
</TABLE>
*American Depositary Receipts (ADR).
**Commercial Paper is traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by the
Company.
+Non-income producing security.
(a)Investment in companies 5% or more of whose outstanding securities
are held by the Company (such companies are defined as "Affiliated
Companies" in section 2(a)(3) of the Investment Company Act of
1940) are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Net Share Dividend
Industry Affiliate Activity Net Cost Income
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Healthcare Walsh International, 200,000 $2,839,250 --
Cost Inc.
Containment
--------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
44
<PAGE> 95
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of April 30, 1996
================================================================================================================================
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$341,400,212) (Note 1a) $387,081,548
Cash 675,103
Foreign cash (Note 1b) 106
Receivables:
Securities sold $ 3,167,354
Capital shares sold 1,881,118
Dividends 243,864 5,292,336
------------
Prepaid registration fees and other assets (Note 1f) 31,578
------------
Total assets 393,080,671
------------
================================================================================================================================
Liabilities: Payables:
Securities purchased 5,614,903
Capital shares redeemed 4,693,338
Investment adviser (Note 2) 330,783
Distributor (Note 2) 201,932 10,840,956
------------
Accrued expenses and other liabilities 418,739
------------
Total liabilities 11,259,695
------------
================================================================================================================================
Net Assets: Net assets $381,820,976
============
================================================================================================================================
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $ 2,504,690
Consist of: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 4,437,614
Class C Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 443,959
Class D Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 420,298
Paid-in capital in excess of par 296,249,234
Undistributed realized capital gains on investments and foreign currency transactions--net 32,081,227
Unrealized appreciation on investments and foreign currency transactions--net 45,683,954
------------
Net assets $381,820,976
============
================================================================================================================================
Net Asset Class A--Based on net assets of $132,082,857 and 25,046,900 shares outstanding $ 5.27
Value: ============
Class B--Based on net assets of $207,412,885 and 44,376,140 shares outstanding $ 4.67
============
Class C--Based on net assets of $20,761,603 and 4,439,592 shares outstanding $ 4.68
============
Class D--Based on net assets of $21,563,631 and 4,202,978 shares outstanding $ 5.13
============
================================================================================================================================
</TABLE>
See Notes to Financial Statements.
45
<PAGE> 96
Merrill Lynch Healthcare Fund, Inc., April 30, 1996
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended April 30, 1996
================================================================================================================================
<S> <C> <C>
Investment Dividends (net of $140,890 foreign withholding tax) $ $ 2,109,795
Income (Notes Interest and discount earned 1,087,600
1d & 1e): -----------
Total Income 3,197,395
-----------
================================================================================================================================
Expenses: Investment advisory fees (Note 2) $ 2,441,908
Account maintenance and distribution fees--Class B (Note 2) 1,266,179
Transfer agent fees--Class B (Note 2) 412,494
Transfer agent fees--Class A (Note 2) 285,789
Registration fees (Note 1f) 159,630
Printing and shareholder reports 152,757
Account maintenance and distribution fees--Class C (Note 2) 83,101
Accounting services (Note 2) 77,879
Professional fees 77,826
Custodian fees 77,036
Transfer agent fees--Class D (Note 2) 29,702
Account maintenance fees--Class D (Note 2) 27,054
Transfer agent fees--Class C (Note 2) 25,981
Directors' fees and expenses 22,048
Pricing fees 191
Other 9,190
-----------
Total expenses 5,148,765
-----------
Investment loss--net (1,951,370)
-----------
================================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Investments--net 45,832,335
Gain (Loss) Foreign currency transactions--net (138,301) 45,694,034
on Invest- -----------
ments & For- Change in unrealized appreciation/depreciation on:
eign Cur- Investments--net 34,595,030
rency Trans- Foreign currency transactions--net (12,551) 34,582,479
actions--Net ----------- -----------
(Notes 1b, Net realized and unrealized gain on investments and foreign currency transactions 80,276,513
1c, 1e & 3): -----------
Net Increase in Net Assets Resulting from Operations $78,325,143
-----------
================================================================================================================================
See Notes to Financial Statements.
</TABLE>
46
<PAGE> 97
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended April 30,
----------------------------
Increase (Decrease) in Net Assets: 1996 1995
================================================================================================================================
<S> <S> <C> <C>
Operations: Investment loss--net $ (1,951,370) $ (1,000,353)
Realized gain (loss) on investments and foreign currency transactions--net 45,694,034 (819,555)
Change in unrealized appreciation/depreciation on investments and
foreign currency
transactions--net 34,582,479 9,775,276
------------ ------------
Net increase in net assets resulting from operations 78,325,143 7,955,368
------------ ------------
================================================================================================================================
Distribu- Realized gain on investments--net:
butions to Class A (4,033,407) (4,761,771)
Shareholder Class B (5,976,897) (4,901,206)
(Note 1g) Class C (376,208) --
Class D (455,478) --
------------ ------------
Net decrease in net assets resulting from distributions to shareholders (10,841,990) (9,662,977)
------------ ------------
================================================================================================================================
Capital Net increase in net assets derived from capital share transactions 159,000,753 22,599,545
Share Trans- ------------- ------------
actions
(Note 4):
================================================================================================================================
Net Assets: Total increase in net assets 226,483,906 20,891,936
Beginning of year 155,337,070 134,445,134
------------- ------------
End of year $ 381,820,976 $155,337,070
------------- ------------
================================================================================================================================
</TABLE>
See Notes to Financial Statements.
47
<PAGE> 98
Merrill Lynch Healthcare Fund, Inc, April 30, 1996
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------
For the
The following per share data and ratios Five-Month For the
have been derived from information provided Period Year
in the financial statements. Ended Ended
For the Year Ended April 30, April 30, Nov. 30,
-------------------------------------------
Increase (Decrease) in Net Asset Value: 1996+ 1995+ 1994+ 1993 1992 1991
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 3.81 $ 3.87 $ 3.59 $ 3.63 $ 9.19 $ 7.94
Operating -------- -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.01) (.01) (.02) .02 .00 .03
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.67 .22 .31 (.06) .88 2.08
-------- -------- -------- -------- -------- --------
Total from investment operations 1.66 .21 .29 (.04) .88 2.11
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Return of capital--net -- -- -- -- (3.97) --
Investment income--net -- -- (.01) -- -- (.03)
Realized gain on investments--net (.20) (.27) -- -- (2.47) (.83)
-------- -------- -------- -------- -------- --------
Total dividends and distributions (.20) (.27) (.01) -- (6.44) (.86)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 5.27 $ 3.81 $ 3.87 $ 3.59 $ 3.63 $ 9.19
======== ======== ======== ======== ======== ========
================================================================================================================================
Total Based on net asset value per share 44.01% 6.47% 8.19% (1.10%) 10.96%++ 29.44%
Investment ======== ======== ======== ======== ======== ========
Return:**
================================================================================================================================
Ratios to Expenses 1.53% 1.79% 1.55% 1.85% 1.56%* 1.61%
Average ======== ======== ======== ======== ======== ========
Net Assets: Investment income (loss)--net (.23%) (.21%) (.48%) .48% (.16%)* .27%
======== ======== ======== ======== ======== ========
================================================================================================================================
Supplemental Net assets, end of period (in thousands) $132,083 $ 69,650 $ 70,753 $ 63,528 $ 61,132 $125,979
Data: ======== ======== ======== ======== ======== ========
Portfolio turnover 133.50% 196.91% 133.58% 103.06% 147.63% 206.29%
======== ======== ======== ======== ======== ========
Average commission rate paid+++++ $ .0977 -- -- -- -- --
======== ======== ======== ======== ======== ========
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------------
For the
The following per share data and ratios Five-Month For the
have been derived from information provided Period Year
in the financial statements. Ended Ended
For the Year Ended April 30, April 30, Nov. 30,
-------------------------------------------
Increase (Decrease) in Net Asset Value: 1996+ 1995+ 1994+ 1993+ 1992+ 1991
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 3.43 $ 3.55 $ 3.31 $ 3.38 $ 9.01 $ 7.84
Operating -------- -------- -------- -------- -------- --------
Performance: Investment loss--net (.05) (.04) (.05) (.01) (.02) (.03)
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.49 .19 .29 (.06) .83 2.03
-------- -------- -------- -------- -------- --------
Total from investment operations 1.44 .15 .24 (.07) .81 2.00
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
Return of capital--net -- -- -- -- (3.97) --
Investment income--net -- -- -- -- -- --
Realized gain on investments--net (.20) (.27) -- -- (2.47) (.83)
-------- -------- -------- -------- -------- --------
</TABLE>
48
<PAGE> 99
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Total dividends and distributions (.20) (.27) -- -- (6.44) (.83)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 4.67 $ 3.43 $ 3.55 $ 3.31 $ 3.38 $ 9.01
======== ======== ======== ======== ======== ========
==================================================================================================================================
Total Based on net asset value per share 42.46% 5.29% 7.25% (2.07%) 10.26%+++ 28.30%
Investment ======== ======== ======== ======== ======== ========
Return:**
==================================================================================================================================
Ratios to Expenses 2.55% 2.85% 2.56% 2.89% 2.58%* 2.63%
Average Net ======== ======== ======== ======== ======== ========
Assets: Investment loss--net (1.24%) (1.29%) (1.52%) (.41%) (1.02%)* (.79%)
======== ======== ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, end of period (in thousands) $207,413 $ 79,485 $ 63,692 $ 33,071 $ 5,356 $ 6,007
Data: ======== ======== ======== ======== ======== ========
Portfolio turnover 133.50% 196.91% 133.58% 103.06% 147.63% 206.29%
======== ======== ======== ======== ======== ========
Average commission rate paid+++++ $ .0977 -- -- -- -- --
======== ======== ======== ======== ======== ========
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
--------------------------- --------------------------
For the For the
For the Period For the Period
The following per share data and ratios have been derived Year October 21, Year October 21,
from information provided in the financial statements. Ended 1994++++ Ended 1994++++
April 30, to April 30, April 30, to April 30,
Increase (Decrease) in Net Asset Value: 1996++ 1995++ 1996++ 1995++
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 3.43 $ 3.27 $ 3.72 $ 3.61
Operating ------------ ------------ ------------ ------------
Performance: Investment loss--net (.06) (.04) (.02) (.02)
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net 1.50 .20 1.63 .13
------------ ------------ ------------ ------------
Total from investment operations 1.45 .16 1.61 .11
------------ ------------ ------------ ------------
Less distributions from realized gain on investments--net (.20) -- (.20) --
------------ ------------ ------------ ------------
Net asset value, end of period $ 4.68 $ 3.43 $ 5.13 $ 3.72
============ ============ ============ ============
===================================================================================================================================
Total Based on net asset value per share 42.76% 4.89%+++ 43.74% 3.05%+++
Investment ============ ============ ============ ============
Return:**
===================================================================================================================================
Ratios to Expenses 2.52% 3.28%* 1.75% 2.44%*
Average Net ============ ============ ============ ============
Assets: Investment loss--net (1.19%) (2.13%)* (.44%) (1.23%)*
============ ============ ============ ============
===================================================================================================================================
Supplemental Net assets, end of period (in thousands) $ 20,761 $ 1,816 $ 21,564 $ 4,386
Data: ============ ============ ============ ============
Portfolio turnover 133.50% 196.91% 133.50% 196.91%
============ ============ ============ ============
Average commission rate paid+++++ $ .0977 -- $ .0977 --
============ ============ ============ ============
===================================================================================================================================
</TABLE>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Calculation is based on the average number of shares outstanding
during the period.
++++Commencement of Operations.
+++Aggregate total investment return.
+++++For fiscal years beginning on or after September 1, 1995,
the Company is required to disclose its average commission rate
per share for purchases and sales of equity securities.
See Notes to Financial Statements.
49
<PAGE> 100
Merrill Lynch Healthcare Fund, Inc, April 30, 1996
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Healthcare Fund, Inc. (the "Company") is registered
under the Investment Company Act of 1940 as a non-diversified,
open-end management investment company. The Company offers
four classes of shares under the Merrill Lynch Select Pricing SM
System. Shares of Class A and Class D are sold with a front-end sales
charge. Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to
the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to its account maintenance
and distribution expenditures. The following is a summary of signifi-
cant accounting policies followed by the Company.
(a) Valuation of securities--Portfolio securities which are traded on
stock exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any sales, at the last
available bid price. Securities traded in the over-the-counter market
are valued at the last available bid price prior to the time of
valuation. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated by
or under the authority of the Board of Directors as the primary
market. Securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest
and most representative market. Options written are valued at the
last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the last bid price. Short-term
securities are valued at amortized cost, which approximates market
value. Other investments, including futures contracts and related
options, are stated at market value. Securities and assets for which
market quotations are not available are valued at fair value as
determined in good faith by or under the direction of the Company's
Board of Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or valuing
(unrealized) assets or liabilities expressed in foreign currencies into
US dollars. Realized and unrealized gains or losses from investments
include the effects of foreign exchange rates on investments.
(c) Derivative financial instruments--The Company may engage in
various portfolio strategies to seek to increase its return by hedging
its portfolio against adverse movements in the equity, debt, and
currency markets. Losses may arise due to changes in the value of
the contract or if the counterparty does not perform under the
contract.
* Financial futures contracts--The Company may also purchase or
sell interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific future
date and at a specific price or yield. Upon entering into a contract,
the Company deposits and maintains as collateral such initial mar-
gin as required by the exchange on which the transaction is effected.
Pursuant to the contract, the Company agrees to receive from or pay
to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Company as unrealized
gains or losses. When the contract is closed, the Company records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it
was closed.
* Foreign currency options and futures--The Company may also
purchase or sell listed or over-the-counter foreign currency options,
foreign currency futures and related options on foreign currency
futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with
respect to hedges on non-US dollar denominated securities owned
by the Company, sold by the Company but not yet delivered, or
committed or anticipated to be purchased by the Company.
* Forward foreign exchange contracts--The Company is authorized
to enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Company's records. However, the effect on
operations is recorded from the date the Company enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Options--The Company is authorized to write covered put and call
options and purchase put options. When the Company writes an
option, an amount equal to the premium received by the Company is
50
<PAGE> 101
reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current
market value of the option written. When a security is purchased
or sold through an exercise of an option, the related premium paid
(or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of
the security sold. When an option expires (or the Company enters
into a closing transaction), the Company realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain
or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing
investments.
(d) Income taxes--It is the Company's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income--Security transac-
tions are recorded on the dates the transactions are entered into
(the trade dates). Dividend income is recorded on the ex-dividend
date, except that if the ex-dividend date has passed, certain divi-
dends from foreign securities are recorded as soon as the Company
is informed of the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis. Real-
ized gains and losses on security transactions are determined on the
identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid
by the Company are recorded on the ex-dividend dates.
(h) Reclassification--Generally accepted accounting principles,
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax
differences of $1,951,370 and $55,875 have been reclassified
from accumulated net investment loss and paid-in capital in excess
of par, respectively, to undistributed net realized capital gains.
These reclassifications have no effect on net assets or net asset
values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Company has entered into an Investment Advisory Agreement
with Merrill Lynch Asset Management, L.P. ("MLAM"). The general
partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
which is the limited partner. The Company has also entered into a
Distribution Agreement and Distribution Plans with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Company's portfolio
and provides, or arranges for affiliates to provide, the administrative
services necessary for the operation of the Company. As compensa-
tion for its services to the Company, MLAM receives monthly com-
pensation at the annual rate of 1.0% of the average daily net assets
of the Company.
Certain states in which shares of the Company are qualified for sale
impose limitations on the expenses of the Company. The most
restrictive annual expense limitation requires that MLAM reim-
burse the Company to the extent that expenses (excluding interest,
taxes, distribution fees, brokerage fees and commissions, and ex-
traordinary items) exceed 2.5% of the Company's first $30 million of
average daily net assets, 2.0% of the Company's next $70 million of
average daily net assets, and 1.5% of the average daily net assets in
excess thereof. MLAM's obligation to reimburse the Company is
limited to the amount of the investment advisory fee. No fee pay-
ment will be made to MLAM during any fiscal year which will cause
such expenses to exceed the most restrictive expense limitation at
the time of such payment.
Pursuant to the distribution plans (the "Distribution Plans") adopted
by the Company in accordance with Rule 12b-1 under the Invest-
ment Company Act of 1940, the Company pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Account
Maintenance Fee Distribution Fee
- --------------------------------------------------------------------------------
<S> <C> <C>
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
- --------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 102
NOTES TO FINANCIAL STATEMENTS (concluded)
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to
the Company. The ongoing account maintenance fee compensates
the Distributor and MLPF&S for providing account maintenance
services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the year ended April 30, 1996, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer con-
cessions on sales of the Company's Class A and Class D Shares
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
MLFD MLPF&S
- ----------------------------------------------------------------------------
<S> <C> <C>
Class A $ 2,062 $ 28,477
Class D $17,137 $244,507
- ----------------------------------------------------------------------------
</TABLE>
For the year ended April 30, 1996, MLPF&S received contingent
deferred sales charges of $331,285 and $8,074 relating to trans-
actions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $234,328 in commissions on the
execution of portfolio security transactions for the Company for
the year ended April 30, 1996.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or
directors of MLAM, MLPF&S, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term
securities, for the year ended April 30, 1996 were $454,084,136
and $305,143,238, respectively.
Net realized and unrealized gains (losses) as of April 30, 1996
were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Realized
Gains Unrealized
(Losses) Gains
- ----------------------------------------------------------------------------
<S> <C> <C>
Long-term investments $ 45,831,771 $ 45,681,336
Short-term investments 564 --
Foreign currency transactions (138,301) 2,618
------------ ------------
Total $ 45,694,034 $ 45,683,954
============ ============
- ---------------------------------------------------------------------------
</TABLE>
As of April 30, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $45,490,015, of which $53,501,428
related to appreciated securities and $8,011,413 related to
depreciated securities. The aggregate cost of investments at
April 30, 1996 for Federal income tax purposes was $341,591,533.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $159,000,753 and $22,599,545 for the years ended April 30,
1996 and April 30, 1995, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Class A Shares for the
Year Ended Dollar
April 30, 1996 Shares Amount
- ---------------------------------------------------------------------------
<S> <C> <C>
Shares sold 10,277,222 $ 49,677,305
Shares issued to shareholders in reinvest-
ment of distributions 737,767 3,519,148
------------ ------------
Total issued 11,014,989 53,196,453
Shares redeemed (4,237,137) (19,882,706)
------------ ------------
Net increase 6,777,852 $ 33,313,747
============ ============
- ---------------------------------------------------------------------------
</TABLE>
52
<PAGE> 103
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Class A Shares for the Year Dollar
Ended April 30, 1995 Shares Amount
- ---------------------------------------------------------------------------
<S> <C> <C>
Shares sold 5,713,906 $ 20,654,552
Shares issued to shareholders in reinvest-
ment of distributions 1,236,169 4,042,270
------------ ------------
Total issued 6,950,075 24,696,822
Shares redeemed (6,956,106) (25,023,035)
------------ ------------
Net decrease (6,031) $ (326,213)
============ ============
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended April 30, 1996 Shares Amount
- ---------------------------------------------------------------------------
<S> <C> <C>
Shares sold 31,670,575 $137,932,842
Shares issued to shareholders in reinvest-
ment of distributions 1,257,829 5,333,197
------------ ------------
Total issued 32,928,404 143,266,039
Automatic conversion of shares (274,090) (1,131,610)
Shares redeemed (11,442,314) (47,991,244)
------------ ------------
Net increase 21,212,000 $ 94,143,185
============ ============
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Class B Shares for the Year Dollar
Ended April 30, 1995 Shares Amount
- ---------------------------------------------------------------------------
<S> <C> <C>
Shares sold 14,768,466 $ 48,509,782
Shares issued to shareholders in reinvest-
ment of distributions 1,486,559 4,415,081
------------ ------------
Total issued 16,255,025 52,924,863
Automatic conversion of shares (334,825) (1,098,987)
Shares redeemed (10,719,834) (34,866,393)
------------ ------------
Net increase 5,200,366 $ 16,959,483
============ ============
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Class C Shares for the Year Dollar
Ended April 30, 1996 Shares Amount
- ---------------------------------------------------------------------------
<S> <C> <C>
Shares sold 4,706,948 $ 20,619,006
Shares issued to shareholders in reinvest-
ment of distributions 81,297 344,700
------------ ------------
Total issued 4,788,245 20,963,706
Shares redeemed (877,644) (3,793,037)
------------ ------------
Net increase 3,910,601 $ 17,170,669
============ ============
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Class C Shares for the Period Dollar
Oct. 21, 1994++ to April 30, 1995 Shares Amount
- ---------------------------------------------------------------------------
<S> <C> <C>
Shares sold 584,554 $ 1,949,867
Shares redeemed (55,563) (184,106)
------------ ------------
Net increase 528,991 $ 1,765,761
============ ============
- ---------------------------------------------------------------------------
</TABLE>
+Commencement of Operations.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Class D Shares for the Year Dollar
Ended April 30, 1996 Shares Amount
- ---------------------------------------------------------------------------
<S> <C> <C>
Shares sold 5,979,086 $ 28,807,012
Shares issued to shareholders in reinvest-
ment of distributions 85,423 396,362
Automatic conversion of shares 251,321 1,131,610
------------ ------------
Total issued 6,315,830 30,334,984
Shares redeemed (3,290,897) (15,961,832)
------------ ------------
Net increase 3,024,933 $ 14,373,152
============ ============
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Class D Shares for the Period Dollar
Oct. 21, 1994++ to April 30, 1995 Shares Amount
- ---------------------------------------------------------------------------
<S> <C> <C>
Shares sold 1,239,834 $ 4,397,052
Automatic conversion of shares 309,359 1,098,987
------------ ------------
Total issued 1,549,193 5,496,039
Shares redeemed (371,148) (1,295,525)
------------ ------------
Net increase 1,178,045 $ 4,200,514
============ ============
- ---------------------------------------------------------------------------
</TABLE>
+Commencement of Operations.
5. Commitments:
At April 30, 1996, the Company had entered into foreign exchange
contracts under which it had agreed to buy various foreign currencies
with an approximate value of $979,000.
53
<PAGE> 104
[This page is intentionally left blank.]
<PAGE> 105
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies....... 2
Healthcare............................ 2
International Diversification......... 2
Types of Portfolio Companies.......... 2
Other Factors......................... 3
Hedging Techniques.................... 4
Investment Restrictions............... 8
Management of the Company............... 11
Directors and Officers................ 11
Compensation of Directors............. 12
Advisory and Management
Arrangements........................ 13
Purchase of Shares...................... 14
Initial Sales Charge Alternatives--
Class A and Class D Shares.......... 15
Reduced Initial Sales Charges......... 17
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements........................ 20
Distribution Plans.................... 20
Limitations on the Payment of Deferred
Sales Charges....................... 20
Redemption of Shares.................... 22
Deferred Sales Charges--Class B and
Class C Shares...................... 22
Portfolio Transactions and Brokerage.... 23
Determination of Net Asset Value........ 24
Shareholder Services.................... 26
Investment Account.................... 26
Automatic Investment Plans............ 27
Reinvestment of Dividends and Capital
Gains Distributions................. 27
Systematic Withdrawal Plans--
Class A and Class D Shares.......... 27
Exchange Privilege.................... 28
Dividends, Distributions and Taxes...... 30
Tax Treatment of Options, Futures
and Forward Foreign Exchange
Transactions........................ 32
Special Rules for Certain Foreign
Currency Transactions............... 33
Performance Data........................ 34
General Information..................... 36
Description of Shares................. 36
Computation of Offering Price
per Share........................... 37
Independent Auditors.................. 38
Custodian............................. 38
Transfer Agent........................ 38
Legal Counsel......................... 38
Reports to Shareholders............... 38
Additional Information................ 38
Security Ownership of Certain
Beneficial Owners................... 39
Independent Auditors' Report............ 40
Financial Statements.................... 41
Code #10255-0896
</TABLE>
[LOGO TYPE]
MERRILL LYNCH
HEALTHCARE FUND, INC.
STATEMENT OF
ADDITIONAL
INFORMATION
August 26, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 106
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
<PAGE> 107
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for the years ended April 30, 1996,
1995, 1994 and 1993, the five-month period ended April 30, 1992,
the year ended November 30, 1991, the eight-month period ended
November 30, 1990 and each of the periods in the four-year period
ended March 31, 1987.
Contained in Part B:
Schedule of Investments as of April 30, 1996.
Statement of Assets and Liabilities as of April 30, 1996.
Statement of Operations for the year ended April 30, 1996.
Statements of Changes in Net Assets for the years ended April 30,
1996 and 1995.
Financial Highlights for the years ended April 30, 1996,
1995, 1994 and 1993, the five-month period ended April 30, 1992,
and the year ended November 30, 1991.
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------
<C> <C> <S>
1(a) -- Articles of Incorporation of Registrant, dated October 28, 1982.(b)
(b) -- Articles of Amendment to Articles of Incorporation of Registrant, dated
November 29, 1982.(b)
(c) -- Articles of Amendment to Articles of Incorporation of Registrant, dated October
3, 1988.(b)
(d) -- Articles of Amendment to Articles of Incorporation of Registrant, dated April
27, 1992.(b)
(e) -- Articles of Amendment to Articles of Incorporation of Registrant, dated October
17, 1994.(b)
(f) -- Articles Supplementary to Articles of Incorporation of Registrant, dated
October 17, 1994.(b)
2 -- By-Laws of Registrant.(b)
3 -- None.
4 -- Portions of the Articles of Incorporation and the By-Laws of the Registrant
defining the rights of holders of shares of the Registrant.(a)
5(a) -- Amended Investment Advisory Agreement between Registrant and Merrill Lynch
Asset Management.(b)
(b) -- Supplement to Investment Advisory Agreement between Registrant and Merrill
Lynch Asset Management, L.P.(d)
6(a) -- Form of Class A Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(c)
(b) -- Class B Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(a)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor,
Inc. with respect to the Merrill Lynch Mutual Fund Advisor Program.(d)
(d) -- Form of Class C Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(c)
(e) -- Form of Class D Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(c)
7 -- None.
</TABLE>
C-1
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------
<C> <C> <S>
8 -- Custody Agreement between Registrant and The Chase Manhattan Bank, N.A.(b)
9 -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Merrill Lynch Financial Data Services, Inc.(b)
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management, Inc.(b)
14 -- None.
15(a) -- Class B Shares Distribution Plan and Class B Shares Distribution Plan
Sub-Agreement of the Registrant.(e)
(b) -- Form of Class C Shares Distribution Plan and Class C Shares Distribution Plan
Sub-Agreement of the Registrant.(c)
(c) -- Form of Class D Shares Distribution Plan and Class D Shares Distribution Plan
Sub-Agreement of the Registrant.(c)
16(a) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class A Shares.(b)
(b) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class B Shares.(b)
(c) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class C Shares.(b)
(d) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class D Shares.(b)
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
18 -- Merrill Lynch Select Pricing(SM) Plan pursuant to Rule 18f-3.(f)
</TABLE>
- -------------------------
(a) Reference is made to Article V, Article VI (section 3), Article VII, Article
VIII and Article X of the Registrant's Articles of Incorporation, as
amended, filed as Exhibits 1(a), 1(b), 1(c), 1(d), 1(e) and 1(f) to the
Registration Statement; and to Article II, Article III (sections 1, 3, 5, 6,
and 17), Article VI, Article VII, Article XIII and Article XIV of the
Registrant's By-Laws filed as Exhibit 2 to the Registration Statement.
(b) Filed on August 24, 1995, as an Exhibit to Post-Effective Amendment No. 17
to Registrant's Registration Statement under the Securities Act of 1933, on
Form N-1A.
(c) Filed on October 11, 1994 as an Exhibit to Post-Effective Amendment No. 16
to Registrant's Registration Statement under the Securities Act of 1933, on
Form N-1A.
(d) Filed on August 26, 1994, as an Exhibit to Post-Effective Amendment No. 15
to Registrant's Registration Statement under the Securities Act of 1933, on
Form N-1A.
(e) Filed on August 27, 1993, as an Exhibit to Post-Effective Amendment No. 14
to Registrant's Registration Statement under the Securities Act of 1933, on
Form N-1A.
(f) 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 (File No. 2-99473),
filed on January 25, 1996.
C-2
<PAGE> 109
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any other
person.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS JULY 31, 1996
- -------------------------------------------------------------------------------- -------------
<S> <C>
Class A Common Stock, par value $0.10 per share................................. 30,305
Class B Common Stock, par value $0.10 per share................................. 27,100
Class C Common Stock, par value $0.10 per share................................. 4,095
Class D Common Stock, par value $0.10 per share................................. 2,608
</TABLE>
Note: The numbers of holders shown above 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 Registrant's Articles of Incorporation,
Article VI of 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 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.
Each officer and director of the Registrant claiming indemnification within
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in connection
with proceedings to which he is a party in the manner and to the full extent
permitted under the General Laws of the State of Maryland; provided, however,
that the person seeking indemnification shall provide to the Registrant a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Registrant has been met and a written
undertaking to repay any such advance, if it should ultimately be determined
that the standard of conduct has not been met, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Registrant for his undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; or (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at the
time the advance is proposed to be made, that there is reason to believe that
the person seeking indemnification will ultimately be found to be entitled to
indemnification.
C-3
<PAGE> 110
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, make advances 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.
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 INVESTMENT ADVISER.
Merrill Lynch Asset Management, L.P. ("MLAM" or the "Investment Adviser"),
acts as investment adviser for the following open-end investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill
Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch Institutional Intermediate Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement
Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global
Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill
Lynch Variable Series Funds, Inc.; and for the following closed-end investment
companies: Convertible Holdings, Inc., Merrill
C-4
<PAGE> 111
Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Senior Floating Rate
Fund, Inc. and Merrill Lynch Municipal Strategy Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund Accumulation
Program, Inc.; and for the following closed-end investment companies: Apex
Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund
II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured 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 Insured Fund II, 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 New York Insured
Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and Worldwide
DollarVest Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch Funds
for Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Investment Adviser, FAM, Merrill Lynch Funds Distributor, Inc. ("MLFD"),
Princeton Services, Inc. ("Princeton Services") and Princeton Administrators
L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Merrill
Lynch & Co., Inc. ("ML & Co.") is World Financial Center, North Tower, 250 Vesey
Street, New York, New York 10281. The address of Merrill Lynch Financial Data
Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
C-5
<PAGE> 112
Set forth below is a list of each executive officer and director 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 May 1, 1993 for his or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the preceding paragraphs and Messrs.
Giordano, Harvey, Kirstein and Monagle are directors, trustees or officers of
one or more of such companies.
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH PROFESSION, VOCATION
NAME INVESTMENT ADVISER OR EMPLOYMENT
- ------------------------------ ------------------------ -------------------------------------
<S> <C> <C>
ML & Co....................... Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services............ General Partner General Partner of FAM
Arthur Zeikel................. President and Director President of FAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.
Terry K. Glenn................ Executive Vice President Executive Vice President of FAM;
Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton
Administrators, L.P.
Vincent R. Giordano........... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Elizabeth Griffin............. Senior Vice President Senior Vice President of FAM
Norman R. Harvey.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel........ Senior Vice President Senior Vice President of FAM
N. John Hewitt................ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein............ Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of FAM; Senior
Secretary Vice President, General Counsel,
Director and Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss............... Senior Vice President Senior Vice President and Controller
and Controller of FAM; Senior Vice President and
Controller of Princeton Services
Stephen M. M. Miller.......... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Michael L. Quinn.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989
to 1995.
Richard L. Reller............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
C-6
<PAGE> 113
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH PROFESSION, VOCATION
NAME INVESTMENT ADVISER OR EMPLOYMENT
- ------------------------------ ------------------------ -------------------------------------
<S> <C> <C>
Gerald M. Richard............. Senior Vice President Senior Vice President and Treasurer
and Treasurer of FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Ronald L. Welburn............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman............... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., and the Municipal Fund
Accumulation Program, Inc., and MLFD also acts as the principal underwriter for
the following closed-end investment companies: Merrill Lynch High Income
Municipal Bond Program, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Aldrich,
Brady, Breen, Crook, Fatseas, and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- ------------------------------ ------------------------------------- ------------------------
<S> <C> <C>
Terry K. Glenn................ President and Director Executive Vice President
Arthur Zeikel................. Director President and Director
Philip L. Kirstein............ Director Senior Vice President
William E. Aldrich............ Senior Vice President None
Robert W. Crook............... Senior Vice President None
Kevin P. Boman................ Vice President None
Michael J. Brady.............. Vice President None
William M. Breen.............. Vice President None
Mark A. DeSario............... Vice President None
James T. Fatseas.............. Vice President None
Michelle T. Lau............... Vice President None
Debra W. Landsman-Yaros....... Vice President None
Gerald M. Richard............. Vice President and Treasurer Treasurer
Salvatore Venezia............. Vice President None
William Wasel................. Vice President None
Robert Harris................. Secretary Secretary
</TABLE>
(c) Not applicable.
C-7
<PAGE> 114
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of the Registrant, 800 Scudders Mill
Road, Plainsboro, New Jersey 08536, and its transfer agent, Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Company--Advisory and Management Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management of the
Company--Advisory and Management Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, Registrant is not
a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of the Registrant's latest annual report to shareholders, upon
request and without charge.
C-8
<PAGE> 115
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 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 23RD DAY
OF AUGUST 1996.
Merrill Lynch Healthcare Fund, Inc.
(Registrant)
By /s/ ARTHUR ZEIKEL
---------------------------------
(Arthur Zeikel, President)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATE(S) INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------- ------------------
<C> <S> <C>
/s/ ARTHUR President and Director
ZEIKEL (Principal Executive
- --------------------------------------------- Officer)
(Arthur Zeikel)
GERALD M. RICHARD* Treasurer (Principal
- --------------------------------------------- Financial and
(Gerald M. Richard) Accounting Officer)
DONALD Director
CECIL*
- ---------------------------------------------
(Donald Cecil)
EDWARD H. MEYER* Director
- ---------------------------------------------
(Edward H. Meyer)
CHARLES C. Director
REILLY*
- ---------------------------------------------
(Charles C. Reilly)
RICHARD R. Director
WEST*
- ---------------------------------------------
(Richard R. West)
EDWARD D. ZINBARG* Director
- ---------------------------------------------
(Edward D. Zinbarg)
*By /s/ ARTHUR ZEIKEL August 23, 1996
- ---------------------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-9
<PAGE> 116
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------------------------------------------------------------
<S> <C> <C> <C>
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
</TABLE>
C-10
<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Healthcare Fund, Inc.
We consent to the use in Post-Effective Amendment No. 18 to Registration
Statement No. 2-80150 of our report dated June 6, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
August 26, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000709140
<NAME> MERRILL LYNCH HEALTHCARE FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 341,400,212
<INVESTMENTS-AT-VALUE> 387,081,548
<RECEIVABLES> 5,292,336
<ASSETS-OTHER> 706,707
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 393,080,671
<PAYABLE-FOR-SECURITIES> 5,614,903
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,644,792
<TOTAL-LIABILITIES> 11,259,695
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 304,055,795
<SHARES-COMMON-STOCK> 25,046,900
<SHARES-COMMON-PRIOR> 18,269,048
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,081,227
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 45,683,954
<NET-ASSETS> 132,082,857
<DIVIDEND-INCOME> 2,109,795
<INTEREST-INCOME> 1,087,600
<OTHER-INCOME> 0
<EXPENSES-NET> (5,148,765)
<NET-INVESTMENT-INCOME> (1,951,370)
<REALIZED-GAINS-CURRENT> 45,694,034
<APPREC-INCREASE-CURRENT> 34,582,479
<NET-CHANGE-FROM-OPS> 78,325,143
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (4,033,407)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,277,222
<NUMBER-OF-SHARES-REDEEMED> (4,237,137)
<SHARES-REINVESTED> 737,767
<NET-CHANGE-IN-ASSETS> 226,483,906
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (875,322)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,441,908
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,148,765
<AVERAGE-NET-ASSETS> 96,903,673
<PER-SHARE-NAV-BEGIN> 3.81
<PER-SHARE-NII> (.01)
<PER-SHARE-GAIN-APPREC> 1.67
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.20)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.27
<EXPENSE-RATIO> 1.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000709140
<NAME> MERRILL LYNCH HEALTHCARE FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 341,400,212
<INVESTMENTS-AT-VALUE> 387,081,548
<RECEIVABLES> 5,292,336
<ASSETS-OTHER> 706,787
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 393,080,671
<PAYABLE-FOR-SECURITIES> 5,614,903
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,644,792
<TOTAL-LIABILITIES> 11,259,695
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 304,055,795
<SHARES-COMMON-STOCK> 44,376,140
<SHARES-COMMON-PRIOR> 23,164,140
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,081,227
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 45,683,954
<NET-ASSETS> 207,412,885
<DIVIDEND-INCOME> 2,109,795
<INTEREST-INCOME> 1,087,600
<OTHER-INCOME> 0
<EXPENSES-NET> (5,148,765)
<NET-INVESTMENT-INCOME> (1,951,370)
<REALIZED-GAINS-CURRENT> 45,694,034
<APPREC-INCREASE-CURRENT> 34,582,479
<NET-CHANGE-FROM-OPS> 78,325,143
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (5,976,897)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 31,670,575
<NUMBER-OF-SHARES-REDEEMED> (11,716,404)
<SHARES-REINVESTED> 1,257,829
<NET-CHANGE-IN-ASSETS> 226,483,906
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (875,322)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,441,908
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,148,765
<AVERAGE-NET-ASSETS> 126,428,694
<PER-SHARE-NAV-BEGIN> 3.43
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> 1.49
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.20)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.67
<EXPENSE-RATIO> 2.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000709140
<NAME> MERRILL LYNCH HEALTHCARE FUND, INC.
<SERIES>
<NUMBER> 003
<NAME> CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 341,400,212
<INVESTMENTS-AT-VALUE> 387,081,548
<RECEIVABLES> 5,292,336
<ASSETS-OTHER> 706,787
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 393,080,671
<PAYABLE-FOR-SECURITIES> 5,614,903
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,644,792
<TOTAL-LIABILITIES> 11,259,695
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 304,055,795
<SHARES-COMMON-STOCK> 4,439,592
<SHARES-COMMON-PRIOR> 528,991
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,081,227
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 45,683,954
<NET-ASSETS> 20,761,603
<DIVIDEND-INCOME> 2,109,795
<INTEREST-INCOME> 1,087,600
<OTHER-INCOME> 0
<EXPENSES-NET> (5,148,765)
<NET-INVESTMENT-INCOME> (1,951,370)
<REALIZED-GAINS-CURRENT> 45,694,034
<APPREC-INCREASE-CURRENT> 34,582,479
<NET-CHANGE-FROM-OPS> 78,325,143
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (376,208)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,706,948
<NUMBER-OF-SHARES-REDEEMED> (877,644)
<SHARES-REINVESTED> 81,297
<NET-CHANGE-IN-ASSETS> 226,483,906
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (875,322)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,441,908
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,148,765
<AVERAGE-NET-ASSETS> 8,264,970
<PER-SHARE-NAV-BEGIN> 3.43
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> 1.50
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.20)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.68
<EXPENSE-RATIO> 2.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000709140
<NAME> MERRILL LYNCH HEALTHCARE FUND, INC.
<SERIES>
<NUMBER> 004
<NAME> CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 341,400,212
<INVESTMENTS-AT-VALUE> 387,081,548
<RECEIVABLES> 5,292,336
<ASSETS-OTHER> 706,787
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<TOTAL-ASSETS> 393,080,671
<PAYABLE-FOR-SECURITIES> 5,614,903
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,644,792
<TOTAL-LIABILITIES> 11,259,695
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 304,055,795
<SHARES-COMMON-STOCK> 4,202,978
<SHARES-COMMON-PRIOR> 1,178,045
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,081,227
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 45,683,954
<NET-ASSETS> 21,563,631
<DIVIDEND-INCOME> 2,109,795
<INTEREST-INCOME> 1,087,600
<OTHER-INCOME> 0
<EXPENSES-NET> (5,148,765)
<NET-INVESTMENT-INCOME> (1,951,370)
<REALIZED-GAINS-CURRENT> 45,694,034
<APPREC-INCREASE-CURRENT> 34,582,479
<NET-CHANGE-FROM-OPS> 78,325,143
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (455,478)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,230,407
<NUMBER-OF-SHARES-REDEEMED> (3,290,897)
<SHARES-REINVESTED> 85,423
<NET-CHANGE-IN-ASSETS> 226,483,906
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (875,322)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,441,908
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,148,765
<AVERAGE-NET-ASSETS> 10,762,824
<PER-SHARE-NAV-BEGIN> 3.72
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> 1.63
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.20)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.13
<EXPENSE-RATIO> 1.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
