<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1998
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. [_]
[X]
Post-Effective Amendment No. 20
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
Amendment No. 21
(Check appropriate box or boxes)
----------------
MERRILL LYNCH HEALTHCARE FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH 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:
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.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[X]immediately upon filing pursuant to paragraph (b)
[_]on (date) pursuant to paragraph (b)
[_]60 days after filing pursuant to paragraph (a)(1)
[_]on (date) pursuant to paragraph (a)(1)
[_]75 days after filing pursuant to paragraph (a)(2)
[_]on (date) pursuant to paragraph (a)(2) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: Shares of Common Stock, par value
$.10 per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH 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
Item 3. Condensed Financial Information...... Financial Highlights; Performance Data
Item 4. General Description of Registrant.... Risk Factors and Special
Considerations; 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; Merrill Lynch Select
PricingSM System; 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; Shareholder
Services
Item 9. Pending Legal Proceedings............ Not Applicable
PART B
Item 10. Cover Page........................... Cover Page
Item 11. Table of Contents.................... Back Cover Page
Item 12. General Information and History...... General Information
Item 13. Investment 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
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
JULY 29, 1998
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 that seeks 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 Pricing SM 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 (the
"Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609) 282-
2800], or from securities dealers that have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"). The Distributor is a division of
Princeton Funds Distributor, Inc. The minimum initial purchase is $1,000, and
the minimum subsequent purchase is $50, except that for retirement plans the
minimum initial purchase is $100 and the minimum subsequent purchase is $1,
and for participants in certain fee-based programs, the minimum initial
purchase is $250 and the minimum subsequent purchase is $50. Merrill Lynch may
charge its customers a processing fee (presently $5.35) for confirming
purchases and repurchases. Purchases and redemptions made directly through
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent") are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the 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 July 29, 1998 (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 Commission maintains a
Web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information
regarding the Company. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
----------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
<PAGE>
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 None(d) 4.0% during the first year, 1.0% for one None(d)
original purchase decreasing 1.0% annually year(f)
price or redemption thereafter to 0.0% after the
proceeds, whichever is fourth year(e)
lower)................
Exchange Fee........... None None None None
ANNUAL COMPANY OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS)
Investment Advisory
Fees(g)............... 1.00% 1.00% 1.00% 1.00%
12b-1 Fees(h):
Account Maintenance
Fees.................. None 0.25% 0.25% 0.25%
Distribution Fees...... None 0.75% 0.75% None
(Class B shares convert to
Class D shares automatically
after approximately eight
years and cease being subject
to distribution fees)
Other Expenses:
Shareholder Servicing
Costs(i).............. 0.19% 0.22% 0.24% 0.19%
Other.................. 0.13% 0.13% 0.12% 0.12%
----- ----- ----- -----
Total Other Expenses.. 0.32% 0.35% 0.36% 0.31%
----- ----- ----- -----
Total Company Operating
Expenses.............. 1.32% 2.35% 2.36% 1.56%
===== ===== ===== =====
</TABLE>
- --------
(a) Class A shares are sold to a limited group of investors including
existing Class A shareholders, certain retirement plans and participants
in certain fee-based programs. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares"--page 25 and
"Shareholder Services--Fee-Based Programs"--page 38.
(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
fee-based programs. Class A or Class D purchases of $1,000,000 or more
may not be subject to an initial sales charge. See "Purchase of Shares--
Initial Sales Charge Alternatives--Class A and Class D Shares"--page 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 that
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. A
0.75% sales charge for 401(k) purchases over $1,000,000 will apply. See
"Shareholder Services--Fee-Based Programs"--page 38.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 38.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 38.
(g) See "Management of the Company--Advisory and Management Arrangements"--
page 21.
(h) See "Purchase of Shares--Distribution Plans"--page 31.
(i) See "Management of the Company--Transfer Agency Services"--page 23.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including the maximum
$52.50 initial sales charge (Class A and
Class D shares only) and assuming (1) the
Total 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
(including any applicable CDSC for Class B
and Class C shares):
Class A..................................... $65 $92 $121 $203
Class B..................................... $64 $93 $126 $250*
Class C..................................... $34 $74 $126 $270
Class D..................................... $68 $99 $133 $228
An investor would pay the following expenses
on the same $1,000 investment assuming no
redemption at the end of the period:
Class A..................................... $65 $92 $121 $203
Class B..................................... $24 $73 $126 $250*
Class C..................................... $24 $74 $126 $270
Class D..................................... $68 $99 $133 $228
</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
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Transfer Agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares."
MERRILL LYNCH SELECT PRICING SM SYSTEM
The Company offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more than 50 registered investment companies advised by Merrill Lynch Asset
Management, L.P. ("MLAM" or the
3
<PAGE>
"Investment Adviser") or its affiliate, Fund Asset Management, L.P. ("FAM").
Funds advised by MLAM or FAM that utilize the Merrill Lynch Select Pricing SM
System are referred to herein as "MLAM- advised mutual funds."
Each Class A, Class B, Class C or Class D share of the 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 CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, and 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 nor 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 CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the
Company. The distribution-related revenues paid with respect to one 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 or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase
of Shares."
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ---------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Maximum 5.25% No No No
initial sales
A charge(/2/)(/3/)
- ---------------------------------------------------------------------------
B CDSC for a period 0.25% 0.75% B shares convert to
of four years, at D shares automatically
a rate of 4.0% after approximately
during the first eight years(/5/)
year, decreasing
1.0% annually to
0.0%(/4/)
- ---------------------------------------------------------------------------
1.0% CDSC for one 0.25% 0.75% No
C year(/6/)
- ---------------------------------------------------------------------------
D Maximum 5.25% 0.25% No No
initial sales
charge(/3/)
</TABLE>
(footnotes on next page)
4
<PAGE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. See "Class
A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the 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 in that account. Other eligible investors include
certain retirement plans and participants in certain fee-based
programs. In addition, Class A shares will be offered at net asset
value to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries
(the term "subsidiaries," when used herein with respect to ML & Co.,
includes MLAM, 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 of 5.25% is reduced for purchases of
$25,000 and over, and waived for purchases by certain retirement
plans and participants in connection with certain fee-based programs.
Purchases of $1,000,000 or more may not be subject to an initial
sales charge but if the initial sales charge is waived, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. A 0.75% sales charge for 401(k)
purchases over $1,000,000 will apply. Sales charges also are reduced
under a right of accumulation that takes into account the investor's
holdings of all classes of all MLAM-advised mutual funds. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and
Class D Shares."
Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Company's average net
assets attributable to Class B shares, as well as a CDSC if they are
redeemed within four years of purchase. Such CDSC may be modified in
connection with certain fee-based programs. Approximately eight years
after issuance, Class B shares will convert automatically into Class
D shares of the 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
5
<PAGE>
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 1.0% CDSC if they are redeemed within one year after purchase.
Such CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B shares), Class C shares have no
conversion feature and, accordingly, an investor who purchases Class C
shares will be subject to distribution fees that will be imposed on
Class C shares for an indefinite period subject to annual approval by
the Company's Board of Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
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. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived, such purchases may be subject to a 1.0% CDSC
if the shares are redeemed within one year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. 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
fee-based programs. Class D shares also will be issued upon conversion
of Class B shares as described above under "Class B." See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares."
The following is a discussion of the factors that an investor 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 or her
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the CDSCs imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their
6
<PAGE>
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 that may qualify the investor for reduced initial sales charges
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class
C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the 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 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>
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, 1998 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 FOR THE
FIVE- EIGHT-
MONTH FOR THE MONTH
PERIOD YEAR PERIOD
FOR THE YEAR ENDED APRIL 30, ENDED ENDED ENDED
----------------------------------------------------------- APRIL 30, NOV. 30, NOV. 30,
1998+ 1997+ 1996+ 1995+ 1994+ 1993 1992+++ 1991 1990++
-------- -------- -------- ------- ------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.............. $ 5.05 $ 5.27 $ 3.81 $ 3.87 $ 3.59 $ 3.63 $ 9.19 $ 7.94 $ 9.13
-------- -------- -------- ------- ------- ------- ------- -------- --------
Investment income
(loss)--net......... (.02) .02 (.01) (.01) (.02) .02 -- .03 .05
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions-- net.. 2.02 .40 1.67 .22 .31 (.06) .88 2.08 (.75)
-------- -------- -------- ------- ------- ------- ------- -------- --------
Total from
investment
operations.......... 2.00 .42 1.66 .21 .29 (.04) .88 2.11 (.70)
-------- -------- -------- ------- ------- ------- ------- -------- --------
Less dividends and
distributions:
Return of capital--
net................. -- -- -- -- -- -- (3.97) -- --
Investment income--
net................. -- -- -- -- (.01) -- -- (.03) (.08)
Realized gain on
investments--net.... (1.21) (.64) (.20) (.27) -- -- (2.47) (.83) (.41)
-------- -------- -------- ------- ------- ------- ------- -------- --------
Total dividends and
distributions....... (1.21) (.64) (.20) (.27) (.01) -- (6.44) (.86) (.49)
-------- -------- -------- ------- ------- ------- ------- -------- --------
Net asset value, end
of period........... $ 5.84 $ 5.05 $ 5.27 $ 3.81 $ 3.87 $ 3.59 $ 3.63 $ 9.19 $ 7.94
======== ======== ======== ======= ======= ======= ======= ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share..... 44.06% 8.55% 44.01% 6.47% 8.19% (1.10%) 10.96%# 29.44% (8.75%)#
======== ======== ======== ======= ======= ======= ======= ======== ========
RATIOS TO AVERAGE
NET ASSETS:
Expenses............ 1.32% 1.40% 1.53% 1.79% 1.55% 1.85% 1.56%* 1.61% 1.77%*
======== ======== ======== ======= ======= ======= ======= ======== ========
Investment income
(loss)--net......... (.28%) .32% (.23%) (.21%) (.48%) .48% (.16%)* .27% .62%*
======== ======== ======== ======= ======= ======= ======= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands).......... $146,154 $121,529 $132,083 $69,650 $70,753 $63,528 $61,132 $125,979 $114,852
======== ======== ======== ======= ======= ======= ======= ======== ========
Portfolio turnover.. 115.99% 125.94% 133.50% 196.91% 133.58% 103.06% 147.63% 206.29% 159.11%
======== ======== ======== ======= ======= ======= ======= ======== ========
Average commission
rate paid##......... $ .0775 $ .0803 $ .0977 -- -- -- -- -- --
======== ======== ======== ======= ======= ======= ======= ======== ========
<CAPTION>
FOR THE YEAR
ENDED MARCH 31,
-------------------
1990 1989
--------- ---------
<S> <C> <C>
INCREASE (DECREASE)
IN NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.............. $ 9.61 $ 10.55
--------- ---------
Investment income
(loss)--net......... .05 .15
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions-- net.. .96 (.12)
--------- ---------
Total from
investment
operations.......... 1.01 .03
--------- ---------
Less dividends and
distributions:
Return of capital--
net................. -- --
Investment income--
net................. (.07) (.15)
Realized gain on
investments--net.... (1.42) (.82)
--------- ---------
Total dividends and
distributions....... (1.49) (.97)
--------- ---------
Net asset value, end
of period........... $ 9.13 $ 9.61
========= =========
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share..... 11.36% 0.36%
========= =========
RATIOS TO AVERAGE
NET ASSETS:
Expenses............ 1.61% 1.46%
========= =========
Investment income
(loss)--net......... .78% 1.07%
========= =========
SUPPLEMENTAL DATA:
Net assets, end of
period (in
thousands).......... $140,635 $170,742
========= =========
Portfolio turnover.. 122.57% 113.85%
========= =========
Average commission
rate paid##......... -- --
========= =========
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
++ 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. The "Average commission rate paid"
includes commissions paid in foreign currencies, which have been converted
into U.S. dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------------------
FOR THE
FIVE- FOR THE
FOR THE MONTH++++ EIGHT-
YEAR ENDED PERIOD FOR THE MONTH+++ FOR THE
APRIL 30, ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
------------------------------------------------------------ APRIL 30, NOV. 30, NOV. 30, MARCH 31,
1998+ 1997+ 1996+ 1995+ 1994+ 1993+ 1992+ 1991 1990 1990+
-------- -------- -------- ------- ------- ------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE
(DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $ 4.40 $ 4.67 $ 3.43 $ 3.55 $ 3.31 $ 3.38 $ 9.01 $ 7.84 $ 9.05 $ 9.57
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Investment
loss--net....... (.06) (.03) (.05) (.04) (.05) (.01) (.02) (.03) (.01) (.06)
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--
net............. 1.72 .35 1.49 .19 .29 (.06) .83 2.03 (.75) .97
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Total from
investment
operations...... 1.66 .32 1.44 .15 .24 (.07) .81 2.00 (.76) .91
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Less dividends
and
distributions:
Return of
capital--net.... -- -- -- -- -- -- (3.97) -- -- --
Investment
income--net..... -- -- -- -- -- -- -- -- (.04) (.01)
Realized gain on
investments--
net............. (1.15) (.59) (.20) (.27) -- -- (2.47) (.83) (.41) (1.42)
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Total dividends
and
distributions... (1.15) (.59) (.20) (.27) -- -- (6.44) (.83) (.45) (1.43)
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Net asset value,
end of period... $ 4.91 $ 4.40 $ 4.67 $ 3.43 $ 3.55 $ 3.31 $ 3.38 $ 9.01 $ 7.84 $ 9.05
======== ======== ======== ======= ======= ======= ====== ====== ====== ======
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 42.60% 7.44% 42.46% 5.29% 7.25% (2.07%) 10.26%# 28.30% (9.37%)# 10.23%
======== ======== ======== ======= ======= ======= ====== ====== ====== ======
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... 2.35% 2.44% 2.55% 2.85% 2.56% 2.89% 2.58%* 2.63% 2.82%* 2.60%
======== ======== ======== ======= ======= ======= ====== ====== ====== ======
Expenses........ 2.35% 2.44% 2.55% 2.85% 2.56% 2.89% 2.58%* 2.63% 2.82%* 2.68%
======== ======== ======== ======= ======= ======= ====== ====== ====== ======
Investment
loss--net....... (1.31%) (.72%) (1.24%) (1.29%) (1.52%) (.41%) (1.02%)* (.79%) (.36%)* (.31%)
======== ======== ======== ======= ======= ======= ====== ====== ====== ======
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $208,520 $178,025 $207,413 $79,485 $63,692 $33,071 $5,356 $6,007 $3,222 $2,412
======== ======== ======== ======= ======= ======= ====== ====== ====== ======
Portfolio
turnover........ 115.99% 125.94% 133.50% 196.91% 133.58% 103.06% 147.63% 206.29% 159.11% 122.57%
======== ======== ======== ======= ======= ======= ====== ====== ====== ======
Average
commission rate
paid##.......... $ .0775 $ .0803 $ .0977 -- -- -- -- -- -- --
======== ======== ======== ======= ======= ======= ====== ====== ====== ======
<CAPTION>
FOR THE
PERIOD
OCT. 21,
1988++ TO
MARCH 31,
1989+
-----------
<S> <C>
INCREASE
(DECREASE) IN
NET ASSET VALUE:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period.......... $10.24
-----------
Investment
loss--net....... (.02)
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--
net............. (.06)
-----------
Total from
investment
operations...... (.08)
-----------
Less dividends
and
distributions:
Return of
capital--net.... --
Investment
income--net..... (.06)
Realized gain on
investments--
net............. (.53)
-----------
Total dividends
and
distributions... (.59)
-----------
Net asset value,
end of period... $ 9.57
===========
TOTAL INVESTMENT
RETURN:**
Based on net
asset value per
share........... 2.43%#
===========
RATIOS TO
AVERAGE NET
ASSETS:
Expenses, net of
reimbursement... 2.38%*
===========
Expenses........ 2.38%*
===========
Investment
loss--net....... (.33%)*
===========
SUPPLEMENTAL
DATA:
Net assets, end
of period (in
thousands)...... $ 342
===========
Portfolio
turnover........ 113.85%
===========
Average
commission rate
paid##.......... --
===========
</TABLE>
- ----
+ Based on average shares outstanding.
++ 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 effects 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. The "Average commission rate paid"
includes commissions paid in foreign currencies, which have been
converted into U.S. dollars using the prevailing exchange rate on the
date of the transaction. Such conversions may significantly affect the
rate shown.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
<TABLE>
<CAPTION>
CLASS C++ CLASS D++
-------------------------------------------- ---------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR OCTOBER 21, FOR THE YEAR OCTOBER 21,
ENDED APRIL 30, 1994+ ENDED APRIL 30, 1994+
--------------------------- TO APRIL 30, ---------------------------- TO APRIL 30,
1998 1997 1996 1995 1998 1997 1996 1995
------- ------- ------- -------------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 4.40 $ 4.68 $ 3.43 $ 3.27 $ 4.89 $ 5.13 $ 3.72 $ 3.61
------- ------- ------- ------ ------- ------- ------- ------
Investment income
(loss)--net............. (.06) (.04) (.05) (.04) (.03) --### (.02) (.02)
Realized and unrealized
gain on investments and
foreign currency
transactions--net....... 1.73 .35 1.50 .20 1.95 .39 1.63 .13
------- ------- ------- ------ ------- ------- ------- ------
Total from investment
operations.............. 1.67 .31 1.45 .16 1.92 .39 1.61 .11
------- ------- ------- ------ ------- ------- ------- ------
Less distributions from
realized gain on
investments--net........ (1.15) (.59) (.20) -- (1.19) (.63) (.20) --
------- ------- ------- ------ ------- ------- ------- ------
Net asset value, end of
period.................. $ 4.92 $ 4.40 $ 4.68 $ 3.43 $ 5.62 $ 4.89 $ 5.13 $ 3.72
======= ======= ======= ====== ======= ======= ======= ======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 42.66% 7.28% 42.76% 4.89%# 43.95% 8.11% 43.74% 3.05%#
======= ======= ======= ====== ======= ======= ======= ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 2.36% 2.46% 2.52% 3.28%* 1.56% 1.65% 1.75% 2.44%*
======= ======= ======= ====== ======= ======= ======= ======
Investment income
(loss)--net............. (1.31%) (.76%) (1.19%) (2.13%)* (.52%) .06% (.44%) (1.23%)*
======= ======= ======= ====== ======= ======= ======= ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $19,860 $17,762 $20,761 $1,816 $25,718 $18,318 $21,564 $4,386
======= ======= ======= ====== ======= ======= ======= ======
Portfolio turnover...... 115.99% 125.94% 133.50% 196.91% 115.99% 125.94% 133.50% 196.91%
======= ======= ======= ====== ======= ======= ======= ======
Average commission rate
paid##.................. $ .0775 $ .0803 $ .0977 -- $ .0775 $ .0803 $ .0977 --
======= ======= ======= ====== ======= ======= ======= ======
</TABLE>
- ----
+ Commencement of Operations.
++ Based on average shares outstanding.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Company is
required to disclose its average commission rate per share for purchases
and sales of equity securities. The "Average commission rate paid"
includes commissions paid in foreign currencies, which have been converted
into U.S. dollars using the prevailing exchange rate on the date of the
transaction. Such conversions may significantly affect the rate shown.
### Amount is less than $.01 per share.
10
<PAGE>
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. The Company may invest heavily in securities
denominated or quoted in currencies other than the U.S. dollar, and 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 those currencies 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 Commission's
reporting requirements.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments that could affect 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.
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
11
<PAGE>
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 that 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 because of the higher expenses incurred by the Company, in
such areas as custodial costs and advisory fees. 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% 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. The suitability for any particular investor of a purchase of
shares of the Company will depend upon, among other things, such investor's
investment objectives and such investor's ability to accept the risks of
investing in such industries and markets including the risk of loss of
principal.
12
<PAGE>
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. Thus, 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% 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 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,
prevailing market or economic conditions warrant.
13
<PAGE>
The Company also may invest in securities subject to repurchase agreements
with banks or securities firms if the underlying securities are those that
otherwise qualify for investment by the Company and if, as a result thereof,
not more than 15% of the Company's 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, the market value of such ADRs may not
reflect such information.
HEDGING TECHNIQUES
The Company may engage in various 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 engage in
hedging activities only 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
engage in these transactions only 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 on or before a specified future date and at a specified
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 prior to
14
<PAGE>
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 (premiums paid) of all outstanding options on
securities held by the Company would exceed 5% of the market value of the
Company's total assets.
Stock or Other Financial Index Options and Futures. The Company is
authorized to engage in transactions in stock or other financial index options
and futures (including futures on government bonds), and related options on
such futures. The Company may purchase or write put and call options on stock
or other financial indices to hedge against the risks of market-wide stock
price movements in the securities in which the Company invests. Options on
indices are similar to options on securities except that on settlement, the
parties to the contract pay or receive an amount of cash equal to the
difference between the closing value of the index on the relevant valuation
date and the exercise price of the option times a specified multiple. The
Company may invest in stock or other financial 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 or other financial index
futures contracts and financial futures contracts ("futures contracts") as a
hedge against adverse changes in the market value of its portfolio securities
as described below. A futures contract is an agreement between two parties
that obligates the purchaser of the futures contract to buy and the seller of
a futures contract to sell a security for a set price on a future date. Unlike
most other futures contracts, a stock index futures contract does not require
actual delivery of securities but results in cash settlement based upon the
difference in value of the index between the time the contract was entered
into and the time of its settlement. The 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 any particular 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
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long futures position, whether the long position is the purchase of a futures
contract or the 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 is also authorized to purchase and write call and put options on
futures contracts including financial futures and stock indices in connection
with its hedging activities. Generally, these strategies 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
("OTC") foreign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions 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
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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.
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 (up to one year) 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 bank will place cash or liquid
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 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 contract is unleveraged.
Restrictions on OTC Options. The Company will engage in OTC options,
including OTC stock index options, OTC foreign currency options and options on
foreign currency futures, only with member banks of the Federal Reserve System
and primary dealers in 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
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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% 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. Government securities dealer
recognized by the Federal Reserve Bank of New York and if 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 that 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 that 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.
There can be no assurance that a liquid secondary market for options or
futures traded on an exchange or in the OTC 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 that any person may trade on a particular trading day. The
Investment Adviser does not
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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.
OTHER INVESTMENT PRACTICES
Non-Diversified Status. The Company is classified as non-diversified within
the meaning of the Investment Company Act of 1940, as amended (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 for the special tax treatment afforded a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Additional Information--Taxes." 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 that 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.
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 (i) a
broker which is an affiliated person of the Company, (ii) a broker which is an
affiliated person of such an affiliated person and (iii) 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. 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. The portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular
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fiscal year by the monthly average of the value of the portfolio securities
owned by the Company during the particular fiscal year. A high portfolio
turnover rate involves certain tax consequences and greater transaction costs
in the form of dealer spreads and brokerage commissions, which are borne
directly by the 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
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. These 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 that
cannot be readily resold because of legal or contractual restrictions or that
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 the Company's total assets
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 that 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.
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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.
The Directors of the Company are:
Arthur Zeikel*--Chairman of the Investment Adviser and its affiliate, FAM;
Chairman and Director of Princeton Services, Inc. ("Princeton Services"); and
Executive Vice President of ML & Co.
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.
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* 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 Asset Management Group of ML & Co. (which
includes the Investment Adviser), acts as the investment adviser to more than
100 registered investment companies and offers portfolio management services
to individuals and institutions. As of June 1998, the Asset Management Group
had a total of approximately $489 billion in investment company and other
portfolio assets under management. This amount includes assets managed for
certain affiliates of the Investment Adviser.
The Investment Adviser receives compensation at the annual rate of 1.0% of
the average daily net assets of the Company. This fee is higher than those of
many other mutual funds, but the Company believes it is justified by the
special investment focus of the Company. For the fiscal year ended April 30,
1998, the fee paid by the Company to the Investment Adviser was $3,524,780
(based on average daily net assets of approximately $352.5 million).
The Company has entered into an investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement"). The Investment
Advisory Agreement provides that subject to the direction
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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 all the
office space, facilities, equipment and personnel necessary for management of
the Company.
The Investment Adviser has also entered into a sub-advisory agreement with
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), a wholly owned,
indirect subsidiary of ML & Co. and an affiliate of the Investment Adviser,
pursuant to which the Investment Adviser pays MLAM U.K. a fee for providing
investment advisory services to the Investment Adviser with respect to the
Company computed at an annual rate to be determined from time to time between
the Investment Adviser and MLAM U.K., but in no event in excess of the amount
the Investment Adviser actually receives for providing services to the Company
pursuant to the Investment Advisory Agreement. MLAM U.K. has offices at Milton
Gate, 1 Moor Lane, London EC2Y 9HA, England. For the fiscal year ended April
30, 1998, the Investment Adviser paid MLAM U.K. no fee pursuant to the sub-
advisory agreement.
Jordan C. Schreiber, Senior Vice President of the Company, is the Company's
Portfolio Manager. Mr. Schreiber has been a First Vice President of the
Investment Adviser since 1997, a Vice President thereof from 1983 to 1997, and
a Portfolio Manager thereof since 1983. Mr. Schreiber has been primarily
responsible for the day-to-day management of the Company's investment
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 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, 1998, the Company reimbursed
the Investment Adviser $77,706 for accounting services. For the same period,
the ratio of total expenses to average net assets was 1.32% for Class A
shares, 2.35% for Class B shares, 2.36% for Class C shares and 1.56% 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 that incorporates the Code of Ethics
of the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Company within periods of trading by the Company in the same (or
equivalent) security (15 or 30 days depending upon the transaction).
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TRANSFER AGENCY SERVICES
The Transfer Agent, which is a 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 an annual fee of up to $11.00 per Class
A or Class D account and up to $14.00 per Class B or Class C account and is
entitled to reimbursement for certain transaction charges and out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts that close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing a beneficial
interest of a person in the relevant share class or a record keeping system,
provided the record keeping system is maintained by a subsidiary of ML & Co.
For the fiscal year ended April 30, 1998, the Company paid the Transfer Agent
$747,398 pursuant to the Transfer Agency Agreement.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the distributor of the shares of the 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,
and for participants in certain fee-based programs, the minimum initial
purchase is $250 and the minimum subsequent purchase is $50.
The Company offers its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
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 $5.35) to
confirm a sale of shares to such customers. Purchases made directly through
the Transfer Agent are not subject to the processing fee.
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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 CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the Company and, accordingly, such charges do not affect the net
asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Company for each class of
shares are calculated in the same manner at the same time and will differ only
to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid (except that Class B shareholders may vote
upon any material changes to expenses charged under the Class D Distribution
Plan). See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services --Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the 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,
that are eligible to sell shares.
24
<PAGE>
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(/1/) FEE FEE CONVERSION FEATURE
- ---------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Maximum 5.25% No No No
initial sales
A charge(/2/)(/3/)
- ---------------------------------------------------------------------------
B CDSC for a period 0.25% 0.75% B shares convert to
of four years, at D shares automatically
a rate of 4.0% after approximately
during the first eight years(/5/)
year, decreasing
1.0% annually to
0.0%(/4/)
- ---------------------------------------------------------------------------
1.0% CDSC for one 0.25% 0.75% No
C year(/6/)
- ---------------------------------------------------------------------------
D Maximum 5.25% 0.25% No No
initial sales
charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs may be imposed if the redemption occurs
within the applicable CDSC time period. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Certain Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a 1.0% CDSC if redeemed within one
year. Such CDSC may be waived in connection with certain fee-based
programs. A 0.75% sales charge for 401(k) purchases over $1,000,000 will
apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares, certain retirement
plans and certain fee-based programs may be 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.
(6) The CDSC may be waived in connection with certain fee-based programs.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
25
<PAGE>
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net
asset value plus varying sales charges (i.e., sales loads), as set forth
below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------ ----------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000......... 5.25% 5.54% 5.00%
$25,000 but less than
$50,000.................. 4.75 4.99 4.50
$50,000 but less than
$100,000................. 4.00 4.17 3.75
$100,000 but less than
$250,000................. 3.00 3.09 2.75
$250,000 but less than
$1,000,000............... 2.00 2.04 1.80
$1,000,000 and over**..... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on certain Class A and Class D
purchases of $1,000,000 or more, and on Class A purchases by certain
retirement plans and participants in connection with certain fee-based
programs. If the sales charge is waived, in connection with a purchase of
$1,000,000 or more, such purchases may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. Such CDSC may be waived
in connection with certain fee-based programs. The charge 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.
The proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities. During the fiscal year ended April
30, 1998, the Company sold 4,839,861 Class A shares for aggregate net proceeds
of $26,553,000. The gross sales charges for the sale of Class A shares of the
Company for that year were $12,880, of which $940 and $11,940 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 a front-end sales charge
waiver.
During the fiscal year ended April 30, 1998, the Company sold 2,747,909
Class D shares for aggregate net proceeds of $14,310,519. The gross sales
charges for the sale of Class D shares of the Company for that year were
$69,709, of which $4,581 and $65,128 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 a front-end sales charge waiver.
Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Company in a shareholder account, including participants in the Merrill Lynch
Blueprint SM 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 at net
asset value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs and U.S. branches of foreign banking
institutions provided that the program or
26
<PAGE>
branch has $3 million or more initially invested in MLAM-advised mutual funds.
Also eligible to purchase Class A shares at net asset value are participants
in certain investment programs including TMASM Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
purchases made in connection with certain fee-based programs. In addition,
Class A shares 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." See
"Shareholder Services--Fee-Based Programs."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access SM Accounts
available through authorized employers. Subject to certain conditions Class A
and Class D shares are offered at net asset value to shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal
Bond Fund, Inc. and Class A shares are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. who wish to
reinvest in shares of the 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.
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.
27
<PAGE>
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately eight years after Class B shares
are issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the 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." The proceeds from the account maintenance
fees are used to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the 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 Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares, from the dealers' own funds. The
combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Company to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. The proceeds from the 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. 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 that are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds
of redemption or the cost of the shares being redeemed. Accordingly, no CDSC
will be imposed on increases in net asset value above the initial purchase
price. In addition, no CDSC will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
28
<PAGE>
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>
For the fiscal year ended April 30, 1998, the Distributor received CDSCs of
$333,320 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. Additional CDSCs payable to the Distributor may have been
waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 shares (proceeds of $600), 10
shares will not be subject to the CDSC because of dividend reinvestment. With
respect to the remaining 40 shares, the CDSC is applied only to the original
cost of $10 per share and not to the increase in net asset value of $2 per
share. Therefore, $400 of the $600 redemption proceeds will be charged at a
rate of 2.0% (the applicable rate in the third year after purchase for shares
purchased 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 that are purchased by eligible 401(k) or eligible 401(a) plans that are
rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA
and held in such account at the time of redemption. The Class B CDSC is also
waived for any Class B shares purchased within eligible Employee AccessSM
Accounts. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information. The terms of the CDSC may be modified in connection with certain
fee-based programs. See "Shareholder Services--Fee-Based Programs."
29
<PAGE>
Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. The CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs." For the fiscal year ended April 30, 1998, the Distributor
received CDSCs of $3,702 with respect to redemptions of Class C shares, all of
which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Company. Class D shares are subject
to an ongoing account maintenance fee of 0.25% of the Class D 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.
30
<PAGE>
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 per share.
The Conversion Period also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-
Based Programs."
DISTRIBUTION PLANS
The 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, 1998, the Company paid the Distributor
$1,856,344 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $185.6
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection
with Class B shares. For the fiscal year ended April 30, 1998, the Company
paid the Distributor $163,604 pursuant to the Class C Distribution Plan (based
on average daily net assets subject to such Class C Distribution Plan of
approximately $16.4 million), all of which was paid to Merrill
31
<PAGE>
Lynch for providing account maintenance and distribution-related activities
and services in connection with Class C shares. For the fiscal year ended
April 30, 1998, the Company paid the Distributor $54,298 pursuant to the Class
D Distribution Plan (based on average daily net assets subject to such Class D
Distribution Plan of approximately $21.7 million) all of which was paid to
Merrill Lynch for providing account maintenance activities in connection with
Class D shares.
The payments under the Distribution Plans are based 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, CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs,
and the expenses consist of financial consultant compensation.
As of December 31, 1997, with respect to Class B shares, the fully allocated
accrual expenses incurred by the Distributor and Merrill Lynch for the period
since October 21, 1988 (commencement of operations) exceeded fully allocated
accrual revenues for such period by approximately $40,000 (.02% of Class B net
assets at that date). As of April 30, 1998, with respect to Class B shares,
direct cash revenues for the period since October 21, 1988 (commencement of
operations) exceeded direct cash expenses by approximately $5,429,849 (2.60%
of Class B net assets at that date). As of December 31, 1997, with respect to
Class C shares, the fully allocated accrual expenses incurred by the
Distributor and Merrill Lynch for the period since October 21, 1994
(commencement of operations) exceeded fully allocated accrual revenues for
such period by approximately $4,000 (.03% of Class C net assets at that date).
As of April 30, 1998, with respect to Class C shares, direct cash revenues for
the period since October 21, 1994 (commencement of operations) exceeded direct
cash expenses by approximately $346,363 (1.74% 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 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."
32
<PAGE>
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the 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 that may be applicable, there will
be no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the 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
redeemed. Redemption requests should not be sent to the Company. The
redemption request in either event requires the signatures of all persons in
whose names the shares are registered, signed exactly as their names appear on
the Transfer Agent's register or on the certificate, as the case may be. The
signatures on the notice must be guaranteed by an "eligible guarantor
institution" (including, for example, Merrill Lynch branch offices and certain
other financial
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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 it has assured
itself that 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 that do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Company. Merrill
Lynch may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through the
Transfer Agent are not subject to the processing fee. The 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
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.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch financial consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or the
Distributor. The reinstatement will be made at the net asset value per share
next determined after the notice of reinstatement is received and cannot
exceed the amount of the redemption proceeds.
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SHAREHOLDER SERVICES
The Company offers a number of shareholder services and investment plans
described below that 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
Blueprint SM 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 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. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for such shares and then must turn the
certificates over to a new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an IRA from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of
the 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.
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SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to receive systematic withdrawal payments from his
or her Investment Account in the form of payments by check or through
automatic payment by direct deposit to his or her bank account on either a
monthly or quarterly basis. A shareholder whose shares are held within a
CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
Systematic Redemption Program, subject to certain conditions. With respect to
redemptions of Class B and Class C shares pursuant to a systematic withdrawal
plan, the maximum number of Class B or Class C shares that can be redeemed
from an account annually shall not exceed 10% of the value of shares of such
class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
Charges--Class C Shares." Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares."
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be made
to an investor's Investment Account by prearranged charges of $50 or more to
his or her regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Company in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS 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 business on 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 by
telephone (1-800-MER-FUND) to the Transfer Agent if the shareholder's account
is maintained with the Transfer Agent, elect to have subsequent dividends, or
both dividends and capital gains distributions, paid in cash rather than
reinvested, in which event payment will be mailed on or about the payment date
(provided that, in the event that a payment on an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder will not receive
such payment in cash and such payment will automatically be reinvested in
additional shares). 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 Company is not responsible for any failure of delivery to
the shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks.
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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 or her account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second
fund. If the Class A shareholder wants to exchange Class A shares for shares
of a second MLAM-advised mutual fund, and the shareholder does not hold Class
A shares of the second fund in his or her account at the time of the exchange
and is not otherwise eligible to acquire Class A shares of the second fund,
the shareholder will receive Class D shares of the second fund as a result of
the exchange. Class D shares also may be exchanged for Class A shares of a
second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
Shares of the Company that are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC
that might otherwise be due upon redemption of the shares of the 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 of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
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FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees.
Additional information regarding a specific Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in such Program's client agreement and from the Transfer
Agent at (800) MER-FUND or (800) 637-3863.
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.
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
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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 may be 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.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Company's intention to distribute all its net investment income,
if any. Dividends from such net investment income will be paid at least
annually. All net realized 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 will be reinvested automatically in shares of the
Company at net asset value without a sales charge. However, a shareholder
whose account is maintained at the Transfer Agent or whose account is
maintained through Merrill Lynch may elect in writing to receive any such
dividends or distributions, or both, in cash (provided that, in the event that
a payment on an account maintained at the Transfer Agent would amount to
$10.00 or less, a shareholder will not receive such payment in cash and such
payment will automatically be reinvested in additional shares). Dividends and
distributions are taxable to shareholders as discussed below whether they are
reinvested in shares of the Company or received in cash. From time to time,
the Company may declare a special distribution at or about the end of the
calendar year in order to comply with Federal tax requirements that certain
percentages of its ordinary income and capital gains be distributed during the
year.
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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 income dividend distributions, and (b) 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, rather
than as an ordinary income dividend, thereby reducing each shareholder's tax
basis in Company shares for Federal income tax purposes and resulting in a
capital gain for any shareholder who received a distribution greater than the
shareholder's tax basis in Company shares (assuming that the shares were held
as a capital asset). For a detailed discussion of the Federal tax
considerations relevant to foreign currency transactions, 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. As long as 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 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). Recent
legislation creates additional categories of capital gains taxable at
different rates. Generally not later than 60 days after the close of its
taxable year, the Company will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gains
dividends, as well as the amount of capital gain dividends in the different
categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Company. 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 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.
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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. In addition, recent legislation permits a
foreign tax credit to be claimed with respect to withholding tax on a dividend
only if the shareholder meets certain holding period requirements. 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. In the case of foreign taxes passed through by a RIC, the holding
period requirements referred to above must be met by both the shareholder and
the RIC. 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 and other information necessary to claim
the foreign tax credit.
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 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.
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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 per share for all classes of the Company is determined by
the Investment Adviser 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 sum of the market values 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, rounded to the nearest cent. 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,
42
<PAGE>
however, that the per share net asset value of the classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors as the
primary market. Long positions in securities traded in the OTC market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC market are valued
at the last available ask price in the OTC market prior to the time of
valuation. 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. At 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 relating to the account maintenance associated with such shares, and
Class B and Class C shares bear certain expenses relating 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.
43
<PAGE>
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 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.
44
<PAGE>
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Company could be
adversely affected if the computer systems used by the Investment Adviser or
other Company service providers do not properly address this problem prior to
January 1, 2000. The Investment Adviser has established a dedicated group to
analyze these issues and to implement any systems modifications necessary to
prepare for the Year 2000. Currently, the Investment Adviser does not
anticipate that the transition to the 21st century will have any material
impact on its ability to continue to service the Company at current levels. In
addition, the Investment Adviser has sought assurances from the Company's
other service providers that they are taking all necessary steps to ensure
that their computer systems will accurately reflect the Year 2000, and the
Investment Adviser will continue to monitor the situation. At this time,
however, no assurance can be given that the Company's other service providers
have anticipated every step necessary to avoid any adverse effect on the
Company attributable to the Year 2000 Problem.
45
<PAGE>
[This page is intentionally left blank]
<PAGE>
MERRILL LYNCH HEALTHCARE FUND, INC.--AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch 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)
Occupation........................... Name and Address of Employer.........
......................................
......................................
..................................... ......................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital
Gains
Select One: Select One:
[_] Reinvest [_] Reinvest
[_] Cash [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] CHECK
OR [_] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch 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>
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.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
................ , 19 . . . .
Date of initial purchase
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 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, my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Healthcare Fund, Inc. held as security.
By: ................................. .....................................
Signature of Owner Signature of Co-Owner (If registered
in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp
We hereby authorize Merrill Lynch
Funds Distributor 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
This form when completed should be Letter of Intention, Automatic
mailed to: Investment Plan or Systematic
Withdrawal Plan. We guarantee the
Merrill Lynch Healthcare Fund, Shareholder's signature.
Inc.
......................................
c/o Merrill Lynch Financial Data Dealer Name and Address
Services, Inc.
P.O. Box 45289
By ..................................
Jacksonville, Florida 32232-5289 Authorized Signature of Dealer
----- -------
----- ------- ...............
Branch-Code F/C No. F/C Last Name
----- ---------
----- ---------
Dealer's Customer A/C No.
A-2
<PAGE>
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
Name of Owner........................
[ ]
Name of Co-Owner (if any)............ Social Security No. or
Taxpayer Identification
Number
Address..............................
.....................................
Account Number.....................
(if existing account)
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
Merrill Lynch 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 in ............. or
(month)
as soon as possible thereafter.
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: $......... of
(check one) [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of .........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (please print)......................................................
Address........................................................................
...........................................................................
Signature of Owner...................................... Date..................
Signature of Co-Owner (if any).................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO 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.
* ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS
HELD IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC WITHDRAWAL
PLAN IS MADE.
A-3
<PAGE>
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 AUTHORIZATION TO
SERVICES, INC. HONOR ACH DEBITS DRAWN BY
You are hereby authorized to draw an MERRILL LYNCH FINANCIAL DATA
ACH debit each month on my bank SERVICES, INC.
account for investment in Merrill
Lynch Healthcare Fund, Inc., as
indicated below:
Amount of each check or ACH debit To................................Bank
$................................. (Investor's Bank)
Account Number ................... Bank Address..........................
Please date and invest ACH debits on
the 20th of each month beginning City.....................Zip..........
............ or as soon thereafter As a convenience to me, I hereby
(month) as possible. request and authorize you to pay and
charge to my account ACH debits drawn
on my account by and payable to
I agree that you are drawing these Merrill Lynch Financial Data
ACH debits voluntarily at my request Services, Inc. I agree that your
and that you shall not be liable for rights in respect to each such debit
any loss arising from any delay in shall be the same as if it were a
preparing or failure to prepare any check drawn on you and signed
such check or debit. If I change personally by me. This authority is
banks or desire to terminate or to remain in effect until revoked by
suspend this program, I agree to me in writing. Until you receive such
notify you promptly in writing. I notice, you shall be fully protected
hereby authorize you to take any in honoring any such debit. I further
action to correct erroneous ACH agree that if any such debit be
debits of my bank account or dishonored, whether with or without
purchases of fund shares including cause and whether intentionally or
liquidating shares of the fund and inadvertently, you shall be under no
credit my bank account. I further liability.
agree that if a check or debit is
not honored upon presentation,
Merrill Lynch Financial Data ......... .......................
Services, Inc. is authorized to Date Signature of Depositor
discontinue immediately the
Automatic Investment Plan and to ......... .......................
liquidate sufficient shares held in Bank Signature of Depositor
my account to offset the purchase Account (If joint account, both
made with the returned check or Number must sign)
dishonored debit.
.......... .....................
Date Signature of Depositor
.....................
Signature of
Depositor
(If joint
account, both
must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
A-4
<PAGE>
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
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
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>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, 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 DISTRIBU-
TOR. 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.................................................. 21
Board of Directors........................................................ 21
Advisory and Management Arrangements...................................... 21
Code of Ethics............................................................ 22
Transfer Agency Services.................................................. 23
Purchase of Shares......................................................... 23
Initial Sales Charge Alternatives--Class A and Class D Shares............. 25
Deferred Sales Charge Alternatives--Class B and Class C Shares............ 27
Distribution Plans........................................................ 31
Limitations on the Payment of Deferred Sales Charges...................... 33
Redemption of Shares....................................................... 33
Redemption................................................................ 33
Repurchase................................................................ 34
Reinstatement Privilege--Class A and Class D Shares....................... 34
Shareholder Services....................................................... 35
Investment Account........................................................ 35
Systematic Withdrawal Plans............................................... 36
Automatic Investment Plans................................................ 36
Automatic Reinvestment of Dividends and Capital Gains Distributions....... 36
Exchange Privilege........................................................ 37
Fee-Based Programs........................................................ 38
Performance Data........................................................... 38
Additional Information..................................................... 39
Dividends and Distributions............................................... 39
Taxes..................................................................... 40
Determination of Net Asset Value.......................................... 42
Organization of the Company............................................... 43
Shareholder Reports....................................................... 44
Shareholder Inquiries..................................................... 44
Year 2000 Issues.......................................................... 45
Authorization Form......................................................... A-1
</TABLE>
Code #10166-0798
[LOGO] MERRILL LYNCH
Merrill Lynch
Healthcare Fund, Inc.
[Art]
PROSPECTUS
July 29, 1998
Distributor:
Merrill Lynch
Funds Distributor
This prospectus should be retained for future reference.
<PAGE>
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 that seeks 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
July 29, 1998 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the 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 -- DISTRIBUTOR
----------------
The date of this Statement of Additional Information is July 29, 1998
<PAGE>
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
2
<PAGE>
movements than larger, more established companies. These companies may have
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 ("OTC") market or on a regional securities exchange
and may not be traded every day or in the volume typical of trading on a
national securities exchange. As a result, the 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% of its total assets (together with all
other illiquid investments) in illiquid 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% of its total assets would be subject to 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 unsponsored ADRs are
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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.
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, 1997 and 1998 the Company's portfolio turnover rate was 125.94% and
115.99%, respectively. 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 on or before a specified future date and at a
specified 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
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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 or she may be required to sell his or her
securities since he or she may be assigned an exercise notice at any time
prior to the termination of his or her obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer realizes a gain or loss from the sale of the underlying security.
The 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 contract
fluctuates, making the long and short positions in the futures contract more
or less valuable, a process known as "marking to the market". At any time
prior to the settlement date of the futures contract, the position may be
closed out by taking an opposite position which will operate to terminate the
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid to or released by the
broker, and the purchaser realizes a loss or gain. In addition, a nominal
commission is paid on each completed sale transaction.
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
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Company and commodities brokers with respect to initial and variation margin.
Section 18(f) of the Investment Company Act prohibits an open-end investment
company such as the Company from issuing a "senior security" other than a
borrowing from a bank. The staff of the Commission has in the past indicated
that a futures contract may be a "senior security" under the Investment
Company Act.
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 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 security or 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
effectively.
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
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between these currencies. This is accomplished through contractual agreements
to purchase or 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 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
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 of the Company. 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 such
transactions need not be 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.
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Company is classified as non-diversified within
the meaning of 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
securities of a single issuer. The Company's investments will be limited,
however, in order to qualify for the special tax treatment afforded regulated
investment companies under the Code. See "Dividends, Distributions and Taxes."
To qualify, the Company will 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. 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.
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,
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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 borrow
up to an additional 5% of its total assets for temporary purposes, (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.
7. Underwrite securities of other issuers except insofar as the Company
technically may be deemed an underwriter under 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. As a matter of
policy, however, the Company will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of
the Investment Company Act, at any time its shares are owned by another
investment company that is part of the same group of investment companies
as the Company.
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. 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.
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d. 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 if 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 is prohibited
from engaging in portfolio transactions with Merrill Lynch or any of its
affiliates acting as principal.
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 regulated 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 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.
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MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
Information about the Directors, executive officers and portfolio manager 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, Director and the portfolio manager is P.O. Box
9011, Princeton, New Jersey 08543-9011.
Arthur Zeikel (66)--President and Director(1)(2)--Chairman of the Investment
Adviser (which term as used herein includes its corporate predecessors) since
1997; Chairman of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1997; President of the
Investment Adviser and FAM from 1977 to 1997; Chairman of Princeton Services,
Inc. ("Princeton Services") since 1997 and Director thereof since 1993;
President of Princeton Services from 1993 to 1997; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.
Donald Cecil (71)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
Edward H. Meyer (71)--Director(2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
Charles C. Reilly (67)--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; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.
Richard R. West (60)--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 Realty Trust, Inc.
(real estate holding company) and Alexander's, Inc. (real estate company).
Edward D. Zinbarg (63)--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.
Terry K. Glenn (57)--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
Princeton Funds Distributor, Inc. since 1986 and Director thereof since 1991;
President of Princeton Administrators, L.P. since 1988.
Norman R. Harvey (64)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1982.
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Jordan C. Schreiber (68)--Senior Vice President and Portfolio Manager(1)--
First Vice President of the Investment Adviser since 1997, Vice President of
the Investment Adviser from 1983 to 1997, and Portfolio Manager thereof since
1983.
Donald C. Burke (38)--Vice President(1)(2)--First Vice President of the
Investment Adviser since 1997 and Director of Taxation thereof since 1990;
Vice President of the Investment Adviser from 1990 to 1997.
Gerald M. Richard (49)--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 Princeton Funds
Distributor, Inc. since 1981 and Treasurer thereof since 1984.
Philip Mandel (51)--Secretary(1)(2)--First Vice President of the Investment
Adviser since 1997; Vice President and Assistant General Counsel of Merrill
Lynch from 1989 to 1997.
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(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 June 30, 1998, 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. For the fiscal year ended April 30, 1998, fees and
expenses paid to non-affiliated Directors aggregated $37,000.
12
<PAGE>
The following table sets forth for the fiscal year ended April 30, 1998,
compensation paid by the Company to the non-affiliated Directors and for the
calendar year ended December 31, 1997, the aggregate compensation paid by all
registered investment companies advised by 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................. $8,500 None $275,850
Edward H. Meyer.............. $5,000 None $222,100
Charles C. Reilly............ $7,500 None $313,000
Richard R. West.............. $7,500 None $299,000
Edward D. Zinbarg............ $7,500 None $133,500
</TABLE>
- --------
(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows:
Mr. Cecil (34 registered investment companies consisting of 34
portfolios); Mr. Meyer (34 registered investment companies consisting of
34 portfolios); Mr. Reilly (51 registered investment companies consisting
of 64 portfolios); Mr. West (52 registered investment companies
consisting of 74 portfolios) and Mr. Zinbarg (19 registered investment
companies consisting of 19 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, 1996,
1997 and 1998, the investment advisory fees paid by the Company to the
Investment Adviser aggregated $2,441,908, $3,764,088 and $3,524,780,
respectively.
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
13
<PAGE>
as the fees of all Directors of the Company who are affiliated persons of the
Investment Adviser. 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,
1996, 1997 and 1998, the amount of such reimbursement was $77,879, $103,336
and $77,706, 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."
As described in the Prospectus, the Investment Adviser has also entered into
a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited
("MLAM U.K.") pursuant to which MLAM U.K. provides investment advisory
services to the Investment Adviser with respect to the Company.
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser as defined under the
Investment Company Act because of their ownership of its voting securities or
their power to exercise a controlling influence over its management or
policies. Similarly, the following entities may be considered "controlling
persons" of MLAM U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a
subsidiary of Merrill Lynch International Holdings, Inc., a subsidiary of
Merrill Lynch International Inc., a subsidiary of ML & Co.
Duration and Termination. Unless earlier terminated as described herein, the
Investment Advisory Agreement 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.
The Company issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and
14
<PAGE>
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
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege."
The Merrill Lynch Select Pricing SM System is used by more than 50 registered
investment companies advised by the Investment Adviser or its affiliate, FAM.
Funds advised by the Investment Adviser or FAM which utilize the Merrill Lynch
Select PricingSM 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. The gross sales charges for the sale of Class A
shares of the Company for the fiscal year ended April 30, 1996 were $30,539,
of which $28,477 was received by Merrill Lynch and $2,062 was received by the
Distributor. The gross sales charges for the sale of Class A shares of the
Company for the fiscal year ended April 30, 1997 were $14,807, of which
$12,924 was received by Merrill Lynch and $1,883 was received by the
Distributor. The gross sales charges for the sale of Class A shares of the
Company for the fiscal year ended April 30, 1998 were $12,880, of which
$11,940 was received by Merrill Lynch and $940 was received by the
Distributor. The gross sales charges for the sale of Class D shares of the
Company for the fiscal year ended April 30, 1996 were $261,644, of which
$244,507 was received by Merrill Lynch and $17,137 was received by the
Distributor. The gross sales charges for the sale of Class D shares of the
Company for the fiscal year ended April 30, 1997 were $77,021, of which
$73,273 was received by Merrill Lynch and $3,748 was received by the
Distributor. The gross sales charges for the sale of Class D shares of the
Company for the fiscal year ended April 30, 1998 were $69,709 of which $65,128
was received by Merrill Lynch and $4,581 was received by the Distributor.
For the fiscal years ended April 30, 1996, 1997, and 1998, the Distributor
received no contingent deferred sales charges ("CDSCs") with respect to
redemptions within one year after purchase of Class A or Class D shares
purchased subject to a front-end sales charge waiver.
15
<PAGE>
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
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her 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 that has not been in existence for at least six months or that
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 of shares of the Company by employees or by
employers on behalf of employees, by means of a payroll deduction plan or
otherwise. 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
16
<PAGE>
this investment option, a shareholder of one of the above-referenced
continuously offered closed-end funds (an "eligible fund") must sell his or
her shares of common stock of the eligible fund (the "eligible shares") back
to the eligible fund in connection with a tender offer conducted by the
eligible fund and reinvest the proceeds immediately in the designated class of
shares of the 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 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 at least five percent
of the intended amount will be held in escrow during the 13-month period
(while remaining registered in the name of the purchaser) for this purpose.
The first purchase under the Letter of Intention must be at least five percent
of the dollar amount of such Letter. If a purchase during the term of such
Letter would otherwise be subject to a further reduced sales charge based on
the right of accumulation, the purchaser will be entitled on that purchase and
subsequent purchases to the further reduced percentage sales charge that would
be
17
<PAGE>
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.
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 completing a new or existing Letter of Intention from the
Company.
Merrill Lynch Blueprint SM Program. Class D shares of the Company are offered
to participants in the Merrill Lynch Blueprint SM 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). In addition, 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 Class A or Class D share investors.
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 Service Agreement.
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 Blueprint SM
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA SM Managed Trusts. Class A shares are offered to TMA SM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
Employee Access SM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee Access SM Accounts available through authorized employers. The initial
minimum for such accounts is $500 except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is
$50.
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-
18
<PAGE>
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.
Class D shares of the Company are offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
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 a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the 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 that might
result from an acquisition of assets having net unrealized appreciation that
is disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the 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 that (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, that 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).
19
<PAGE>
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based
on similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the
account maintenance and/or distribution fees paid by the Company to Merrill
Lynch Funds Distributor, a division of Princeton Fund Distributor, Inc. (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 Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the
20
<PAGE>
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 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, 1998,
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:
<TABLE>
<CAPTION>
DATA CALCULATED AS OF APRIL 30, 1998
(IN THOUSANDS)
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, 1998:
Under NASD Rule as
Adopted................ $192,570 $12,036 $2,640 $14,676 $6,915 $7,760 $1,564
Under Distributor's
Voluntary Waiver....... $192,570 $12,036 $ 962 $12,998 $6,915 $6,083 $1,564
Class C Shares, for the
period October 21, 1994
(commencement of
operations) to April
30, 1998:
Under NASD Rule as
Adopted................ $ 27,846 $ 1,740 $ 273 $ 2,013 $ 383 $1,630 $ 149
</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. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares
in conjunction with the shareholder's participation in the Merrill
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<PAGE>
Lynch Mutual Fund Adviser (Merrill Lynch MFA SM) Program (the "MFA Program").
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(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
certain instances including 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 in the case of such withdrawals are:
(a) any partial or complete redemption in connection with a tax-free
distribution following retirement under a tax-deferred retirement plan or
attaining age 59 1/2 in the case of an IRA or other retirement plan, or part
of a series of equal periodic payments (not less frequently than annually)
made for the life (or life expectancy) or any redemption resulting from the
tax-free return of an excess contribution to an IRA; or (b) any partial or
complete redemption following the death or disability (as defined in the Code)
of a Class B shareholder (including one who owns the Class B shares as joint
tenant with his or her spouse) provided the redemption is requested within one
year of the death or initial determination of disability. For the fiscal years
ended April 30, 1996, 1997 and 1998, the Distributor received CDSCs of
$331,285, $500,257 and $333,320, respectively, with respect to the redemption
of Class B shares, all of which were paid to Merrill Lynch. Similarly, for the
fiscal years ended April 30, 1996, 1997 and 1998, the Distributor received
CDSCs of $8,074, $21,653 and $3,702, respectively, with respect to the
redemption of Class C shares, all of which were paid to Merrill Lynch.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in Blueprint SM. 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.
22
<PAGE>
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 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 Blueprint SM 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. 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 Conduct Rules 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 U.S. 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 U.S., 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 U.S.
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 in the
U.S. or Europe, as the case may be. ADRs, like other securities traded in the
U.S., as well as GDRs traded in the U.S., will be subject to negotiated
commission rates.
23
<PAGE>
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 and persons affiliated with such persons are prohibited from dealing
with the Company as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Since transactions in the OTC market usually involve transactions with dealers
acting as principal for their own accounts, affiliated persons of the Company,
including Merrill Lynch and its affiliates, will not serve as the Company's
dealer in such transactions. However, affiliated persons of the Company may
serve as its broker in listed or OTC transactions conducted on an agency basis
provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, the Company may not purchase securities during the existence of
any underwriting syndicate for such securities of which Merrill Lynch is a
member and in a private transaction in which Merrill Lynch serves as placement
agent except pursuant to procedures adopted by the Board of Directors of the
Company that either comply with rules adopted by the Commission or with
interpretations of the Commission staff. 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 that
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, 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. For the fiscal year ended April
30, 1997, the Company paid total brokerage commissions of $1,399,360, of which
$262,491, or 18.6%, was paid to Merrill Lynch for effecting 17.6% of the
aggregate dollar amount of transactions in which the Company paid brokerage
commissions. For the fiscal year ended April 30, 1998, the Company paid total
brokerage commissions of $983,494, of which $233,975, or 23.79%, was paid to
Merrill Lynch for effecting 21.73% of the aggregate dollar amount of
transactions in which the Company paid brokerage commissions.
24
<PAGE>
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, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation.
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 and higher transfer
agency fees applicable with respect to the Class B and Class C shares and the
daily expense accruals of the account maintenance fees applicable with respect
to the Class D shares; moreover, the per share net asset value of the Class B
and Class C shares generally will be lower than the per share net asset value
of the Class D shares reflecting the daily expense accruals of the
distribution fees and higher transfer agency fees applicable with respect to
the Class B and Class C shares of the 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 that are traded on stock
exchanges, are valued at the last sale price (regular way) on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market. Long positions in securities
traded in the OTC market are valued at the last available bid price in the OTC
market prior to the time of valuation. Short positions in securities traded in
the OTC market are valued at the last available ask price in the OTC market
prior to the time of valuation. Portfolio securities that are traded both in
the OTC market and on a stock exchange are valued according to the broadest
and most representative market. When the 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
25
<PAGE>
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 business on the NYSE. The
values of such securities used in computing the net asset value of the
Company's shares are 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 Blueprint SM 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.
26
<PAGE>
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 or she be issued certificates for his or her shares, and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an IRA from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of
the 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.
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.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will 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 NYSE 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
(provided that, in the event that a payment on an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder will not receive
such payment in cash and such payment will automatically be reinvested in
additional shares). The Company is not responsible for any failure of delivery
to the shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks.
Shareholders may, at any time, notify 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.
27
<PAGE>
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired 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 shares having a value of
$10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and the class of shares to be redeemed. Redemptions will be made at net
asset value as determined as of 15 minutes after the close of business on the
NYSE (generally 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 shares will be redeemed at the
close of business on the following business day. The check for the withdrawal
payment will be mailed, or the direct deposit of the withdrawal payment will
be made, on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends and distributions on all shares in
the Investment Account are reinvested automatically in shares of the Company.
A shareholder's Systematic Withdrawal Plan may be terminated at any time,
without charge or penalty, by the shareholder, the Company, the Transfer Agent
or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchase of additional 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 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.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the
shareholder's account three business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or fourth
Monday of each month, in the case of monthly redemptions, or of every other
month, in the case of bimonthly redemptions. For quarterly, semiannual or
annual redemptions, the shareholder may select the month in which the shares
are to be redeemed and may designate whether the redemption is to be made on
the first, second, third or fourth Monday of the month. If the first Monday of
the month is not a business day, the redemption will be processed at net asset
value on the next business day. The CMA(R) or CBA(R) Systematic Redemption
Program is not available if 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.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will
28
<PAGE>
be waived. Shares redeemed pursuant to a systematic withdrawal plan will be
redeemed in the same order as Class B or Class C shares are otherwise
redeemed. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B
and Class C Shares--Contingent Deferred Sales Charges--Class B Shares" and "--
Contingent Deferred Sales Charges--Class C Shares" in the Prospectus. Where
the systematic withdrawal plan is applied to Class B shares, upon conversion
of the last Class B shares in an account to Class D shares, the systematic
withdrawal plan will automatically be applied thereafter to Class D shares.
See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and Class
C Shares--Conversion of Class B Shares to Class D Shares" in the Prospectus.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Company have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill
Lynch Select PricingSM System, Class A shareholders may exchange Class A
shares of the 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 or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, but does not hold Class A shares of the second fund in
his or her account at the time of the exchange and is not otherwise eligible
to acquire Class A shares of the second fund, the shareholder will receive
Class D shares of the second fund as a result of the exchange. Class D shares
also may be exchanged for Class A shares of a second MLAM-advised mutual fund
at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund. Class
B, Class C and Class D shares 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 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
29
<PAGE>
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 Special
Value Fund Class B shares for more than five years.
Shareholders also may exchange shares of the Company into shares of certain
money market funds advised by the Investment Adviser or its affiliates, but
the period of time that Class B or Class C shares are held in a money market
fund will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
that were acquired as a result of an exchange for Class B or Class C shares of
the 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 newly-acquired fund will be
aggregated with previous holding periods for purposes of reducing the CDSC.
Thus, for example, an investor may exchange Class B shares of the 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 that 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.
30
<PAGE>
To exercise the exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Company of the
exchange. Shareholders of the Company, and shareholders of the other MLAM-
advised mutual funds, with shares for which certificates have not been issued,
may exercise the exchange privilege by wire through their securities dealers.
The 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. As long as 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 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). Recent
legislation creates additional categories of capital gains taxable at
different rates. Generally not later than 60 days after the close of its
taxable year, the Company will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gains
dividends, as well as the amount of capital gain dividends in the different
categories of capital gain referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Company. 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 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.
31
<PAGE>
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. In addition, recent legislation permits a
foreign tax credit to be claimed with respect to withholding tax on a dividend
only if the shareholder meets certain holding period requirements. 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. In the case of foreign taxes passed through by a RIC, the holding
period requirements referred to above must be met by both the shareholder and
the RIC. No deductions for foreign taxes, moreover, 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 and other information necessary to claim
the foreign tax credit. 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.
32
<PAGE>
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 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.
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.
33
<PAGE>
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.
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.
34
<PAGE>
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.
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>
One Year Ended April 30,
1998................... 36.50% $1,365.00 38.60% $1,386.00
Five Years Ended April
30, 1998............... 19.71% $2,457.90 19.77% $2,464.70
Ten Years Ended April
30, 1998............... 13.19% $3,452.80 -- --
Inception (October 21,
1988) to April 30,
1998................... -- -- 14.04% $3,494.00
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
Year Ended April 30,
1998................... 44.06% $1,440.60 42.60% $1,426.00
Year Ended April 30,
1997................... 8.55% $1,085.50 7.44% $1,074.40
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 -- --
Inception (October 21,
1988) to April 30,
1989................... -- -- 4.89% $1,048.90
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 -- --
</TABLE>
(continued on next page)
35
<PAGE>
<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>
Year Ended April 30,
1985................... (6.31)% $ 936.90 -- --
Year Ended April 30,
1984................... 6.00% $1,060.00 -- --
Inception (April 1,
1983) to April 30,
1983................... 1.75% $1,017.50 -- --
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (April 1,
1983) to April 30,
1998................... 497.10% $5,971.00 -- --
Inception (October 21,
1988) to April 30,
1998................... -- -- 249.40% $3,494.00
<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>
Year Ended April 30,
1998................... 41.66% $1,416.60 36.39% $1,363.90
Inception (October 21,
1994) to April 30,
1998................... 26.54% $2,291.80 24.82% $2,184.10
<CAPTION>
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended April 30,
1998................... 42.66% $1,426.60 43.95% $1,439.50
Year Ended April 30,
1997................... 7.28% $1,072.80 8.11% $1,081.10
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
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to April 30,
1998................... 129.18% $2,291.80 118.41% $2,184.10
</TABLE>
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.
36
<PAGE>
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 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, 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.
37
<PAGE>
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, 1998, and its shares outstanding on that
date is set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets................ $146,153,521 $208,520,228 $19,860,380 $25,717,951
============ ============ =========== ===========
Number of Shares
Outstanding.............. 25,017,225 42,457,344 4,039,118 4,578,740
============ ============ =========== ===========
Net Asset Value per Share
(net assets divided by
number of shares
outstanding)............. $ 5.84 $ 4.91 $ 4.92 $ 5.62
Sales Charge (Class A and
Class D shares: 5.25% of
offering price; 5.54% of
net asset value)*........ .32 ** ** .31
------------ ------------ ----------- -----------
Offering Price............ $ 6.16 $ 4.91 $ 4.92 $ 5.93
============ ============ =========== ===========
</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.
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, 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 U.S. 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.
38
<PAGE>
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.
Under a separate agreement, ML & Co. 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
On June 30, 1998, Merrill Lynch Trust Company owned an aggregate of
approximately 5.2% of the outstanding shares of the Company on behalf of
certain employee retirement or savings plan accounts for which Merrill Lynch
Trust Company acts as trustee. The address of Merrill Lynch Trust Company is
265 Davidson Avenue, #4, Somerset, NJ 08873.
39
<PAGE>
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, 1998, the related statements of operations for the year then
ended and changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-
year period then ended. These financial statements and the financial
highlights are the responsibility of the 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, 1998 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Healthcare Fund, Inc. as of April 30, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
June 9, 1998
40
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
NORTH Shares Value Percent of
AMERICA Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States Biotechnology 20,000 ++Affymetrix, Inc. $ 510,000 $ 622,500 0.2%
150,000 ++Aphton Corp. 3,184,625 2,081,250 0.5
20,000 ++COR Therapeutics, Inc. 349,376 376,250 0.1
100,000 ++Centocor, Inc. 4,072,463 4,206,250 1.1
255,000 ++Coulter Pharmaceuticals, Inc. 3,092,500 7,267,500 1.8
280,000 ++Emisphere Technologies Inc. 4,511,956 4,672,500 1.2
54,000 ++Genentech, Inc. 3,329,074 3,739,500 0.9
30,000 ++Gilead Sciences, Inc. 1,138,750 1,140,000 0.3
50,000 ++Guilford Pharmaceuticals Inc. 1,086,875 993,750 0.2
30,000 ++Human Genome Sciences, Inc. 1,222,500 1,087,500 0.3
30,000 ++IDEC Pharmaceuticals
Corporation 753,750 1,068,750 0.3
25,000 ++Ligand Pharmaceuticals
Incorporated 360,312 362,500 0.1
100,000 ++Magainin Pharmaceuticals, Inc. 612,500 587,500 0.1
95,000 ++Nanogen Inc. 1,045,000 878,750 0.2
30,000 ++Neurex Corporation 559,689 894,375 0.2
60,000 ++Protein Design Labs, Inc. 1,890,844 1,878,750 0.5
------------ ------------ ------
27,720,214 31,857,625 8.0
Diagnostics 425,000 ++NeoPath, Inc. 7,073,832 5,923,438 1.5
Health Care Cost 120,000 Allegiance Corporation 2,718,950 5,475,000 1.4
Containment 133,500 ++AmeriSource Health Corporation
(Class A) 6,832,102 7,275,750 1.8
160,000 Cardinal Health, Inc. 9,023,331 15,400,000 3.8
106,600 ++Cerner Corporation 2,701,578 3,171,350 0.8
50,000 Columbia/HCA Healthcare
Corporation 1,653,000 1,646,875 0.4
110,000 ++Concentra Managed Care, Inc. 2,993,550 3,396,250 0.8
100,000 ++HEALTHSOUTH Corporation 2,999,660 3,018,750 0.8
180,000 McKesson Corporation 7,118,366 12,723,750 3.2
180,000 ++Medaphis Corporation 1,562,813 1,631,250 0.4
42,500 ++Synetic, Inc. 2,037,500 2,616,406 0.7
130,000 ++Tenet Healthcare Corp. 3,188,878 4,866,875 1.2
50,000 United Healthcare Corporation 3,531,440 3,512,500 0.9
300,000 ++Walsh International, Inc. 3,377,689 4,387,500 1.1
------------ ------------ ------
49,738,857 69,122,256 17.3
</TABLE>
41
<PAGE>
Merrill Lynch Healthcare Fund, Inc., April 30, 1998
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
NORTH AMERICA Shares Value Percent of
(concluded) Industries Held Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
United States Medical 10,000 ++Alliance Pharmaceutical Corp. $ 79,375 $ 76,563 0.0%
(concluded) Specialties 70,000 ++Arterial Vascular
Engineering, Inc. 3,088,160 2,471,875 0.6
30,000 Bausch & Lomb Incorporated 1,415,550 1,483,125 0.4
98,100 Becton Dickinson & Company 4,558,518 6,830,213 1.7
100,000 ++Boston Scientific Corporation 6,118,572 7,231,250 1.8
30,000 C.R. Bard, Inc. 864,673 1,074,375 0.3
140,000 ++Clintrials Research Inc. 988,437 726,250 0.2
240,000 ++Conceptus, Inc. 2,694,124 750,000 0.2
100,000 DePuy, Inc. 2,425,775 3,100,000 0.8
150,000 Guidant Corporation 5,742,748 10,031,250 2.5
100,000 ++Ilex Oncology Inc. 1,200,000 1,250,000 0.3
90,000 ++InControl, Inc. 1,213,908 472,500 0.1
70,000 Medtronic, Inc. 1,348,116 3,683,750 0.9
150,000 ++Novoste Corporation 3,949,063 3,712,500 0.9
62,500 ++Ocular Sciences, Inc. 1,660,000 1,742,188 0.4
400,000 ++Optical Sensors, Incorporated 3,984,376 1,550,000 0.4
170,000 ++Parexel International
Corporation 5,630,001 5,695,000 1.4
40,000 ++Quintiles Transnational Corp. 1,957,500 1,977,500 0.5
235,000 ++ReSound Corporation 1,525,147 1,483,438 0.4
127,500 ++VISX, Incorporated 3,144,063 5,625,937 1.4
------------ ------------ ------
53,588,106 60,967,714 15.2
Pharmaceutical-- 135,000 Warner-Lambert Co. 18,753,437 25,540,312 6.4
Consumer
Pharmaceutical-- 100,000 Bristol-Myers Squibb Company 6,230,398 10,587,500 2.6
Diversified 100,000 Monsanto Company 5,396,744 5,287,500 1.3
100,000 Schering-Plough Corp. 6,641,100 8,012,500 2.0
------------ ------------ ------
18,268,242 23,887,500 5.9
Pharmaceutical-- 100,000 ++ALZA Corp. 4,530,468 4,793,750 1.2
Prescription 149,000 ++Barr Laboratories, Inc. 5,289,500 6,043,812 1.5
100,000 ++Forest Laboratories, Inc. 2,244,500 3,618,750 0.9
280,000 Lilly (Eli) and Company 19,576,552 19,477,500 4.9
15,000 Merck & Co., Inc. 1,963,800 1,807,500 0.5
260,000 Pfizer, Inc. 13,605,618 29,591,250 7.4
250,000 ++SangStat Medical Corporation 8,156,517 8,437,500 2.1
120,000 ++Scherer (R.P.) Corporation 8,917,940 8,760,000 2.2
280,000 ++Sepracor Inc. 7,211,913 12,915,000 3.2
40,000 ++Watson Pharmaceuticals, Inc. 1,597,800 1,720,000 0.4
------------ ------------ ------
73,094,608 97,165,062 24.3
Investments in North America 248,237,296 314,463,907 78.6
</TABLE>
42
<PAGE>
<TABLE>
WESTERN
EUROPE
<C> <S> <C> <S> <C> <C> <C>
Denmark Pharmaceutical-- 20,000 Novo Nordisk A/S (Class B) 2,430,923 3,244,855 0.8
Prescription
Investments in Denmark 2,430,923 3,244,855 0.8
Finland Health Care Cost 454,500 Tamro OYJ 3,495,250 3,255,372 0.8
Containment
Pharmaceutical-- 140,000 ++Orion-yhtymae OY (Class B) 3,660,185 4,345,271 1.1
Diversified
Investments in Finland 7,155,435 7,600,643 1.9
France Pharmaceutical-- 55,000 Synthelabo S.A. 7,050,270 8,278,036 2.1
Diversified
Investments in France 7,050,270 8,278,036 2.1
Germany Medical 20,000 Fresenius AG (Preferred) 3,503,625 4,799,331 1.2
Specialties 55,000 ++Fresenius Medical Care
AG (ADR)* 1,219,434 1,268,437 0.3
------------ ------------ ------
4,723,059 6,067,768 1.5
Pharmaceutical-- 30,000 BASF AG 1,362,942 1,336,120 0.3
Diversified
Investments in Germany 6,086,001 7,403,888 1.8
Ireland Pharmaceutical-- 105,000 ++Elan Corporation PLC (ADR)* 5,385,300 6,523,125 1.6
Prescription
Investments in Ireland 5,385,300 6,523,125 1.6
Sweden Biotechnology 45,000 ++Biora AB 520,478 677,650 0.2
Medical 30,000 Incentive AB (B Shares) 2,906,317 2,896,734 0.7
Specialties
Investments in Sweden 3,426,795 3,574,384 0.9
Switzerland Pharmaceutical-- 8,000 Novartis AG (Registered) 11,008,097 13,231,077 3.3
Consumer
Pharmaceutical-- 500 ++Roche Holding AG 5,769,232 5,070,023 1.3
Prescription
Investments in Switzerland 16,777,329 18,301,100 4.6
United Kingdom Pharmaceutical-- 625,000 ++Shire Pharmaceuticals Group PLC 3,594,686 4,563,372 1.1
Diversified 500,000 SmithKline Beecham PLC 6,442,390 5,956,402 1.5
------------ ------------ ------
10,037,076 10,519,774 2.6
Pharmaceutical-- 20,000 ++Zeneca Group PLC 587,827 860,796 0.2
Prescription
Investments in the
United Kingdom 10,624,903 11,380,570 2.8
Total Investments in
Western Europe 58,936,956 66,306,601 16.5
</TABLE>
43
<PAGE>
Merrill Lynch Healthcare Fund, Inc., April 30, 1998
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 $ 8,000,000 Countrywide Home Loans, Inc.,
Paper** 5.55% due 5/07/1998 $ 7,992,600 $ 7,992,600 2.0%
18,322,000 General Motors Acceptance
Corp., 5.56% due 5/01/1998 18,322,000 18,322,000 4.6
Total Investments in
Short-Term Securities 26,314,600 26,314,600 6.6
Total Investments $333,488,852 407,085,108 101.7
============
Liabilities in Excess of Other Assets (6,833,028) (1.7)
------------ ------
Net Assets $400,252,080 100.0%
============ ======
<FN>
*American Depositary Receipts (ADR).
**Commercial Paper is traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by the
Company.
++Non-income producing security.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of April 30, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$333,488,852) (Note 1a) $407,085,108
Receivables:
Securities sold $ 4,415,796
Capital shares sold 1,060,543
Dividends 242,679 5,719,018
------------
Prepaid registration fees and other assets (Note 1f) 2,310,922
------------
Total assets 415,115,048
------------
</TABLE>
44
<PAGE>
<TABLE>
<S> <S> <C> <C>
Liabilities: Payables:
Securities purchased 8,782,338
Custodian bank (Note 1h) 4,546,271
Capital shares redeemed 815,896
Investment adviser (Note 2) 323,647
Distributor (Note 2) 189,624 14,657,776
------------
Accrued expenses and other liabilities 205,192
------------
Total liabilities 14,862,968
------------
Net Assets: Net assets $400,252,080
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 2,501,723
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 4,245,734
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 403,912
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 457,874
Paid-in capital in excess of par 278,389,652
Undistributed realized capital gains on investments and foreign
currency transactions--net 40,666,843
Unrealized appreciation on investments and foreign currency
transactions--net 73,586,342
------------
Net assets $400,252,080
============
Net Asset Class A--Based on net assets of $146,153,521 and
Value: 25,017,225 shares outstanding $ 5.84
============
Class B--Based on net assets of $208,520,228 and
42,457,344 shares outstanding $ 4.91
============
Class C--Based on net assets of $19,860,380 and
4,039,118 shares outstanding $ 4.92
============
Class D--Based on net assets of $25,717,951 and
4,578,740 shares outstanding $ 5.62
============
See Notes to Financial Statements.
</TABLE>
45
<PAGE>
Merrill Lynch Healthcare Fund, Inc., April 30, 1998
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <S> <C> <C>
For the Year Ended April 30, 1998
Investment Dividends (net of $90,911 foreign withholding tax) $ 2,418,817
Income Interest and discount earned 1,243,600
(Notes 1d & 1e): ------------
Total income 3,662,417
------------
Expenses: Investment advisory fees (Note 2) $ 3,524,780
Account maintenance and distribution fees--Class B (Note 2) 1,856,344
Transfer agent fees--Class B (Note 2) 416,311
Transfer agent fees--Class A (Note 2) 250,046
Account maintenance and distribution fees--Class C (Note 2) 163,604
Printing and shareholder reports 143,179
Accounting services (Note 2) 77,706
Registration fees (Note 1f) 62,213
Custodian fees 57,947
Account maintenance fees--Class D (Note 2) 54,298
Transfer agent fees--Class D (Note 2) 41,805
Transfer agent fees--Class C (Note 2) 39,236
Directors' fees and expenses 37,000
Professional fees 34,218
Pricing fees 1,526
Other 14,697
------------
Total expenses 6,774,910
------------
Investment loss--net (3,112,493)
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 85,163,070
(Loss) on Foreign currency transactions--net (212,792) 84,950,278
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 47,376,707
(Notes 1b, 1c, Foreign currency transactions--net 1,597 47,378,304
1e & 3): ------------ ------------
Net realized and unrealized gain on investments
and foreign currency transactions 132,328,582
------------
Net Increase in Net Assets Resulting from Operations $129,216,089
============
See Notes to Financial Statements.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended April 30,
Increase (Decrease) in Net Assets: 1998 1997
<C> <S> <C> <C>
Operations: Investment loss--net $ (3,112,493) $ (1,169,690)
Realized gain on investments and foreign currency
transactions--net 84,950,278 49,178,658
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 47,378,304 (19,475,916)
------------ ------------
Net increase in net assets resulting from operations 129,216,089 28,533,052
------------ ------------
Distributions to Realized gain on investments--net:
Shareholders Class A (25,786,081) (16,194,846)
(Note 1g): Class B (41,357,421) (24,903,751)
Class C (3,451,735) (2,771,712)
Class D (4,384,072) (2,411,519)
------------ ------------
Net decrease in net assets resulting from
distributions to shareholders (74,979,309) (46,281,828)
------------ ------------
Capital Share Net increase (decrease) in net assets derived from
Transactions capital share transactions 10,381,155 (28,438,055)
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets 64,617,935 (46,186,831)
Beginning of year 335,634,145 381,820,976
------------ ------------
End of year $400,252,080 $335,634,145
============ ============
See Notes to Financial Statements.
</TABLE>
47
<PAGE>
Merrill Lynch Healthcare Fund, Inc., April 30, 1998
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios
have been derived from information provided
in the financial statements. Class A++
For the Year Ended April 30,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 5.05 $ 5.27 $ 3.81 $ 3.87 $ 3.59
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.02) .02 (.01) (.01) (.02)
Realized and unrealized gain on investments
and foreign currency transactions--net 2.02 .40 1.67 .22 .31
-------- -------- -------- -------- --------
Total from investment operations 2.00 .42 1.66 .21 .29
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- -- -- (.01)
Realized gain on investments--net (1.21) (.64) (.20) (.27) --
-------- -------- -------- -------- --------
Total dividends and distributions (1.21) (.64) (.20) (.27) (.01)
-------- -------- -------- -------- --------
Net asset value, end of year $ 5.84 $ 5.05 $ 5.27 $ 3.81 $ 3.87
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 44.06% 8.55% 44.01% 6.47% 8.19%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 1.32% 1.40% 1.53% 1.79% 1.55%
Net Assets: ======== ======== ======== ======== ========
Investment income (loss)--net (.28%) .32% (.23%) (.21%) (.48%)
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $146,154 $121,529 $132,083 $ 69,650 $ 70,753
Data: ======== ======== ======== ======== ========
Portfolio turnover 115.99% 125.94% 133.50% 196.91% 133.58%
======== ======== ======== ======== ========
Average commission rate paid++++ $ .0775 $ .0803 $ .0977 -- --
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding.
++++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. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
48
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
The following per share data and ratios
have been derived from information provided
in the financial statements. Class B++
For the Year Ended April 30,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 4.40 $ 4.67 $ 3.43 $ 3.55 $ 3.31
Operating -------- -------- -------- -------- --------
Performance: Investment loss--net (.06) (.03) (.05) (.04) (.05)
Realized and unrealized gain on investments
and foreign currency transactions--net 1.72 .35 1.49 .19 .29
-------- -------- -------- -------- --------
Total from investment operations 1.66 .32 1.44 .15 .24
-------- -------- -------- -------- --------
Less distributions from realized
gain on investments--net (1.15) (.59) (.20) (.27) --
-------- -------- -------- -------- --------
Net asset value, end of year $ 4.91 $ 4.40 $ 4.67 $ 3.43 $ 3.55
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 42.60% 7.44% 42.46% 5.29% 7.25%
Return:* ======== ======== ======== ======== ========
Ratios to Average Expenses 2.35% 2.44% 2.55% 2.85% 2.56%
Net Assets: ======== ======== ======== ======== ========
Investment loss--net (1.31%) (.72%) (1.24%) (1.29%) (1.52%)
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $208,520 $178,025 $207,413 $ 79,485 $ 63,692
Data: ======== ======== ======== ======== ========
Portfolio turnover 115.99% 125.94% 133.50% 196.91% 133.58%
======== ======== ======== ======== ========
Average commission rate paid++++ $ .0775 $ .0803 $ .0977 -- --
======== ======== ======== ======== ========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding.
++++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. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
49
<PAGE>
Merrill Lynch Healthcare Fund, Inc., April 30, 1998
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
Class C++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. 1994++++ to
For the Year Ended April 30, April 30,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 4.40 $ 4.68 $ 3.43 $ 3.27
Operating -------- -------- -------- --------
Performance: Investment loss--net (.06) (.04) (.05) (.04)
Realized and unrealized gain on investments
and foreign currency transactions--net 1.73 .35 1.50 .20
-------- -------- -------- --------
Total from investment operations 1.67 .31 1.45 .16
-------- -------- -------- --------
Less distributions from realized gain on
investments--net (1.15) (.59) (.20) --
-------- -------- -------- --------
Net asset value, end of period $ 4.92 $ 4.40 $ 4.68 $ 3.43
======== ======== ======== ========
Total Investment Based on net asset value per share 42.66% 7.28% 42.76% 4.89%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.36% 2.46% 2.52% 3.28%*
Net Assets: ======== ======== ======== ========
Investment loss--net (1.31%) (.76%) (1.19%) (2.13%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 19,860 $ 17,762 $ 20,761 $ 1,816
Data: ======== ======== ======== ========
Portfolio turnover 115.99% 125.94% 133.50% 196.91%
======== ======== ======== ========
Average commission rate paid++++++ $ .0775 $ .0803 $ .0977 --
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding.
++++Commencement of operations.
++++++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. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
50
<PAGE>
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
<CAPTION>
Class D++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. 1994++++ to
For the Year Ended April 30, April 30,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 4.89 $ 5.13 $ 3.72 $ 3.61
Operating -------- -------- -------- --------
Performance: Investment income (loss)--net (.03) --+++++ (.02) (.02)
Realized and unrealized gain on investments
and foreign currency transactions--net 1.95 .39 1.63 .13
-------- -------- -------- --------
Total from investment operations 1.92 .39 1.61 .11
-------- -------- -------- --------
Less distributions from realized gain on
investments--net (1.19) (.63) (.20) --
-------- -------- -------- --------
Net asset value, end of period $ 5.62 $ 4.89 $ 5.13 $ 3.72
======== ======== ======== ========
Total Investment Based on net asset value per share 43.95% 8.11% 43.74% 3.05%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.56% 1.65% 1.75% 2.44%*
Net Assets: ======== ======== ======== ========
Investment income (loss)--net (.52%) .06% (.44%) (1.23%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 25,718 $ 18,318 $ 21,564 $ 4,386
Data: ======== ======== ======== ========
Portfolio turnover 115.99% 125.94% 133.50% 196.91%
======== ======== ======== ========
Average commission rate paid++++++ $ .0775 $ .0803 $ .0977 --
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Based on average shares outstanding.
++++Commencement of operations.
++++++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. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
+++Aggregate total investment return.
+++++Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
51
<PAGE>
Merrill Lynch Healthcare Fund, Inc., April 30, 1998
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
significant 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
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the
Company deposits and maintains as collateral such initial margin
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 call options
and purchase put and call options. When the Company writes an
option, an amount equal to the premium received by the Company is reflected as
an asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of the option
written. When a security is
52
<PAGE>
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 transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Company has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Company
are recorded on the ex-dividend dates.
(h) Custodian Bank--The Fund recorded an amount payable to the Custodian Bank
reflecting an overnight overdraft which resulted from a timing difference of a
foreign currency transaction settlement.
(i) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $3,112,493 have been reclassified between undistributed
net realized capital gains and accumulated net investment loss. These
reclassifications have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The 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 compensation for its services to the Company, MLAM receives
monthly compensation at the annual rate of 1.0% of the average daily
net assets of the Company.
Pursuant to the Distribution Plans adopted by the Company in
accordance with Rule 12b-1 under the Investment 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:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
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, 1998, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Company's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $ 940 $11,940
Class D $4,581 $65,128
For the year ended April 30, 1998, MLPF&S received contingent
deferred sales charges of $432,363 and $3,702 relating to
transactions in Class B and Class C Shares, respectively.
53
<PAGE>
Merrill Lynch Healthcare Fund, Inc., April 30, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
In addition, MLPF&S received $233,975 in commissions on the
execution of portfolio security transactions for the Company for the
year ended April 30, 1998.
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, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended April 30, 1998, were $386,076,592 and
$462,494,857, respectively.
Net realized gains (losses) for the year ended April 30, 1998 and
net unrealized gains (losses) as of April 30, 1998 were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
Long-term investments $ 85,162,833 $ 73,596,256
Short-term investments 237 --
Foreign currency transactions (212,792) (9,914)
------------- --------------
Total $ 84,950,278 $ 73,586,342
============= ==============
As of April 30, 1998, net unrealized appreciation for Federal income
tax purposes aggregated $73,463,300, of which $84,523,681 related to
appreciated securities and $11,060,381 related to depreciated
securities. The aggregate cost of investments at April 30, 1998 for
Federal income tax purposes was $333,621,808.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $10,381,155 and ($28,438,055) for the years ended
April 30, 1998 and April 30, 1997, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended April 30, 1998 Shares Amount
Shares sold 4,839,861 $ 26,553,000
Shares issued to shareholders in
reinvestment of distributions 4,346,016 22,534,271
------------ -------------
Total issued 9,185,877 49,087,271
Shares redeemed (8,232,361) (46,621,917)
------------ -------------
Net increase 953,516 $ 2,465,354
============ =============
Class A Shares for the Year Dollar
Ended April 30, 1997 Shares Amount
Shares sold 10,271,437 $ 53,025,059
Shares issued to shareholders in
reinvestment of distributions 2,905,181 14,002,973
------------ -------------
Total issued 13,176,618 67,028,032
Shares redeemed (14,159,809) (72,426,600)
------------ -------------
Net decrease (983,191) $ (5,398,568)
============ =============
Class B Shares for the Year Dollar
Ended April 30, 1998 Shares Amount
Shares sold 9,581,322 $ 44,669,370
Shares issued to shareholders in
reinvestment of distributions 8,250,682 36,413,087
------------ -------------
Total issued 17,832,004 81,082,457
Automatic conversion of shares (436,440) (2,043,674)
Shares redeemed (15,397,914) (74,477,766)
------------ -------------
Net increase 1,997,650 $ 4,561,017
============ =============
Class B Shares for the Year Dollar
Ended April 30, 1997 Shares Amount
Shares sold 10,102,582 $ 46,333,840
Shares issued to shareholders in
reinvestment of distributions 5,243,741 22,076,148
------------ -------------
Total issued 15,346,323 68,409,988
Automatic conversion of shares (183,162) (837,767)
Shares redeemed (19,079,607) (86,243,719)
------------ -------------
Net decrease (3,916,446) $ (18,671,498)
============ =============
Class C Shares for the Year Dollar
Ended April 30, 1998 Shares Amount
Shares sold 3,104,019 $ 14,240,150
Shares issued to shareholders in
reinvestment of distributions 707,594 3,124,538
------------ -------------
Total issued 3,811,613 17,364,688
Shares redeemed (3,810,331) (17,967,749)
------------ -------------
Net increase (decrease) 1,282 $ (603,061)
============ =============
54
<PAGE>
Class C Shares for the Year Dollar
Ended April 30, 1997 Shares Amount
Shares sold 2,063,730 $ 9,385,246
Shares issued to shareholders in
reinvestment of distributions 595,804 2,508,333
------------ -------------
Total issued 2,659,534 11,893,579
Shares redeemed (3,061,290) (13,780,328)
------------ -------------
Net decrease (401,756) $ (1,886,749)
============ =============
Class D Shares for the Year Dollar
Ended April 30, 1998 Shares Amount
Shares sold 2,747,909 $ 14,310,519
Shares issued to shareholders in
reinvestment of distributions 765,310 3,821,348
Automatic conversion of shares 386,266 2,043,674
------------ -------------
Total issued 3,899,485 20,175,541
Shares redeemed (3,063,914) (16,217,696)
------------ -------------
Net increase 835,571 $ 3,957,845
------------ -------------
Class D Shares for the Year Dollar
Ended April 30, 1997 Shares Amount
Shares sold 4,556,042 $ 22,861,805
Shares issued to shareholders in
reinvestment of distributions 445,914 2,082,418
Automatic conversion of shares 164,859 837,767
------------ -------------
Total issued 5,166,815 25,781,990
Shares redeemed (5,626,624) (28,263,230)
------------ -------------
Net decrease (459,809) $ (2,481,240)
============ =============
5. Commitments:
At April 30, 1998, the Company had entered into a foreign exchange
contract under which it had agreed to sell a foreign currency with
an approximate value of $1,111,000.
55
<PAGE>
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
Other Investment Policies and Practices.................................. 8
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
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 27
Systematic Withdrawal Plans.............................................. 27
Exchange Privilege....................................................... 29
Dividends, Distributions and Taxes........................................ 31
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions............................................................ 33
Special Rules for Certain Foreign Currency Transactions.................. 33
Performance Data.......................................................... 34
General Information....................................................... 37
Description of Shares.................................................... 37
Computation of Offering Price per Share.................................. 38
Independent Auditors..................................................... 38
Custodian................................................................ 38
Transfer Agent........................................................... 38
Legal Counsel............................................................ 39
Reports to Shareholders.................................................. 39
Additional Information................................................... 39
Security Ownership of Certain Beneficial Owners.......................... 39
Independent Auditors' Report.............................................. 40
Financial Statements...................................................... 41
</TABLE>
Code #10255-0798
[LOGO] MERRILL LYNCH
Merrill Lynch
Healthcare Fund, Inc.
[Art]
STATEMENT OF
ADDITIONAL
INFORMATION
July 29, 1998
Distributor:
Merrill Lynch
Funds Distributor
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights for each of the years in the six-year period ended
April 30, 1998, 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 years in the two-year period ended March 31, 1990.
Contained in Part B:
Schedule of Investments as of April 30, 1998.
Statement of Assets and Liabilities as of April 30, 1998.
Statement of Operations for the year ended April 30, 1998.
Statements of Changes in Net Assets for each of the years in the two-
year period ended April 30, 1998.
Financial Highlights for each of the years in the five-year period
ended April 30, 1998.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Articles of Incorporation of the Registrant, dated October 28,
1982.(b)
(b) --Articles of Amendment to Articles of Incorporation of the
Registrant, dated November 29, 1982.(b)
(c) --Articles of Amendment to Articles of Incorporation of the
Registrant, dated October 3, 1988.(b)
(d) --Articles of Amendment to Articles of Incorporation of the
Registrant, dated April 27, 1992.(b)
(e) --Articles of Amendment to Articles of Incorporation of the
Registrant, dated October 17, 1994.(b)
(f) --Articles Supplementary to Articles of Incorporation of the
Registrant, dated October 17, 1994.(b)
2 --By-Laws of Registrant.(b)
3 --None.
4 --Copies of instruments defining the rights of shareholders, including
the relevant portions of the Articles of Incorporation, as amended
and supplemented and By-Laws of the Registrant.(c)(b)
5(a) --Amended Investment Advisory Agreement between the Registrant and
Merrill Lynch Asset Management, L.P.(b)
(b) --Supplement to Investment Advisory Agreement between the Registrant
and Merrill Lynch Asset Management, L.P.(e)
(c) --Form of Sub-Advisory Agreement between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Asset Management U.K. Limited.(a)
6(a) --Form of Class A Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc. (now known as Princeton
Funds Distributor, Inc.) (the "Distributor")(b)
(b) --Class B Shares Distribution Agreement between the Registrant and the
Distributor(b)
(c) --Letter Agreement between the Registrant and the Distributor with
respect to the Merrill Lynch Mutual Fund Advisor Program.(e)
(d) --Form of Class C Shares Distribution Agreement between the Registrant
and the Distributor.(d)
(e) --Form of Class D Shares Distribution Agreement between the Registrant
and the Distributor.(d)
7 --None.
8 --Custody Agreement between the Registrant and The Chase Manhattan
Bank, N.A.(b)
9 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc.(b)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.(f)
(b) --Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of the Registrant.(d)
(c) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of the Registrant.(d)
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.(g)
</TABLE>
- --------
(a) Filed on July 29, 1997, as an Exhibit to Post-Effective Amendment No. 19
to Registrant's Registration Statement under the Securities Act of 1933,
as amended, on Form N-1A (File No. 2-80150) (the "Registration
Statement").
(b) Filed on August 24, 1995, as an Exhibit to Post-Effective Amendment No. 17
to the Registration Statement.
(c) 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.
(d) Filed on October 11, 1994 as an Exhibit to Post-Effective Amendment No. 16
to the Registration Statement.
(e) Filed on August 26, 1994, as an Exhibit to Post-Effective Amendment No. 15
to the Registration Statement.
(f) Filed on August 27, 1993, as an Exhibit to Post-Effective Amendment No. 14
to the Registration Statement.
(g) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996, relating to shares of Merrill
Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
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 JUNE 30, 1998
-------------- -------------
<S> <C>
Class A Common Stock, par value $0.10 per share................... 21,328
Class B Common Stock, par value $0.10 per share................... 18,773
Class C Common Stock, par value $0.10 per share................... 2,875
Class D Common Stock, par value $0.10 per share................... 2,517
</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.
C-2
<PAGE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the 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.
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 "1933 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 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
C-3
<PAGE>
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Merrill Lynch Asset Management, L.P. ("MLAM" or the "Investment
Adviser"), acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch
Asset Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc., Merrill
Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill
Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series
Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A.
Government Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis
and Wiley, a division of MLAM); and for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Equity
Portfolio, two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-
State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series
Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund,
Inc., and The Municipal Fund Accumulation Program, Inc.; and for the following
closed-end registered investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund
II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund,
Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II,
Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings California
Insured Fund II, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida
Insured Fund II, MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund
II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield
C-4
<PAGE>
New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-
2665. The address of MLAM, FAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators L.P. is also P.O. Box 9011, Princeton,
New Jersey 08543-9011. The address of Princeton Funds Distributor, Inc.
("Princeton Funds Distributor") and of Merrill Lynch Funds Distributor
("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of
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 the Fund's transfer agent, Merrill Lynch Financial Data Services, Inc.
("MLFDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each 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, 1996 for his, her or its own account or in the
capacity of director, officer, partner or trustee. In addition, Mr. Zeikel is
President, Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President
of substantially all of the investment companies described in the first two
paragraphs of this Item 28 and Messrs. Giordano, Harvey, Kirstein and Monagle
are directors, 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
---- ------------------ ---------------------------
<C> <C> <S>
ML & Co. ............... Limited Partner Financial Services Holding
Company; Limited Partner of
FAM
Princeton Services...... General Partner General Partner of FAM
Arthur Zeikel........... Chairman Chairman of FAM; President
of MLAM and FAM from 1977
to 1997; Chairman and
Director of Princeton
Services; President of
Princeton Services from
1993 to 1997; Executive
Vice President of ML & Co.
Jeffrey M. Peek......... President President of FAM; President
and Director of Princeton
Services; 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
Princeton Funds
Distributor; Director of
MLFDS; President of
Princeton Administrators,
L.P.
Linda L. Federici....... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
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; Senior Vice President
of Princeton Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH PROFESSION, VOCATION
NAME INVESTMENT ADVISER OR EMPLOYMENT
---- ------------------ ---------------------------
<C> <C> <S>
Philip L. Kirstein........ Senior Vice President, Senior Vice President,
General Counsel and General Counsel and
Secretary Secretary of FAM; Senior
Vice President, General
Counsel, Director and
Secretary of Princeton
Services
Ronald M. Kloss........... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
Debra W. Landsman Yaros... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services;
Vice President of
Princeton Funds
Distributor
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;
Director of Princeton
Funds Distributor
Gerald M. Richard......... Senior Vice President Senior Vice President and
and Treasurer Treasurer of FAM; Senior
Vice President and
Treasurer of Princeton
Services; Vice President
and Treasurer of Princeton
Funds Distributor
Gregory D. Upah........... Senior Vice President Senior Vice President of
FAM; Senior Vice President
of Princeton Services
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>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Americas Income Fund, Inc.,
Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund,
Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults International
Portfolio, Merrill Lynch Convertible Fund, Inc., Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund Inc., Merrill Lynch Fund For
Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Growth
Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global
Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch
Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc.,
C-6
<PAGE>
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill
Lynch Real Estate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds,
Inc., Merrill Lynch World Income Fund, Inc., The Municipal Fund Accumulation
Program, Inc. and Worldwide DollarVest Fund, Inc. The address of each of these
registered investment companies is P.O. Box 9011, Princeton, New Jersey 08543-
9011. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA,
England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since May 1,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard are
officers of one or more of the registered investment companies listed in the
first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
BUSINESS,
PROFESSION, VOCATION OR
NAME POSITION WITH MLAM U.K. EMPLOYMENT
---- ----------------------- -----------------------
<C> <C> <S>
Arthur Zeikel........... Director and Chairman Chairman of MLAM and FAM;
President of MLAM and
FAM from 1977 to 1997;
Chairman and Director of
Princeton Services;
President of Princeton
Services from 1993 to
1997; Executive Vice
President of ML & Co.
Alan J. Albert.......... Senior Managing Director Vice President of MLAM
Nicholas C.D. Hall...... President Director of Merrill Lynch
Europe PLC; General
Counsel of Merrill Lynch
International Private
Banking Group
Gerald M. Richard....... Senior Vice President Senior Vice President and
Treasurer of MLAM and
FAM; Senior Vice
President and Treasurer
of Princeton Services;
Vice President and
Treasurer of Princeton
Funds Distributor
Carol Ann Langham....... Company Secretary None
Debra Anne Searle....... Assistant Company Secretary None
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD, a division of Princeton Funds Distributor, acts as the principal
underwriter for the Registrant and for each of the open-end registered
investment companies referred to in the first two paragraphs of Item 28 except
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-
State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., and the Municipal Fund Accumulation
Program, Inc., and MLFD also acts as the principal underwriter for the
following closed-end registered investment companies: Merrill Lynch High
Income Municipal Bond Program, Inc. and Merrill Lynch Senior Floating Rate
Fund, Inc. A separate division of Princeton Funds Distributor acts as the
principal underwriter of a number of other investment companies.
(b) Set forth below is information concerning each director and officer of
Princeton Funds Distributor. 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, Breen, Crook, Fatseas and Wasel is One Financial
Center, 23rd Floor, Boston, Massachusetts 02111-2665.
C-7
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
WITH PRINCETON FUNDS POSITIONS AND OFFICES
NAME DISTRIBUTOR WITH REGISTRANT
- ---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Richard L. Reller....... Director None
Thomas J. Verage........ Director None
William E. Aldrich...... Senior Vice President None
Robert W. Crook......... Senior Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Michael G. Clark........ Vice President None
James T. Fatseas........ Vice President None
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 None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder are maintained at the offices of the Registrant (800 Scudders Mill
Road, Plainsboro, New Jersey 08536), and its transfer agent, 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, the Registrant is not a
party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) The 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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Plainsboro, and State of New Jersey, on the
28th day of July 1998.
Merrill Lynch Healthcare Fund, Inc.
(Registrant)
/s/ Gerald M. Richard
By __________________________________
(GERALD M. RICHARD, TREASURER)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to its Registration Statement has been signed below by the
following persons in the capacities and on the date(s) indicated.
SIGNATURE TITLE DATE
President and
Arthur Zeikel* Director (Principal
Executive Officer)
_________________________________
(ARTHUR ZEIKEL)
Gerald M. Richard* Treasurer (Principal
_____________________________________ Financial and
Accounting Officer)
(GERALD M. RICHARD)
Donald Cecil* Director
_____________________________________
(DONALD CECIL)
Edward H. Meyer* Director
_____________________________________
(EDWARD H. MEYER)
Charles C. Reilly* Director
_________________________________
(CHARLES C. REILLY)
Richard R. West* Director
_________________________________
(RICHARD R. WEST)
Edward D. Zinbarg* Director
_____________________________________
(EDWARD D. ZINBARG)
/s/ Gerald M. Richard July 28, 1998
*By _________________________________
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)
C-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
--Consent of Deloitte & Touche LLP, independent auditors for the
11 Registrant.
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
</TABLE>
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH HEALTHCARE FUND, INC. CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 333488852
<INVESTMENTS-AT-VALUE> 407085108
<RECEIVABLES> 5719018
<ASSETS-OTHER> 2310922
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 415115048
<PAYABLE-FOR-SECURITIES> 8782338
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6080630
<TOTAL-LIABILITIES> 14862968
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 285998895
<SHARES-COMMON-STOCK> 25017225
<SHARES-COMMON-PRIOR> 24063709
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 40666843
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 73586342
<NET-ASSETS> 146153521
<DIVIDEND-INCOME> 2418817
<INTEREST-INCOME> 1243600
<OTHER-INCOME> 0
<EXPENSES-NET> (6774910)
<NET-INVESTMENT-INCOME> (3112493)
<REALIZED-GAINS-CURRENT> 84950278
<APPREC-INCREASE-CURRENT> 47378304
<NET-CHANGE-FROM-OPS> 129216089
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (25786081)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4839861
<NUMBER-OF-SHARES-REDEEMED> (8232361)
<SHARES-REINVESTED> 4346016
<NET-CHANGE-IN-ASSETS> 64617935
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 33808367
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3524780
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6774910
<AVERAGE-NET-ASSETS> 128764639
<PER-SHARE-NAV-BEGIN> 5.05
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> 2.02
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.21)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.84
<EXPENSE-RATIO> 1.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH HEALTHCARE FUND, INC. CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 333488852
<INVESTMENTS-AT-VALUE> 407085108
<RECEIVABLES> 5719018
<ASSETS-OTHER> 2310922
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 415115048
<PAYABLE-FOR-SECURITIES> 8782338
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6080630
<TOTAL-LIABILITIES> 14862968
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 285998895
<SHARES-COMMON-STOCK> 42457344
<SHARES-COMMON-PRIOR> 40459694
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 40666843
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 73586342
<NET-ASSETS> 208520228
<DIVIDEND-INCOME> 2418817
<INTEREST-INCOME> 1243600
<OTHER-INCOME> 0
<EXPENSES-NET> (6774910)
<NET-INVESTMENT-INCOME> (3112493)
<REALIZED-GAINS-CURRENT> 84950278
<APPREC-INCREASE-CURRENT> 47378304
<NET-CHANGE-FROM-OPS> 129216089
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (41357421)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9581322
<NUMBER-OF-SHARES-REDEEMED> (15834354)
<SHARES-REINVESTED> 8250682
<NET-CHANGE-IN-ASSETS> 64617935
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 33808367
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3524780
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6774910
<AVERAGE-NET-ASSETS> 185634393
<PER-SHARE-NAV-BEGIN> 4.40
<PER-SHARE-NII> (.06)
<PER-SHARE-GAIN-APPREC> 1.72
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.15)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 4.91
<EXPENSE-RATIO> 2.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH HEALTHCARE FUND, INC. CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 333488852
<INVESTMENTS-AT-VALUE> 407085108
<RECEIVABLES> 5719018
<ASSETS-OTHER> 2310922
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 415115048
<PAYABLE-FOR-SECURITIES> 8782338
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6080630
<TOTAL-LIABILITIES> 14862968
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 285998895
<SHARES-COMMON-STOCK> 4039118
<SHARES-COMMON-PRIOR> 4037836
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 40666843
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 73586342
<NET-ASSETS> 19860380
<DIVIDEND-INCOME> 2418817
<INTEREST-INCOME> 1243600
<OTHER-INCOME> 0
<EXPENSES-NET> (6774910)
<NET-INVESTMENT-INCOME> (3112493)
<REALIZED-GAINS-CURRENT> 84950278
<APPREC-INCREASE-CURRENT> 47378304
<NET-CHANGE-FROM-OPS> 129216089
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH HEALTHCARE FUND, INC. CLASS D
<S> <C>
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<PAGE>
EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Healthcare Fund, Inc.:
We consent to the use in Post-Effective Amendment No. 20 to Registration
Statement No. 2-80150 of our report dated June 9, 1998 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
July 29, 1998
