As filed with the Securities and Exchange Commission on June 29, 1999
Securities Act File No. 2-80150
Investment Company Act File No. 811-3595
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 21 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 22 [X]
(Check appropriate box or boxes)
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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
Terry K. Glenn
Merrill Lynch Healthcare Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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Copies to:
Counsel for the Fund Michael J. Hennewinkel, Esq.
BROWN & WOOD LLP MERRILL LYNCH
One World Trade Center ASSET MANAGEMENT
New York, New York 10048-0557 P.O. Box 9011
Attention: Thomas R. Smith, Jr., Esq. Princeton, New Jersey 08543-9011
Frank P. Bruno, Esq.
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It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 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.
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Title of Securities Being Registered: Common Stock, par value $.10 per share.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not use this prospectus to sell securities until the registration statement
containing this prospectus, which has been filed with the Securities and
Exchange Commission, is effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Prospectus
[LOGO] Merrill Lynch
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 29, 1999
Merrill Lynch Healthcare Fund, Inc.
August , 1999
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Table of Contents
PAGE
[CLIPART] KEY FACTS
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The Merrill Lynch Healthcare Fund at a Glance.................... 3
Risk/Return Bar Chart............................................ 5
Fees and Expenses................................................ 6
[CLIPART] DETAILS ABOUT THE FUND
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How the Fund Invests............................................. 8
Investment Risks................................................. 10
[CLIPART] YOUR ACCOUNT
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Merrill Lynch Select Pricing(SM) System.......................... 18
How to Buy, Sell, Transfer and Exchange Shares................... 23
Participation in Merrill Lynch Fee-Based Programs................ 27
[CLIPART] MANAGEMENT OF THE FUND
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Merrill Lynch Asset Management................................... 30
Financial Highlights............................................. 31
[CLIPART] FOR MORE INFORMATION
---------------------------------------------------------------------
Shareholder Reports...................................... Back Cover
Statement of Additional Information...................... Back Cover
MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
Key Facts [CLIPART]
In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this prospectus in
the sidebar.
Equity Securities -- common stock or securities whose price is linked to the
value of common stock.
Foreign Securities -- securities issued by a foreign corporation or government,
as distinct from securities issued by a U.S. corporation or the U.S. Government.
Common Stock -- shares of ownership of a corporation.
THE MERRILL LYNCH HEALTHCARE FUND AT A GLANCE
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What is the Fund's investment objective?
The investment objective of the Fund is to seek long term capital appreciation
through worldwide investment in equity securities of companies that, in the
opinion of Fund management, derive or are expected to derive a substantial
portion of their sales from products and services in healthcare.
What are the Fund's main investment strategies?
The Fund tries to achieve its objective by investing primarily in securities of
healthcare companies. These will range from very large corporations to small,
"developmental stage" companies. The Fund may invest up to 15% of its assets in
venture capital investments in these developmental stage companies. The Fund may
invest without limit in foreign securities. The Fund will emphasize equity
securities, primarily common stocks. The Fund may seek to hedge all or a portion
of its portfolio against interest rate, market and currency risks by investing
in certain kinds of derivative securities. We cannot guarantee that the Fund
will achieve its objective.
What are the main risks of investing in the Fund?
As with any fund, the value of the Fund's investments -- and therefore the value
of Fund shares -- may fluctuate. These changes may occur because a particular
stock market is rising or falling. At other times, there are specific factors
that may affect the value of a particular investment. If the value of the Fund's
investments goes down, you may lose money.
As a sector fund that invests in healthcare companies, the Fund is subject to
the risks associated with this sector. This makes the Fund more vulnerable to
price changes of healthcare company securities and factors that affect the
healthcare sector than a more broadly diversified mutual fund. Healthcare
companies are strongly affected by worldwide scientific or technological
developments. Their products may rapidly become obsolete. Many healthcare
companies are also subject to significant government regulation and may be
affected by changes in governmental policies.
Foreign investing involves special risks, including foreign currency risk and
the possibility of substantial volatility due to adverse political, economic or
other developments. Foreign securities may also be less liquid and harder to
MERRILL LYNCH HEALTHCARE FUND, INC. 3
<PAGE>
[CLIPART] Key Facts
value than U.S. securities. These risks are greater for investments in emerging
markets.
Although the Fund may invest in derivatives to hedge against risks in its
portfolio, it is not bound to do so and the Fund cannot guarantee the success of
any hedging strategies it does use. Derivatives may be volatile and subject to
liquidity, leverage, credit and other types of risks.
The Fund is a non-diversified fund, which means that it may invest more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
Who should invest?
The Fund may be an appropriate investment for you if you:
o Are looking for capital appreciation for long term goals, such as
retirement or funding a child's education.
o Are looking for a professionally managed portfolio that will increase
your exposure to the healthcare sector and are willing to accept the
risks of investing in that sector.
o Are looking for exposure to a variety of foreign markets and are
willing to accept the risks of foreign investing.
o Are willing to accept the risk that the value of your investment may
decline in order to seek long term capital appreciation.
o Are not looking for a significant amount of current income.
4 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------
The bar chart and table shown below provide an indication of the risks
of investing in the Fund. The bar chart shows changes in the Fund's performance
for Class B shares for each of the past ten calendar years. Sales charges are
not reflected in the bar chart. If these amounts were reflected, returns would
be less than those shown. The table compares the average annual total returns
for each class of the Fund's shares for the periods shown with those of the S&P
500 Index. How the Fund performed in the past is not necessarily an indication
of how the Fund will perform in the future.
[The following information was depicted in a bar chart in the printed material]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
10.70% (-7.42%) 44.21% 5.46% (-3.50%) (-4.99%) 48.09% 10.69% 28.09% 31.77%
During the ten year period shown in the bar chart, the highest return for a
quarter was 23.92% (quarter ended March 31, 1991) and the lowest return for a
quarter was -25.46% (quarter ended September 30, 1990.) The Fund's year-to-date
return as of June 30, 1999 was %.
Past
Ten Years/
Average Annual Total Returns (for the Past Past Since
calendar year ended December 31, 1998) One Year Five Years Inception
- --------------------------------------------------------------------------------
Merrill Lynch Healthcare Fund* A 26.25% 21.26% 15.32%
S&P 500 Index** 28.58% 24.05% 19.20%
- --------------------------------------------------------------------------------
Merrill Lynch Healthcare Fund* B 27.77% 21.32% 14.74%+
S&P 500 Index** 28.58% 24.05% 19.20%
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Merrill Lynch Healthcare Fund* C 31.07% N/A 26.17%++
S&P 500 Index** 28.58% N/A 28.70%
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Merrill Lynch Healthcare Fund* D 26.10% N/A 24.88%++
S&P 500 Index** 28.58% N/A 28.70%
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* Includes sales charge.
** The S&P 500(R) is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices.
+ This performance does not reflect the effect of conversion of Class B
shares to Class D shares after approximately eight years.
++ Inception date is October 21, 1994.
MERRILL LYNCH HEALTHCARE FUND, INC. 5
<PAGE>
[CLIPART] Key Facts
UNDERSTANDING
EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:
Expenses paid directly by the shareholder:
Shareholder fees -- these include sales charges which you may pay when you buy
or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses -- expenses that cover the costs of operating the
Fund.
Management Fee -- a fee paid to the Manager for managing the Fund.
Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.
Service (Account Maintenance) Fees -- fees used to compensate securities dealers
for account maintenance activities.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy and
hold the different classes of shares of the Fund. Future expenses may be greater
or less than those indicated below.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from
your investment) (a): Class A Class B(b) Class C Class D
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) 5.25%(c) None None 5.25%(c)
- ------------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as
a percentage of original purchase price or
redemption proceeds, whichever is lower) None(d) 4.0%(c) 1.0%(c) None(d)
- ------------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
- ------------------------------------------------------------------------------------------------
Redemption Fee None None None None
- ------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- ------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are
deducted from Fund assets):
- ------------------------------------------------------------------------------------------------
Management Fee 1.00% 1.00% 1.00% 1.00%
- ------------------------------------------------------------------------------------------------
Distribution and/or Service (12b-1) Fees(e) None 1.00% 1.00% 0.25%
- ------------------------------------------------------------------------------------------------
Other Expenses (including transfer agency
fees)(f) 0.27% 0.29% 0.30% 0.27%
- ------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.27% 2.29% 2.30% 1.52%
- ------------------------------------------------------------------------------------------------
</TABLE>
(a) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or sells shares.
(b) Class B shares automatically convert to Class D shares about eight years
after you buy them and will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used in this Prospectus and in all other Fund
materials. If you hold Class B or Class C shares for a long time, it may
cost you more in distribution (12b-1) fees than the maximum sales charge
that you would have paid if you had bought one of the other classes.
(f) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the fiscal year
ended April 30, 1999, the Fund paid the Transfer Agent fees totaling
$808,624. The Investment Adviser provides accounting services to the Fund
at its cost. For the fiscal year ended April 30, 1999, the Fund reimbursed
the Investment Adviser $91,355 for these services.
6 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
Examples:
These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
EXPENSES IF YOU DID REDEEM YOUR SHARES:
---
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A $648 $907 $1,185 $1,978
- --------------------------------------------------------------------------------
Class B $632 $915 $1,225 $2,438*
- --------------------------------------------------------------------------------
Class C $333 $718 $1,230 $2,636
- --------------------------------------------------------------------------------
Class D $672 $980 $1,310 $2,242
- --------------------------------------------------------------------------------
EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
-------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A $648 $907 $1,185 $1,978
- --------------------------------------------------------------------------------
Class B $232 $715 $1,225 $2,438*
- --------------------------------------------------------------------------------
Class C $233 $718 $1,230 $2,636
- --------------------------------------------------------------------------------
Class D $672 $980 $1,310 $2,242
- --------------------------------------------------------------------------------
* Assumes conversion to Class D shares approximately eight years after
purchase. See note (b) to the Fees and Expenses table above.
MERRILL LYNCH HEALTHCARE FUND, INC. 7
<PAGE>
Details About the Fund [CLIPART]
ABOUT THE
PORTFOLIO MANAGER
Jordan C. Schreiber is a Senior Vice President and the portfolio manager of the
Fund. Mr. Schreiber has been a First Vice President of Merrill Lynch Asset
Management since 1997 and a Vice President and a Portfolio Manager thereof since
1983.
ABOUT THE
INVESTMENT ADVISER
The Fund is managed by Merrill Lynch Asset Management
Convertible Securities -- securities, such as corporate bonds or preferred
stock, that are exchangeable for shares of common stock of the issuer or another
company.
Rights -- a security representing the right to subscribe for shares of common
stock.
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
The Fund's goal is long term capital appreciation through investment in
healthcare companies. The Fund tries to achieve its goal by investing in a
global portfolio of healthcare companies, emphasizing equity securities.
The Fund normally expects to invest over 65% of its assets in healthcare
companies, meaning companies that derive a substantial portion of their sales
from products and services in healthcare. These companies may be in a variety of
industries within the general healthcare sector, including:
o Pharmaceutical companies of various types
o Companies that design, manufacture, sell or supply medical, dental and
optical products, hardware or services
o Companies involved in biotechnology, medical, diagnostic and
biochemical research and development
o Companies involved in the ownership and/or operation of healthcare
facilities
While the Fund seeks investments with a healthcare orientation, it has
flexibility with respect to investing in specific industries within the general
healthcare sector. The Fund will not invest more than 25% of its total assets in
any one industry within the sector.
The Fund will maintain a global portfolio, investing in securities of companies
located around the world. This means that the Fund may invest all of its assets
in foreign securities at any given time. Although there are no limits on the
percentage of assets the Fund may invest in any particular country, Fund
management presently thinks that a majority of its assets will be invested in
companies located in the United States, Japan and Western Europe. This belief is
based on current public market values in these countries and anticipated
scientific innovations -- and is subject to change.
The Fund emphasizes investments in equity securities, primarily common stocks.
Other than common stocks, the Fund may invest in convertible securities and
rights. The Fund may invest in the securities of foreign companies in their
local markets or in the form of depositary receipts.
The Fund will attempt to maximize opportunity and reduce risk by investing in
companies in various stages of development, including companies with small
market capitalizations. The Fund may invest up to 15% of its total assets in
venture capital investments in development stage companies. These investments
are generally illiquid securities.
8 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
Depositary Receipt -- a security issued by a financial institution that
evidences ownership of underlying securities issued by a foreign corporation.
Illiquid Securities -- securities that cannot be resold within seven days under
normal circumstances or that have contractual or legal restrictions on resale.
For defensive purposes or to meet redemptions, the Fund may hold cash or invest
in fixed income securities, including government and money market securities.
These investments may be made in companies outside of the healthcare sector.
Fund management will hold these investments in the proportions it believes are
best considering the prevailing market and economic conditions. These
investments may hamper the Fund's ability to meet its investment objective.
The Fund may invest in derivatives in an attempt to hedge its portfolio against
movements in markets, interest rates and currencies. The Fund may not invest in
derivatives for speculative purposes. Derivatives are instruments whose value is
derived from another security, a commodity (such as oil or gold), a currency or
an index such as the Standard & Poor's 500 Index. The Fund may engage in the
following types of derivative transactions:
o Write call options or purchase put options on securities in its
portfolio
o Purchase and sell options on stock or other financial indices
o Purchase and sell financial futures contracts (including stock index
futures)
o Purchase and sell options on futures contracts
o Purchase and sell foreign currency options, foreign currency futures or
options on foreign currency futures
o Enter forward foreign exchange contracts
Investing in certain derivatives will cause the Fund rapidly to gain exposure to
a particular market. The Fund will employ this strategy when it anticipates a
significant market advance, but only in an attempt to offset the increase in the
price of securities it intends to purchase. Because the Fund will normally
follow through and purchase the securities, it does not consider these
transactions to be speculative.
The Fund may borrow money from banks in amounts up to 10% of its total assets
temporarily for extraordinary or emergency purposes, including redemption of
Fund shares or settling securities transactions.
From time to time, the Fund may also lend securities from its portfolio to
financial institutions. The Fund may not lend securities with a value exceeding
10% of its total assets at a given time.
MERRILL LYNCH HEALTHCARE FUND, INC. 9
<PAGE>
[CLIPART] Details About the Fund
The Fund may invest up to 15% of its total assets in illiquid securities.
Illiquid securities are securities that the Fund cannot easily resell, including
venture capital investments and repurchase agreements and securities that have
contractual or legal restrictions on resale, known as restricted securities.
Restricted securities include so-called "Rule 144A securities" that can be
resold to qualified institutional buyers, but not to the general public.
INVESTMENT RISKS
- --------------------------------------------------------------------------------
This section contains a summary discussion of the general risks
of investing in the Fund. As with any fund, there can be no guarantee that the
Fund will meet its goals or that the Fund's performance will be positive for any
period of time.
Market and Selection Risk -- Market risk is the risk that the stock market in
one or more countries in which the Fund invests will go down in value, including
the possibility that the market will go down sharply and unpredictably.
Selection risk is the risk that the investments that Fund management selects
will underperform the stock market or other funds with similar investment
objectives and investment strategies.
Sector Risk -- Sector risk is the risk that the Fund's concentration in the
securities of healthcare companies will expose the Fund to the price movements
of companies in that sector more than a more broadly diversified mutual fund.
Because the Fund invests primarily in one sector, there is the risk that the
Fund will perform poorly during a downturn in that sector. The Fund should be
considered a vehicle for diversification and not a balanced investment program
by itself.
Healthcare-Related Securities -- Although the Fund will invest in a variety of
industries within the general healthcare sector, many healthcare-related
companies share common risks. Many healthcare-related companies are smaller and
less seasoned than companies in other sectors. Healthcare-related companies may
also be strongly affected by scientific or technological developments and their
products may quickly become obsolete. Finally, many
10 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
healthcare-related companies offer products and services that are subject to
government regulation and may be adversely affected by changes in government
policy. A number of legislative proposals concerning healthcare have been
introduced or considered by the U.S. Congress in recent years. These span a wide
range of topics, including cost control, national health insurance, incentives
for compensation in the provision of health care services, tax incentives and
penalties related to health care insurance premiums, and promotion of prepaid
healthcare plans. The Fund cannot predict whether any of these proposals will be
enacted or what effect it may have.
Small Cap and Emerging Growth Securities -- Small cap or emerging growth
companies may have limited product lines or markets. They may be less
financially secure than larger, more established companies. They may depend on a
small number of key personnel. If a product fails, or if management changes, or
there are other adverse developments, the Fund's investment in a small cap or
emerging growth company may lose substantial value.
Small cap or emerging growth securities generally trade in lower volumes and are
subject to greater and more unpredictable price changes than larger cap
securities or the stock market as a whole. Investing in small caps and emerging
growth securities requires a long term view.
Foreign Market Risk -- Since the Fund invests in foreign securities, it offers
the potential for more diversification than an investment only in the United
States. This is because securities traded on foreign markets have often (though
not always) performed differently than securities in the United States. However,
such investments involve special risks not present in U.S. investments that can
increase the chances that the Fund will lose money. In particular, the Fund is
subject to the risk that because there are generally fewer investors on foreign
exchanges and a smaller number of securities traded each day, it may make it
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
Foreign Economy Risk -- The economies of certain foreign markets often do not
compare favorably with the economy of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources
and balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions
MERRILL LYNCH HEALTHCARE FUND, INC. 11
<PAGE>
[CLIPART] Details About the Fund
against a particular country or countries, changes in international trading
patterns, trade barriers and other protectionist or retaliatory measures.
Investments in foreign markets may also be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of companies
or industries, expropriation of assets or the imposition of punitive taxes. In
addition, the governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital markets or in
certain industries. Any of these actions could severely affect security prices,
impair the Fund's ability to purchase or sell foreign securities or transfer the
Fund's assets or income back into the United States, or otherwise adversely
affect the Fund's operations. Other foreign market risks include foreign
exchange controls, difficulties in pricing securities, defaults on foreign
government securities, difficulties in enforcing favorable legal judgments in
foreign courts, and political and social instability. Legal remedies available
to investors in certain foreign countries may be less extensive than those
available to investors in the United States or other foreign countries.
Currency Risk -- Securities in which the Fund invests are usually denominated or
quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated in
that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a strong U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws to
protect investors the way that the U.S. securities laws do. For example, some
foreign countries may have no laws or rules against insider trading. Insider
trading occurs when a person buys or sells a company's securities based on
nonpublic information about that company. Accounting standards in other
countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and
accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying
12 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
or selling securities often are higher in foreign countries than they are in the
United States. This reduces the amount the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States -- The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for the Fund to buy, sell and
hold securities in certain foreign markets than in the U.S. The increased
expense of investing in foreign markets reduces the amount the Fund can earn on
its investments and typically results in a higher operating expense ratio for
the Fund than investment companies invested only in the U.S.
Settlement Risk -- Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign settlement
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.
European Economic and Monetary Union ("EMU") -- Certain European countries have
entered into EMU in an effort to, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
countries. EMU established a single common European currency (the "euro") that
was introduced on January 1, 1999 and is expected to replace the existing
national currencies of
MERRILL LYNCH HEALTHCARE FUND, INC. 13
<PAGE>
[CLIPART] Details About the Fund
all EMU participants by July 1, 2002. Certain securities (beginning with
government and corporate bonds) were redenominated in the euro, and are listed,
trade and make dividend and other payments only in euros. Although EMU is
generally expected to have a beneficial effect, it could negatively affect the
Fund in a number of situations, including as follows:
o If the transition to euro, or EMU as a whole, does not proceed as
planned, the Fund's investments could be adversely affected. For
example, sharp currency fluctuations, exchange rate volatility and
other disruptions of the markets could occur.
o Withdrawal from EMU by a participating country could also have a
negative effect on the Fund's investments, for example if securities
redenominated in euros are transferred back into that country's
national currency.
Borrowing and Leverage Risk -- The Fund may borrow for temporary emergency
purposes including to meet redemptions. Borrowing may exaggerate changes in the
net asset value of Fund shares and in the yield on the Fund's portfolio.
Borrowing will cost the Fund interest expense and other fees. The cost of
borrowing may reduce the Fund's return. Certain derivative securities that the
Fund buys may create leverage.
Concentration Risk -- The Fund is a non-diversified fund. By concentrating in a
smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.
Securities Lending -- The Fund may lend securities to financial institutions
which provide government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be a delay in
recovering the loaned securities. The Fund could also lose money if it does not
recover the securities and the value of the collateral falls. These events could
trigger adverse tax consequences to the Fund.
Risks associated with certain types of securities in which the Fund may invest
include:
Convertibles -- Convertibles are generally debt securities or preferred stocks
that may be converted into common stock. Convertibles typically pay current
income as either interest (debt security convertibles) or dividends (preferred
stocks). A convertible's value usually reflects both the stream of current
income payments and the value of the underlying common stock. The market value
of a convertible performs like a regular debt security, that is, if
14 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
market interest rates rise, the value of a convertible usually falls. Since it
is convertible into common stock, the convertible also has the same types of
market and issuer risk as the underlying common stock.
Derivatives -- The Fund may use derivative instruments including options on
portfolio positions or currencies, options on stock or other financial indices,
financial and currency futures, options on such futures and forward foreign
currency transactions. Derivatives allow the Fund to increase or decrease its
risk exposure more quickly and efficiently than other types of instruments.
Derivatives are volatile and involve significant risks, including:
Credit risk -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable to
honor its financial obligation to the Fund.
Currency risk -- the risk that changes in the exchange rate between
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage risk -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the amount
of investments) that relatively small market movements may result in
large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.
Liquidity risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the
price that the seller believes the security is currently worth.
The Fund may use derivatives for hedging purposes, including anticipatory
hedges. Hedging is a strategy in which the Fund uses a derivative to offset the
risk that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a different
manner than anticipated by the Fund or if the cost of the derivative outweighs
the benefit of the hedge. Hedging also involves the risk that changes in the
value of the derivative will not match those of the holdings being hedged as
expected by the Fund, in which case any losses on the holdings being hedged may
not be reduced. There can be no assurance that
MERRILL LYNCH HEALTHCARE FUND, INC. 15
<PAGE>
[CLIPART] Details About the Fund
the Fund's hedging strategy will reduce risk or that hedging transactions will
be either available or cost effective. The Fund is not required to use hedging
and may choose not to do so.
Debt Securities -- Debt securities, such as bonds, involve credit risk. This is
the risk that the borrower will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial condition
and on the terms of the bonds. These securities are also subject to interest
rate risk. This is the risk that the value of the security may fall when
interest rates rise. In general, the market price of debt securities with longer
maturities will go up or down more in response to changes in interest rates than
the market price of shorter term securities.
Depositary Receipts -- The Fund may invest in securities of foreign issuers in
the form of Depositary Receipts or other securities that are convertible into
securities of foreign issuers. American Depositary Receipts are receipts
typically issued by an American bank or trust company that show evidence of
underlying securities issued by a foreign corporation. European Depositary
Receipts and Global Depositary Receipts each evidence a similar ownership
arrangement. The Fund may also invest in unsponsored Depositary Receipts. The
issuers of such unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and therefore, there may be less
information available regarding such issuers.
Repurchase Agreements -- The Fund may enter into certain types of repurchase
agreements. Under a repurchase agreement, the seller agrees to repurchase a
security at a mutually agreed upon time and price. This insulates the Fund from
changes in the market value of the security during the period, except for
currency fluctuations. If the seller fails to repurchase the security and the
market value declines, the Fund may lose money.
Illiquid Securities -- The Fund may invest up to 15% of its net assets in
illiquid securities that it cannot easily resell within seven days at current
value or that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.
Restricted Securities -- Restricted securities have contractual or legal
restrictions on their resale. They may include private placement securities that
the Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
16 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
Restricted securities may be illiquid. The Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the security.
Rule 144A Securities -- Rule 144A securities are restricted securities that can
be resold to qualified institutional buyers but not to the general public. Rule
144A securities may have an active trading market, but carry the risk that the
active trading market may not continue.
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
If you would like further information about the Fund, including how it invests,
please see the Statement of Additional Information.
MERRILL LYNCH HEALTHCARE FUND, INC. 17
<PAGE>
Your Account [CLIPART]
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------
The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales charge
at the time of purchase. If you buy Class D shares, you also pay an ongoing
account maintenance fee of 0.25%. You may be eligible for a sales charge waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. Because these fees are paid out of the Fund's
assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales charge when you sell Class B or
C shares.
The Fund's shares are distributed by Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
18 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch. through Merrill Lynch.
o Current Class A Limited availability Limited availability Limited availability
shareholders through other through other through other
o Certain Retirement securities dealers. securities dealers. securities dealers.
Plans
o Participants in
certain Merrill
Lynch-sponsored
programs
o Certain affiliates of
Merrill Lynch
- ------------------------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time No. Entire purchase No. Entire purchase Yes. Payable at time
Charge? of purchase. Lower price is invested in price is invested in of purchase. Lower
sales charges shares of the Fund. shares of the Fund. sales charges
available for larger available for larger
investments. investments.
- ------------------------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
- ------------------------------------------------------------------------------------------------------------------------
Account Maintenance No. 0.25% Account 0.25% Account 0.25% Account
and Distribution Maintenance Fee Maintenance Fee Maintenance Fee
Fees? 0.75% Distribution 0.75% Distribution No Distribution Fee.
Fee. Fee.
- ------------------------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
eight years.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH HEALTHCARE FUND, INC. 19
<PAGE>
[CLIPART] Your Account
Right of Accumulation -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.
Letter of Intent -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.
Class A and Class D Shares -- Initial Sales Charge Options
If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase.
Dealer
Compensation
As a % of As a % of as a % of
Your Investment Offering Price Your Investment* Offering Price
- --------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------
** Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or your
redemption proceeds. 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.
No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:
o Purchases under a Right of Accumulation or Letter of Intent.
o Merrill Lynch Blueprint(SM) Program participants.
o TMA(SM) Managed Trusts.
o Certain Merrill Lynch investment or central asset accounts.
20 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
o Certain employer-sponsored retirement or savings plans.
o Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances.
o Certain investors, including directors or trustees of Merrill Lynch
mutual funds and Merrill Lynch employees.
o Certain Merrill Lynch fee-based programs
Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to a 0.25% account maintenance fee, while Class
A shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.
Class B and Class C Shares -- Deferred Sales Charge Options
If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of 0.75% and account maintenance fees of 0.25% each year under distribution
plans that the Fund has adopted under Rule 12b-1. Because these fees are paid
out of the Fund's assets on an ongoing basis, over time these fees increase the
cost of your investment and may cost you more than paying an initial sales
charge. The Distributor uses the money that it receives from the deferred sales
charges and the distribution fees to cover the costs of marketing, advertising
and compensating the Merrill Lynch Financial Consultant or other securities
dealer who assists you in purchasing Fund shares.
MERRILL LYNCH HEALTHCARE FUND, INC. 21
<PAGE>
[CLIPART] Your Account
Class B Shares
If you redeem Class B shares within four years after
purchase, you may be charged a deferred sales charge. The amount of the charge
gradually decreases as you hold your shares over time, according to the
following schedule:
Years Since Purchase Sales Charge*
---------------------------------------------------------------
0 - 1 4.00%
---------------------------------------------------------------
1 - 2 3.00%
---------------------------------------------------------------
2 - 3 2.00%
---------------------------------------------------------------
3 - 4 1.00%
---------------------------------------------------------------
4 and thereafter 0.00%
---------------------------------------------------------------
* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends are not subject to a deferred sales charge.
Not all Merrill Lynch funds have identical deferred sales charge schedules.
If you exchange your shares for shares of another fund, the higher charge
will apply.
The deferred sales charge relating to Class B shares may be reduced or
waived in certain circumstances, such as:
o Certain post-retirement withdrawals from an IRA or other retirement
plan if you are over 59 1/2 years old.
o Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts, group plans participating in the Merrill Lynch
Blueprint(SM) Program and certain retirement plan rollovers.
o Redemption in connection with participation in certain Merrill Lynch
fee-based programs.
o Withdrawals resulting from shareholder death or disability as long
as the waiver request is made within one year of death or disability
or, if later, reasonably promptly following completion of probate,
or in connection with involuntary termination of an account in which
Fund shares are held.
o Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of
up to 10% per year of your Class B account value at the time the
plan is established.
22 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
Your Class B shares convert automatically into Class D shares approximately
eight years after purchase. Any Class B shares received through reinvestment of
dividends paid on converting shares will also convert at that time. Class D
shares are subject to lower annual expenses than Class B shares. The conversion
of Class B to Class D shares is not a taxable event for Federal income tax
purposes.
Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed income fund convert
approximately ten years after purchase compared to approximately eight years for
equity funds. If you acquire your Class B shares in an exchange from another
fund with a shorter conversion schedule, the Fund's eight year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class B
shares of a fund with a longer conversion schedule, the other fund's conversion
schedule will apply. The length of time that you hold both the original and
exchanged Class B shares in both funds will count toward the conversion
schedule. The conversion schedule may be modified in certain other cases as
well.
Class C Shares
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends. The deferred sales charge
relative to Class C shares may be reduced or waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
The chart below summarizes how to buy, sell, transfer and exchange shares
through Merrill Lynch or other securities dealers. You may also buy shares
through the Transfer Agent. To learn more about buying shares through the
Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.
MERRILL LYNCH HEALTHCARE FUND, INC. 23
<PAGE>
[CLIPART] Your Account
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing table on page 19. Be sure
appropriate for you to read this Prospectus carefully.
-------------------------------------------------------------------------------------------------------
Next, determine the amount of The minimum initial investment for the Fund is $1,000 for all
your investment accounts except:
o $250 for certain Merrill Lynch fee-based programs.
o $100 for retirement plans.
(The minimums for initial investments may be waived under certain
circumstances.)
------------------------------------------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on the next calculation of net
Financial Consultant or asset value after your order is placed. Any purchase orders placed
securities dealer submit your prior to the close of business on the New York Stock Exchange
purchase order (generally 4:00 p.m. Eastern time) will be priced at the net asset
value determined that day.
Purchase orders placed after that time will be priced at the net
asset value determined on the next business day. The Fund may reject
any order to buy shares and may suspend the sale of shares at any
time. Merrill Lynch may charge a processing fee to confirm a
purchase. This fee is currently $5.35.
------------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, Call the Transfer Agent at
1-800-MER-FUND and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the address
on the inside back cover of this prospectus.
- ----------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional purchases is generally $50
Investment except that retirement plans have a minimum additional purchase of $1
and certain programs, such as automatic investment plans, may have
higher minimums.
(The minimum for additional purchases may be waived under certain
circumstances.)
------------------------------------------------------------------------------------------------------
Acquire additional shares All dividends are automatically reinvested without a sales charge.
through the automatic
dividend reinvestment plan
------------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis through
investment plan certain Merrill Lynch investment or central asset accounts.
- ----------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a participating You may transfer your Fund shares only to another securities
Another Securities securities dealer dealer that has entered into an agreement with Merrill Lynch. Certain
Dealer shareholder services may not be available for the transferred shares.
You may only purchase additional shares of funds previously
owned before the transfer. All future trading of these assets must
be coordinated by the receiving firm.
------------------------------------------------------------------------------------------------------
Transfer to a non-participating You must either:
securities dealer o Transfer your shares to an account with the Transfer Agent; or
o Sell your shares.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
24 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net
Financial Consultant or asset value after your order is placed. For your redemption request
securities dealer submit your to be priced at the net asset value on the day of your request, you
sales order must submit your request to your dealer prior to that day's close
of business on the New York Stock Exchange (generally 4:00 p.m.
Eastern time). Any redemption request placed after that time will be
priced at the net asset value at the close of business on the next
business day. Dealers must submit redemption requests to the Fund not
more than thirty minutes after the close of business on the New York
Stock Exchange on the day the request was received.
Securities dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a
fee of $5.35. No processing fee is charged if you redeem shares
directly through the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
------------------------------------------------------------------------------------------------------
Sell through the Transfer You may sell shares held at the Transfer Agent by writing to the
Agent Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter
and signatures must be guaranteed. If you hold stock certficiates,
return the certificates with the letter. The Transfer Agent will
normally mail redemption proceeds within seven days following
receipt of a properly completed request. If you make a redemption
request before the Fund has collected payment for the purchase of
shares, the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days.
If you hold share certificates, they must be delivered to the
Transfer Agent before they can be converted. Check with the
Transfer Agent or your Merrill Lynch Financial Consultant for
details.
- ---------------------------------------------------------------------------------------------------------------------------
Sell Shares Participate in the Fund's You can choose to receive systematic payments from your Fund
Systematically Systematic Withdrawal Plan account either by check or through direct deposit to your bank
account on a monthly or quarterly basis. If you hold your Fund shares
in a Merrill Lynch CMA(R), CBA(R) or Retirement Account you can
arrange for systematic redemptions of a fixed dollar amount on a
monthly, bi-monthly, quarterly, semi-annual or annual basis, subject
to certain conditions. Under either method you must have dividends
and other distributions automatically reinvested. For Class B and C
shares your total annual withdrawals cannot be more than 10%
per year of the value of your shares at the time your plan is
established. The deferred sales charge is waived for systematic
redemptions. Ask your Merrill Lynch Financial Consultant for
details.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
MERRILL LYNCH HEALTHCARE FUND, INC. 25
<PAGE>
[CLIPART] Your Account
<TABLE>
<CAPTION>
If You Want to Your Choices Information Important for You to Know
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Exchange Your Select the fund into which you You can exchange your shares of the Fund for shares of many
Shares want to exchange. Be sure to other Merrill Lynch mutual funds. You must have held the shares
read that fund's prospectus used in the exchange for at least 15 calendar days before you can
exchange to another fund.
Each class of Fund shares is generally exchangeable for shares of
the same class of another fund. If you own Class A shares and wish
to exchange into a fund in which you have no Class A shares, you
will exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different initial
or deferred sales charge schedule. If you exchange Class A or D
shares for shares of a fund with a higher initial sales charge than
you originally paid, you will be charged the difference at the time
of exchange. If you exchange Class B shares for shares of a fund
with a different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares in both
funds will count when determining your holding period for
calculating a deferred sales charge at redemption. If you exchange
Class A or D shares for money market fund shares, you will receive
Class A shares of Summit Cash Reserves Fund. Class B or C shares of
the Fund will be exchanged for Class B shares of Summit.
Although there is currently no limit on the number of exchanges
that you can make, the exchange privilege may be modified or
terminated at any time in the future.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
26 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
Net Asset Value -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------
When you buy shares, you pay the net asset value, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, after the close of business on the Exchange (the Exchange
generally closes at 4:00 p.m. Eastern time). The net asset value used in
determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result, the
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's shares.
Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class D
shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------
If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the
MERRILL LYNCH HEALTHCARE FUND, INC. 27
<PAGE>
[CLIPART] Your Account
Dividends -- Ordinary income and capital gains paid to shareholders. Dividends
may be reinvested in additional Fund shares as they are paid.
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value. However,
if you participate in the program for less than a specified period, you may be
charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are
included in the client agreement for each fee-based program and are available
from your Merrill Lynch Financial Consultant.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
The Fund will distribute at least annually any net investment income and any net
realized long-term capital gains. The Fund may also pay a special distribution
at the end of the calendar year to comply with Federal tax requirements. If your
account is with Merrill Lynch and you would like to receive dividends in cash,
contact your Merrill Lynch Financial Consultant. If your account is with the
Transfer Agent and you would like to receive dividends in cash, contact the
Transfer Agent. Although this cannot be predicted with any certainty, the Fund
anticipates that the majority of its dividends, if any, will consist of capital
gains.
You will pay tax on dividends from the Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of
another fund, any gain on the transaction may be subject to tax. Capital gain
dividends are generally taxed at different rates than ordinary income dividends.
If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.
28 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
"BUYING A DIVIDEND"
Unless your investment is in a tax deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend. The reason? If you buy
shares when a fund has realized but not yet distributed income or capital gains,
you will pay the full price for the shares and then receive a portion of the
price back in the form of a taxable dividend. Before investing you may want to
consult your tax adviser.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. You may be
able to claim a credit or take a deduction for foreign taxes paid by the Fund if
certain requirements are met.
By law, the Fund must withhold 31% of your dividends and proceeds if you have
not provided a taxpayer identification number or social security number or if
the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws.
MERRILL LYNCH HEALTHCARE FUND, INC. 29
<PAGE>
Management of the Fund [CLIPART]
MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch Asset Management, the Fund's Investment Adviser, manages the
Fund's investments and its business operations under the overall supervision of
the Fund's Board of Directors. The Investment Adviser has the responsibility for
making all investment decisions for the Fund. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an
affiliate, under which the Investment Adviser may pay a fee for services it
receives. The Fund pays the Investment Adviser a fee at the annual rate of 1.0%
of the average daily net assets of the Fund.
Merrill Lynch Asset Management is part of the Merrill Lynch Asset Management
Group which had approximately $___ billion in investment company and other
portfolio assets under management as of July 1999. This amount includes assets
managed for Merrill Lynch affiliates
A Note About Year 2000
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"). The Fund could
be adversely affected if the computer systems used by the Fund's management or
other Fund service providers do not properly address this problem before January
1, 2000. The Fund's management expects to have addressed this problem before
then, and does not anticipate that the services it provides will be adversely
affected. The Fund's other service providers have told Fund management that they
also expect to resolve the Year 2000 Problem, and Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Fund invests. This negative impact may be greater for companies in
foreign markets, particularly emerging markets, since they may be less prepared
for the Year 2000 Problem than domestic companies and markets. If the companies
in which the Fund invests have Year 2000 Problems, the Fund's returns could be
adversely affected.
30 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends). This information has been audited by
Deloitte & Touche LLP, whose report, along with the Fund's financial statements,
are included in the Fund's annual report to shareholders, which is available
upon request.
<TABLE>
<CAPTION>
Class A+ Class B+
----------------------------------------------- --------------------------------------------
For the Year Ended April 30, For the Year Ended April 30,
----------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value: 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ $ 5.05 $ 5.27 $ 3.81 $ 3.87 $ $ 4.40 $ 4.67 $ 3.43 $ 3.55
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net (.02) .02 (.01) (.01) (.06) (.03) (.05) (.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain on
investments and foreign currency
transactions -- net 2.02 .40 1.67 .22 1.72 .35 1.49 .19
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.00 .42 1.66 .21 1.66 .32 1.44 .15
- ------------------------------------------------------------------------------------------------------------------------------------
Less dividends and distributions:
Investment income -- net -- -- -- -- -- -- -- --
In excess of investment income -- net -- -- -- -- -- -- -- --
Realized gain on investments -- net (1.21) (.64) (.20) (.27) (1.15) (.59) (.20) (.27)
In excess of realized gain on
investments -- net -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.21) (.64) (.20) (.27) (1.15) (.59) (.20) (.27)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ $ 5.84 $ 5.05 $ 5.27 $ 3.81 $ $ 4.91 $ 4.40 $ 4.67 $ 3.43
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Return:*
- ------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share % 44.06% 8.55% 44.01% 6.47% % 42.60% 7.44% 42.46% 5.29%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses % 1.32% 1.40% 1.53% 1.79% % 2.35% 2.44 2.55% 2.85%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net % (.28)% .32% (.23)% (.21)% % (1.31)% (.72)% (1.24)% (1.29)%
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in
thousands) $ $146,154 $121,529 $132,083 $ 69,650 $ $208,520 $178,025 $207,413 $ 79,485
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover % 115.99% 125.94% 133.50% 196.91% % 115.99% 125.94% 133.50% 196.91%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
+ Based on average shares outstanding.
MERRILL LYNCH HEALTHCARE FUND, INC. 31
<PAGE>
[CLIPART] Management of the Fund
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
` Class C++ Class D++
---------------------------------------- ---------------------------------------------
For the For the
Period Period
For the Year Ended October For the Year Ended October
April 30, 21, 1994+ April 30, 21, 1994+
------------------------------- to ------------------------------- to
Increase (Decrease) in April 30, April 30,
Net Asset Value: 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.
## Amount is less than $.01 per share.
32 MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
(This page intentionally left blank)
MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
(This page intentionally left blank)
MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
---------------------------------
POTENTIAL
INVESTORS
Open an account (two options)
---------------------------------
(1) (2)
- ---------------------------- -----------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT Financial Data Services, Inc.
OR SECURITIES DEALER P.O. Box 45289
Jacksonville, Florida 32232-5289
Advises shareholders on
their fund investments. Performs recordkeeping and
- ---------------------------- reporting services.
-----------------------------------
----------------------------------------------------
DISTRIBUTOR
Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
----------------------------------------------------
- ------------------------ -----------------------------------
COUNSEL CUSTODIAN
------------------
Brown & Wood LLP THE FUND The Chase Manhattan Bank
One World Trade Center Global Securities Services
New York, New York The Board of 4 Chase MetroTech Center, 18th Floor
10048-0557 Directors oversees Brooklyn, New York 11245
the Fund.
Provides legal advice ------------------ Holds the Fund's
to the Fund. assets for safekeeping.
- ------------------------ -----------------------------------
- ----------------------------------- ------------------------------------
INDEPENDENT AUDITORS INVESTMENT ADVISER
Deloitte & Touche LLP Merrill Lynch Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
- ----------------------------------- P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's
day-to-day activities.
------------------------------------
MERRILL LYNCH HEALTHCARE FUND, INC.
<PAGE>
For More Information [CLIPART]
Shareholder Reports
Additional information about the Fund's investments is available in the Funds's
annual and semi-annual reports to shareholders. In the Fund's annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. You
may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch Financial
Consultant or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or mutual
fund account number. If you have any questions, please call your Merrill Lynch
Financial Consultant or the Transfer Agent at 1-800-MER-FUND.
Statement of Additional Information
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc. P.O. Box 45289 Jacksonville, Florida 32232-5289 or
by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone
number or address indicated above, if you have any questions.
Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus
Investment Company Act file #811-3595
Code #10166-08-99
(C)Merrill Lynch Asset Management, L.P.
Prospectus
[LOGO] Merrill Lynch
Merrill Lynch
Healthcare Fund, Inc.
August , 1999
<PAGE>
The information in this statement of additional information is not complete and
may be changed. This statement of additional information is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
Preliminary Statement of Additional Information Dated June 29, 1999
STATEMENT OF ADDITIONAL INFORMATION
Merrill Lynch Healthcare Fund, Inc.
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800
Merrill Lynch Healthcare Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks long term capital appreciation
through worldwide investment in equity securities of issuers that, in the
opinion of Merrill Lynch Asset Management, L.P., the investment adviser of the
Fund ("MLAM" or the "Investment Adviser"), derive or are expected to derive a
substantial portion of their sales from products and services in healthcare. The
Fund will pursue its investment objective by investing in a global portfolio of
securities of companies in various stages of development. Until the Fund changed
its investment objective on April 27, 1992, the Fund was known as Sci/Tech
Holdings, Inc. There can be no assurance that the Fund's investment objective
will be achieved. For more information on the Fund's investment objective and
policies, see "Investment Objective and Policies."
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Purchase of Shares."
-------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated August
__, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1999 annual report to shareholders. You may request a copy of the annual report
or the Prospectus at no charge by calling (800) 456-4587 ext. 789 between 8:00
a.m. and 8:00 p.m. on any business day.
-------------------
Merrill Lynch Asset Management -- Investment Adviser
Merrill Lynch Funds Distributor -- Distributor
The date of this Statement of Additional Information is August __, 1999.
-------------------
<PAGE>
TABLE OF CONTENTS
Page
-----
Investment Objective and Policies ................................. 2
Risk Factors and Special Considerations ........................ 3
Derivatives .................................................... 9
Other Investment Policies and Practices ........................ 14
Investment Restrictions ........................................ 15
Portfolio Turnover ............................................. 18
Management of the Fund ............................................ 18
Directors and Officers ......................................... 18
Compensation of Directors ...................................... 19
Management and Advisory Arrangements ........................... 20
Code of Ethics ................................................. 21
Purchase of Shares ................................................ 21
Initial Sales Charge Alternatives --
Class A and Class D Shares ................................... 22
Deferred Sales Charge Alternatives --
Class B and Class C Shares ................................... 26
Distribution Plans ............................................. 29
Limitations on the Payment of Deferred Sales Charges ........... 31
Redemption of Shares .............................................. 31
Redemption ..................................................... 32
Repurchase ..................................................... 32
Reinstatement Privilege -- Class A and Class D Shares .......... 33
Pricing of Shares ................................................. 33
Determination of Net Asset Value ............................... 33
Computation of Offering Price Per Share ........................ 34
Portfolio Transactions ............................................ 34
Shareholder Services .............................................. 36
Investment Account ............................................. 36
Exchange Privilege ............................................. 37
Fee-Based Programs ............................................. 39
Retirement and Education Savings Plans ......................... 39
Automatic Investment Plans ..................................... 39
Automatic Dividend Reinvestment Plan ........................... 39
Systematic Withdrawal Plan ..................................... 40
Dividends and Taxes ............................................... 41
Dividends ...................................................... 41
Taxes .......................................................... 41
Tax Treatment of Options, Futures and Forward Foreign
Exchange Transactions ........................................ 43
Special Rules for Certain Foreign Currency Transactions ........ 43
Performance Data .................................................. 44
General Information ............................................... 46
Description of Shares .......................................... 46
Independent Auditors ........................................... 46
Custodian ...................................................... 46
Transfer Agent ................................................. 47
Legal Counsel .................................................. 47
Reports to Shareholders ........................................ 47
Shareholder Inquiries .......................................... 47
Additional Information ......................................... 47
Financial Statements .............................................. 47
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund 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
Fund will pursue this objective by investing in a global portfolio of securities
of companies in various stages of development. The Fund 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 Fund will be realized. The
investment objective of the Fund described in the first sentence of this
paragraph is a fundamental policy of the Fund and may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities.
The investment objective of the Fund 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 Fund 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 Fund
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 such fields, such companies may
face special risks 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 Fund's investment in a company
whose products are not commercially successful or are rendered obsolete may
decrease substantially.
The Fund 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 in the world equity
markets and anticipated scientific innovations, it is presently contemplated
that a majority of the Fund'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. The Fund 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. As a result, when the Investment
Adviser believes it is in the best interests of the shareholders of the Fund,
the Fund may have few or no investments outside the United States.
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 Fund's portfolio as a whole. This negative correlation also may offset
unrealized gains the Fund 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.
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 stock.The Fund anticipates that under normal conditions at least 65%
of its total assets will be invested in healthcare companies. The Fund 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. The Fund may invest more than 5% of its assets in securities issued or
guaranteed by certain foreign governments.
2
<PAGE>
The Fund will attempt to maximize opportunity and reduce risk by investing
in a portfolio of companies in different stages of development. Portfolio
companies will range from large, well-established companies to medium-sized
companies and smaller, less seasoned companies in an earlier stage of
development.
Investments in larger companies present certain advantages attributable to
their greater financial resources: more extensive research and development,
manufacturing, marketing and service capabilities; more stability; and greater
depth of management and technical personnel. Investments in smaller, less
seasoned companies may present greater opportunities for growth but also involve
greater risks than customarily are associated with more established companies.
The securities of smaller companies may be subject to more abrupt or erratic
market movements than larger, more established companies. These companies may
have 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 Fund of portfolio
securities to meet redemptions or otherwise may require the Fund to sell these
securities at a discount from market prices or during periods when such
disposition is not desirable or to make many small sales over a lengthy period
of time.
The Fund 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
Fund'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 Fund also may be
subject to restrictions contained in the securities laws of other countries in
disposing of portfolio securities. As a result, the Fund 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 Fund may be forced to dispose of such investments at less than their fair
market value. Where registration is required, the Fund 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 Fund shares, these investments will be valued
at fair value.
The U.S. Government has from time to time imposed restrictions, through
taxation and otherwise, on foreign investments by U.S. investors such as the
Fund. If such restrictions should be reinstituted, it might become necessary for
the Fund to invest all or substantially all of its assets in U.S. securities. In
such event, the Fund would review its investment objective and investment
policies to determine whether changes are appropriate.
The Fund'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 Fund are redeemable on a daily
basis in U.S. dollars, the Fund 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.
Risk Factors and Special Considerations
Sector Risk
The economic benefit of an investment in the Fund depends on many factors
beyond the control of the Fund, the Investment Adviser and its affiliates. The
Fund's concentration in healthcare-related securities exposes it to the price
movements of companies in one sector more than a more broadly diversified mutual
fund. Because the Fund invests primarily in one sector, there is the risk that
the Fund will perform poorly during a downturn in that sector.
Healthcare-oriented investment companies such as the Fund, as with other sector
funds, may be subject to rapidly changing asset inflows and outflows. Because of
its emphasis on healthcare-related securities, the Fund should be considered a
vehicle for diversification and not as a balanced investment program. The
suitability for a particular investor of a purchase of shares of the Fund will
depend upon, among other things, the investor's investment objectives and the
investor's ability to accept the risks associated with investing in
healthcare-related securities, including the risk of loss of principal.
3
<PAGE>
Investments in Healthcare
The Fund's investments in securities of healthcare related companies
present certain risks that may not exist to the same degree in other types of
investments. While the Fund will invest in the securities of entities in several
different industries considered by Fund management to be healthcare related,
many of those entities share common characteristics that may affect an
investment in the Fund. 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 Fund invests are also strongly affected by worldwide
scientific or technological developments and are companies whose products may
fall rapidly into obsolescence. Even though such companies may be involved in
different aspects of the more general healthcare area, the Fund's focus on this
area increases the degree to which it may be affected by new developments. Many
of the companies may offer products or services that are subject to governmental
regulation and may, therefore, be affected adversely by government 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 healthcare services, tax incentives and penalties related to healthcare
insurance premiums and promotion of prepaid healthcare plans. The Fund is unable
to predict the effect of any of these proposals, if enacted.
Concentration Risk
The Fund is classified as non-diversified within the meaning of the
Investment Company Act of 1940 (the "Investment CompanyAct"), which means that
the Fund is not limited by the Act with respect to the proportion of its assets
that it may invest in securities of a single issuer. To the extent that the Fund
assumes large positions in the securities of a small number of issuers, the
Fund'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 Fund may be more susceptible to any
single economic or regulatory occurrence than a diversified company.
Risks of Investing in Foreign Securities
Foreign Market Risk. Since the Fund invests in foreign securities, it
offers the potential for more diversification than an investment only in the
United States. This is because securities traded on foreign markets have often
(though not always) performed differently than securities in the United States.
However, such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular, the
Fund is subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of shares traded each day, it may make it
difficult for the Fund to buy and sell securities on those exchanges. In
addition, prices of foreign securities may go up and down more than prices of
securities traded in the United States.
Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources and balance
of payments position. Certain such economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.
4
<PAGE>
Currency Risk. Securities in which the Fund invests are usually
denominated or quoted in currencies other than the U.S. Dollar. Changes in
foreign currency exchange rates affect the value of the Fund's portfolio.
Generally, when the u.S. Dollar rises in value against a foreign currency, a
security denominated in that currency loses value because the currency is worth
fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against
a foreign currency, a security denominated in that currency gains value because
the currency is worth more U.S. dollars. This risk, generally known as "currency
risk," means that a strong U.S. dollar will reduce returns for U.S. Investors
while a weak U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the U.S. securities laws do. For example, some
foreign countries may have no laws or rules against insider trading. Insider
trading occurs when a person buys or sells a company's securities based on
non-public information about that company. Accounting standards in other
countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and
accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying or selling securities often are higher in
foreign countries than they are in the United States. This reduces the amount
the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States. The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition, there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for the Fund to buy, sell and
hold securities in certain foreign markets than in the U.S. The increased
expense of investing in foreign markets reduces the amount the Fund can earn on
its investments and typically results in a higher operating expense ratio for
the Fund than investment companies invested only in the U.S.
Settlement Risk. Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign settlement
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions; these problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.
European Economic and Monetary Union ("EMU"). For a number of years,
certain European countries have been seeking economic unification that would,
among other things, reduce barriers between countries, increase competition
among companies, reduce government subsidies in certain industries, and reduce
or eliminate currency fluctuations among these European countries. The Treaty on
European Union (the "Maastricht Treaty") set out a framework for the European
Economic and Monetary Union ("EMU") among the countries that comprise the
European Union ("EU"). EMU established a single common European currency (the
"euro") that was introduced on January 1, 1999 and is expected to replace the
existing national currencies of all EMU participants by July 1, 2002. EMU took
effect for the initial EMU participants on January 1, 1999. Certain securities
issued in participating EU countries (beginning with government and corporate
bonds) were redenominated in the euro, and are listed, traded, and make dividend
and other payments only in euros.
No assurance can be given that EMU will take full effect, that all the
changes planned for the EU can be successfully implemented, or that these
changes will result in the economic and monetary unity and stability intended.
There is a possibility that EMU will not be completed, or will be completed but
then partially or completely unwound. Because any participating country may opt
out of EMU within the first three years, it is
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also possible that a significant participant could choose to abandon EMU, which
could diminish its credibility and influence. Any of these occurrences could
have adverse effects on the markets of both participating and non-participating
countries, including sharp appreciation or depreciation of participants'
national currencies and a significant increase in exchange rate volatility, a
resurgence in economic protectionism, an undermining of confidence in the
European markets, an undermining of European economic stability, the collapse or
slowdown of the drive toward European economic unity, and/or reversion of the
attempts to lower government debt and inflation rates that were introduced in
anticipation of EMU. Also, withdrawal from EMU by an initial participant could
cause disruption of the financial markets as securities redenominated in euros
are transferred back into that country's national currency, particularly if the
withdrawing country is a major economic power. Such developments could have an
adverse impact on the Fund's investments in Europe generally or in specific
countries participating in EMU. Gains or losses from euro conversions may be
taxable to Fund shareholders under foreign or, in certain limited circumstances,
U.S. tax laws.
Sovereign Debt. The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities. Investments
in sovereign debt are subject to the risk that a government entity may delay or
refuse to pay interest or repay principal on its sovereign debt. Some of these
reasons may include cash flow problems, insufficient foreign currency reserves,
political considerations, the relative size of its debt position to its economy
or its failure to put in place economic reforms required by the International
Monetary Fund or other multilateral agencies. If a government entity defaults,
it may ask for more time in which to pay or for further loans. There is no legal
process for collecting sovereign debts that a government does not pay or
bankruptcy proceeding by which all or part of sovereign debt that a government
entity has not repaid may be collected.
Emerging Markets Risk. The risks of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation, or the
United Nations. Emerging markets are riskier because they develop unevenly and
may never fully develop. They are more likely to experience hyperinflation and
currency devaluations, which adversely affect returns to U.S. investors. In
addition, the securities markets in many of these countries have far lower
trading volumes and less liquidity than developed markets. Since these markets
are so small, they may be more likely to suffer sharp and frequent price changes
or long term price depression because of adverse publicity, investor
perceptions, or the actions of a few large investors. In addition, traditional
measures of investment value used in the United States, such as price to
earnings ratios, may not apply to certain small markets.
Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets may
also face other significant internal or external risks, including the risk of
war, and ethnic, religious, and racial conflicts. In addition, governments in
many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.
Risks Associated with Portfolio Securities
Securities of Smaller or Emerging Growth Companies. An investment in the
Fund involves greater risk than is customarily associated with funds that invest
in more established companies. The securities of smaller or emerging growth
companies may be subject to more abrupt or erratic market movements than larger,
more established companies or the market average in general. These companies may
have limited product lines, markets or financial resources, or they may be
dependent on a limited management group. Because of these factors, the Fund
believes that its shares may be suitable for investment by persons who can
invest without concern for current income and who are in a financial position to
assume above-average investment risk in search of above-average long-term
reward. It is not intended as a complete investment program but is designed for
those long-term investors who are prepared to experience above-average
fluctuations in net asset value.
While the issuers in which the Fund will primarily invest may offer greater
opportunities for capital appreciation than large cap issuers, investments in
smaller or emerging growth companies may involve greater risks and thus may be
considered speculative. Management believes that properly selected companies of
this type have the potential to increase their earnings or market valuation at a
rate substantially in excess of the general
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growth of the economy. Full development of these companies and trends frequently
takes time and, for this reason, the Fund should be considered as a long-term
investment and not as a vehicle for seeking short-term profits.
The securities in which the Fund invests will often be traded only in the
over-the-counter 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 Fund of portfolio securities to
meet redemptions or otherwise may require the Fund to sell these securities at a
discount from market prices or during periods when in management's judgment such
disposition is not desirable or to make many small sales over a lengthy period
of time.
While the process of selection and continuous supervision by management
does not, of course, guarantee successful investment results, it does provide
access to an asset class not available to the average individual due to the time
and cost involved. Careful initial selection is particularly important in this
area as many new enterprises have promise but lack certain of the fundamental
factors necessary to prosper. Investing in small and emerging growth companies
requires specialized research and analysis. In addition, many investors cannot
invest sufficient assets in such companies to provide wide diversification.
Small companies are generally little known to most individual investors
although some may be dominant in their respective industries. Management of the
Fund believes that relatively small companies will continue to have the
opportunity to develop into significant business enterprises. The Fund may
invest in securities of small issuers in the relatively early stages of business
development which have a new technology, a unique or proprietary product or
service, or a favorable market position. Such companies may not be counted upon
to develop into major industrial companies, but management believes that
eventual recognition of their special value characteristics by the investment
community can provide above-average long-term growth to the portfolio.
Equity securities of specific small cap issuers may present different
opportunities for long-term capital appreciation during varying portions of
economic or securities markets cycles, as well as during varying stages of their
business development. The market valuation of small cap issuers tends to
fluctuate during economic or market cycles, presenting attractive investment
opportunities at various points during these cycles.
Smaller companies, due to the size and kinds of markets that they serve,
may be less susceptible than large companies to intervention from the Federal
government by means of price controls, regulations or litigation.
Depositary Receipts. The Fund may invest in the securities of foreign
issuers in the form of Depositary Receipts or other securities convertible into
securities of foreign issuers. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. American Depositary Receipts ("ADRs") are receipts typically
issued by an American bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation. European Depositary
Receipts ("EDRs") are receipts issued in Europe that evidence a similar
ownership arrangement. Global Depositary Receipts ("GDRs") are receipts issued
throughout the world that evidence a similar 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 in Europe and are designed for use throughout the
world. The Fund may invest in unsponsored Depositary Receipts. The issuers of
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States, and therefore, there may be less information
available regarding such issuers and there may not be a correlation between such
information and the market value of the Depositary Receipts.
Convertible Securities. Convertible securities entitle the holder to
receive interest payments on corporate debt securities or the dividend
preference on a preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise the conversion
privilege.
The characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed-income nature. As a result of the
conversion feature, however, the interest rate or dividend preference on a
convertible security is generally less than would be the case if the securities
were issued in nonconvertible form.
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In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.
Convertible securities are issued and traded in a number of securities
markets. For the past several years, the principal markets have been the United
States, the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. Even in cases where a substantial portion of the
convertible securities held by the Fund are denominated in United States
dollars, the underlying equity securities may be quoted in the currency of the
country where the issuer is domiciled. With respect to convertible securities
denominated in a currency different from that of the underlying equity
securities, the conversion price may be based on a fixed exchange rate
established at the time the security is issued. As a result, fluctuations in the
exchange rate between the currency in which the debt security is denominated and
the currency in which the share price is quoted will affect the value of the
convertible security. As described below, the Fund is authorized to enter into
foreign currency hedging transactions in which it may seek to reduce the effect
of such fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield of nonconvertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value" which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value.
Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain
circumstances.
Debt Securities. Debt securities, such as bonds, involve credit risk. This
is the risk that the borrower will not make timely payments of principal and
interest. The degree of credit risk depends on the issuer's financial condition
and on the terms of the bonds. These securities are also subject to interest
rate risk. This is the risk that the value of the security may fall when
interest rates rise. In general, the market price of debt securities with longer
maturities will go up or down more in response to changes in interest rates than
the market price of shorter term securities.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Under a repurchase agreement, the seller agrees, upon
entering into the contract with the Fund, to repurchase the security at a
mutually agreed-upon time and price in a specified currency, thereby determining
the yield during the term of the agreement. This results in a fixed rate of
return insulated from market fluctuations during such period although it may be
affected by currency fluctuations. The price at which the trades are conducted
do not reflect accrued interest or dividends on the underlying obligation.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the event of default by the seller under a repurchase agreement construed to
be a collateralized loan, the underlying securities are not owned by the Fund
but only constitute collateral for the seller's obligation to pay the repurchase
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price. Therefore, the Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed
rate, the rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such securities and the accrued interest on
the securities. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of the seller to perform. The Fund may not invest more
than 15% of its net assets in repurchase agreements maturing in more than seven
days together with all other illiquid investments.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its net
assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.
The Fund may invest in securities that are not registered under the
Securities Act or that are subject to trading restrictions under the laws of a
foreign jurisdiction ("restricted securities"). Restricted securities may be
sold in private placement transactions between the issuers and their purchasers
and may be neither listed on an exchange nor traded in other established
markets. In many cases, privately placed securities may not be freely
transferable under the laws of the applicable jurisdiction or due to contractual
restrictions on resale. As a result of the absence of a public trading market,
privately placed securities may be less liquid and more difficult to value than
publicly traded securities. To the extent that privately placed securities may
be resold in privately negotiated transactions, the prices realized from the
sales, due to illiquidity, could be less than those originally paid by the Fund
or less than their fair market value. In addition, issuers whose securities are
not publicly traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their securities were publicly
traded. If any privately placed securities held by the Fund are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expenses of registration. Certain
of the Fund's investments in private placements may consist of direct
investments and may include investments in smaller, less-seasoned issuers, which
may involve greater risks. These issuers may have limited product lines, markets
or financial resources, or they may be dependent on a limited management group.
In making investments in such securities, the Fund may obtain access to material
nonpublic information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.
144A Securities. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either freely tradable in their primary markets
offshore or have been determined to be liquid in accordance with the policies
and procedures adopted by the Fund's Board. The Board of Directors has adopted
guidelines and delegated to the Investment Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board of
Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to predict with
assurance exactly how this market for restricted securities sold and offered
under Rule 144A will continue to develop, the Board of Directors will carefully
monitor the Fund's investments in these securities. This investment practice
could have the effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these securities.
Derivatives
The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil), a currency or an index (a measure of value or
rates, such as the Standard & Poor's 500 Index or the prime lending rate).
Derivatives allow the Fund to increase or decrease the level of risk to which
the Fund is exposed more quickly and efficiently than transactions in other
types of instruments.
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Hedging. The Fund may use Derivatives for hedging purposes. Hedging is a
strategy in which a Derivative is used to offset the risk that other Fund
holdings may decrease in value. Losses on the other investment may be
substantially reduced by gains on a Derivative that reacts in an opposite manner
to market movements. While hedging can reduce losses, it can also reduce or
eliminate gains if the market moves in a different manner than anticipated by
the Fund or if the cost of the Derivative outweighs the benefit of the hedge.
Hedging also involves the risk that changes in the value of the Derivative will
not match those of the holdings being hedged as expected by the Fund, in which
case any losses on the holdings being hedged may not be reduced. This risk is
known as "Correlation Risk."
The Fund may use the following types of Derivative instruments and trading
strategies:
Options on Securities and Securities Indices
Purchasing Put Options. The Fund may purchase put options on securities
held in its portfolio or securities indices the performance of which correlates
with securities held in its portfolio. When the Fund purchases a put option, in
consideration for an upfront payment (the "option premium") the Fund acquires a
right to sell to another party specified securities owned by the Fund at a
specified price (the "exercise price") on or before a specified date (the
"expiration date"), in the case of an option on securities, or to receive from
another party a payment based on the amount a specified securities index
declines below a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a put option limits the
Fund's risk of loss in the event of a decline in the market value of the
portfolio holdings underlying the put option prior to the option's expiration
date. If the market value of the portfolio holdings associated with the put
option increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio holdings
than would have been realized without the purchase of the put. Purchasing a put
option may involve correlation risk, and may also involve liquidity and credit
risk. The Fund will not purchase put options on securities (including index
options), if as a result of such purchase, the aggregate cost (premiums paid) of
all outstanding options on securities held by the Fund would exceed 5% of the
market value of the Fund's assets.
Writing Call Options. The Fund may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
correlates with securities held in its portfolio. When the Fund writes a call
option, in return for an option premium the Fund gives another party the right
to buy specified securities owned by the Fund at the exercise price on or before
the expiration date, in the case of an option on securities, or agrees to pay to
another party an amount based on any gain in a specified securities index beyond
a specified level on or before the expiration date, in the case of an option on
a securities index. In the event the party to which the Fund has written an
option fails to exercise its rights under the option because the value of the
underlying securities is less than the exercise price, the Fund will partially
offset any decline in the value of the underlying securities through the receipt
of the option premium. By writing a call option, however, the Fund limits its
ability to sell the underlying securities, and gives up the opportunity to
profit from any increase in the value of the underlying securities beyond the
exercise price, while the option remains outstanding. Writing a call option may
involve correlation risk.
Additional Options on Securities Indices
Purchasing Call Options on Indices. The Fund may purchase call options on
securities indices that are correlated with the types of securities it intends
to purchase. When the Fund purchases a call option, in consideration for the
option premium the Fund acquires a right to receive from another party a payment
based on the amount a specified securities index increases beyond a specified
level on or before the expiration date. The purchase of a call option may
protect the Fund from having to identify specific securities in which to invest
in a market the Fund believes to be attractive (an "anticipatory hedge"). In the
event the Fund determines not to purchase a security underlying a call option,
however, the Fund may lose the entire option premium. Purchasing a call option
involves correlation risk, and may also involve liquidity and credit risk.
Writing Put Options on Indices. The Fund may also write put options on
securities indices. When the Fund writes a put option on an index, in return for
an option premium the Fund agrees to pay to another party an amount based on any
decline in a specified securities index below a specified level on or before the
expiration date. In the
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event the party to which the Fund has written an option fails to exercise its
rights under the option because the value of the underlying securities is
greater than the exercise price, the Fund will profit by the amount of the
option premium. By writing a put option, however, the Fund will be obligated to
make a cash payment reflecting any decline in the index. Accordingly, when the
Fund writes a put option it is exposed to a risk of loss in the event the value
of the underlying index falls below the exercise price, which loss potentially
may substantially exceed the amount of option premium received by the Fund for
writing the put option. The Fund will write a put option on a securities index
only to hedge against the risks of market-wide stock price movements in the
securities in which the Fund invests. Writing a put option on an index may
involve substantial leverage risk.
The Fund is also authorized to purchase or sell call or put options in
connection with closing out call or put options it has previously purchased or
sold.
Types of Options. The Fund may engage in transactions in options on
securities or securities indices on U.S. and foreign exchanges and in the OTC
markets. In general, exchange-traded options have standardized exercise prices
and expiration dates and require the parties to post margin against their
obligations, and the performance of the parties' obligations in connection with
such options is guaranteed by the exchange or a related clearing corporation.
OTC options have more flexible terms negotiated between the buyer and the
seller, but generally do not require the parties to post margin and are subject
to greater credit risk. OTC options also involve greater liquidity risk. See
"Additional Risk Factors of OTC Transactions; Limitation on the Use of OTC
Derivatives" below.
Futures
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a
specified future date at a specified price. No price is paid upon entering into
a futures contract. Rather, upon purchasing or selling a futures contract the
Fund is required to deposit collateral ("margin") equal to a percentage
(generally less than 10%) of the contract value. Each day thereafter until the
futures position is closed, the Fund will pay additional margin representing any
loss experienced as a result of the futures position the prior day or be
entitled to a payment representing any profit experienced as a result of the
futures position the prior day. Futures involve substantial leverage risk.
The Fund may purchase and sell stock or other financial index futures
contracts and financial futures contracts as a hedge against adverse market
changes in the value of its portfolio securities. The sale of a futures contract
limits the Fund's risk of loss through a decline in the market value of
portfolio holdings correlated with the futures contract prior to the futures
contract's expiration date. In the event the market value of the portfolio
holdings correlated with the futures contract increases rather than decreases,
however, the Fund will realize a loss on the futures position and a lower return
on the portfolio holdings than would have been realized without the purchase of
the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund is also authorized to purchase and write call and put options on
futures contracts including financial futures and stock indices in connection
with its hedging activities. Generally, these strategies would be utilized under
the same market and market sector conditions (i.e., Conditions relating to
specific types of investments) in which the Fund enters into futures
transactions. The Fund may purchase put options or write call options on futures
contracts and stock indices rather than selling the underlying futures contract
in anticipation of a decrease in the market value of its securities. Similarly,
the Fund 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 Fund intends to purchase.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying asset is a
currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). When the Fund is not fully invested in
a particular market and anticipates
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a significant advance, it may purchase index options, futures and options
thereon to gain rapid market exposure that may inpart or entirely offset
increases in the cost of securities the Fund intends to purchase. As such
purchases are made, the Fund will unwind its positions in these derivatives. The
Fund does not consider these transactions to be speculative under these
circumstances. It is anticipated that, in a substantial majority of these
transactions, the Fund will purchase such securities upon the unwinding of its
positions in the derivatives, but under unusual circumstances (e.g. the Fund
experiences significant redemptions) a position may be unwound without the
corresponding purchase of securities.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged. The Fund will
further limit transactions in futures and options on futures to the extent
necessary to prevent the Fund from being deemed a "commodity pool" under
regulations of the Commodity Futures Trading Commission. The Fund may enter into
transactions in futures and options thereon on U.S. or foreign exchanges and in
OTC markets. As indicated above, OTC options are more flexible in their terms
but are also riskier. See "Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Derivatives" below.
Foreign Exchange Transactions
The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell listed or OTC options on currencies and
purchase and sell currency futures and related options thereon (collectively,
"Currency Instruments") for purposes of hedging against the decline in the value
of currencies in which its portfolio holdings are denominated against the U.S.
dollar. Such transactions could be effected with respect to hedges on non-U.S.
dollar denominated securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund. The Fund
will not attempt to hedge all of its foreign portfolio positions.
Forward Foreign Exchange Transactions. Forward foreign exchange
transactions are OTC contracts to purchase or sell a specified amount of a
specified currency or multinational currency unit at a price and future date set
at the time of the contract. Spot foreign exchange transactions are similar but
require current, rather than future, settlement. The Fund will enter into
foreign exchange transactions only for purposes of hedging either a specific
transaction or a portfolio position. The Fund may enter into a foreign exchange
transaction for purposes of hedging a specific transaction by, for example,
purchasing a currency needed to settle a security transaction or selling a
currency in which the Fund has received or anticipates receiving a dividend or
distribution. The Fund may enter into a foreign exchange transaction for
purposes of hedging a portfolio position by selling forward a currency in which
a portfolio position of the Fund is denominated or by purchasing a currency in
which the Fund anticipates acquiring a portfolio position in the near future.
Forward foreign exchange transactions involve substantial currency risk, and
also involve credit and liquidity risk. If the Fund enters into a position
hedging transaction, its bank will place cash or liquid securities in a separate
account of the Fund in an amount equal to the value of the Fund'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 Fund's commitment with respect to such contracts. The
Fund will not enter into a position hedging commitment if, as a result thereof,
the Fund will have more than 15% of its value committed to such contracts. The
Fund will not enter into a forward contract with a term of more than one year.
Currency Futures. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through use of currency futures or options
thereon. Currency futures are similar to forward foreign exchange transactions
except that futures are standardized, exchange-traded contracts. See "Futures".
Currency futures involve substantial currency risk, and also involve leverage
risk.
Currency Options. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through the use of currency options.
Currency options are similar to options on securities, but in consideration for
an option premium the writer of a currency option is obligated to sell (in the
case of a call option) or purchase (in the case of a put option) a specified
amount of a specified currency on or before the expiration date for a specified
amount of another currency. The Fund may engage in transactions in options on
currencies either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below. Currency options involve substantial currency risk, and may
also involve credit, leverage or liquidity risk.
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Limitations on Currency Hedging. The Fund is authorized to deal in foreign
exchange between currencies of Far Eastern,European and Western Pacific
countries and the U.S. dollar. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in such currency. The Fund will not incur potential net
liabilities of more than 20% of its total assets from Currency Instruments.
Risk Factors in Hedging Foreign Currency Risks. Hedging transactions
involving Currency Instruments involve substantial risks, including correlation
risk. While the Fund's use of Currency Instruments to effect hedging strategies
is intended to reduce the volatility of the net asset value of the Fund's
shares, the net asset value of the Fund's shares will fluctuate. Moreover,
although Currency Instruments will be used with the intention of hedging against
adverse currency movements, transactions in Currency Instruments involve the
risk that anticipated currency movements will not be accurately predicted and
that the Fund's hedging strategies will be ineffective. To the extent that the
Fund hedges against anticipated currency movements which do not occur, the Fund
may realize losses, and decrease its total return, as the result of its hedging
transactions. Furthermore, the Fund will only engage in hedging activities from
time to time and may not be engaging in hedging activities when movements in
currency exchange rates occur.
The exchanges on which the Fund 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
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 position limits will have any adverse impact on the portfolio
strategies for hedging the Fund's portfolio effectively.
It may not be possible for the Fund to hedge against currency exchange rate
movements, even if correctly anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Fund is not able to
enter into a hedging transaction at an effective price, or (ii) the currency
exchange rate movement relates to a market with respect to which Currency
Instruments are not available and it is not possible to engage in effective
foreign currency hedging.
It is possible that, under certain circumstances, the Fund 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 Fund 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 Fund determines that income from such transactions need
not be subject to this restriction. The cost to the Fund of engaging in foreign
currency transactions varies with such factors as the currencies involved, the
length of the contract period and the market conditions then prevailing. Since
transactions in foreign currency exchange usually are conducted on a principal
basis, no fees or commissions are involved.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit Risk -- the risk that the counterparty on a Derivative transaction
will be unable to honor its financial obligation to the Fund.
Currency Risk -- the risk that changes in the exchange rate between two
currencies will adversely affect the value (in U.S. dollar terms) of an
investment.
Leverage Risk -- the risk associated with certain types of investments or
trading strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large changes
in the value of an investment. Certain investments or trading strategies that
involve leverage can result in losses that greatly exceed the amount originally
invested.
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Liquidity Risk -- the risk that certain securities may be difficult or
impossible to sell at the time that the seller would like or at the price that
the seller believes the security is currently worth.
Use of Derivatives for hedging purposes involves correlation risk. If the
value of the Derivative moves more or less than the value of the hedged
instruments the Fund will experience a gain or loss which will not be completely
offset by movements in the value of the hedged instruments. To compensate for
imperfect correlations, the Fund 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 Fund may
purchase or sell fewer such 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 Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives." However, there can be
no assurance that, at any specific time, either a liquid secondary market will
exist for a Derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may therefore not be possible to close a
position in a Derivative without incurring substantial losses, if at all.
Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund. When
the Fund engages in such a transaction, the Fund will deposit in a segregated
account at its custodian liquid securities with a value at least equal to the
Fund's exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Commission). Such segregation will ensure that
the Fund has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives
Certain Derivatives traded in OTC markets, including OTC options, involve
substantial liquidity risk. The absence of liquidity may make it difficult or
impossible for the Fund to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for the Fund to
ascertain a market value for such instruments. The Fund will therefore acquire
illiquid OTC instruments (i) if the agreement pursuant to which the instrument
is purchased contains a formula price at which the instrument may be terminated
or sold, or (ii) for which the Investment Adviser anticipates the Fund can
receive on each business day at least two independent bids or offers, unless a
quotation from only one dealer is available, in which case that dealer's
quotation may be used.
Because Derivatives traded in OTC markets are not guaranteed by an exchange
or clearing corporation and generally do not require payment of margin, to the
extent that the Fund has unrealized gains in such instruments or has deposited
collateral with its counterparty the Fund is at risk that its counterparty will
become bankrupt or otherwise fail to honor its obligations. The Fund will
attempt to minimize the risk that a counterparty will become bankrupt or
otherwise fail to honor its obligations by engaging in transactions in
Derivatives traded in OTC markets only with financial institutions which have
substantial capital or which have provided the Fund with a third-party guaranty
or other credit enhancement.
Other Investment Policies and Practices
Borrowing and Leverage. The Fund may borrow for temporary emergency
purposes including to meet redemptions. The use of leverage by the Fund creates
an opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's portfolio. Although the principal of
such borrowings will be fixed, the Fund's assets may change in value during the
time the borrowings are outstanding. Borrowings will create interest
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expenses for the Fund which can exceed the income from the assets purchased with
the borrowings. Certain types of borrowings by the Fund may result in the Fund
being subject to covenants in credit agreements relating to asset coverage,
portfolio composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing
the Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the specified
cure period may result in acceleration of outstanding indebtedness and require
the Fund to dispose of portfolio investments at a time when it may be
disadvantageous to do so. The Fund at times may borrow from affiliates of the
Investment Adviser, provided that the terms of such borrowings are no less
favorable than those available from comparable sources of funds in the
marketplace.
Lending of Portfolio Securities. The Fund may lend securities with a value
not exceeding 10% of its total assets. In return, the Fund receives collateral
in an amount equal to at least 100% of the current market value of the loaned
securities in cash or securities issued or guaranteed by the U.S. Government.
During the period of such a loan, the Fund receives the income on both the
loaned securities and the collateral, which increases its yield. The Fund may
pay reasonable finder's, administrative and custodial fees in connection with
its loans. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or for any other reason, the Fund
could experience delays and costs in gaining access to the collateral and could
suffer a loss to the extent the value of the collateral falls below the market
value of the borrowed securities.
Investment in Other Investment Companies. The Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Fund. In accordance with the Investment Company Act, the Fund
may invest up to 10% of its total assets in securities of other investment
companies. In addition, under the Investment Company Act the Fund may not own
more than 3% of the total outstanding voting stock of any investment company and
not more than 5% of the value of the Fund's total assets may be invested in the
securities of any investment company. If the Fund acquires shares in investment
companies, shareholders would bear both their proportionate share of expenses in
the Fund (including management and advisory fees) and, indirectly, the expenses
of such investment companies (including management and advisory fees).
Investments by the Fund in wholly owned investment entities created under the
laws of certain countries will not be deemed an investment in other investment
companies.
Suitability. The economic benefit of an investment in the Fund depends upon
many factors beyond the control of the Fund, the Investment Adviser and its
affiliates. Because of its emphasis on healthcare related securities, the Fund
should be considered a vehicle for diversification and not as a balanced
investment program. The suitability for any particular investor of a purchase of
shares in the Fund will depend upon, among other things, such investor's
investment objectives and such investor's ability to accept the risks associated
with investing in healthcare related securities, including the risk of loss of
principal.
Investment Restrictions
The Fund 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 Fund's outstanding voting
securities (which for this purpose and under the Investment Company Act means
the lesser of (i) 67% of the Fund's shares present at a meeting at which more
than 50% of the outstanding shares of the Fund are represented or (ii) more than
50% of the outstanding shares). The Fund may not:
1. Invest more than 25% of its assets, taken at market value at the time
of purchase, 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 Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
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 Fund may lend its portfolio securities, provided that the
lending of portfolio securities may be made only in accordance with applicable
law and the guidelines set forth in the Fund's Prospectus and Statement of
Additional Information, as they may be amended from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 331/3% of its total
assets (including the amount borrowed), (ii) the Fund may, to the extent
permitted by applicable law, borrow up to an additional 5% of its total
assets for temporary purposes, (iii) the Fund may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) the Fund may purchase securities on margin to
the extent permitted by applicable law.The Fund may not pledge its assets
other than to secure such borrowings or, to the extent permitted by the
Fund's investment policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the Fund
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 Fund may do so in accordance with applicable law and the
Fund's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
In addition, the Fund has adopted non-fundamental investment restrictions
that may be changed by the Board of Directors without a vote of the Fund's
shareholders. Under the non-fundamental investment restrictions, theFund may
not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(F) or (G) (the "fund of funds" provisions) of
investment company the Investment Company Act, at any time its shares are
owned by another that is part of the same group of investment companies as
the Fund.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which can not otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Directors of the Fund has otherwise determined
to be liquid pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act (a "Rule 144A security") and
determined to be liquid by the Fund's Board of Directors are not subject to
the limitations set forth in this investment restriction.
d. Notwithstanding fundamental investment restriction (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 Fund shares. In addition, the Fund will
not purchase securities while borrowings are outstanding except to exercise
prior commitments and to exercise subscription rights.
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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, theFund has adopted an investment policy pursuant to which
it will not purchase or sell OTC options if, as a result of such transactions,
the sum of the market value of OTC options currently outstanding which are held
by the Fund, the market value of the underlying securities covered by OTC call
options currently outstanding which were sold by the Fund and margin deposits on
the Fund's existing OTC options on futures contracts exceed 10% of the net
assets of the Fund, taken at market value, together with all other assets of the
Fund which are illiquid or are not otherwise readily marketable. However, if an
OTC option is sold by the Fund to a primary U.S. Government securities dealer
recognized by the Federal Reserve Bank of New York and if the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer at
a predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the underlying
securities minus the option's strike price). The repurchase price with the
primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money." This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by
theCommission staff of its position.
The Board of Directors may draft guidelines and delegate to the Investment
Adviser the daily function of monitoring the liquidity of restricted securities,
including Rule 144A securities. The Board will, however, maintain sufficient
oversight and be ultimately responsible for the determinations. The Board has
determined that securities that are freely tradable in their primary market
overseas should be deemed liquid.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with theInvestment Adviser, the Fund is
prohibited from engaging in certain transactions involving such firm or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." Without such an exemptive order, the Fund would be
prohibited from engaging in portfolio transactions with Merrill Lynch or any of
its affiliates acting as principal.
The Fund's investment restrictions contain an exception that permits the
Fund to purchase securities pursuant to the exercise of subscription rights,
subject to the condition that such purchase will not result in the Fund ceasing
to be treated as a regulated investment company as required by 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 Fund's interest in the issuing company being diluted.
The market for such rights is not well developed, and accordingly, the Fund may
not always realize full value on the sale of rights. Therefore, the exception
applies in cases where the limits would otherwise be exceeded by exercising
rights or have already been exceeded as a result of fluctuations in the market
value of the Fund's portfolio securities with the result that the Fund 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.
Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Fund's investments are limited, however, in
order to allow the Fund to qualify as a "regulated investment company" under the
Code. See "Dividends and Taxes -- Taxes." To qualify, the Fund complies 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 Fund'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 Fund will not own more than 10% of the
outstanding voting securities 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 Fund assumes large positions in the securities of a small number
of issuers, the Fund'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 Fund may be more
susceptible to any single economic, political or regulatory occurrence than a
diversified company.
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Portfolio Turnover
The Investment Adviser will effect portfolio transactions without regard to
the time the securities have been held, 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, financial or economic
conditions. As a result of its investment policies, under certain market
conditions the Fund's portfolio turnover rate may be higher than that of other
investment companies; however, it is extremely difficult to predict portfolio
rates with any degree of accuracy. The portfolio turnover rate is calculated by
dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of U.S. government securities and
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. A high portfolio turnover may result in negative tax consequences,
such as an increase in capital gain dividends. High portfolio turnover may also
involve correspondingly greater transaction costs in the form of dealer spreads
and brokerage commissions, which are borne directly by the Fund.
MANAGEMENT OF THE FUND
Directors and Officers
The Directors of the Fund consist of eight individuals, six of whom are not
"interested persons" of the Fund as defined in the Investment Company Act (the
"non-interested Directors"). The Directors are responsible for the overall
supervision of the operations of the Fund and perform the various duties imposed
on the directors of investment companies by the Investment Company Act.
Information about the Directors, executive officers and the portfolio manager of
the Fund, including their ages and their principal occupations for at least the
last five years, is set forth below. Unless otherwise noted, the address of each
Director, executive officer and the portfolio manager is P.O. Box 9011,
Princeton, New Jersey 08543-9011.
TERRY K. GLENN (58) -- President and Director(1)(2) -- Executive Vice
President of the Investment Adviser and Fund Asset Management, L.P. ("FAM")
(which terms as used herein include their corporate predecessors) since 1983;
President of Princeton Funds Distributor, Inc. ("PFD") since 1986 and Director
thereof since 1991; Executive Vice President and Director of Princeton Services,
Inc. ("Princeton Services") since 1993; President of Princeton Administrators,
L.P. since 1988.
DONALD CECIL (72) -- Director(2)(3) -- 1114 Avenue of the Americas, New
York, New York 10036. Special Limited Partner of Cumberland Associates (an
investment partnership) since 1982; Member of Institute of Chartered Financial
Analysts; Member and Chairman of Westchester County (N.Y.) Board of
Transportation.
ROLAND M. MACHOLD (63) -- Director(2)(3) -- 1091 Princeton-Kingston Road,
Princeton, New Jersey 08540. Director of the State of New Jersey Division of
Investment from 1977 to 1998; Trustee of Bryn Mawr College since 1990 and of
Teacher's College, Columbia University since 1985; Co-Chair Emeritus and
Founding Director of the Council of Institutional Investors; Member of the
Capital Formation and Regulatory Processes Advisory Committee of the Securities
and Exchange Commission from 1995 to 1996; Member of the Institutional Investor
Advisory Committee of the New York Stock Exchange from 1992 to 1995.
EDWARD H. MEYER (72) -- Director(2)(3) -- 777 Third Avenue, New York, New
York 10017. President of Grey Advertising Inc. since 1968, Chief Executive
Officer since 1970 and Chairman of the Board of Directors since 1972; Director
of The May Department Stores Company, Bowne & Co., Inc. (financial printers),
Harman International Industries, Inc. and Ethan Allen Interiors, Inc.
CHARLES C. REILLY (68) -- Director(2)(3) -- 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 (61) -- Director(2)(3) -- 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), Vornado Operating Company,
Inc. and Alexander's, Inc. (real estate company).
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ARTHUR ZEIKEL (67) -- Director(1)(2) -- 300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Investment Adviser and FAM from 1997 to 1999 and
President thereof from 1977 to 1997; Chairman of Princeton Services from 1997 to
1999, Director thereof from 1993 to 1999 and President thereof from 1993 to
1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from
1990 to 1999.
EDWARD D. ZINBARG (64) -- Director(2)(3) -- 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.
JORDAN C. SCHREIBER (69) -- 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; Portfolio Manager of the Investment
Adviser since 1983.
DONALD C. BURKE (39) -- Vice President and Treasurer(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; First Vice
President of the Investment Adviser from 1997 to 1999; Vice President of the
Investment Adviser from 1990 to 1997; Director of Taxation of the Investment
Adviser since 1990; Vice President of PFD since 1999.
ROBERT HARRIS (47) -- Secretary (1)(2) -- First Vice President of the
Investment Adviser since 1997; Vice President of the Investment Adviser from
1984 to 1997 and attorney associated with the Investment Adviser since 1980;
Secretary of PFD since 1982.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Director or officer is a trustee, director or officer of certain other
investment companies for which the Investment Adviser or FAM acts as the
investment adviser or manager.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Directors.
As of , 1999, the Directors and officers of the Fund as a group (11
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director of the Fund, Mr. Glenn, a Director
and officer of the Fund, and the other officers of the Fund owned an aggregate
of less than 1% of the outstanding shares of common stock of ML & Co.
Compensation of Directors
The Fund pays each non-interested Director a fee of $3,500 per year plus
$500 per Board meeting attended. The Fund also compensates each member of the
Audit and Nominating Committee (the "Committee"), which consists of the
non-interested Directors at a rate of $500 per Committee meeting attended. The
Fund pays the Chairman of the Committee an additional fee of $250 per Committee
meeting attended. The Fund reimburses each non-interested Director for his
out-of-pocket expenses relating to attendance at Board and Committee meetings.
The following table shows the compensation earned by the non-interested
Directors for the fiscal year ended April 30, 1999 and the aggregate
compensation paid to them from all registered investment companies advised by
the Investment Adviser and its affiliate, FAM ("MLAM/FAM-advised funds"), for
the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregate
Pension or Estimated Compensation from
Retirement Benefits Annual Fund and Other
Position with Compensation Accrued as Part of Benefits upon MLAM/FAM-
Name Fund From Fund Fund Expense Retirement Advised Funds(1)
- ----- -------------- ------------ ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Donald Cecil Director $8,500 None None $277,808
Roland M. Machold Director $4,250 None None $ 39,208(2)
Edward H. Meyer Director $7,000 None None $214,558
Charles C. Reilly Director $7,500 None None $362,858
Richard R. West Director $7,500 None None $346,125
Edward D. Zinbarg Director $7,500 None None $133,959
</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. Machold (19 registered investment companies consisting of 19 portfolios);
Mr. Meyer (34 registered investment companies consisting of 34 portfolios);
Mr. Reilly (57 registered investment companies consisting of 70 portfolios);
Mr. West (59 registered investment companies consisting of 83 portfolios);
and Mr. Zinbarg (19 registered investment companies consisting of 19
portfolios).
(2)Mr. Machold was elected a Director of the Fund and director or trustee of
certain other MLAM/FAM-advised funds on October 20, 1998.
19
<PAGE>
Directors of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares--Initial Sales Charge Alternatives -- Class A and
Class D Shares -- Reduced Initial Sales Charges -- Purchase Privilege of Certain
Persons."
Management and Advisory Arrangements
Investment Advisory Services. The Investment Adviser provides the Fund with
investment advisory and management services. Subject to the supervision of the
Directors, the Investment Adviser is responsible for the actual management of
the Fund's portfolio and constantly reviews the Fund'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 necessary personnel for management of the Fund.
Investment Advisory Fee. The Fund has entered into an investment advisory
agreement with the Investment Adviser (the "Investment Advisory Agreement"),
pursuant to which the Investment Adviser receives for its services to the Fund
monthly compensation at the annual rate of 1.0% of the average daily net assets
of the Fund. The table below sets forth information about the total management
fees paid by the Fund to the Investment Adviser for the periods indicated.
Investment Advisory
Fiscal Year Ended April 30, Fee
--------------------------- ----
1999 ............................................ $
1998 ............................................ $3,524,780
1997 ............................................ $3,764,088
The Investment Adviser has entered into a sub-advisory agreement with
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") pursuant to which MLAM
U.K. provides investment advisory services to the Investment Adviser with
respect to the Fund. For the fiscal years ended April 30, 1999, 1998 and 1997,
the Investment Adviser paid no fees to MLAM U.K. pursuant to this agreement.
Payment of Fund Expenses. The Investment Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the Fund
connected with investment and economic research, trading and investment
management of the Fund, as well as the fees of all Directors of the Fund who are
affiliated persons of the Investment Adviser. The Fund pays all other expenses
incurred in the operation of the Fund, including among other things: taxes,
expenses for legal and auditing services, costs of printing proxies, stock
certificates, shareholder reports, prospectuses and statements of additional
information, except to the extent paid by Merrill Lynch Funds Distributor, a
division of PFD (the "Distributor"); charges of the custodian and sub-custodian,
and the transfer agent; expenses of redemption of shares; SEC fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of non-interested Directors; accounting and pricing costs (including the daily
calculations of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other expenses
properly payable by the Fund. Accounting services are provided for the Fund by
the Investment Adviser and the Fund reimburses the Investment Adviser for its
costs in connection with such services on a semi-annual basis. The Distributor
will pay certain promotional expenses of the Fund incurred in connection with
the offering of shares of the Fund. Certain expenses will be financed by the
Fund pursuant to distribution plans in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares -- Distribution Plans."
Organization of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are ML & Co., a financial services holding
company and the parent of Merrill Lynch, 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.
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.
20
<PAGE>
Duration and Termination. Unless earlier terminated as described herein,
the Investment Advisory Agreement will continue in effect for a period of two
years from the date of execution and will remain in effect from year to year if
approved annually (a) by the Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the Investment
Company Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party or by vote of the shareholders of the Fund.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Fund's Transfer Agent pursuant to
a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and
redemption of shares and the opening and maintenance of shareholder accounts.
Pursuant to the Transfer Agency Agreement, the Transfer Agent receives a fee of
$11.00 per Class A or Class D account and $14.00 per Class B or Class C account
and is entitled to reimbursement for certain transaction charges and
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. Additionally, a $.20 monthly closed account charge will be assessed
on all accounts which close during the calendar year. Application of this fee
will commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the beneficial
interest of a person in the relevant share class on a recordkeeping system,
provided the recordkeeping system is maintained by a subsidiary of ML & Co.
Distribution Expenses. The Fund has entered into four separate distribution
agreements with the Distributor in connection with the continuous offering of
each class of shares of the Fund (the "Distribution Agreements"). The
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays for
the printing and distribution of copies thereof used in connection with the
offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Investment Advisory Agreement described above.
Code of Ethics
The Board of Directors of the Fund 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 pre-clear
any personal securities investment (with limited exceptions, such as government
securities). The pre-clearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. The substantive restrictions applicable to all employees of
the Investment Adviser include a ban on acquiring any securities in a "hot"
initial public offering and a prohibition from profiting on short-term trading
in securities. In addition, no employee may purchase or sell any security that
at the time is being purchased or sold (as the case may be), or to the knowledge
of the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
PURCHASE OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C or Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund and has the same
21
<PAGE>
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees (also known as service 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 contingent deferred sales charges ("CDSCs"),
distribution fees and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and differ only to the extent
that account maintenance and distribution fees and any incremental transfer
agency costs relating to a particular class are borne exclusively by that class.
Each class has different exchange privileges. See "Shareholder Services --
Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class C
shares in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by the Investment Adviser or FAM. Funds
advised by the Investment Adviser or FAM that utilize the Merrill Lynch Select
Pricing(SM) System are referred to herein as "Select Pricing Funds."
The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. 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.
Initial Sales Charge Alternatives -- Class A and Class D Shares
Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase Class
A shares should purchase Class A shares rather than Class D shares because there
is an account maintenance fee imposed on Class D shares. Investors qualifying
for significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges imposed
in connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A or
Class D shares, because over time the accumulated ongoing account maintenance
and distribution fees on Class B or Class C shares may exceed the initial sales
charges and, in the case of Class D shares, the account maintenance fee.
Although some investors who previously purchased Class A shares may no longer be
eligible to purchase Class A shares of other Select Pricing Funds, those
previously purchased Class A shares, together with Class B, Class C and Class D
share holdings, will count toward a right of accumulation which may qualify the
investor for a reduced initial sales charge 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.
The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children under
the age of 21 years purchasing shares for his, her or their own account and to
single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the Investment Company Act, but does not include purchases by
any such company that has not been in existence for at least six months or which
has no purpose other than the purchase
22
<PAGE>
of shares of the Fund or shares of other registered investment companies at a
discount; provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
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
who currently own Class A shares in a shareholder account, including
participants in the Merrill Lynch Blueprint(SM) program, are entitled to
purchase additional Class A shares of the Fund in that account. Certain
employee-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 has $3
million or more initially invested in Select Pricing Funds. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs including TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, collective investment
trusts for which Merrill Lynch Trust Company serves as trustee and certain
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. Certain persons who acquired shares of certain
MLAM-advised closed-end funds in their initial offerings who wish to reinvest
the net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions are met. In addition, Class A shares of the Fund and certain other
Select Pricing Funds are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Senior Floating Rate Fund
II, Inc. and, if certain conditions are met, to shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. who wish to reinvest the net proceeds from a sale of certain of their
shares of common stock pursuant to a tender offer conducted by such funds in
shares of the Fund and certain other Select Pricing Funds.
<TABLE>
<CAPTION>
Class A and Class D Sales Charge Information
Class A Shares
---------------------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained By Paid To Redemption of
April 30, Collected Distributor Merrill Lynch Load-Waived Shares
----------------- ---------- ------------ ------------- ------------------
<S> <C> <C> <C> <C>
1999 $15,154 $1,257 $13,897 0
1998 $12,880 $ 940 $11,940 0
1997 $14,807 $1,883 $12,924 0
</TABLE>
<TABLE>
<CAPTION>
Class D Shares
---------------------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
April 30, Collected Distributor Merrill Lynch Load-Waived Shares
----------------- ---------- ------------ ------------ ------------------
<S> <C> <C> <C> <C>
1999 $132,250 $8,207 $124,043 0
1998 $ 69,709 $4,581 $ 65,128 0
1997 $ 77,021 $3,748 $ 73,273 0
</TABLE>
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
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.
23
<PAGE>
Reinvested Dividends. No initial sales charges are imposed upon Class A and
Class D shares issued as a result of the automatic reinvestment of dividends.
Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase shares
of the Fund subject to an initial sales charge at the offering price applicable
to the total of (a) the public offering price of the shares then being purchased
plus (b) an amount equal to the then current net asset value or cost, whichever
is higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of any other Select Pricing Funds. For any such right of accumulation
to be made available, the Distributor must be provided at the time of purchase,
by the purchaser or the purchaser's securities dealer, with sufficient
information to permit confirmation of qualification. 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 Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent is not a binding obligation to purchase any amount of Class A
or Class D shares; however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intent may be included under a
subsequent Letter of Intent executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. The
value of Class A and Class D shares of the Fund and of other Select Pricing
Funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intent, may be included as
a credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intent (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 5.0% 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
Intent must be at least 5.0% 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 applicable to a single purchase equal to the total
dollar value of the Class A or Class D shares then being purchased under such
Letter, but there will be no retroactive reduction of the sales charge 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 Intent will be deducted from
the total purchases made under such Letter. An exchange from the Summit Cash
Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. 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 Fund through
Blueprint will acquire the Class A or Class D shares at net asset value plus a
sales charge calculated in accordance with the Blueprint sales charge schedule
(i.e., up to $300 at 4.25%, $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 Fund are offered at net asset value
plus a sales charge of .50% of 1% for corporate or group IRA programs placing
orders to purchase their Class A or Class D shares through Blueprint. Services,
including the exchange privilege, available to Class A and Class D investors
through Blueprint, however, may differ from those available to other Class A or
Class D share investors.
24
<PAGE>
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 LynchBusiness 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
IRARollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, the Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA(SM) Managed Trusts. Class A shares are offered at net asset value to
TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services.
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 investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.
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. Additional
information regarding purchases by employer-sponsored retirement or savings
plans and certain other arrangements is available toll-free fromMerrill Lynch
Business Financial Services at (800) 237-7777.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM/FAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.) and their directors and employees, and any
trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of the Fund at net asset value. The Fund realizes
economies of scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Fund. Employees and directors or trustees
wishing to purchase shares of the Fund must satisfy the Fund's suitability
standards.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that 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 Fund with proceeds from a redemption of
shares 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 must establish that such
redemption had been made within 60 days prior to the investment in the Fund and
the proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor that has a business relationship with a Merrill
Lynch Financial Consultant and that has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice") if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares of
such other fund were subject to a sales charge either at the time of purchase or
on a deferred basis; and, second, such purchase of Class D shares must be made
within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that 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
25
<PAGE>
advise Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from the redemption of shares of such other mutual fund 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.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by FAM or MLAM who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill Lynch Select Pricing(SM) System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other Select Pricing Funds
("Eligible Class D Shares"), if the following conditions are met. First, the
sale of closed-end fund shares must be made through Merrill Lynch, and the net
proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible 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 Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
and Merrill Lynch Senior Floating Rate Fund II, Inc. will receive Class A shares
of the Fund and shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. will receive Class D shares
of the Fund, except that shareholders already owning Class A shares of the Fund
will be eligible to purchase additional Class A shares pursuant to this option,
if such additional Class A shares will be held in the same account as the
existing Class A shares and the other requirements pertaining to the
reinvestment privilege are met. In order to exercise this investment option, a
shareholder of one of the above-referenced continuously offered closed-end funds
(an "eligible fund") must sell his or her shares of common stock of the eligible
fund (the "eligible shares") back to the eligible fund in connection with a
tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus) is
applicable. Purchase orders from eligible fund shareholders wishing to exercise
this investment option will be accepted only on the day that the related tender
offer terminates and will be effected at the net asset value of the designated
class of the Fund on such day.
Acquisition of Certain Investment Companies. Class D shares may be offered
at net asset value in connection with the acquisition of the assets of or merger
or consolidation with a personal holding company or a public or private
investment company.
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 Select Pricing Funds.
Because no initial sales charges are deducted at the time of the 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 that do not qualify for
the reduction in initial sales charges. Both Class B and Class C shares are
subject to ongoing account maintenance fees and distribution fees; however, the
ongoing account maintenance and distribution fees potentially may be offset to
the extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In addition, Class B shares will be converted into
Class D shares of the Fund after a conversion period of approximately eight
years, and thereafter investors will be subject to lower ongoing fees.
26
<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. See "Pricing of Shares -- Determination of Net Asset Value" below.
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. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in the
lowest applicable rate being charged. 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. It will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends and then of shares held longest during the
four-year period. 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.
The following table sets forth the Class B CDSC:
CDSC as a Percentage
of Dollar Amount
Year Since Purchase Payment Made Subject to Charge
------------------------------- ----------------
0-1 ................................................ 4.0%
1-2 ................................................ 3.0%
2-3 ................................................ 2.0%
3-4 ................................................ 1.0%
4 and thereafter ................................... None
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon 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 a CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the charge 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).
The Class B CDSC may be 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
(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 or, if later, reasonably promptly following
completion of probate. The Class B CDSC also may be waived on redemptions of
shares by certain eligible 401(a) and 401(k) plans. The CDSC may also be 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 may be waived for any Class B shares that were acquired and held at the
time of the redemption in an Employee Access(SM) Account available through
employers providing eligible 401(k) plans. The Class B CDSC may also be waived
for any Class B shares that are purchased by a Merrill Lynch rollover IRA that
was funded by a rollover from a terminated 401(k) plan managed by the MLAM
Private Portfolio Group and held in such account at the time of redemption. The
Class B CDSC may also be waived or its terms may be modified in connection with
certain fee-based programs. The Class B CDSC may also be waived in connection
with involuntary termination of an account in which Fund shares are held or for
withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See
"Shareholder Services -- Fee Based Programs" and "-- Systematic Withdrawal
Plan."
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements. Certain employer-sponsored retirement or savings plans and certain
other arrangements may purchase Class B shares with a waiver of the CDSC upon
redemption, 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. Such
Class B shares will convert into Class D shares approximately ten years after
the plan purchases the first share of any Select Pricing Fund. Minimum purchase
requirements may be waived or
27
<PAGE>
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.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants inBlueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares of the Fund are offered throughBlueprint only to
members of certain affinity groups.The CDSC is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B investors through Blueprint, however, may differ
from those available to other investors inClass B shares. Orders for purchases
and redemptions of Class B shares of the Fund will be grouped for execution
purposes which, in some circumstances, may involve the execution of such orders
two business days following the day such orders are placed. The minimum initial
purchase price is $100, with a $50 minimum for subsequent purchases through
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of 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.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of the average daily 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 value 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 the Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing 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 on to the holding period
for the shares acquired. The Conversion Period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services -- Exchange Privilege" will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
Contingent Deferred Sales Charges -- Class C Shares
Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. 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. 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. It will be assumed that the
redemption is first of shares held for over one year or shares acquired pursuant
to
28
<PAGE>
reinvestment of dividends and then of shares held longest during the one-year
period. 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. The Class C CDSC
may be waived in connection with involuntary termination of an account in which
Fund shares are held and withdrawals through the Merrill Lynch Systematic
Withdrawal Plans. See "Shareholder Services -- Systematic Withdrawal Plan." The
Class C CDSC of the Fund and certain other MLAM-advised mutual funds may be
waived with respect to Class C shares purchased by an investor with the net
proceeds of a tender offer made by certain MLAM-advised closed end funds,
including Merrill Lynch Senior Floating Rate Fund II, Inc. Such waiver is
subject to the requirement that the tendered shares shall have been held by the
investor for a minimum of one year and to such other conditions as are set forth
in the prospectus for the related closed end fund.
Class B and Class C Sales Charge Information
Class B Shares*
----------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended April 30, by Distributor Merrill Lynch
------------------- -------------- --------------
1999 $ 352,702 $ 352,702
1998 $ 333,320 $ 333,320
1997 $ 500,257 $ 500,257
- -----------------
* Additional Class B 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.
Class C Shares
----------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended April 30, by Distributor Merrill Lynch
------------------ -------------- --------------
1999 $ 12,116 $12,116
1998 $ 3,702 $ 3,702
1997 $ 21,653 $21,653
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and are used in whole
or in part by the Distributor to defray the expenses of dealers (including
Merrill Lynch) related to providing distribution-related services to the Fund in
connection with the sale of the Class B and Class C shares, such as the payment
of compensation to financial consultants for selling Class B and Class C shares
from the dealer's own funds. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B and
Class C shares without a sales charge being deducted at the time of purchase.
See "Distribution Plans" below. 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.
Distribution Plans
Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each
a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.
The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pay the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and Merrill
Lynch (pursuant to a sub-agreement) in connection with account maintenance
activities with respect to Class B, Class C and Class D shares. Each of those
classes has exclusive voting rights with respect to the 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).
The Distribution Plans for Class B and Class C shares each provides that
the Fund also pay the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rate of 0.75%
of the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services and bearing certain distribution-related expenses of the Fund,
including payments to
29
<PAGE>
financial consultants for selling Class B and Class C shares of the Fund. The
Distribution Plans relating to Class B and Class C shares are designed to permit
an investor to purchase Class B and Class C shares through dealers without the
assessment of an initial sales charge and at the same time permit the dealer to
compensate its financial consultants in connection with the sale of the Class B
and Class C shares.
The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Directors must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination of
non-interested Directors shall be committed to the discretion of the
non-interested Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested Directors concluded that there is
reasonable likelihood that each Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the non-interested Directors
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders and all material amendments are required to be
approved by the vote of Directors, including a majority of the non-interested
Directors who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of the Distribution Plan or such report, the first two years in an easily
accessible place.
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 and/or distribution fees paid to the
Distributor. 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 annually, as of December 31 of each year, on a "fully allocated accrual"
basis and quarterly on a "direct expense and revenue/cash" basis. On the fully
allocated accrual basis, revenues consist of the account maintenance fees,
distribution fees, the CDSCs and certain other related revenues, and expenses
consist of financial consultant compensation, branch office and regional
operation center selling and transaction processing expenses, advertising, sales
promotion and marketing expenses, corporate overhead and interest expense. On
the direct expense and revenue/cash basis, revenues consist of the account
maintenance fees, distribution fees and CDSCs and the expenses consist of
financial consultant compensation.
As of December 31, 1998, the fully allocated accrual revenues of the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded the fully allocated accrual expenses by
approximately $807,000 (0.33% of Class B net assets at that date). As of April
30, 1999, direct cash revenues for the period since the commencement of
operations of Class B shares exceeded direct cash expenses by $7,292,060 (2.8%
of Class B net assets at that date). As of December 31, 1998, the fully
allocated accrual revenues of the Distributor and Merrill Lynch for the period
since the commencement of operations of Class C shares exceeded the fully
allocated accrual expenses by approximately $37,000 (0.14% of Class C net assets
at that date). As of April 30, 1999, direct cash revenues for the period since
the commencement of operations of Class C shares exceeded direct cash expenses
by $519,005 (1.6% of Class C net assets at that date).
For the fiscal year ended April 30, 1999, the Fund paid the Distributor
$ pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $ 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, 1999, the Fund paid the Distributor $
pursuant to the Class C Distribution Plan (based on average daily net assets
subject to such Class C Distribution Plan of approximately $ million), all of
which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended April 30, 1999, the Fund paid the Distributor $
pursuant to the Class D Distribution Plan (based on average daily net assets
subject to such Class D Distribution Plan of approximately $ million), all of
which was paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares.
30
<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 Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed separately (defined
to exclude shares issued pursuant to dividend reinvestments and exchanges), plus
(2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with the
Class B shares is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares and any CDSCs will be paid
to the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance fee. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.
The following table sets forth comparative information as of April 30, 1999
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.
<TABLE>
<CAPTION>
Data Calculated as of April 30, 1999
----------------------------------------------------------------------------------------
(in thousands)
Annual
Distribution
Allowable Amounts Fee at
Eligible Allowable Interest on Maximum Previously Aggregate Current Net
Gross Aggregate Unpaid Amount Paid to Unpaid Asset
Sales(1) Sales Charges(2) Balance(3) Payable Distributor(4) Balance Level(5)
------- ---------------- ---------- --------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares for the period
October 21, 1988 (commencement of
operations) to April 30, 1999
Under NASD Rule as Adopted ......... $236,073 $14,928 $3,402 $18,330 $ 8,998 $9,332 $1,920
Under Distributor's Voluntary
Waiver ........................... $236,073 $14,928 $1,007 $15,935 $ 8,998 $6,937 $1,920
Class C Shares, for the period
October 21, 1994 (commencement of
operations) to April 30, 1999
Under NASD Rule as Adopted ......... $ 40,971 $ 2,558 $ 451 $ 3,009 $ 578 $2,431 $ 235
</TABLE>
- -------------
(1)Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2)Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of Summit
can only be purchased by exchange from another fund (the "redeemed fund").
Upon such an exchange, the maximum allowable sales charge payment to the
redeemed fund is reduced in accordance with the amount of the redemption.
This amount is then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the remaining balance of
this amount is deducted from the maximum allowable sales charge payment to
Summit and added to the maximum allowable sales charge payment to the fund
into which the exchange is made.
(3)Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(4)Consists of CDSC payments, distribution fee payments and accruals. See "What
are the Fund's fees and expenses?" in the Prospectus. This figure may include
CDSCs that were deferred when a shareholder redeemed shares prior to the
expiration of the applicable CDSC period and invested the proceeds, without
the imposition of a sales charge, in Class A shares in conjunction with the
shareholder's participation in the Merrill Lynch Mutual Fund Advisor (Merrill
Lynch MFA(SM) Program (the "MFA Program"). The CDSC is booked as a contingent
obligation that may be payable if the shareholder terminates participation in
the MFA Program.
(5)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 voluntary maximum (with respect to Class B shares) or the
NASD maximum (with respect to Class B and Class C shares).
REDEMPTION OF SHARES
Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper
31
<PAGE>
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 right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the New York Stock Exchange (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 Fund is not reasonably
practicable, and for such other periods as the Commission may by order permit
for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities held
by the Fund at such time.
Redemption
A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake 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 Fund. The redemption request in either event requires the
signature(s) of all persons in whose name(s) the shares are registered, signed
exactly as such name(s) appear(s) on the Transfer Agent's register. The
signature(s) on the redemption requests must be guaranteed by an "eligible
guarantor institution" as such is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), 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, payments will be mailed within seven
days of receipt of a proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment (e.g., cash, Federal funds or certified check
drawn on a United States bank). The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that good
payment (e.g., cash, Federal funds or certified check drawn on a United States
bank) has been collected for the purchase of such Fund shares, which will not
usually exceed 10 days.
Repurchase
The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers at the net asset
value next computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided that the
request for repurchase is submitted to the dealer prior to the regular close of
business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) and
such request is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later than
30 minutes after the close of business on the NYSE, in order to obtain that
day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Transfer Agent on
accounts held at the Transfer Agent are not subject to the processing fee. The
Fund reserves the right to reject any order for
32
<PAGE>
repurchase, which right of rejection might adversely affect shareholders seeking
redemption through the repurchase procedure. However, a shareholder whose order
for repurchase is rejected by the Fund may redeem Fund shares as set forth
above.
Reinstatement Privilege -- Class A and Class D Shares
Shareholders who have redeemed their Class A or Class D shares of the Fund
have a privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
PRICING OF SHARES
Determination of Net Asset Value
Reference is made to "How Shares are Priced" in the Prospectus.
The net asset value of the shares of all classes of the Fund is determined
once daily Monday through Friday after the close of business on the NYSE on each
day the NYSE is open for trading. The NYSE generally closes at 4:00 p.m.,
Eastern time. 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
NYSE is not open for trading 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.
Net asset value is computed by dividing the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends accrued
but not yet received) minus all liabilities (including accrued expenses) by the
total number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Investment Adviser and Distributor
are accrued daily.
The per share net asset value of Class B, Class C and Class D shares
generally will be lower than the per share net asset value of Class A shares,
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to Class B and Class C
shares, and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of Class D shares reflecting the daily expense accruals of
the distribution fees and higher transfer agency fees applicable with respect to
Class B and Class C shares of the Fund. It is expected, however, that the per
share net asset value of the four classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends, 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 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 Fund
writes an option, the amount of the premium received is recorded on the books of
the Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Other
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investments, including financial futures contracts and related options, are
stated at market value. Securities and assets for which market quotations are
not readily available are stated at fair value as determined in good faith by or
under the direction of the Directors of the Fund. Such valuations and procedures
will be reviewed periodically by the Directors.
Generally, trading in non-U.S. securities, as well as 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 Fund'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 that may not be reflected in the computation of the Fund's net asset value.
Computation of Offering Price Per Share
An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on April 30, 1999 is set forth below.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets ................................ $ $ $ $
============== ============== ============= =============
Number of Shares Outstanding ..............
============== ============== ============= =============
Net Asset Value Per Share (net assets
divided by number of shares
outstanding) ............................ $ $ $ $
Sales Charge (for Class A and Class D
shares: 5.25% of offering price; 5.54%
of net asset value per share)* .......... ** **
============== ============== ============= =============
Offering Price ............................ $ $ $ $
============== ============== ============= =============
</TABLE>
- ----------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See "Purchase of Shares
-- Deferred Sales Charges Alternatives -- Class B and Class C Shares" herein.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions and the allocation of brokerage. The Fund has no
obligation to deal with any broker or group of brokers in the execution of
transactions in portfolio securities and does not use any particular broker or
dealer. In executing transactions with brokers and dealers, the Investment
Adviser seeks to obtain the best net results for the Fund, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution and operational facilities of
the firm and the firm's risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Fund does not necessarily pay the lowest spread or commission available. In
addition, consistent with the Conduct Rules of the NASD and policies established
by the Board of Directors of the Fund, the Investment Adviser may consider sales
of shares of the Fund as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Fund; however, whether or not a
particular broker or dealer sells shares of the Fund neither qualifies nor
disqualifies such broker or dealer to execute transactions for the Fund.
Subject to obtaining the best price and execution, brokers who provide
supplemental investment research services to the Investment Adviser may receive
orders for transactions by the Fund. Such supplemental research services
ordinarily consist of assessments and analyses of the business or prospects of a
company, industry or economic sector. 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. If in the judgment of the Investment
Adviser the Fund will benefit from supplemental research services, the
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<PAGE>
Investment Adviser is authorized to pay brokerage commissions to a broker
furnishing such services that are in excess of commissions that another broker
may have charged for effecting the same transaction. Certain supplemental
research services may primarily benefit one or more other investment companies
or other accounts for which the Investment Adviser exercises investment
discretion. Conversely, the Fund may be the primary beneficiary of the
supplemental research services received as a result of portfolio transactions
effected for such other accounts or investment companies.
The Fund anticipates that its brokerage transactions involving securities
of issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Foreign equity securities may be held by the Fund in the form of ADRs,
EDRs, GDRs or other securities convertible into foreign equity securities. ADRs,
EDRs and GDRs may be listed on stock exchanges, or traded in over-the-counter
markets in the United States or Europe, as the case may be. ADRs, like other
securities traded in the United States, will be subject to negotiated commission
rates. The Fund's ability and decisions to purchase or sell portfolio securities
of foreign issuers may be affected by laws or regulations relating to the
convertibility and repatriation of assets. Because the shares of the Fund are
redeemable on a daily basis in United States dollars, the Fund intends to manage
its portfolio so as to give reasonable assurance that it will be able to obtain
United States 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.
Information about the brokerage commissions paid by the Fund, including
commissions paid to Merrill Lynch, is set forth in the following table:
Aggregate Brokerage Commissions Paid
Fiscal Year Ended April 30, Commissions Paid to Merrill Lynch
--------------------------- ----------------- ---------------
1999 ............................. $ $
1998 ............................. $ 983,494 $233,975
1997 ............................. $1,399,360 $262,491
For the fiscal year ended April 30, 1999, the brokerage commissions paid to
Merrill Lynch represented % of the aggregate brokerage commissions paid and
involved % of the Fund's dollar amount of transactions involving payment of
brokerage commissions.
The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in securities
involved, except in those circumstances in which better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund 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 the dealers acting as principal for their own accounts, the
Fund will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, an affiliated person
of the Fund may serve as its broker in 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 Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member or
in a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Board of Directors of the Fund that
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. See "Investment Objective and Policies -- Investment
Restrictions."
Section 11(a) of the Exchange Act generally prohibits members of the United
States 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,
35
<PAGE>
(ii) at least annually furnishes the account with the aggregate compensation
received by the member in effecting such transactions, and (iii) complies with
any rules the Commission has prescribed with respect to the requirements of
clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch
acting as a broker for the Fund in any of its portfolio transactions executed on
any such securities exchange of which it is a member, appropriate consents have
been obtained from the Fund and annual statements as to aggregate compensation
will be provided to the Fund.
The Board of Directors of the Fund has considered the possibility of
seeking to recapture for the benefit of the Fund 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 Fund to
the Investment Adviser. After considering all factors deemed relevant, the Board
of Directors made a determination not to seek such recapture. The Board will
reconsider this matter from time to time.
Because of different objectives or other factors, a particular security may
be bought for one or more clients of the Investment Adviser or an affiliate when
one or more clients of the Investment Adviser or an affiliate are selling the
same security. If purchases or sales of securities arise for consideration at or
about the same time that would involve the Fund or other clients or funds for
which the Investment Adviser or an affiliate acts as manager 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 an affiliate during
the same period may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch. Certain of these services are available only to U.S. investors
and certain of these services are not available to investors who place orders
through the Merrill Lynch Blueprint(SM) Program.
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 dividends. The statements
will also show any other activity in the account since the preceding statement.
Shareholders will also receive separate confirmations for each purchase or sale
transaction other than automatic investment purchases and the reinvestment of
dividends. A shareholder with an account held at the Transfer Agent may make
additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent. A shareholder may also maintain an account
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's name
may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of a shareholder who has an Investment Account. Issuance of
certificates representing all or only part of the full shares in an Investment
Account may be requested by a shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch to another
securities dealer that has entered into a selected dealer agreement with Merrill
Lynch. Certain shareholder services may not be available for the transferred
shares. After the transfer, the shareholder may purchase additional shares of
funds owned before the transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer his or her
shares to a securities dealer that has not entered into a selected dealer
agreement with Merrill Lynch, the shareholder must either (i) redeem his or her
shares, paying any applicable CDSC or (ii) continue to maintain an Investment
Account at the Transfer Agent for those shares. The shareholder may also request
the new securities dealer to maintain the shares in an account at the Transfer
Agent registered in the name of the securities
36
<PAGE>
dealer for the benefit of the shareholder whether the securities dealer has
entered into a selected dealer agreement or not.
Shareholders considering transferring a tax-deferred retirement account,
such as an individual retirement account, from Merrill Lynch to another
securities dealer should be aware that, if the firm to which the retirement
account is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares, paying any applicable CDSC, so that
the cash proceeds can be transferred to the account at the new firm, or such
shareholder must continue to maintain a retirement account at Merrill Lynch for
those shares.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market fund specifically designated for exchange by
holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege and any shares utilized in an exchange must have been held by
the shareholder for at least 15 days. Before effecting an exchange, shareholders
should obtain a currently effective prospectus of the fund into which the
exchange is to be made. Exercise of the exchange privilege is treated as a sale
of the exchanged shares and a purchase of the acquired shares for Federal income
tax purposes.
Exchanges of Class A and Class D Shares. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund if
the shareholder holds any Class A shares of the second fund in the account in
which the exchange is made at the time of the exchange or is otherwise eligible
to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second Select Pricing Fund, but does
not hold Class A shares of the second fund in his or her account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as a
result of the exchange. Class D shares also may be exchanged for Class A shares
of a second Select Pricing Fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class D shares are exchangeable with shares of the
same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds or
for Class A shares of Summit, ("new Class A or Class D shares") are transacted
on the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount equal to the difference, if any, between the sales
charge previously paid on the outstanding Class A orClass D shares and the sales
charge payable at the time of the exchange on the new Class A or Class D shares.
With respect to outstanding Class A or Class D shares as to which previous
exchanges have taken place, the "sales charge previously paid" shall include the
aggregate of the sales charges paid with respect to such Class A or Class D
shares in the initial purchase and any subsequent exchange. Class A or Class D
shares issued pursuant to dividend reinvestment are sold on a no-load basis in
each of the funds offering Class A or Class D shares. For purposes of the
exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares generally
may be exchanged into the Class A or Class D shares, respectively, of the other
funds with a reduced sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offer to exchange their Class B or Class C shares for Class B or Class C shares,
respectively, of certain other Select Pricing Funds or for Class B shares of
Summit ("new Class B or Class C shares") on the basis of relative net asset
value per Class B or Class C share, without the payment of any CDSC that might
otherwise be due on redemption of the outstanding shares. Class B shareholders
of the Fund exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the new Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the Class B shares of the fund from which the
exchange has been made. For purposes of computing the CDSC
37
<PAGE>
that may be payable on a disposition of the new Class B or Class C shares, the
holding period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B shares of the Fund for those of Merrill Lynch Special Value
Fund, Inc. ("Special Value Fund") after having held the Fund's Class B shares
for two and a half years. The 2% CDSC that generally would apply to a redemption
would not apply to the exchange. Three years later the investor may decide to
redeem the Class B shares of Special Value Fund and receive cash. There will be
no CDSC due on this redemption, since by "tacking" the two and a half year
holding period of Fund Class B shares to the three-year holding period for the
Special Value Fund Class B shares, the investor will be deemed to have held the
Special Value Fund Class B shares for more than five years.
Exchanges for Shares of a Money Market Fund. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B or Class C
shares of Select Pricing Funds and, in the event of such an exchange, the period
of time that Class B shares of Summit are held will count toward satisfaction of
the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any Conversion Period with respect to Class B shares. Class B
shares of Summit will be subject to a distribution fee at an annual rate of
0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.
Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who exchanged Select Pricing
Fund shares for shares of such other money market funds and subsequently wish to
exchange those money market fund shares for shares of the Fund will be subject
to the CDSC schedule applicable to such Fund shares, if any. The holding period
for the money market fund shares will not count toward satisfaction of the
holding period requirement for reduction of the CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA Program, i.e., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA Program, Class A shares will be
re-exchanged for the class of shares originally held. For purposes of computing
any CDSC that may be payable upon redemption of Class B or Class C shares so
reacquired, or the Conversion Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the holding period for
the Class B or Class C shares originally held. The Fund's exchange privilege is
also modified with respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA Program. First, the initial
allocation of assets is made under the MFA Program. Then, any subsequent
exchange under the MFA Program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously paid
on the shares of the other Select Pricing Fund and the sales charge payable on
the shares of the Fund being acquired in the exchange under the MFA Program.
Exercise of the Exchange Privilege. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and shareholders
of the other Select Pricing Funds with shares for which certificates have not
been issued, may exercise the exchange privilege by wire through their
securities dealers. The Fund reserves the right to require a properly completed
Exchange Application. This exchange privilege may be modified or terminated in
accordance with the rules of the Commission. The Fund reserves the right to
limit the number of times an investor may exercise the exchange privilege.
Certain funds may suspend the continuous offering of their shares to the general
public at any time and may thereafter resume such offering from time to time.
The exchange privilege is available only to U.S. shareholders in states where
the exchange legally may be made. It is contemplated that the exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by
the Distributor.
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<PAGE>
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
1-800-MER-FUND (1-(800)-637-3863).
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and education savings
plans are available from Merrill Lynch. Under these plans, investments may be
made in the Fund and certain of the other mutual funds sponsored by Merrill
Lynch as well as in other securities. Merrill Lynch may charge an initial
establishment fee and an annual fee for each account.Information with respect to
these plans is available on request from Merrill Lynch.
Capital gains and ordinary income received in each of the plans referred to
above are exempt from Federal taxation until distributed from the plans.
Different tax rules apply to Roth IRA plans and education savings plans.
Investors considering participation in any retirement or education savings plan
should review specific tax laws relating thereto and should consult their
attorneys or tax advisers with respect to the establishment and maintenance of
any such plan.
Automatic Investment Plans
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities dealer,
or by mail directly to the Transfer Agent, acting as agent for such securities
dealer. Voluntary accumulation also can be made through a service known as the
Fund's Automatic Investment Plan. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
Alternatively, an investor that maintains a CMA(R) or CBA(R) account may arrange
to have periodic investments made in the Fund in amounts of $100 ($1 for
retirement accounts) or more through the CMA(R) or CBA(R) Automated Investment
Program.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to the method of payment,
dividends will be automatically reinvested, without sales charge, in additional
full and fractional shares of the Fund. Such reinvestment will be at the net
asset value of shares of the Fund as of the close of business on the NYSE on the
monthly payment date for such dividends. No CDSC will be imposed upon redemption
of shares issued as a result of the automatic reinvestment of dividends.
Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent, if their account is maintained
with the Transfer Agent elect to have subsequent dividends paid in cash, rather
than
39
<PAGE>
reinvested in shares of the Fund or vice versa (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). Commencing ten days
after the receipt by the Transfer Agent of such notice, those instructions will
be effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed dividend checks. Cash payments can also be directly
deposited to the shareholder's bank account.
Systematic Withdrawal Plan
A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
the class of shares to be redeemed. Redemptions will be made at net asset value
as determined 15 minutes after the close of business on the NYSE (generally, the
NYSE closes at 4:00 p.m., Eastern time) on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If the NYSE
is not open for business on such date, the shares will be redeemed at the close
of business on the following business day. The check for the withdrawal payment
will be made, on the next business day following redemption. When a shareholder
is making systematic withdrawals, dividends on all shares in the Investment
Account are reinvested automatically in Fund shares. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the Distributor.
With respect to redemptions of Class B or 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." Where the
systematic withdrawal plan is applied to Class B shares, upon conversion of the
last Class B shares in an account to Class D shares, the systematic withdrawal
plan will be applied thereafter to Class D shares if the shareholder so elects.
If an investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Merrill Lynch Financial
Consultant.
Withdrawal payments should not be considered as dividends. Each withdrawal
is a taxable event. If periodic withdrawals continuously exceed reinvested
dividends, the shareholder's original investment may be reduced correspondingly.
Purchases of additional shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax liabilities.
The Fund will not knowingly accept purchase orders for shares of the Fund from
investors that maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Automatic 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) or
CBA(R) 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 Monday selected is
40
<PAGE>
not a business day, the redemption will be processed at net asset value on the
next business day. The CMA(R) or CBA(R) Systematic Redemption Program is not
available if Fund shares are being purchased within the account pursuant to the
Automated Investment Program. For more information on the CMA(R) or CBA(R)
Systematic Redemption Program, eligible shareholders should contact their
Merrill Lynch Financial Consultant.
DIVIDENDS AND TAXES
Dividends
The Fund intends to distribute substantially all of 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
Fund's shareholders at least annually. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to comply
with Federal tax requirements that certain percentages of its ordinary income
and capital gains be distributed during the year. If in any fiscal year, the
Fund has net income from certain foreign currency transactions, such income will
be distributed at least annually.
See "Shareholder Services -- Automatic Dividend Reinvestment Plan" for
information concerning the manner in which dividends may be reinvested
automatically in shares of the Fund. 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 in cash. Dividends are taxable to
shareholders, as discussed below, whether they are reinvested in shares of the
Fund or received in cash. The per share dividends on Class B and Class C shares
will be lower than the per share dividends on Class A and Class D shares as a
result of the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B and Class C shares; similarly, the per
share dividends on Class D shares will be lower than the per share dividends on
Class A shares as a result of the account maintenance fees applicable with
respect to the Class D shares. See "Pricing of Shares -- Determination of Net
Asset Value."
Taxes
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). As long as it so qualifies, the Fund (but not
its shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and net realized capital gains that it distributes to Class
A, Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Certain categories of
capital gains are taxable at different rates. Generally not later than 60 days
after the close of its taxable year, the Fund will provide its shareholders with
a written notice designating the amount of any capital gain dividends as well as
any amount of capital gain dividends in the different categories of capital gain
referred to above.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income dividends
may be eligible for the dividends received deduction allowed to corporations
under the Code, if certain requirements are met. For this purpose, the Fund will
allocate dividends eligible for the dividends received deduction among the Class
A, Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the issuance and sale
of multiple classes of stock) that is based on the gross income allocable to
Class A, Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe. If the Fund
pays a dividend in January that was declared in the previous October, November
or December to
41
<PAGE>
shareholders of record on a specified date in one of such months, then such
dividend will be treated for tax purposes as being paid by the Fund and received
by its shareholders on December 31 of the year in which such dividend was
declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% 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 Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
may be able to claim United States 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 Fund. 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. The Fund also must meet these holding period requirements,
and if the Fund fails to do so, it will not be able to "pass through" to
shareholders the ability to claim a credit or a deduction for the related
foreign taxes paid by the Fund. If the Fund satisfies the holding period
requirements and if more than 50% in the value of its total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible, and intends, to file an election with the Internal Revenue
Service pursuant to which shareholders of the Fund will be required to include
their proportionate shares of such withholding taxes in their United States
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 United
States income taxes. 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
United States withholding tax on the income resulting from the Fund's election
described in this paragraph but may not be able to claim a credit or deduction
against such United States tax for the foreign taxes treated as having been paid
by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes and other information needed to claim
the foreign tax credit. For this purpose, the Fund will allocate 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 Fund on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
42
<PAGE>
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions
The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. Unless
such contract is a forward foreign exchange contract, or is a non- equity option
or a regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Fund may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to certain transactions entered into by the Fund solely to reduce
the risk of changes in price or interest or currency exchange rates with respect
to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The Fund
may, nonetheless, elect to treat the gain or loss from certain forward foreign
exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.
Special Rules for Certain Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stocks, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, futures, or forward
foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders as
ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than such
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and the mark-to-market rules described above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.
43
<PAGE>
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
that 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
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with formulas 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 as in the case of Class B and
Class C shares and the maximum sales charge in the case of Class A and D shares.
Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance and
distribution charges and any incremental transfer agency costs relating to each
class of shares will be borne exclusively by that class. The Fund will include
performance data for all classes of shares of the Fund in any advertisement or
information including performance data of the Fund.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time. In advertisements distributed
to investors whose purchases are subject to waiver of the CDSC in the case of
Class B and Class C shares (such as investors in certain retirement plans) or to
reduced sales loads in the case of Class A and Class D shares, the performance
data may take into account the reduced, and not the maximum, sales charge or may
not take into account the CDSC and therefore may reflect greater total return
since, due to the reduced sales charges or waiver of the CDSC, a lower amount of
expenses is deducted. See "Purchase of Shares." The Fund's total return may be
expressed either as a percentage or as a dollar amount in order to illustrate
such total return on a hypothetical $1,000 investment in the Fund at the
beginning of each specified period.
Set forth below is total return information for the Class A, Class B, Class
C and Class D shares of the Fund for the periods indicated.
44
<PAGE>
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------------------------- --------------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ------------------ ---------------- ----------------- -----------------
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended April 30, 1999 ............ % $ % $
Five Years Ended April 30,1999 ........... % $ % $
Ten Years Ended April 30, 1999 ........... % $ % $
Annual Total Return
(excluding maximum applicable sales charges)
Year Ended April 30,
1999 .................................. % $ % $
1998 .................................. 44.06% $ 1,440.60 42.60% $ 1,426.00
1997 .................................. 8.55% $ 1,085.50 7.44% $ 1,074.40
1996 .................................. 44.01% $ 1,440.10 42.46% $ 1,424.60
1995 .................................. 6.47% $ 1,064.70 5.29% $ 1,052.90
1994 .................................. 8.19% $ 1,081.90 7.25% $ 1,072.50
1993 .................................. (1.10)% $ 989.00 (2.07)% $ 979.30
1992 .................................. 13.17% $ 1,131.70 11.88% $ 1,118.80
1991 .................................. 17.10% $ 1,171.00 15.75% $ 1,157.50
1990 .................................. 7.46% $ 1,074.60 6.57% $ 1,065.70
Aggregate Total Return
(including maximum applicable sales charges)
Inception (April 1, 1983) to
April 30, 1999 ........................ % $ -- --
Inception (October 21, 1988) to
April 30, 1999 ........................ -- -- % $
</TABLE>
<TABLE>
<CAPTION>
Class C Shares Class D Shares
----------------------------------- -----------------------------------
Expressed as Redeemable Value Expressed as Redeemable Value
a percentage of a hypothetical a percentage of a hypothetical
based on a $1,000 investment based on a $1,000 investment
hypothetical at the end of hypothetical at the end of
Period $1,000 investment the period $1,000 investment the period
- ------ ------------------ ---------------- ----------------- -----------------
Average Annual Total Return
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended April 30, 1999 ............. % $ % $
Inception (October 21, 1994) to
April 30, 1999 ......................... % $ % $
Annual Total Return
(excluding maximum applicable sales charges)
Year Ended April 30,
1999 ................................... % $ % $
1998 ................................... 42.66% $ 1,426.60 43.95% $ 1,439.50
1997 ................................... 7.28% $ 1,072.80 8.11% $ 1,081.10
1996 ................................... 42.76% $ 1,427.60 43.74% $ 1,437.40
Inception (October 21, 1994) to
April 30, 1995 ......................... 4.89% $ 1,048.90 3.05% $ 1,030.50
Aggregate Total Return
(including maximum applicable sales charges)
Inception (October 21, 1994) to
April 30, 1999 ......................... % $ % $
</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,"
the total return data quoted by the Fund in advertisements directed to such
investors may take into account the reduced, and not the maximum, sales charge
or may not take into account the CDSC, and therefore may reflect greater total
return since, due to the reduced sales charges or the waiver of CDSCs, a lower
amount of expenses may be deducted.
45
<PAGE>
On occasion, the Fund may compare its performance to various indices
including the Standard & Poor's 500 Index, the Dow Jones Industrial Average, or
to performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc. ("Morningstar"), CDA Investment Technology, Inc., Money
Magazine, U.S. News & World Report, Business Week, Forbes Magazine, Fortune
Magazine or other industry publications. When comparing its performance to a
market index, the Fund may refer to various statistical measures derived from
the historic performance of the Fund and the index, such as standard deviation
and beta. In addition, from time to time, the Fund may include the Fund's
Morningstar risk-adjusted performance ratings in advertisements or supplemental
sales literature. As with other performance data, performance comparisons should
not be considered indicative of the Fund's relative performance for any future
period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
GENERAL INFORMATION
Description of Shares
The Fund, 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 Fund has an authorized capital of 400,000,000 shares
of Common Stock, par value of $0.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock, each of which
consists of 100,000,000 shares. Shares of Class A, Class B, Class C and ClassD
Common Stock represent an interest in the same assets of the Fund and are
identical in all respects except that the Class B, Class C and Class D shares
bear certain expenses related to the account maintenance and/or distribution of
such shares and have exclusive voting rights with respect to matters relating to
such account maintenance and/or distribution expenditures. The Board of
Directors of the Fund may classify and reclassify the shares of the Fund into
additional classes ofCommonStock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act 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
10% of the outstanding shares of the Fund.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 Fund and in the net assets of the
Fund 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 Fund. 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.
Independent Auditors
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540 has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-interested Directors of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.
Custodian
The Chase Manhattan Bank, (the "Custodian"), 4 Chase MetroTech Center, 18th
Floor, Global Securities Services, Brooklyn, New York 11245, acts as the
custodian of the Fund's assets. Under its contract with the Fund, the Custodian
is authorized, among other things, to establish separate accounts in foreign
currencies and to cause
46
<PAGE>
foreign securities owned by the Fund to be held in its offices outside of the
United States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
Transfer Agent
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See "How to Buy, Sell,
Transfer and Exchange Shares -- Through the Transfer Agent" in the Prospectus.
Legal Counsel
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.
Reports to Shareholders
The fiscal year of the Fund ends on April 30 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
Shareholder Inquiries
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.
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 Fund 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.
Under a separate agreement, ML & Co. has granted the Fund 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 Fund at any time or to grant the use of such name to
any other company, and the Fund has granted ML & Co. under certain conditions,
the use of any other name it might assume in the future, with respect to any
corporation organized by ML & Co.
To the knowledge of the Fund, the following persons or entities owned
beneficially 5% or more of a class of the Fund's shares as of August 1, 1999
Percentage
Name Address and Class
- -------------------------- ---------------------- --------------------
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
47
<PAGE>
CODE #: 10255-08-99
<PAGE>
PART C
ITEM 23. Exhibits
Exhibit
Number Description
- ------- ----------
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 the Registrant.(b)
3 -- 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)
4(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)
5(a) -- Form of Class A Shares Distribution Agreement between the Registrant
and Merrill Lynch Funds Distributor, Inc.(b)
(b) -- Class B Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(b)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. with respect to the Merrill Lynch Mutual Fund
Advisor Program.(e)
(d) -- Class C Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
(e) -- Class D Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc.(d)
6 -- None.
7 -- Custody Agreement between the Registrant and The Chase Manhattan
Bank. (b)
8(a) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between the Registrant and Merrill Lynch Financial
Data Services, Inc.(b)
(b) -- License Agreement Relating to Use of Name between the Registrant
and Merrill Lynch & Co., Inc.
9(a) -- Opinion of Brown & Wood LLP, counsel to the Registrant.(h)
(b) -- Consent of Brown & Wood LLP, counsel to the Registrant.
10 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 -- None.
12 -- Certificate of Merrill Lynch Asset Management, L.P.(b)
13(a) -- Class B Distribution Plan and Class B Distribution Plan Sub-Agreement
of the Registrant.(f)
(b) -- Form of Class C Distribution Plan and Class C Distribution Plan
Sub-Agreement of the Registrant.(d)
(c) -- Form of Class D Distribution Plan and Class D Distribution Plan
Sub-Agreement of the Registrant.(d)
14 -- None.
15 -- Merrill Lynch Select PricingSM System Plan pursuant to Rule 18f-3.(g)
C-1
<PAGE>
- ---------------
(a) Filed on July 29, 1997, as an Exhibit to Post-Effective Amendment No. 19 to
the 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).
(h) Filed on January 18, 1983 as an Exhibit to Pre-Effective Amendment No. 1 to
the Registration Statement. Refiled with this Post-Effective Amendment No.
21 pursuant to Electronic Data Gathering, Analysis and Retrieval (EDGAR)
requirements. Prior to April 27, 1992, the Fund was known as Sci/Tech
Holdings, Inc.
Item 24. Persons Controlled by or Under Common Control with the Program
Not applicable.
Item 25. Indemnification
Reference is made to Article VI of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A, Class B, Class C and Class D
Distribution Agreements.
Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. Absent a court determination that
an officer or director seeking indemnification was not liable on the merits or
guilty of willful misfeaseance, 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; (c) a majority of a quorum of non-party
independent directors, or independent legal counsel in a written opinion, shall
determine, based on a review of facts readily available to the Registrant at the
time the advance is proposed to be made, that there is reason to believe that
the person seeking indemnification will ultimately be found to be entitled to
indemnification.
C-2
<PAGE>
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 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 (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
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 26. Business and Other Connections of Investment Adviser
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
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, 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., Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill Lynch
Senior Floating Rate Fund II, Inc. MLAM also acts as sub-adviser to Merrill
Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio,
two investment portfolios of EQ Advisors Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment Adviser
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
C-3
<PAGE>
Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income
Fund, Inc., and The Municipal Fund Accumulation Program, Inc.; and for the
following closed-end registered investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II,
Inc., Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings California Insured
Fund III, Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida
Insured Fund III, MuniHoldings Florida Insured Fund IV, MuniHoldings Insured
Fund, Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings Insured Fund III,
Inc., MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New Jersey Insured
Fund, Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New
Jersey Insured Fund III, Inc., MuniHoldings New York Fund, Inc., MuniHoldings
New York Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc.,
MuniHoldings New York Insured Fund III, Inc., MuniHoldings Pennsylvania Insured
Fund, MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey
Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc.,
MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc. and Worldwide DollarVest Fund, Inc.
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 the Investment Adviser, FAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. ("Princeton Administrators") is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Princeton
Funds Distributor, Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD")
is P.O. Box 9081, Princeton, New Jersey 08543-9081. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and ML & Co. is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281-1201. The address of the Fund's transfer agent, Financial Data Services,
Inc. ("FDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since May 1, 1997 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Glenn is President and
Mr. Burke is Vice President and Treasurer of all or substantially all of the
investment companies described in the first two paragraphs of this Item 26, and
Messrs. Giordano and Monagle are officers of one or more of such companies.
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ----- -------------------- ----------------------------------
<S> <C> <C>
ML & Co. ................... Limited Partner Financial Services Holding Company; Limited Partner of FAM
Princeton Services ......... General Partner General Partner of FAM
Jeffrey M. Peek ............ President President of FAM; President and Director of Princeton Services;
Executive Vice President of ML & Co.; Managing Director and
Co-Head of the Investment Banking Division of Merrill Lynch in
1997
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Position(s) with the Other Substantial Business,
Name Investment Adviser Profession, Vocation or Employment
- ----- -------------------- ----------------------------------
<S> <C> <C>
Terry K. Glenn ............ Executive Vice Executive Vice President of FAM; Executive Vice
President President and Director of Princeton Services; President and
Director of PFD; Director of FDS; President of Princeton
Administrators
Donald C. Burke ........... Senior Vice President, Senior Vice President and Treasurer of FAM;
Treasurer and Senior Vice President and Treasurer of Princeton Services;
Director of Taxation Vice President of PFD; First Vice President of the Investment
Adviser from 1997 to 1999; Vice President of the Investment
Adviser from 1990 to 1997
Michael G. Clark .......... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton
Services; Treasurer and Director of PFD; First Vice President of
the Investment Adviser from 1997 to 1999; Vice President of the
Investment Adviser from 1996 to 1997
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
Michael J. Hennewinkel .... Senior Vice President, Senior Vice President, Secretary and General Counsel
Secretary and General of FAM; Senior Vice President of Princeton Services
Counsel
Philip L. Kirstein ........ Senior Vice President Senior Vice President of FAM; Senior Vice President, Secretary,
General Counsel and Director 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 PFD
Stephen M. M. Miller ...... Senior Vice President Executive Vice President of Princeton Administrators; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr. .... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton
Services
Brian A. Murdock .......... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton
Services
Gregory D. Upah ........... Senior Vice President Senior Vice President of FAM; Senior Vice President of Princeton
Services
</TABLE>
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: The Corporate
Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc.,
Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill
Lynch Consults International Portfolio, Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, 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
C-5
<PAGE>
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc., Merrill
Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series
Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Senior
Floating Rate Fund II, 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 33 King
William Street, London EC4R 9AS, 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, 1997,
for his or her own account or in the capacity of director, officer, partner or
trustee. In addition, Messrs. Glenn, Burke and Albert are officers of one or
more of the registered investment companies listed in the first two paragraphs
of this Item 26.
<TABLE>
<CAPTION>
Position With Other Substantial Business,
Name MLAM U.K. Profession, Vocation or Employment
- ----- ----------------- ----------------------------------
<S> <C> <C>
Terry K. Glenn ............ Director and Chairman Executive Vice President of MLAM and FAM; Executive Vice President
and Director of Princeton Services; President and Director of PFD;
President of Princeton Administrators
Alan J. Albert ............ Senior Managing Vice President of MLAM
Director
Nicholas C.D. Hall ........ Director Director of Merrill Lynch Europe PLC.; General Counsel of Merrill
Lynch International Private Banking Group
Donald C. Burke ........... Treasurer Senior Vice President and Treasurer of MLAM and FAM; Director
of Taxation of MLAM; Senior Vice President and Treasurer of Princeton
Services; Vice President of PFD; First Vice President of MLAM from 1997
to 1999; Vice President of MLAM from 1990 to 1997
Carol Ann Langham ......... Company Secretary None
Debra Anne Searle ......... Assistant Company None
Secretary
</TABLE>
Item 27. Principal Underwriters
(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies referred
to in the first two paragraphs of Item 26 except CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc. and The Municipal Fund Accumulation Program, Inc. MLFD also acts as the
principal underwriter for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund II, Inc. A separate division of PFD acts
as the principal underwriter of a number of other investment companies.
C-6
<PAGE>
(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
Position(s) and Office(s) Position(s) and Office(s) with
Name with PFD Registrant
- ----- ---------------------- ----------------------------------
<S> <C> <C>
Terry K. Glenn ........................ President and Director President and Director
Michael G. Clark ...................... Treasurer and Director None
Thomas J. Verage ...................... Director None
Robert W. Crook ....................... Senior Vice President None
Michael J. Brady ...................... Vice President None
William M. Breen ...................... Vice President None
Donald C. Burke ....................... Vice President Vice President and Treasurer
James T. Fatseas ...................... Vice President None
Debra W. Landsman-Yaros ............... Vice President None
Michelle T. Lau ....................... Vice President None
Salvatore Venezia ..................... Vice President None
William Wasel ......................... Vice President None
Robert Harris ......................... Secretary Secretary
(c) Not applicable.
</TABLE>
Item 28. 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 (the "1940 Act")
and the rules thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its transfer agent,
Financial Data Services, Inc. (4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484).
Item 29. Management Services
Other than as set forth under the caption "Management of the Fund --
Merrill Lynch Asset Management" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund -- Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
Item 30. Undertakings.
Not applicable.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 29th day of June, 1999.
MERRILL LYNCH HEALTHCARE FUND, INC.
(Registrant)
By /s/ DONALD C. BURKE
------------------------------------
(Donald C. Burke, Vice President and Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ---- ----
<S> <C> <C>
TERRY K. GLENN* President and Director
- ------------------------------------------- (Principal Executive Officer)
(Terry K. Glenn)
/s/ DONALD C. BURKE Vice President and Treasurer June 29, 1999
- ------------------------------------------- (Principal Financial
(Donald C. Burke) and Accounting Officer)
DONALD CECIL* Director
- ------------------------------------------
(Donald Cecil)
ROLAND M. MACHOLD* Director
- ------------------------------------------
(Roland M. Machold)
EDWARD H. MEYER* Director
- ------------------------------------------
(Edward H. Meyer)
CHARLES C. REILLY* Director
- ------------------------------------------
(Charles C. Reilly)
RICHARD R. WEST* Director
- ------------------------------------------
(Richard R. West)
ARTHUR ZEIKEL* Director
- ------------------------------------------
(Arthur Zeikel)
EDWARD D. ZINBARG* Director
- ------------------------------------------
(Edward D. Zinbarg)
*By: /s/DONALD C. BURKE June 29, 1999
- ------------------------------------------
(Donald C. Burke, Attorney-in-Fact)
</TABLE>
C-8
<PAGE>
POWER OF ATTORNEY
The undersigned, the Directors/Trustees and the Officers of each of the
registered investment companies listed below, hereby authorize Terry K. Glenn,
Donald C. Burke and Joseph T. Monagle, Jr. or any of them, as attorney-in- fact,
to sign on his or her behalf in the capacities indicated any Registration
Statement or amendment thereto (including post-effective amendments) for each of
the following registered investment companies and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission: Merrill Lynch
Americas Income 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 Global Allocation Fund, Inc.; Merrill
Lynch Global Bond Fund for Investment and Retirement; Merrill Lynch Global
Holdings, Inc.; Merrill Lynch Global SmallCap Fund, Inc.; Merrill Lynch Global
Technology Fund, Inc.; Merrill Lynch Global Value Fund, Inc.; Merrill Lynch
Healthcare Fund, Inc.; Merrill Lynch International Equity Fund; Merrill Lynch
Latin America Fund, Inc.; Merrill Lynch Middle East/Africa Fund, Inc.; Merrill
Lynch Pacific Fund, Inc.; Merrill Lynch Short-Term Global Income Fund, Inc.;
Merrill Lynch Technology Fund, Inc.; and Worldwide DollarVest Fund, Inc.
Dated: April 16, 1999
/S/ TERRY K. GLENN
--------------------------------------------
Terry K. Glenn
(President/Principal Executive
Officer/Director/Trustee)
/S/ DONALD CECIL
--------------------------------------------
Donald Cecil
(Director/Trustee)
/S/ EDWARD H. MEYER
--------------------------------------------
Edward H. Meyer
(Director/Trustee)
/S/ RICHARD R. WEST
--------------------------------------------
Richard R. West
(Director/Trustee)
/S/ EDWARD D. ZINBARG
--------------------------------------------
Edward D. Zinbarg
(Director/Trustee)
/S/ DONALD C. BURKE
--------------------------------------------
Donald C. Burke
(Vice President/Treasurer/Principal
Financial and Accounting Officer)
/S/ ROLAND M. MACHOLD
--------------------------------------------
Roland M. Machold
(Director/Trustee)
/S/ CHARLES C. REILLY
--------------------------------------------
Charles C. Reilly
(Director/Trustee)
/S/ ARTHUR ZEIKEL
--------------------------------------------
Arthur Zeikel
(Director/Trustee)
C-9
<PAGE>
EXHIBIT INDEX
Exhibit
Numbers Description
- -------- ----------
8(b) -- License Agreement Relating to Use of Name between the
Registrant and Merrill Lynch & Co., Inc.
9(a) -- Opinion of Brown & Wood LLP, counsel to the Registrant.
(b) -- Consent of Brown & Wood LLP, counsel to the Registrant.
10 -- Consent of Deloitte & Touche LLP, independent auditors for
the Registrant.
Exhibit 8(b)
LICENSE AGREEMENT RELATING TO USE OF NAME
AGREEMENT made as of the 10th day of February, 1992, between MERRILL LYNCH
& CO., INC., a Delaware corporation ("ML&Co."), and SCI/TECH HOLDINGS, INC., a
Maryland corporation which will soon be renamed MERRILL LYNCH HEALTHCARE FUND,
INC. (the "Fund");
W I T N E S S E T H :
WHEREAS, ML&Co. was incorporated under the laws of the State of Delaware
on March 27, 1973 under the corporate name "Merrill Lynch & Co., Inc." and has
used such name at all times thereafter;
WHEREAS, ML&Co. was duly qualified as a foreign corporation under the laws
of the State of New York on April 25, 1973 and has remained so qualified at all
times thereafter;
WHEREAS, the Fund was incorporated under the laws of the State of Maryland
on October 29, 1982; and
WHEREAS, the Fund desires to qualify as a foreign corporation under the
laws of the State of New York as the Fund is proposed to be renamed and has
requested ML&Co. to give its consent to the use of the name "Merrill Lynch" in
the Fund's corporate name.
<PAGE>
NOW, THEREFORE, in consideration of the premises and or the covenants
hereinafter contained, ML&Co. and the Fund hereby agree as follows:
I. ML&Co. hereby grants the Fund a non-exclusive license to use the words
"Merrill Lynch" in its corporate name.
II. ML&Co. hereby consents to the qualification of the Fund as a foreign
corporation under the laws of the State of New York with the words "Merrill
Lynch" in its corporate name and agrees to execute such formal consents as may
be necessary in connection with such filing.
III. The non-exclusive license hereinabove referred to has been given and
is given by ML&Co. on the condition that it may at any time, in its sole and
absolute discretion, withdraw the non-exclusive license to the use of the words
"Merrill Lynch" in the name of the Fund; and, as soon as practicable after
receipt by the Fund of written notice of the withdrawal of such non-exclusive
license, and in no event later than ninety days thereafter, the Fund will change
its name so that such name will not thereafter include the words "Merrill Lynch"
or any variation thereof.
IV. ML&Co. reserves and shall have the right to grant to any other
company, including without limitation, any other investment company, the right
to use the words "Merrill Lynch" or variations thereof in its name and no
consent or permission of the Fund
2
<PAGE>
shall be necessary; but, if required by an applicable law of any state, the Fund
will forthwith grant all requisite consents.
V. The Fund will not grant to any other company the right to use a name
similar to that of the Fund or ML&Co. without the written consent of ML&Co.
VI. Regardless of whether the Fund should hereafter change its name and
eliminate the words "Merrill Lynch" or any variation thereof from such name, the
Fund hereby grants to ML&Co. the right to cause the incorporation of other
corporations or the organization of voluntary associations which may have names
similar to that of the Fund or to that to which the Fund may change its name and
to own all or any portion of the shares of such other corporations or
associations and to enter into contractual relationships with such other
corporations or associations, subject to any requisite approval of a majority of
the Fund's shareholders and the Securities and Exchange Commission and subject
to the payment of a reasonable amount to be determined at the time of use, and
the Fund agrees to give and execute any such formal consents or agreements as
may be necessary in connection therewith.
VII. This Agreement may be amended at any time by a writing signed by the
parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MERRILL LYNCH & CO., INC.
By /s/Arthur Zeikel
----------------
Executive Vice President
SCI/TECH HOLDINGS, INC.
By /s/ Philip Kirstein
-------------------
Senior Vice President
4
Exhibit 9(a)
BROWN, WOOD, IVEY, MITCHELL & PETTY
One World Trade Center, New York, N.Y. 10048
212-838-5300
----------
555 CALIFORNIA STREET TELEX: 127324 1000 ASHLEY DRIVE
SAN FRANCISCO, CA 94104 CABLE ADDRESS: BROWOODLAW TAMPA FLORIDA 33602
TELEPHONE: 415-398-3909 TELECOPIER: 212-839-5599 TELEPHONE 813-223-9600
TELECOPIER: 415-397-4621 ------
1001 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-887-9175
TELECOPIER: 202-833-2031
January 17, 1983
Sci/Tech Holdings, Inc.
633 Third Avenue
New York, New York 10017
Dear Sirs:
This opinion is being furnished in connection with the registration by
Sci/Tech Holdings, Inc., a Maryland corporation (the "Company"), of an
indefinite number of shares of its Common Stock, par value $0.10 per share (the
"Shares"), under the Securities Act of 1933, as amended (the "Securities Act").
Said registration is to be effected in accordance with Rule 24f-2 under the
Investment Company Act of 1940, as amended, pursuant to the Company's
registration statement on Form N-1, as amended (the "Registration Statement"),
under the Securities Act.
As counsel for the Company, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have
<PAGE>
examined and are familiar with the Articles of Incorporation of the Company, the
By-Laws of the Company, and such other documents as we have deemed relevant to
the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of Common Stock of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the prospectus constituting
a part thereof.
Very truly yours,
/s/ Brown, Wood, Ivey, Mitchell & Petty
EXHIBIT 9(b)
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
TELEPHONE: 212-839-5300
FACSIMILE: 212-839-5599
June 29 , 1999
Merrill Lynch Healthcare Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Ladies and Gentlemen:
We consent to the filing in Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A (File Nos. 2-80150 and 811-3595) of our opinion dated
January 17, 1983 filed on January 18, 1983 as an Exhibit to Pre-Effective
Amendment No. 1 to such Registration Statement and to the use of our name in the
prospectus and statement of additional information constituting parts thereof.
Very truly yours,
/s/ BROWN & WOOD LLP
EXHIBIT 10
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Healthcare Fund, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 21 to Registration Statement No. 2-80150 of our report dated June 3, 1999
appearing in the annual report to shareholders of Merrill Lynch Healthcare Fund,
Inc. for the year ended April 30, 1999, and to the reference to us under the
caption "Financial Highlights" in the Prospectus, which is a part of such
Registration Statement.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Princeton, New Jersey
June 29, 1999
