<PAGE>
PROSPECTUS
OCTOBER 21, 1994
MERRILL LYNCH FUND FOR TOMORROW, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Fund For Tomorrow, Inc. (the 'Fund') is a diversified,
open-end management investment company (commonly known as a mutual fund),
seeking long-term growth of capital by investing in a quality-oriented portfolio
of securities, primarily common stocks, of companies that the Fund's management
believes are particularly well positioned to benefit from demographic and
cultural changes, primarily as they affect future consumer markets. The Fund is
designed primarily, but not exclusively, for younger investors who desire a
long-term investment in the stock market.
------------------------
Pursuant to the Merrill Lynch Select Pricing(Service Mark) 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(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. See 'Merrill Lynch Select Pricing(Service Mark)
System' on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the 'Distributor' or 'MLFD'), P.O. Box 9011, Princeton, New Jersey 08543-9011,
(609) 282-2800, or from securities dealers which have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated ('Merrill Lynch'). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except that for retirement plans,
the minimum initial purchase is $100, and the minimum subsequent purchase is $1.
Merrill Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and redemptions directly through
the Fund's Transfer Agent are not subject to the processing fee. See 'Purchase
of Shares' and 'Repurchase and Redemption of Shares.'
------------------------
This Prospectus tells you briefly the information you should know before
investing in the Fund. You should read it and keep it for future reference. A
Statement of Additional Information, dated October 21, 1994, has been filed with
the Securities and Exchange Commission and contains further information about
the Fund. You can obtain a copy without charge by contacting your broker or by
calling or writing the Fund at the telephone number and address printed above.
The Statement of Additional Information is hereby incorporated by reference into
this Prospectus.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C(c) CLASS D(c)
---------- -------------------------------- ---------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge Imposed
on Purchases (as a
percentage of offering
price).................... 5.25%(d) None None 5.25%(d)
Sales Charge Imposed on
Dividend Reinvestments.... None None None None
Deferred Sales Charge (as a
percentage of original
purchase price or
redemption proceeds, 1% for one
whichever is lower)....... None(e) 4.0% during the first year, year None(e)
decreasing 1.0% annually
thereafter to 0.0% after the
fourth year
Exchange Fee................ None None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)(f)
Investment Advisory
Fees(g)................... 0.65% 0.65% 0.65% 0.65%
12b-1 Fees(h):
Account Maintenance
Fees.................... None 0.25% 0.25% 0.25%
Distribution Fees......... None 0.75% 0.75% None
(Class B shares convert to Class D
shares automatically
after approximately eight years
and cease being subject to
distribution fees)
Other Expenses:
Custodian Fees.......... 0.02% 0.02% 0.02% 0.02%
Shareholder Servicing
Costs(i).............. 0.13% 0.16% 0.16% 0.13%
Other................... 0.08% 0.08% 0.08% 0.08%
---------- --------- ---------- ----------
Total Other
Expenses............ 0.23% 0.26% 0.26% 0.23%
---------- --------- --------- ---------
TOTAL FUND OPERATING
EXPENSES................ 0.88% 1.91% 1.91% 1.13%
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
- ------------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs. See
'Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares'--page 13.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares'--page 15.
(c) Prior to the date of this Prospectus, the Fund has not offered its Class C
and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
'Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares'--page 13.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ('CDSC'), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge will instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(f) Information for Class A and Class B shares is stated for the fiscal year
ended January 31, 1994. Information under 'Other Expenses' for Class C and
Class D shares is estimated for the fiscal year ending January 31, 1995.
(g) See 'The Fund and Its Management--Advisory Fee'--page 10.
(h) See 'Purchase of Shares--Distribution Plans'--page 18.
(i) See 'The Fund and Its Management--Transfer Agency Services Fee'--page 11.
2
<PAGE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE
PERIOD OF:
-------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- --------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment
including the maximum $52.50 initial
sales charge (Class A and Class D
shares only) and assuming (1) the
Total Fund Operating Expenses for each
class set forth above; (2) a 5% annual
return throughout the periods; and (3)
redemption at the end of the period:
Class A............................ $61.00 $79.00 $ 99.00 $155.00
Class B............................ $59.00 $80.00 $103.00 $204.00*
Class C............................ $29.00 $60.00 $103.00 $223.00
Class D............................ $63.00 $87.00 $111.00 $183.00
An investor would pay the following
expenses on the same $1,000 investment
assuming no redemption at the end of
the period:
Class A............................ $61.00 $79.00 $ 99.00 $155.00
Class B............................ $19.00 $60.00 $103.00 $204.00*
Class C............................ $19.00 $60.00 $103.00 $223.00
Class D............................ $63.00 $87.00 $111.00 $183.00
</TABLE>
- ------------------
* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission ('Commission') regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C
shareholders who own their shares for an extended period of time may pay more in
Rule 12b-1 distribution fees than the economic equivalent of the maximum
front-end sales charge permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ('NASD'). Merrill Lynch may
charge its customers a processing fee (presently $4.85) for confirming purchases
and repurchases. Purchases and redemptions directly through the Fund's Transfer
Agent are not subject to the processing fee. See 'Purchase of Shares' and
'Repurchase and Redemption of Shares.'
MERRILL LYNCH SELECT PRICING(SERVICE MARK) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System. The shares of each class may be purchased at a
price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of Class A
and Class D are sold to investors choosing the initial sales charge
alternatives, and shares of Class B and Class C are sold to investors choosing
the deferred sales charge alternatives. The Merrill Lynch Select Pricing(Service
Mark) System is used by more than 50 mutual funds advised by Merrill Lynch Asset
Management, L.P., doing business as Merrill Lynch Asset Management
3
<PAGE>
('MLAM' or the 'Investment Adviser') or an affiliate of MLAM, Fund Asset
Management, L.P. ('FAM'). Funds advised by MLAM or FAM are referred to herein
as 'MLAM-advised mutual funds.'
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenanance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege.'
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System, followed by a more detailed description of each class and a discussion
of the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(Service Mark) System
that the investor believes is most beneficial under the investor's particular
circumstances. More detailed information as to each class of shares is set forth
under 'Purchase of Shares.'
4
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 5.25% No No No
initial sales
charge(2)(3)
B CDSC for a period of 0.25% 0.75% B shares convert to
4 years, at a rate D shares
of 4.0% during the automatically
first year, after
decreasing 1.0% approximately
annually to 0.0% eight years(4)
C 1.0% CDSC for one 0.25% 0.75% No
year
D Maximum 5.25% 0.25% No No
initial sales
charge(3)
</TABLE>
- ------------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ('CDSCs') are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(2) Offered only to eligible investors. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors.'
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See 'Class
A' and 'Class D' below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder account
are entitled to purchase additional Class A shares in that account.
Other eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares will be offered to directors and employees of Merrill Lynch &
Co., Inc. and its subsidiaries (the term 'subsidiaries,' when used
herein with respect to Merrill Lynch & Co., Inc., includes MLAM, FAM
and certain other entities directly or indirectly wholly-owned and
controlled by Merrill Lynch & Co., Inc.) and to members of the Boards
of MLAM-advised mutual funds. The maximum initial sales charge is
5.25%, which is reduced for purchases of $25,000 and over. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but if
the initial sales charge is waived such purchases will be subject to a
CDSC of 1.0% if the shares are redeemed within one year after purchase.
Sales charges also are reduced under a right of accumulation which
takes into account the investor's holdings of all classes of all
MLAM-advised mutual funds. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares.'
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25%, an
ongoing distribution fee of 0.75% of the Fund's average net
5
<PAGE>
assets attributable to the Class B shares, and a CDSC if they are
redeemed within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into
Class D shares of the Fund, which are subject to an account maintenance
fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into
Class D shares automatically after approximately ten years. If Class B
shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the Class
B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired. Automatic conversion of Class B shares into Class D
shares will occur at least once a month on the basis of the relative
net asset values of the shares of the two classes on the conversion
date, without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also will
convert automatically to Class D shares. The conversion period for
dividend reinvestment shares and for certain retirement plans is
modified as described under 'Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares.'
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC if they are redeemed within one year of purchase. Although Class C
shares are subject to a 1.0% CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchase will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares. Class D shares also will be issued upon conversion
of Class B shares as described above under 'Class B.' See 'Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares.'
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(Service Mark) System that the investor believes is most beneficial under
his particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because of the 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
6
<PAGE>
purchases of Class B or Class C shares. Investors not qualifying for reduced
initial sales charges who expect to maintain their investment for an extended
period of time also may elect to purchase Class A or Class D shares, because
over time the accumulated ongoing account maintenance and distribution fees on
Class B or Class C shares may exceed the initial sales charge and, in the case
of Class D shares, the account maintenance fee. Although some investors that
previously purchased Class A shares may no longer be eligible to purchase
Class A shares of other MLAM-advised mutual funds, those previously purchased
Class A shares, together with Class B, Class C and Class D share holdings, will
count toward a right of accumulation which may qualify the investor for reduced
initial sales charges on new initial sales charge purchases. In addition, the
ongoing Class B and Class C account maintenance and distribution fees will cause
Class B and Class C shares to have higher expense ratios, pay lower dividends
and have lower total returns than the initial sales charge shares. The ongoing
Class D account maintenance fees will cause Class D shares to have a higher
expense ratio, pay lower dividends and have a lower total return than Class A
shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See 'Purchase of Shares--Limitations on the Payment of Deferred
Sales Charges.'
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below, with the exception of the
information for the six months ended July 31, 1994, which is unaudited, has been
audited in conjunction with the annual audits of the Fund by Deloitte & Touche
LLP, independent auditors. Financial statements for the year ended January 31,
1994 and the independent auditors' report thereon and the financial statements
for the six-month period ended July 31, 1994, are included in the Statement of
Additional Information. The following per share data and ratios have been
derived from information provided in the financial statements. Financial
information is not presented for Class C or Class D shares, since no shares of
those classes are publicly issued as of the date of this Prospectus. Further
information about the performance of the Fund is contained in the Fund's most
recent annual report to shareholders which may be obtained, without charge, by
calling or writing the Fund at the telephone number or address on the front
cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS B
-------
CLASS A FOR THE
-------------------------------------------------------------------------------- SIX
FOR THE MONTHS
SIX MONTHS ENDED
ENDED FOR THE YEAR ENDED JANUARY 31, JULY
JULY 31, -------------------------------------------------------------- 31,
1994 1994 1993 1992 1991 1990 1989+ 1994
---------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period....... $16.39 $16.29 $16.84 $15.49 $15.26 $14.96 $16.05 $16.30
------ ------ ------ ------ ------ ------ ------ ------
Investment income
(loss)-- net........... .05 .15 .25 .36 .41 .30 .08 (.03)
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--net(1)... (1.97) 2.18 .49 3.74 .59 1.45 .43 (1.96)
------ ----- ----- ----- ----- ----- ---- ----
Total from investment
operations............... (1.92) 2.33 .74 4.10 1.00 1.75 .51 (1.99)
------ ------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions:
Investment
income--net........... -- -- (.23) (.35) (.40) (.41) (.13) --
Realized gain on
investments--net...... (.75) (2.23) (1.06) (2.40) (.37) (1.04) (1.47) (.73)
------ ------- ------- ------- ------- ------- ------- -------
Total dividends
and distributions...... (.75) (2.23) (1.29) (2.75) (.77) (1.45) (1.60) (.73)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period........... $13.72 $16.39 $16.29 $16.84 $15.49 $15.26 $14.96 $13.58
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share........ (11.57)%++++ 15.78% 4.79% 28.35% 6.64% 10.92% 3.90%++++ (12.03)%++++
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
RATIOS TO AVERAGE
NET ASSETS:
Expenses, excluding
distribution
fees.................... .91% .88% .90% .95% .96% .89% .91%+++ .94%+++
------ ------ ------ ----- ----- ----- ----- -----
Expenses................. .91% .88% .90% .95% .96% .89% .91%+++ 1.94%+++
------ ------ ------ ----- ----- ----- ----- -----
Investment income
(loss)--net.............. .64% .95% 1.35% 1.81% 2.58% 2.20% 1.87%+++ (.39)%+++
------ ------ ------ ------ ----- ----- ----- -------
------ ------ ------ ------ ----- ----- ----- -------
SUPPLEMENTAL DATA:
Net assets, end of
period
(in thousands)........... $9,233 $10,942 $11,394 $8,846 $5,478 $4,466 $476 $316,015
------ ------- ------- ------- ------- ------- ------- -------
Portfolio
turnover................. 26.12% 48.63% 40.58% 48.28% 25.57% 15.23% 10.26% 26.12%
------ ------ ------ -------- ----- ------ ------ ------
------ ------ ------ -------- ----- ------ ------ ------
<CAPTION>
FOR THE YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------------------------------------
1994* 1993 1992 1991 1990 1989 1988 1987 1986 1985++
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning
of period.......... $ 16.28 $ 16.82 $ 15.48 $ 15.24 $ 14.94 $ 13.78 $ 16.74 $ 13.34 $ 11.89 $ 10.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Investment income
(loss)-- net.... (.01) .06 .14 .24 .21 .20 .15 .09 .11 .22
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--
net(1).......... 2.17 .52 3.77 .60 1.36 2.72 (1.51) 3.49 1.72 1.80
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations........ 2.16 .58 3.91 .84 1.57 2.92 (1.36) 3.58 1.83 2.02
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Investment
income--net..... -- (.06) (.17) (.23) (.23) (.20) (.16) (.10) (.13) (.13)
Realized gain on
investments--net. (2.14) (1.06) (2.40) (.37) (1.04) (1.56) (1.44) (.08) (.25) --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends
and
distributions... (2.14) (1.12) (2.57) (.60) (1.27) (1.76) (1.60) (.18) (.38) (.13)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period.... $ 16.30 $ 16.28 $ 16.82 $ 15.48 $ 15.24 $ 14.94 $ 13.78 $ 16.74 $ 13.34 $ 11.89
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT
RETURN:**
Based on net asset
value per share... 14.60% 3.75% 26.96% 5.59% 9.77% 22.11% (8.63)% 26.99% 15.87% 24.33%++++
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
RATIOS TO AVERAGE
NET ASSETS:
Expenses, excluding
distribution
fees.............. .91% .92% .98% 1.00% .93% .96% .87% .87% .98% 1.25%+++
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Expenses........... 1.91% 1.92% 1.98% 2.00% 1.93% 1.96% 1.87% 1.87% 1.98% 2.25%+++
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Investment income
(loss)--net....... (.07)% .36% .83% 1.53% 1.20% 1.18% .92% .65% 1.30% 2.64%+++
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
SUPPLEMENTAL DATA:
Net assets, end of
period
(in thousands).... $396,424 $447,186 $476,106 $442,944 $516,402 $562,899 $669,402 $723,907 $348,147 $110,366
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Portfolio
turnover.......... 48.63% 40.58% 48.28% 25.57% 15.23% 10.26% 23.03% 30.03% 6.69% 18.28%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
- ------------------------
* Based on average shares outstanding during the period.
** Total investment returns exclude the effects of sales loads.
+ Class A shares commenced operations on October 26, 1988.
++ Class B shares commenced operations on March 5, 1984.
+++ Annualized.
++++ Aggregate total investment return.
(1) Foreign currency transaction amounts have been reclassified to conform to
the 1994 presentation.
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term growth of capital. The Fund
seeks to achieve its objective by investing in a quality-oriented portfolio of
securities of companies that the Fund's management believes are particularly
well positioned to benefit from demographic and cultural changes, primarily as
they affect future consumer markets in the United States and, to a lesser
extent, foreign consumer markets. Management will seek to identify and analyze
demographic trends, such as the aging of the 'baby boom' generation and shifts
in geographical population growth rates, as well as cultural trends, such as the
changing composition and needs of the work force, and to evaluate the effect of
such factors on the demand for particular products and services. Based on such
analysis, management will seek to identify companies whose products and services
respond to the changing needs of consumers, and thus are believed to represent
attractive investment opportunities. It is anticipated that the Fund will invest
primarily in common stocks of such companies. However, when management believes
it is advisable to do so, the Fund may invest in other securities, including,
but not limited to, convertible securities, preferred stocks and bonds. The Fund
does not presently intend to purchase bonds rated lower than BBB by Standard &
Poor's Ratings Group ('S&P') or Baa by Moody's Investors Service, Inc.
('Moody's'). See 'Investment Practices and Restrictions--Investment Grade Debt
Securities.' While no one can predict the prices of securities from day to day,
the Fund attempts to reduce overall exposure to risk from declines in securities
prices by spreading its investments over many different companies in a variety
of industries. No assurance can be given that the Fund will be able to achieve
its investment objective.
In seeking to identify quality companies, particular emphasis is placed by
management on common stocks of companies which, in addition to being considered
well positioned to benefit from cultural and demographic factors, are believed
to have internal strengths, such as good financial resources, a satisfactory
rate of return on capital, a good industry position and superior management
skills. Management believes that companies with these characteristics have a
good chance of achieving consistent earnings growth, which in turn should make
it likely that the prices of their stocks will increase over time.
The Fund may invest up to 25% of its assets in the securities of foreign
issuers. The Fund reserves the right to invest, temporarily, all or a portion of
its assets in high quality money market securities (such as U.S. Treasury bills,
bank certificates of deposit, commercial paper and repurchase agreements) for
purposes of enhancing liquidity and avoiding the effects of declining stock
prices when it seems advisable to do so in light of prevailing market or
economic conditions. The proportion of the Fund's assets that is invested in
money market securities will vary from time to time.
THE FUND AND ITS MANAGEMENT
The Fund is a mutual fund, technically known as an open-end, diversified,
management investment company. The Fund was incorporated under the laws of the
State of Maryland on October 5, 1983. When you buy shares in the Fund your
investment is combined with the investments of others and used to buy various
securities, mainly common stocks. Through your ownership of shares, you
participate in the investment performance of those securities. The Fund is
designed primarily, but not exclusively, for younger investors who desire a
long-term investment in the stock market.
The Board of Directors of the Fund consists of six individuals, five of
whom are not 'interested persons' of the Fund as defined in the Investment
Company Act of 1940, as amended (the 'Investment Company Act'). The
9
<PAGE>
Board of Directors of the Fund is responsible for the overall supervision of the
operations of the Fund and performs the various duties imposed on the directors
of investment companies by the Investment Company Act.
The Directors of the Fund are:
ARTHUR ZEIKEL*--President and Chief Investment Officer of the Investment
Adviser and its affiliate, Fund Asset Management, L.P. ('FAM'); President and
Director of Princeton Services, Inc.; Executive Vice President of Merrill Lynch
& Co., Inc. ('ML & Co.'), and Executive Vice President of Merrill Lynch;
Director of Merrill Lynch Funds Distributor, Inc.
RONALD W. FORBES--Professor of Finance, School of Business, State
University of New York at Albany.
CYNTHIA A. MONTGOMERY--Professor, Harvard Business School.
CHARLES C. REILLY--Self-employed financial consultant; Adjunct Professor,
Columbia University School of Business; Former President and Chief Investment
Officer of Verus Capital, Inc.; Former Senior Vice President of Arnhold and S.
Bleichroeder, Inc.
KEVIN A. RYAN--Professor of Education at Boston University since 1982;
Founder and current Director of The Boston University Center for the Advancement
of Ethics and Character.
RICHARD R. WEST--Professor of Finance, and Dean from 1984 to 1993, of New
York University, Leonard N. Stern School of Business Administration.
- ------------------
* Interested person, as defined in the Investment Company Act of 1940, of the
Fund.
The Investment Adviser, with offices at 800 Scudders Mill Road, Plainsboro,
New Jersey 08536 (mailing address: P.O. Box 9011, Princeton, New Jersey
08543-9011), is owned and controlled by ML & Co., a financial services holding
company, and the parent of Merrill Lynch. The Investment Adviser manages the
investment of the Fund's assets, provides administrative services and manages
the Fund's business affairs. These services are subject to general oversight by
the Fund's Board of Directors. The Investment Adviser or its affiliate, FAM,
currently serves as the investment adviser to over 100 other registered
investment companies, as well as to numerous pension plans and other
institutions. As of August 31, 1994, the Investment Adviser and FAM had a total
of approximately $165.7 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Investment
Adviser.
Vincent P. Dileo is the portfolio manager for the Fund. Mr. Dileo is a Vice
President of the Investment Adviser and has been employed by the Investment
Adviser in this capacity since 1984. For the past five years, Mr. Dileo has
acted as portfolio manager of one or more other registered investment companies
sponsored by the Investment Adviser, and continues to act in such capacity.
Advisory Fee. The shareholders have approved an Investment Advisory
Agreement (the 'Advisory Agreement') pursuant to which the Fund pays the
Investment Adviser a monthly fee based upon the average daily value of the
portfolio's net assets at the following annual rates: 0.65% of the average daily
net assets not exceeding $750 million; 0.60% of the average daily net assets
exceeding $750 million but not exceeding $1 billion; and 0.55% of the average
daily net assets exceeding $1 billion. For the fiscal year ended January 31,
1994, the fee paid by the Fund to the Investment Adviser was $2,782,877 (based
on average net assets of approximately $425.8 million). For the fiscal year
ended January 31, 1994, the ratio of total expenses to average
10
<PAGE>
net assets was 0.88% for the Class A shares and 1.91% for the Class B shares; no
Class C or Class D shares had been issued during that year.
Transfer Agency Services Fee. Financial Data Services, Inc. (the 'Transfer
Agent'), which is a wholly-owned 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 shareholder account and
$14.00 per Class B or Class C shareholder account and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For the year ended January 31, 1994, the total fee paid by the
Fund to the Transfer Agent was $674,885. At August 31, 1994, the Fund had 930
Class A shareholder accounts, 48,657 Class B shareholder accounts, no Class C
shareholder accounts and no Class D shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $691,428 plus out-of-pocket expenses.
Reimbursement for Portfolio Accounting Services. Accounting services are
provided to the Fund by the Investment Adviser, and the Fund reimburses the
Investment Adviser for its costs in connection with such services on a
semi-annual basis. For the fiscal year ended January 31, 1994, the Fund
reimbursed the Investment Adviser $88,054 for accounting services.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor Inc. (the 'Distributor'), an affiliate of
both the Investment Adviser and Merrill Lynch, acts as the Distributor of the
shares of the Fund. Shares of the Fund are offered continuously for sale by the
Distributor and other eligible securities dealers (including Merrill Lynch).
Shares of the Fund may be purchased from securities dealers or by mailing a
purchase order directly to the Transfer Agent. The minimum initial purchase is
$1,000 and the minimum subsequent purchase is $50, except for retirement plans,
the minimum initial purchase is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing(Service Mark) System, as described below. The applicable offering price
for purchase orders is based upon the net asset value of the Fund next
determined after receipt of the purchase orders by the Distributor. As to
purchase orders received by securities dealers prior to 4:15 P.M., New York
time, which include orders received after the determination of net asset value
on the previous day, the applicable offering price will be based on the net
asset value as of 4:15 P.M., New York time, on the day the orders are placed
with the Distributor, provided the orders are received by the Distributor prior
to 4:30 P.M., New York time, on that day. If the purchase orders are not
received prior to 4:30 P.M., New York time, such orders shall be deemed received
on the next business day. 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. Any order may be rejected by the Distributor or the Fund.
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
11
<PAGE>
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchases directly through the Fund's Transfer Agent are not subject to the
processing fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System, which permits each investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives and shares of Class
B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
therafter being subject to a CDSC and ongoing distribution fees. A discussion of
the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(Service Mark) System is
set forth under 'Merrill Lynch Select Pricing(Service Mark) System' on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See 'Distribution Plans' below. Each class has different exchange
privileges. See 'Shareholder Services--Exchange Privilege.'
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
12
<PAGE>
The following table sets forth a summary of the distribution arrrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
<S> <C> <C> <C> <C>
A Maximum 5.25% No No No
initial sales
charge(2)(3)
B CDSC for a period of 0.25% 0.75% B shares convert to
4 years, at a D shares
rate of 4.0% automatically
during the first after
year, decreasing approximately
1.0% annually to eight years(4)
0.0%
C 1.0% CDSC for one 0.25% 0.75% No
year
D Maximum 5.25% 0.25% No No
initial sales
charge(3)
</TABLE>
- ------------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See 'Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors.'
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividended reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A rather than Class D shares
because there is an account maintenance fee imposed on Class D shares.
13
<PAGE>
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below:
<TABLE>
<CAPTION>
DISCOUNT
TO
SELECTED
SALES LOAD SALES LOAD DEALERS
AS AS AS
PERCENTAGE PERCENTAGE* PERCENTAGE
OF OF THE NET OF THE
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Less than $25,000....................... 5.25% 5.54% 5.00%
$25,000 but less than $50,000........... 4.75 4.99 4.50
$50,000 but less than $100,000.......... 4.00 4.17 3.75
$100,000 but less than $250,000......... 3.00 3.09 2.75
$250,000 but less than $1,000,000....... 2.00 2.04 1.80
$1,000,000 and over**................... 0.00 0.00 0.00
</TABLE>
- ------------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994. If the sales charge is
waived, such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A purchases made prior to
October 21, 1994 may be subject to a CDSC, in lieu of an initial sales
charge, if the shares are redeemed within one year of purchase at the
following rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on
purchases of $2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to
$5,000,000; and 0.25% on purchases of more than $5,000,000. The charge will
be assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. A sales charge of 0.75% will be
charged on purchases of $1 million or more of Class A or Class D shares by
certain 401(k) plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the 'Securities Act'). During the fiscal year ended January 31,
1994, the Fund sold 188,941 Class A shares for aggregate net proceeds of
$3,088,274. The gross sales charges for the sale of Class A shares of the Fund
for that year were $44,720, of which $2,638 and $42,082 were received by the
Distributor and Merrill Lynch, respectively. No CDSCs were received with respect
to Class A shares for which the initial sales charge was waived during the
fiscal year ended January 31, 1994 or the six months ended July 31, 1994.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch
Blueprint(Service Mark) Program, are entitled to purchase additional Class A
shares in that account. Certain employer sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMASM Managed Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services and certain purchases made in connection with the Merrill Lynch
Mutual Fund Adviser program. In addition, Class A shares will be offered at net
asset value to ML & Co. and its subsidiaries and their directors and employees
and to members of the Boards of MLAM-advised investment companies, including the
Fund. Certain persons who
14
<PAGE>
acquired shares of certain MLAM-advised closed-end funds 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 and Class D shares of the Fund if
certain conditions set forth in the Statement of Additional Information are met
for closed-end funds that commenced operations prior to October 21, 1994. For
example, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in
shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under 'Eligible Class A Investors.'
Class D shares are offered at net asset value to an investor who has a
business relationship with a financial consultant who joined Merrill Lynch from
another investment firm within six months prior to the date of purchase if
certain conditions set forth in the Statement of Additional Information are met.
Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies. Class D shares also are
offered at net asset value, without sales charge, to an investor who has a
business relationship with a Merrill Lynch financial consultant and who has (i)
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, or (ii)
invested in a mutual fund sponsored by a non-Merrill Lynch company for which
Merrill Lynch has not served as a selected dealer, if certain conditions set
forth in the Statement of Additional Information are met.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(Service Mark) Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement or
Savings Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.00% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See 'Conversion of Class B
Shares to Class D Shares' below. Both Class B and Class C shares are subject to
an
15
<PAGE>
account maintenance fee of 0.25% of net assets and a distribution fee of 0.75%
of net assets as discussed below under 'Distribution Plans.'
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See 'Distribution
Plans' below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Fund to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See 'Limitations on
the Payment of Deferred Sales Charges' below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under 'Shareholder
Services--Exchange Privilege' will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
OF DOLLAR
AMOUNT
YEAR SINCE PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
---------------------------------------- ---------------
<S> <C>
0-1................................ 4.00%
1-2................................ 3.00%
2-3................................ 2.00%
3-4................................ 1.00%
4 and thereafter................... 0.00%
</TABLE>
16
<PAGE>
For the fiscal year ended January 31, 1994, the Distributor received CDSCs
of $172,596 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer from a
shareholder's account to another account will be assumed to be made in the same
order as a redemption.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to 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 2.00% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
('IRA') or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch Blueprint(Service Mark) Program. The CDSC also
is waived for any Class B shares which are purchased by eligible 401(k) or
eligible 401(a) plans which are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The Charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases
in net asset value above the initial purchase price. In addition, no Class C
CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
17
<PAGE>
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the 'Conversion Period'), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
'Conversion Date') on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at leaset one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ('Class B Retirement Plans').
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
'Distribution Plan') with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid
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monthly, at the annual rate of 0.25% of the average daily net assets of the Fund
attributable to shares of the relevant class in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) in connection with
account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and payable monthly, at the annual rate of 1.00%
of average daily net assets of the Class B shares of the Fund under a
distribution plan previously adopted by the Fund (the 'Prior Plan') to
compensate the Distributor and Merrill Lynch for providing account maintenance
and distribution-related activities and services to Class B shareholders. The
fee rate payable and the services provided under the Prior Plan are identical to
the aggregate fee rate payable and the services provided under the Class B
Distribution Plan, the difference being that the account maintenance and
distribution services have been unbundled.
For the fiscal year ended January 31, 1994, the Fund paid the Distributor
account maintenance fees of $1,043,348 and distribution fees of $3,130,043 under
the Class B Distribution Plan. The Fund did not begin to offer shares of Class C
and Class D publicly until the date of this Prospectus. Accordingly, no payments
have been made pursuant to the Class C or Class D Distribution Plans prior to
the date of this Prospectus.
The payments under the Distribution Plans are based upon a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a 'fully allocated accrual' basis and quarterly on a 'direct expense and
revenue/cash' basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSC 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, 1993, direct cash revenues for the same period exceeded direct cash expenses
by approximately $41,538,762 (10.57% of Class B net assets at that date). As of
January 31, 1994, direct cash revenues for the period since commencement of the
offering of Class B shares exceeded direct cash expenses by $41,852,310 (10.56%
of Class B net assets at that date). As of December 31, 1993, the fully
allocated accrual revenues incurred by the
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Distributor and Merrill Lynch with respect to Class B shares for the period
March 5, 1984 to December 31, 1993 exceeded fully allocated accrual expenses for
such period by approximately $9,534,000 (2.43% of Class B net assets at that
date).
The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee,
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under 'Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to Class
D Shares.'
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares, but not
the account maintenance fee. The maximum sales charge rule is applied separately
to each class. As applicable to the 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 reinvestment
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.
REPURCHASE AND REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.
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REPURCHASE
The Fund will repurchase shares through a shareholder's listed securities
dealer. The Fund will normally accept orders to repurchase shares by wire or
telephone from dealers for their customers at the net asset value next computed
after receipt of the order by the dealer, less any applicable CDSC, provided
that the request for repurchase is received by the dealer prior to the close of
business on the New York Stock Exchange on the day received.
Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 4:30 P.M., New York time, in order to obtain that day's
closing price. These repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC); however non-affiliated securities dealers may impose a service charge on
the shareholder for effecting such repurchases. Merrill Lynch may charge its
customers a processing fee (presently $4.85) to confirm the repurchase of shares
to such customers. Redemptions directly through the Transfer Agent are not
subject to the processing fee. The Fund reserves the right to reject any order
for repurchase, which right of rejection might adversely affect shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem shares as set
forth below.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., Transfer Agency Mutual Fund Operations, P.O. Box 45289, Jacksonville,
Florida 32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., Transfer Agency Mutual Fund
Operations, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Redemption requests should not be sent to the Fund. Except for any CDSC which
may be applicable, there will be no charge for redemption if you send your
request directly to the Transfer Agent.
To redeem through the Transfer Agent you must send a written request in
proper form. The request for redemption must be signed by all persons in whose
names the shares are registered, and the names must be exactly the same as the
names which were signed when the shares were bought. The signatures must also be
guaranteed. A 'guaranteed' signature does not mean the same thing as a
'notarized' signature. The signature(s) on the redemption request must be
guaranteed by an 'eligible guarantor institution' as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications.
Generally, the properly signed written request, with the signatures
guaranteed, will be all you need to send to redeem your shares. In some cases,
however, other documents may be necessary. For example, although the Fund
normally does not issue certificates for shares, it will do so if you make a
special request to the Transfer Agent. If you have asked for and received
certificates for your shares, certificates for the shares being redeemed must
accompany your redemption request. In other cases, the Transfer Agent might
require additional documents, such as trust instruments, death certificates,
appointments as executor or administrator of an estate or certificates of
corporate authority.
The payment for your redemption will be mailed to you within seven days
after the Transfer Agent receives the request in proper form. Exceptions to this
are if normal trading is not taking place on the New York Stock Exchange, or if
the shares to be redeemed have recently been purchased by check and the check
has not yet
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cleared. If the purchase check has not yet cleared, the Transfer Agent may delay
mailing a redemption check until the purchase check has cleared, which is
usually within ten days after payment of the purchase price.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the 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. 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. A redemption and subsequent purchase that qualify for
the reinstatement privilege will otherwise be processed in the same manner as
other redemptions and purchases of Fund shares. The reinstatement privilege is a
one-time privilege and may be exercised by the Class A or Class D shareholder
only the first time such shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares. Full
details as to each of such services, copies of the various plans described below
and instructions as to how to participate in the various plans and services, or
to change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page of this Prospectus or from the
Distributor or Merrill Lynch.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive, at least quarterly,
statements from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions.
Shareholders may make additions to their Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders may also maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened at the Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A or Class D
shares (paying any applicable CDSC) so that the cash proceeds can be transferred
to the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder at the Transfer Agent. Shareholders
considering transferring a tax-deferred retirement account such as an individual
retirement account from Merrill
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Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the retirement account is to be transferred will not take
delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund at the net asset value per share next
determined after the close of the New York Stock Exchange on the ex-dividend
date of such dividend or distribution. A shareholder may at any time, by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent, elect to
have subsequent dividends or both dividends and capital gains distributions paid
in cash, rather than reinvested, in which event payment will be mailed on or
about the payment date. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed on redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from such shareholder's Investment
Account in the form of payments by check or through automatic payment by direct
deposit to such shareholder's bank account on either a monthly or quarterly
basis. A Class A or Class D shareholder whose shares are held within a
CMA(Registered), CBA(Registered) or Retirement Account may elect to have shares
redeemed on a monthly, bi-monthly, quarterly, semiannual or annual basis through
the Systematic Redemption Program, subject to certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
or Class D shares may be made to an investor's Investment Account by
pre-arranged charges of $50 or more to his regular bank account. Investors who
maintain CMA(Registered) accounts may arrange to have periodic investments made
to the Fund in their CMA(Registered) accounts or in certain related accounts in
amounts of $100 or more through the CMA(Registered) Automated Investment
Program.
Retirement Plans. Self-directed individual retirement accounts and other
retirement plans are available from Merrill Lynch. Under these plans,
investments may be made in the Fund and certain other mutual funds whose shares
are distributed by the Distributor, as well as in other securities. Merrill
Lynch charges an initial establishment fee and an annual custodial fee for each
account. The minimum initial purchase to establish any such plan is $100 and the
minimum subsequent purchase is $1.
Shareholders considering transferring a tax-deferred retirement account
such as an individual retirement account from Merrill Lynch to another brokerage
firm or financial institution, should be aware that if the firm to which the
retirement account is being transferred will not take delivery of shares of the
Fund, the 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
continue to maintain a retirement account at Merrill Lynch for those shares.
Exchange Privilege. Shareholders of each class of shares of the Fund have
an exchange privilege with certain other MLAM-advised mutual funds. There is
currently no limitation on the number of times a shareholder may exercise the
exchange privilege. The exchange privilege may be modified or terminated at any
time in accordance with the rules of the Commission.
Under the Merrill Lynch Select Pricing(Service Mark) System, Class A
shareholders may exchange Class A shares of the Fund for Class A shares of a
second MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his account in which the exchange is made at the time of the
exchange or is otherwise eligible
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to purchase Class A shares of the second fund. If the Class A shareholder wants
to exchange Class A shares for shares of a second MLAM-advised mutual fund, and
the shareholder does not hold Class A shares of the second fund in his account
at the time of the exchange and is not otherwise eligible to acquire Class A
shares of the second fund, the shareholder will receive Class D shares of the
second fund as a result of the exchange. Class D shares also may be exchanged
for Class A shares of a second MLAM-advised mutual fund at any time as long as,
at the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is 'tacked' to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see 'Shareholder Services--Exchange
Privilege' in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ('MFA')
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
In addition to any increase in the value of your shares, you may receive
two kinds of return from the Fund: dividends and capital gains distributions.
Dividends. Dividends from stocks and interest earned from other
investments are the Fund's main sources of income. Substantially all of this
income, less expenses, is distributed at least semi-annually to shareholders.
The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer agency
fees applicable to that class. See 'Additional Information--Determination of
Net Asset Value.'
Your dividends will be automatically applied to purchase additional shares
of the Fund through our shareholder reinvestment program at the net asset value
per share on the ex-dividend date, unless you notify your Merrill Lynch
financial consultant or the Transfer Agent in writing that you would rather
receive dividends in cash. There is no sales charge for purchases of additional
shares through our reinvestment program. If you give instructions to pay your
dividends in cash, your instructions will take effect 10 days after Merrill
Lynch or the Transfer Agent receives them. Dividends and distributions are
taxable to shareholders as described below whether they are reinvested in shares
of the Fund or received in cash.
Capital Gains. When the Fund sells securities from its portfolio, it can
realize capital gains or losses, depending on whether the prices for which the
securities are sold are higher or lower than the prices the Fund paid to
purchase them. Net realized capital gains represent the total profit from sales
of securities, minus total losses from sales of securities, including any losses
carried forward from prior years. The Fund distributes any net realized capital
gains to shareholders at least annually. As in the case of income dividends,
capital gains distributions will be automatically reinvested in additional
shares of the Fund at the net asset value per share in effect on the ex-dividend
date, without a sales charge, unless you give your Merrill Lynch financial
consultant or the Transfer Agent 10 days' prior instructions to pay them in
cash.
Taxes. The Fund intends to continue to qualify as a regulated investment
company ('RIC') under the Internal Revenue Code of 1986, as amended (the 'Code')
and as a condition of such election the Fund intends to distribute substantially
all of its net investment income and net capital gains to shareholders. If the
Fund qualifies as a RIC, it will not be required to pay Federal income tax on
the portion of its investment company taxable income and net capital gains which
is distributed to its shareholders.
Shareholders will be subject to tax on dividends and distributions even
though a shareholder chooses to reinvest any dividends and distributions in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gains
distributions. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporate shareholders under the
Code, if certain requirements are met. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a date during one of such months, then such dividend or
distribution 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 the dividend
was declared.
In addition, all RICs are required to pay a nondeductible 4% excise tax to
the extent the RIC does not distribute, during each calendar year, (i) 98% of
its ordinary income, determined on a calendar year basis, (ii) 98% of its
capital gains, determined, in general, on an October 31 year end, and (iii) all
ordinary income and
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net capital gains for previous years that were not distributed during such
years. While the Fund intends to distribute its income and capital gains in the
manner necessary to avoid imposition of the 4% excise tax, there can be no
assurance that sufficient amounts of a taxable income and gain will be
distributed to avoid imposition of the tax. In such event, the Fund will be
liable for the excise tax only on the amount by which the Fund does not meet the
foregoing distribution requirement.
Pursuant to the Fund's investment objectives, the Fund may invest in
foreign securities. Foreign taxes may be paid by the Fund as a result of tax
laws of countries in which the Fund may invest. It is impossible to determine
the amount of any such withholding at this time. Because the Fund limits its
investments in foreign securities, shareholders will not be entitled to claim
foreign tax credits with respect to their share of foreign taxes paid by the
Fund on income from investments of foreign securities held by the Fund.
To avoid being subject to a 31% Federal back-up withholding tax on
reportable dividend and capital gains distributions and on the proceeds of
redemptions, a shareholder must furnish the Fund with his taxpayer
identification number and must certify under penalty of perjury that such number
is correct. The taxpayer identification number of a shareholder who is an
individual is his social security number. An investor must also certify whether
he or she is currently subject to back-up withholding or has been notified by
the IRS that he or she will be subject to back-up withholding.
If a shareholder exercises an exchange privilege within 90 days of
acquiring shares of the Fund, then any loss recognized on the exchange will be
reduced (or any gain increased) to the extent the sales charge paid to the Fund
reduces any sales charge that would have been owed upon the purchase of the new
shares in the absence of the exchange privilege. Instead, such sales 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 the shares are disposed of. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
A loss on the sale or exchange of shares of the Fund held by a shareholder
for less than six months will be capital loss to the extent of any long-term
capital gains distributions paid with respect to such shares.
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.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. The laws of
the various states may vary as to the taxation of distributions of the Fund.
Shareholders are urged to consult their own tax advisers regarding specific
questions regarding the Federal, state or local taxation of distributions from
the Fund. For a further discussion of the tax considerations with respect to
owning Fund shares, see the discussion in the Statement of Additional
Information under 'Dividends, Distributions and Taxes.'
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INVESTMENT PRACTICES AND RESTRICTIONS
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions. This practice is
intended to help the Fund increase the yield on its portfolio.
Writing of Covered Call Options. The Fund may, from time to time, sell
(i.e., 'write') covered call options where the Investment Adviser determines
that such transactions will further the Fund's investment objective. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy particular securities owned by the Fund at a specified
price for a certain period of time. By writing a covered call option, the Fund,
in return for the premium income realized from the sale of the option, gives up
the opportunity to profit from a price increase in the underlying security above
the option exercise price, where the price increase occurs while the option is
in effect. In addition, the Fund's ability to sell the underlying security will
be limited while the option is in effect. The Fund may not write covered call
options on underlying securities having a value exceeding 15% of the value of
its total assets.
Foreign Securities. Investments in the securities of foreign issuers
involve certain considerations and risks not ordinarily associated with
investments in securities of domestic issuers. Foreign companies are not
generally subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to U.S. companies. Foreign
securities exchanges, brokers and listed companies may be subject to less
government supervision and regulation than exists in the United States. Dividend
and interest income may be subject to withholding and other foreign taxes which
may adversely affect the net return on such investments. In addition, with
respect to certain countries, there are risks of expropriation, confiscatory
taxation, political or social instability or diplomatic developments which could
affect assets of the Fund held in foreign countries.
There may be less publicly available information about a foreign company
than a U.S. company. Foreign securities markets may have substantially less
volume than U.S. securities markets and some foreign company securities are less
liquid and more volatile than comparable securities of U.S. companies. A
portfolio of foreign securities may also be adversely affected by fluctuations
in the rates of exchange between the currencies of different nations and by
exchange control regulations. Foreign markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions. Delays in settlement could
result in temporary periods when assets of the Fund are uninvested and no return
is earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of such portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. In
addition, a portfolio which includes foreign securities can expect to have a
higher expense ratio because of the increased transaction costs on non-U.S.
securities markets and the increased costs of maintaining the custody of foreign
securities.
Portfolio Brokerage. Orders for transactions in portfolio securities are
placed for the Fund with a number of brokers and dealers, including Merrill
Lynch. Merrill Lynch has advised the Fund that, in transactions with Merrill
Lynch, the Fund receives a commission rate at least as favorable as the rate
Merrill Lynch charges its other customers in similar transactions.
27
<PAGE>
Investment Grade Debt Securities. The Fund has no present intention of
investing in bonds rated lower than BBB by S&P or Baa by Moody's. Bonds rated
BBB (or Baa) may have speculative characteristics. In addition, changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds. If the rating of an instrument held by the Fund is changed so that
the instrument would no longer qualify for investment by the Fund, the Fund will
seek to dispose of that instrument as soon as practicable in light of the
circumstances and consistent with the interests of the Fund.
Investment Restrictions. The Fund has adopted certain investment
restrictions which may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act. Those restrictions provide, among other things, that the
Fund may not:
- Invest more than 5% of its assets in the securities of any one
issuer (except for government securities); or purchase more than 10% of the
outstanding voting securities of any one company or more than 10% of any
class of a company's securities.
- Pledge any of its assets, except that the Fund may pledge securities
having a value of not more than 10% of its total assets in order to secure
permitted borrowings from banks. Such borrowings may not exceed 5% of the
value of the Fund's assets.
- Purchase a restricted security or a security for which there is no
readily available market if as a result of such purchase more than 5% of
the Fund's assets would be invested in such securities.
- The additional investment restrictions adopted by the Fund, which
may be changed by the Board of Directors without a vote of shareholders,
provide that the Fund may not: (1) invest in securities of foreign issuers
if at the time of acquisition more than 25% of the value of the Fund's
total assets would be invested in such securities; or (2) invest more than
5% of its assets in companies having a record, together with predecessors,
of less than three years of continuous operation.
The Board of Directors of the Fund, at a meeting held on August 4, 1994,
approved certain changes to the fundamental and non-fundamental investment
restrictions of the Fund. These changes were proposed in connection with the
creation of a set of standard fundamental and non-fundamental investment
restrictions that would be adopted, subject to shareholder approval, by
substantially all of the non-money market mutual funds advised by MLAM or FAM.
The proposed uniform investment restrictions are designed to provide each of
these funds, including the Fund, with as much investment flexibility as possible
under the Investment Company Act and applicable state securities regulations,
help promote operational efficiencies and facilitate monitoring of compliance.
The investment objectives and policies of the Fund will be unaffected by the
adoption of the proposed investment restrictions.
The full text of the proposed investment restrictions is set forth under
'Investment Objective and Policies--Proposed Uniform Investment Restrictions'
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and the
Fund's Prospectus and Statement of Additional Information will be supplemented
to reflect such change.
28
<PAGE>
ADDITIONAL INFORMATION
Determination of Net Asset Value. Net asset value per share for all
classes is computed once daily at 4:15 P.M., New York time, as of the close of
trading on each day the New York Stock Exchange is open. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies will be
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation. Net asset value is determined by
adding together the total market value of all portfolio securities, cash and
other assets held by the Fund, and interest and dividends accrued. All
liabilities, including accrued expenses, are subtracted. The resulting amount is
divided by the total number of shares outstanding to arrive at the net asset
value of each share. In order to determine the price you will pay for your
shares, the Fund uses the first net asset value figure computed after the
Distributor receives your order. The per share net asset value of Class A shares
generally will be higher than the per share net asset value of shares of the
other classes, reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to Class B
and Class C shares and the daily expense accruals of the account maintenance
fees applicable with respect to Class D shares; moreover, the per share net
asset value of Class D shares generally will be higher than the per share net
asset value of Class B and Class C shares, reflecting the daily expense accruals
of the distribution and higher transfer agency fees applicable with respect to
Class B and Class C shares. It is expected, however, that the per share net
asset value of the classes will tend to converge immediately after the payment
of dividends or distributions which will differ by approximately the amount of
the expense accrual differential between the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last quoted bid prices
as of the close of trading on the New York Stock Exchange on each day by one or
more brokers that make markets in the securities. Portfolio securities which are
traded both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market. Securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Board of Directors
of the Fund.
Performance Data. The Fund may from time to time include its average
annual total return in advertisements or information furnished to present or
prospective shareholders. Average annual total return is computed separately for
Class A, Class B, Class C and Class D shares in accordance with a formula
specified by the Securities and Exchange Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on portfolio investments over
such periods) that would equate the initial amount invested to the redeemable
value of such investment at the end of each period. Average annual total return
will be computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including any CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period such as in the case of Class B and
Class C shares and the maximum initial sales charge in the case of Class A and
Class D shares. Dividends paid by the Fund with respect to all shares, to the
extent any dividends are paid, will be calculated in the same manner at the same
time on the same day and will be in the same amount, except that account
maintenance fees and distribution charges and any incremental transfer agency
costs relating to each class of shares will be borne exclusively by that class.
The Fund will include performance data for all classes of shares of the Fund in
any advertisement or information including performance data of the Fund.
29
<PAGE>
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charge will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements directed to investors whose purchases are subject to waiver of
the CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans) or reduced sales charges in the case of Class A and Class D
shares, performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the CDSC and therefore may reflect
greater total return since, due to the reduced sales charges or waiver of the
CDSC, a lower amount of expenses may be deducted. See 'Purchase of Shares.' The
Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate the effect of such total return on a hypothetical
$1,000 investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Value Line Composite Index, the Dow
Jones Industrial Average, Lipper Analytical Services, Inc., or performance data
published by Morningstar Publications, Inc., Money Magazine, U.S. News & World
Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine and
Fortune Magazine. 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 representative of the Fund's relative performance for any future
period.
The Fund's average annual total return will vary depending upon market
conditions, the securities comprising the Fund's portfolio, the Fund's operating
expenses and the amount of net capital gains or losses realized by the Fund
during the period. An investment in the Fund will fluctuate and an investor's
shares, when redeemed, may be worth more or less than their original cost.
Organization of the Fund. The Fund was incorporated under Maryland law on
October 5, 1983. It has an authorized capital of 400,000,000 shares of Common
Stock, par value $0.10 per share, divided into four classes, designated Class A,
Class B, Class C and Class D Common Stock, each of which consists of 100,000,000
shares. Class A, Class B, Class C and Class D Common Stock represent interests
in the same assets of the Fund and are identical in all respects except that
Class B, Class C and Class D shares bear certain expenses related to the account
maintenance associated with such shares and Class B and Class C shares bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to account maintenance
and distribution expenditures, as applicable. See 'Purchase of Shares.' The Fund
has received an order from the Commission permitting the issuance and sale of
multiple classes of Common Stock. The Directors
30
<PAGE>
of the Fund may classify and reclassify the shares of the Fund into additional
classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and to 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; or (iv) ratification of selection of
independent auditors. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive rights. Shares
have the conversion rights described in this Prospectus. Each share of Common
Stock is entitled to participate equally in dividends and distributions declared
by the Fund and in the net assets of the Fund upon liquidation or dissolution
after satisfaction of outstanding liabilities, except that, as noted above, the
Class B, Class C and Class D shares bear certain additional expenses.
Shareholder Inquiries. Shareholder inquiries should be directed to the
Fund at the telephone number or address set forth on the cover page of this
Prospectus.
Shareholder Reports. Only one copy of each shareholder report and certain
shareholder communications will be mailed to each identified shareholder
regardless of the number of accounts such shareholder has. If a shareholder
wishes to receive separate copies of each report and communication for each of
the shareholder's related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, and/or Fund account number. If you
have any questions regarding this please call your Merrill Lynch financial
consultant or Financial Data Services, Inc. at 800-637-3863.
31
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[This page intentionally left blank]
32
<PAGE>
MERRILL LYNCH FUND FOR TOMORROW, INC.--AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
Note: This form may not be used for purchases through the Merrill Lynch
Blueprint(Service Mark) Program. You may request a Merrill Lynch
Blueprint(Service Mark) Program application by calling toll free (800)
637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Fund For Tomorrow, Inc. and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $............ payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1.................................... 4.......................................
2.................................... 5.......................................
3.................................... 6.......................................
Name .........................................................................
First Name Initial Last Name
Name of Co-Owner (if any) ....................................................
First Name Initial Last Name
Address ...............................
........................................
(Zip Code)
Occupation.............. Name and Address of Employer ......................
...................................... .....................................
...................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Long-Term Capital Gains
Dividends
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
/ / Check or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Fund For Tomorrow, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) / / checking / / savings
Name on your Account ..........................................................
Bank Name .....................................................................
Bank Number ............................. Account Number ....................
Bank Address ..................................................................
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING THIS
SERVICE.
Signature of Depositor ........................................................
Signature of Depositor .................................. Date ...............
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED 'VOID' OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
33
<PAGE>
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER INDENTIFICATION NUMBER
/ / / / / / / / / / / /
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
'Additional Information--Taxes') either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ('IRS') has notified me that I am no longer
subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
...................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
.............................. , 19 ......
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Fund For Tomorrow, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds Distributor,
Inc. acts as distributor over the next 13 month period which will equal or
exceed:
/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / / $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Fund For Tomorrow,
Inc. Prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Fund For Tomorrow, Inc. held as security.
By ...................................... ....................................
Signature of Owner Signature of Co-Owner
(If registered in joint parties,
both must sign)
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
(1) Name................................ (2) Name..............................
Account Number.......................... Account Number........................
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp.
[INDICIA]
This form when completed should be mailed to:
Merrill Lynch Fund For Tomorrow, Inc.
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the shareholder's signature.
...............................................................................
Dealer Name and Address
By..............................................................................
Authorized Signature of Dealer
/ / / / / / / / / .....................
Branch-Code F/C No. F/C Last Name
/ / / / / / / / / /
Dealer's Customer Account No.
34
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH FUND FOR TOMORROW, INC.--AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
Note: This form is required to apply for the Systematic Withdrawal or Automatic
Investment Plans only.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner .................................. / / / / / / / / / /
Social Security No.
Name of Co-Owner (if any) ...................... or Taxpayer Identification No.
Address .............................................
............................. Account Number .................................
(if existing account)
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Fund For
Tomorrow, Inc. at cost or current offering price. Withdrawals to be made either
(check one) / / Monthly on the 24th day of each month, or / / Quarterly on the
24th day of March, June, September and December. If the 24th falls on a weekend
or holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ............. or as soon as possible thereafter.
(month)
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE):
/ / $ ......... or / / ......... % of the current value of / / Class A or
/ / Class D shares in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of .......................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print) ....................................................
Address .......................................................................
.......................................................................
Signature of Owner ....................... Date ..............................
Signature of Co-Owner (if any) .................................................
(b) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your account ..........................................................
Bank Name ......................................................................
Bank Number .......................... Account Number .......................
Bank Address ..................................................................
...............................................................................
Signature of Depositor ................... Date ..............................
Signature of Depositor ........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED 'VOID' OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
35
<PAGE>
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ('ACH') debit on my checking account as described below each
month to purchase (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Fund For Tomorrow, Inc., subject to the terms set forth below.
In the event that I am not eligible to purchase Class A shares, I understand
that Class D shares will be purchased.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Fund For Tomorrow, Inc. as indicated below:
Amount of each check or ACH debit $ ...........................................
Account Number ................................................................
Please date and invest ACH debits on the 20th of each month beginning
......................... or as soon thereafter as possible.
(month)
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Financial Data Services, Inc. is authorized to discontinue
immediately the Automatic Investment Plan and to liquidate sufficient shares
held in my account to offset the purchase made with the dishonored debit.
.................... ........................................
Date Signature of Depositor
........................................
Signature of Depositor
(If joint account, both must
sign)
AUTHORIZATION TO
HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To ....................................................................... Bank
(Investor's Bank)
Bank Address ..................................................................
City ............ State ............ Zip Code ...............................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Financial Data
Services, Inc., I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked by me in writing. Until you
receive such notice, you shall be fully protected in honoring any such debit. I
further agree that if any such debit be dishonored, whether with or without
cause and whether intentionally or inadvertently, you shall be under no
liability.
.................... ....................................
Date Signature of Depositor
.................... ....................................
Bank Account Number Signature of Depositor
(If joint account, both must
sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
'VOID' SHOULD ACCOMPANY THIS APPLICATION.
36
<PAGE>
Investment Adviser
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributor
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, New York 10022
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE INVESTMENT ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Fee Table......................................... 2
Merrill Lynch Select Pricing(Service Mark)
System.......................................... 3
Financial Highlights.............................. 8
Investment Objective and Policies................. 9
The Fund and Its Management....................... 9
Purchase of Shares................................ 11
Initial Sales Charge Alternatives--
Class A and Class D Shares................... 13
Deferred Sales Charge Alternatives--
Class B and Class C Shares................... 15
Distribution Plans.............................. 18
Limitations on the Payment of Deferred Sales
Charges...................................... 20
Repurchase and Redemption of Shares............... 20
Repurchase...................................... 21
Redemption...................................... 21
Reinstatement Privilege--Class A and
Class D Shares............................... 22
Shareholder Services.............................. 22
Dividends, Distributions and Taxes................ 25
Investment Practices and Restrictions............. 27
Additional Information............................ 29
Determination of Net Asset Value................ 29
Performance Data................................ 29
Organization of the Fund........................ 30
Shareholder Inquiries........................... 31
Shareholder Reports............................. 31
Authorization Form................................ 33
</TABLE>
Code # 10227-1094
[LOGO]
MERRILL LYNCH
FUND FOR
TOMORROW, INC.
[ART]
PROSPECTUS
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 21, 1994
MERRILL LYNCH FUND FOR TOMORROW, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
----------------------
Merrill Lynch Fund For Tomorrow, Inc. (the 'Fund') is a mutual fund that
has as its primary investment objective long-term growth of capital. In seeking
to accomplish its objective the Fund invests in a quality-oriented portfolio of
securities, primarily common stocks, of companies that the Fund's management
believes are well positioned to benefit from demographic and cultural changes,
primarily as they affect future consumer markets. The Fund is designed
primarily, but not exclusively, for younger investors who desire a long-term
investment in the stock market.
Pursuant to the Merrill Lynch Select Pricing(Service Mark) 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(Service Mark) 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.
----------------------
A Prospectus for the Fund dated October 21, 1994, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from Merrill Lynch Funds Distributor, Inc. (the 'Distributor' or
'MLFD'), P.O. Box 9011, Princeton, New Jersey 08543-9011, (609) 282-2800 or from
your securities dealer. This Statement of Additional Information contains
information in addition to and more detailed than that set forth in the
Prospectus. It is intended to provide you additional information regarding the
activities and operations of the Fund, and should be read in conjunction with
the Prospectus.
----------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
As discussed in the Prospectus, the Fund may invest in convertible
securities, preferred stocks and bonds when management determines it is
advisable to do so. Such securities will be issued by companies which satisfy
the criteria, set forth in the Prospectus, utilized by management in identifying
quality companies. The Fund has no present intention of investing in bonds rated
lower than BBB by Standard & Poor's Ratings Group ('S&P') or Baa by Moody's
Investors Service, Inc. ('Moody's'). See 'Investment Practices and
Restrictions--Investment Grade Debt Securities' in the Prospectus.
As also discussed in the Prospectus, the Fund may, under certain
circumstances, invest all or a portion of its assets in high quality money
market securities which, for this purpose, shall include the following: (1) U.S.
Treasury bills; (2) bankers' acceptances and certificates of deposit of the 50
largest commercial banks in the United States, measured by total assets as shown
by their most recent annual financial statements; (3) commercial paper rated A-1
or A-2 by S&P or P-1 or P-2 by Moody's, or, if not rated, issued by companies
having an outstanding debt issue rated AA or better by S&P or Aa or better by
Moody's; and (4) repurchase agreements with respect to the foregoing.
MANAGEMENT OF THE FUND
Reference is made to 'The Fund and Its Management' in the Prospectus for
certain information concerning management and advisory arrangements of the Fund.
The Investment Adviser. Merrill Lynch Asset Management, L.P., doing
business as Merrill Lynch Asset Management ('MLAM' or the 'Investment Adviser'),
is the investment adviser of the Fund. The Investment Adviser or its affiliate,
Fund Asset Management, L.P. ('FAM'), is also the investment adviser to over 100
other registered investment companies as well as to numerous pension plans and
other institutions. The Investment Adviser is a Delaware limited partnership and
is owned and controlled by Merrill Lynch & Co., Inc. a financial services
holding company ('ML & Co.').
The Advisory Agreement. Under its investment advisory agreement with the
Fund (the 'Advisory Agreement'), the Investment Adviser is responsible for the
actual management of the Fund's portfolio. Responsibility for making decisions
to buy, sell or hold a particular security rests with the Investment Adviser,
subject to review by the Board of Directors. The Investment Adviser provides the
portfolio managers for the Fund, who make investment decisions and place orders
to effect portfolio transactions for the Fund. In this regard, the Investment
Adviser has access to the total securities research and economic research
facilities of Merrill Lynch, Pierce, Fenner & Smith Incorporated ('Merrill
Lynch'). Pursuant to the Advisory Agreement, the Investment Adviser also
performs certain administrative and management services for the Fund. The
Advisory Agreement obligates the Investment Adviser 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,
and to pay the fees of all Directors of the Fund who are affiliated with ML &
Co. or any of its subsidiaries. Portfolio 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.
The Advisory Agreement will continue in effect until March 31, 1995.
Thereafter, it may continue in effect from year to year if approved at least
annually by the vote of a majority of Directors of the Fund or by the holders of
a majority of the Fund's outstanding shares. Any such continuation also requires
approval by a majority of the Directors who are not parties to the Advisory
Agreement or 'interested persons' of any such party as defined in the Act by
vote cast in person at a meeting called for such purpose. The Advisory Agreement
may be terminated
2
<PAGE>
at any time, without penalty, on sixty days' written notice by the Fund's Board
of Directors, by the holders of a majority of the Fund's outstanding voting
securities or by the Investment Adviser. The Advisory Agreement automatically
terminates in the event of its assignment (as defined in the Investment Company
Act and the rules thereunder).
The Advisory Agreement provides that the Fund will pay the Investment
Adviser a monthly fee based upon the average daily value of the Fund's net
assets at the following annual rate: 0.65% of the average daily net assets not
exceeding $750 million; 0.60% of the average daily net assets exceeding $750
million but not exceeding $1 billion; and 0.55% of the average daily net assets
exceeding $1 billion. Certain states in which the shares of the Fund are
qualified for sale impose limitations on the expenses of the Fund. At the date
of this Statement of Additional Information, the most restrictive annual expense
limitations require that the Investment Adviser reimburse the Fund in any amount
necessary (up to the amount of the advisory fee) to prevent the Fund's aggregate
ordinary operating expenses (excluding interest, taxes, distribution and
brokerage fees and commissions, and extraordinary charges such as litigation
costs) from exceeding in any fiscal year 2.5% of the Fund's first $30,000,000 of
average net assets, 2.0% of the next $70,000,000 of average net assets and 1.5%
of the remaining average net assets. No payment of the investment advisory fee
will be made to the Investment Adviser which would result in Fund expenses
exceeding on a cumulative annualized basis the most restrictive applicable
expense limitation in effect at the time of such payment. To date, no
reimbursement of expenses has been required pursuant to the applicable expense
limitation provisions discussed above. For the Fund's fiscal years ended January
31, 1994, January 31, 1993 and January 31, 1992, the Investment Adviser earned a
fee of $2,782,877, $3,019,482 and $2,998,337, respectively, from the Fund.
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Director and executive officer is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL--President and Director (1)(2)--President and Chief Executive
Officer of the Investment Adviser (which term as used herein includes its
corporate predecessors) since 1977 and Director and Chief Investment Officer
thereof since 1976; President and Chief Investment Officer of FAM (which term as
used herein includes its corporate predecessors) since 1977; President and
Director of Princeton Services since 1993; Executive Vice President of ML & Co.
since 1990; Executive Vice President of Merrill Lynch since 1990 and Senior Vice
President from 1985 to 1990; Director of Merrill Lynch Funds Distributor, Inc.
('MLFD' or the 'Distributor').
RONALD W. FORBES--Director (2)--School of Business, BA 309, SUNY Albany,
1400 Washington Avenue, Albany, New York 12222. Professor of Finance, School of
Business, State University of New York at Albany, since 1989.
CYNTHIA A. MONTGOMERY--Director (2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L.--Kellogg Graduate School of Management,
Northwestern University, 1985-1989; Assistant Professor, Graduate School of
Business Administration, The University of Michigan, 1979-1985; Director, UNUM
Corporation.
CHARLES C. REILLY--Director (2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from
3
<PAGE>
1979-1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from
1973-1990; Adjunct Professor, Columbia University Graduate School of Business
since 1990; Adjunct Professor, Wharton School, University of Pennsylvania, 1990;
Director, Harvard Business School Alumni Association.
KEVIN A. RYAN--Director (2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Professor of Education at Boston University since 1982;
Founder and current Director of The Boston University Center for the Advancement
of Ethics and Character; Formerly taught on the faculties of the University of
Chicago, Stanford University and The Ohio State University.
RICHARD R. WEST--Director (2)--482 Tepi Drive, Southbury, Connecticut
06488. Professor of Finance, and Dean from 1984 to 1993, of New York University
Leonard N. Stern School of Business Administration since 1984; Professor of
Finance at the Amos Tuck School of Business Administration, Dartmouth College,
from 1976-1984 and Dean from 1976-1983; Director of Bowne & Co., Inc., Vornado,
Inc. (real estate holding company), Re Capital Corp. (reinsurance holding
corporation), Smith Corona Inc. (manufacturer of typewriters and word
processors) and Alexander's, Inc. (retailer).
TERRY K. GLENN--Executive Vice President (1)(2)--Executive Vice President
of the Investment Adviser and FAM since 1983; Executive Vice President of
Princeton Services since 1993; President of Distributor since 1986 and Director
thereof since 1991.
NORMAN R. HARVEY--Senior Vice President (1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1982.
VINCENT P. DILEO--Vice President (1)--Portfolio Manager of the Investment
Adviser since 1984.
DONALD C. BURKE--Vice President (1)(2)--Vice President and Director of
Taxation of the Investment Adviser since 1990; Employee with Deloitte & Touche
LLP from 1982 until 1990.
GERALD M. RICHARD--Treasurer (1)(2)--Senior Vice President and Treasurer of
the Investment Adviser and FAM; Senior Vice President and Treasurer of Princeton
Services since 1993; Vice President of the Distributor since 1981, and Treasurer
since 1984.
SUSAN B. BAKER--Secretary (1)(2)--Vice President of the Investment Adviser
since 1993; attorney associated with the Investment Adviser since 1987; attorney
in private practice from 1985-1987.
- ------------------
(1) Interested person, as defined in the Act, of the Fund.
(2) Such Director or officer is a director, trustee or officer of other
investment companies for which the Investment Adviser or FAM acts as
investment adviser.
Mr. Zeikel, a Director of the Fund, and the officers of the Fund owned on
September 30, 1994 an aggregate of less than 1% of the outstanding shares of
Common Stock of ML & Co.
The Fund has an Audit and Nominating Committee consisting of all of the
Directors of the Fund who are not interested persons of the Fund.
As of September 30, 1994, the officers and Directors of the Fund as a group
(12 persons) owned less than 1% of the outstanding shares of the Fund. Each
unaffiliated Director is paid a fee by the Fund of $1,000 per year plus $400 per
meeting, plus actual out-of-pocket expenses for each meeting of the Board of
Directors attended. The Fund also compensates each member of the Audit and
Nominating Committee of the Board of Directors, with a fee of $1,000 per year.
In addition, the Chairman of the Committee receives an annual fee of $1,000 for
serving as Chairman of the Committee. These fees and expenses aggregated $31,896
for the fiscal year ended January 31, 1994.
4
<PAGE>
PURCHASE OF SHARES
Reference is made to 'Purchase of Shares' in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System: shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of the Fund
represents an identical interest in the investment portfolio of the Fund and has
the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees, and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which the account maintenance and/or distribution fees
are paid. Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege.'
The Merrill Lynch Select Pricing(Service Mark) System is used by more than
50 mutual funds advised by MLAM or its affiliate, FAM. Funds advised by MLAM or
FAM are referred to herein as 'MLAM-advised mutual funds.'
The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the 'Distribution Agreements'). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the Fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provisions as the Advisory Agreement described
above.
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the period ended
July 31, 1994 were $6,350, of which the Distributor received $456 and Merrill
Lynch received $5,894. The gross sales charges for the sale of Class A shares
for the fiscal years ended January 31, 1994, 1993 and 1992 were $44,720, $83,818
and $69,135, of which the Distributor received $2,638, $5,098 and $3,593 and
Merrill Lynch received $42,082, $78,720 and $65,542, respectively. During the
fiscal year ended January 31, 1994 and the six months ended July 31, 1994, the
Distributor received CDSCs on Class A shares for which the initial sales charge
was waived of $0.
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 spouse and their children under the
age of 21 years purchasing shares for his 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 which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants
5
<PAGE>
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.
REDUCED INITIAL SALES CHARGES
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 other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund, or any
other MLAM-advised mutual funds, made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at Financial Data Services, Inc., the Fund's transfer
agent. The Letter of Intention is not available to employee benefit plans for
which Merrill Lynch provides plan participant record-keeping services. The
Letter of Intention is not a binding obligation to purchase any amount of Class
A or Class D shares; however, its execution will result in the purchaser paying
a lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intention may be included under a
subsequent Letter of Intention executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. The
value of Class A and Class D shares of the Fund and of other MLAM-advised mutual
funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intention, may be included
as a credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intention (minimum of $25,000), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to at least five percent of the intended amount
will be held in escrow during the 13-month period (while remaining registered in
the name of the purchaser) for this purpose. The first purchase under the Letter
of Intention must be at least five percent of the dollar amount of such Letter.
If a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to that further
reduced percentage sales charge but there will be no retroactive reduction of
the sales charges on any previous purchase. The value of any shares redeemed or
otherwise disposed of by the purchaser prior to termination or completion of the
Letter of Intention will be deducted from the total purchases made under such
Letter. An exchange from a MLAM-advised money market fund into the Fund that
creates a sales charge will count toward completing a new or existing Letter of
Intention from the Fund.
6
<PAGE>
Merrill Lynch Blueprint(Service Mark) Program. Class D shares of the
Fund are offered to participants in the Merrill Lynch Blueprint(Service Mark)
Program ('Blueprint'). In addition, participants in Blueprint who own Class A
shares of the Fund may purchase additional Class A shares of the Fund through
Blueprint. The Blueprint Program is directed to small investors, group IRAs and
participants in certain affinity groups such as benefit plans, credit unions and
trade associations. 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 to $5,000 at
3.25% plus $3.00, and $5,000.01 or more at the standard sales charge rates
disclosed in the Prospectus). In addition, Class A or Class D shares of the Fund
are being offered at net asset value plus a sales charge of 1/2 of 1% for
corporate or group IRA programs placing orders to purchase their Class A or
Class D shares through Blueprint. Services, including the exchange privilege,
available to Class A and Class D investors through Blueprint, however, may
differ from those available to other investors in Class A and Class D shares.
Class A and Class D shares are offered at net asset value, to participants
in Blueprint through the Merrill Lynch Directed IRA Rollover Program ('IRA
Rollover Program') available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(see definition below) whose Trustee and/or Plan Sponsor offers the Merrill
Lynch Directed IRA Rollover Program.
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(Service Mark)
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA(Service Mark) Managed Trusts. Class A shares are offered to
TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services at net asset value.
Employer Sponsored Retirement and Savings Plans. Class A and Class D
shares are offered at net asset value to employer sponsored retirement or
savings plans, such as tax qualified retirement plans within the meaning of
Section 410(a) of the Internal Revenue Code of 1986, as amended (the 'Code'),
deferred compensation plans within the meaning of Section 403(b) and 457 of the
Code, other deferred compensation arangements, Voluntary Employee Benefits
Association ('VEBA') plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee Services system, herein
referred to as 'Employer Sponsored Retirement or Savings Plans,' provided the
plan has accumulated at least $20 million in MLAM-advised mutual funds (in the
case of Class A shares) or $5 million in MLAM-advised mutual funds (in the case
of Class D shares). Class D shares may be offered at net asset value to new
Employer Sponsored Retirement or Savings Plans, provided the plan has $3 million
or more initially invested in MLAM-advised mutual funds. Assets of Employer
Sponsored Retirement or Savings Plans sponsored by the same sponsor or an
affiliated sponsor may be aggregated. Class A shares and Class D shares also are
offered at net asset value to Employer Sponsored Retirement or Savings Plans
that have at least 1,000 employees eligible to participate in the plan (in the
case of Class A shares) or between 500 and 999 employees eligible to participate
in the plan (in the case of Class D shares). Employees eligible to participate
in Employer Sponsored Retirement or Savings Plans of the same sponsoring
employer or its affiliates may be aggregated. Tax qualified retirement plans
within the
7
<PAGE>
meaning of Section 401(a) of the Code meeting any of the foregoing requirements
and which are provided specialized services (e.g., plans whose participants may
direct on a daily basis their plan allocations among a wide range of investments
including individual corporate equities and other securities in addition to
mutual fund shares) by the Merrill Lynch Blueprint(Service Mark) Program, are
offered Class A shares at a price equal to net asset value per share plus a
reduced sales charge of 0.50%. Any Employer Sponsored Retirement or Savings Plan
which does not meet the above described qualifications to purchase Class A
shares or Class D shares at net asset value has the option of (i) purchasing
Class A shares at the initial sales charge and possible CDSC schedule disclosed
in the Prospectus, if it is otherwise eligible to purchase Class A shares, (ii)
purchasing Class D shares at the initial sales charge and possible CDSC schedule
disclosed in the Prospectus, (iii) if the Employer Sponsored Retirement or
Savings Plan meets the specified requirements, purchasing Class B shares with a
waiver of the CDSC upon redemption, or (iv) if the Employer Sponsored Retirement
or Savings Plan does not qualify to purchase Class B shares with a waiver of the
CDSC upon redemption, purchasing Class C shares at the CDSC schedule disclosed
in the Prospectus. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Employer Sponsored Retirement
or Savings Plans.
Purchase Privilege of Certain Persons. Directors of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of ML & Co. and its subsidiaries (the term 'subsidaries,' 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 any trust, pension,
profit-sharing or other benefit plan for such persons, may purchase Class A
shares of the Fund at net asset value. Under such programs, the Fund realizes
economies of scale and reduction of sales-related expenses by virtue of
familiarity 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 will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied. First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than 6 months. Second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must have been maintained in the interim in cash or a money market fund.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis. Second, the investor must also 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 also will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and when
8
<PAGE>
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 such fund was subject to a
sales charge either at the time of purchase or on a deferred basis. Second, such
purchase of Class D shares must be made within 90 days after such notice.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ('Eligible Class A Shares') are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or FAM who purchased such closed-end fund shares prior to October 21,
1994 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
MLAM-advised mutual funds ('Eligible Class D Shares'), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D Shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option. Class A
shares of the Fund are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. ('Senior Floating Rate Fund') who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
of Senior Floating Rate Fund in shares of the Fund. In order to exercise this
investment option, Senior Floating Rate Fund shareholders must sell their Senior
Floating Rate Fund shares to the Senior Floating Rate Fund in connection with a
tender offer conducted by the Senior Floating Rate Fund and reinvest the
proceeds immediately in the Fund. This investment option is available only with
respect to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a personal holding company or a public or private investment company. The value
of the assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund which
might result from an acquisition of assets having net unrealized appreciation
which is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is ready ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under 'Investment Objective and
Policies' herein.
9
<PAGE>
DISTRIBUTION PLANS
Reference is made to 'Purchase of Shares--Distribution Plans' in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
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.
During the fiscal year ended January 31, 1994, the Fund paid $4,173,391
under the Distribution Plan for Class B shares, an amount equal to 1% of the
average daily net assets of the Class B shares for such fiscal year. All such
amounts were paid to the Distributor and in turn were paid by the Distributor to
Merrill Lynch to defray a portion of its costs incurred in rendering account
maintenance and distribution services to the Fund, including advancement of
sales commissions to its account executives for the sale of the Class B shares
of the Fund.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Act. Among other things, each
Distribution Plan provides that the Distributor shall provide and the Directors
shall review quarterly reports of the disbursement of the account maintenance
fees and/or distribution fees paid to the Distributor. In their consideration of
each Distribution Plan, the Directors must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and its related class of shareholders. Each Distribution Plan further
provides that, so long as the Distribution Plan remains in effect, the selection
and nomination of Directors who are not 'interested persons' of the Fund, as
defined in the Act (the 'Independent Directors'), shall be committed to the
discretion of the Independent Directors then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Directors
concluded that there is reasonable likelihood that such Distribution Plan will
benefit the Fund and its related class of shareholders. Each Distribution Plan
can be terminated at any time, without penalty, by the vote of a majority of the
Independent Directors or by the 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 Independent
Directors who have no direct or indirect financial interest in such Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of each Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the date
of such Distribution Plan or such report, the first two years in an easily
accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ('NASD') imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares, but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
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
10
<PAGE>
maximum') in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance fee.
In certain circumstances the amount payable pursuant to the voluntary maximum
may exceed the amount payable under the NASD formula. In such circumstances
payment in excess of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of July 31, 1994
with respect to the Class B shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum for the period March 5, 1984 (commencement of
the public offering of Class B shares) to July 31, 1994. Since Class C shares of
the Fund had not been publicly issued prior to the date of this Statement of
Additional Information, information concerning Class C shares is not yet
provided below.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1994
-----------------------------------------------------------------------------------------
(IN THOUSANDS) ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- --------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $1,130,895 $70,681 $41,095 $111,776 $ 52,438 $59,338 $2,370
Under Distributor's
Voluntary Waiver....... $1,130,895 $70,681 $ 5,654 $ 76,335 $ 52,438 $23,897 $2,370
</TABLE>
- ------------------
(1) Purchase price of all eligible Class B shares sold since March 5, 1984
(commencement of the public offering of Class B shares) other than shares
acquired through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under a prior plan at
the 1.0% rate, 0.75% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. See 'Purchase of Shares--Distribution Plans' in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
REDEMPTIONS
Reference is made to 'Repurchase and Redemption of Shares' in the
Prospectus for certain information as to the redemption and repurchase of Fund
shares.
Redemption Payments. Payment for shares presented for redemption will be
made by check sent within seven days after receipt by the Transfer Agent of a
shareholder's written request in proper form and, if issued, certificates for
the shares being redeemed. Such payment may be postponed or the right of
redemption suspended: (a) when the New York Stock Exchange is closed for other
than customary weekends and holidays; (b) when trading on that Exchange is
restricted; (c) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets; or (d) during any other period when the Securities and Exchange
Commission by order so permits. Applicable rules and regulations of the
Securities and Exchange Commission govern as to whether the conditions described
in (b) or (c) above exist.
11
<PAGE>
DEFERRED SALES CHARGE--CLASS B SHARES
As discussed in the Prospectus under 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares,' while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account ('IRA') or
other retirement plan or on redemptions of Class B shares following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan which is permitted to
be made without tax penalty under the Internal Revenue Code of 1986, as amended
(the 'Code'), or attaining age 59 1/2 in the case of an IRA or other retirement
plan, or part of series of equal periodic payments (not less frequently than
annually) made for life (or life expectancy) or any redemption resulting from
the tax-free return of an excess contribution to an IRA; or (b) any partial or
complete redemption following the death or disability (as defined in the Code)
of a Class B shareholder (including one who owns the Class B shares as joint
tenant with his or her spouse), provided the redemption is requested within one
year of the death or initial determination of disability. For the years ended
January 31, 1994, 1993 and 1992, the Distributor received contingent deferred
sales charges of $172,596, $218,627 and $304,110, respectively, all of which was
paid to Merrill Lynch.
Merrill Lynch Blueprint(Service Mark) Program. Class B shares are offered
to certain participants in Blueprint. Blueprint is directed to small investors
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares of the Fund are offered through Blueprint only to
members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B investors through Blueprint, however, may differ
from those available to other Class B investors. Orders for purchases and
redemptions of Class B shares of the Fund will be grouped for execution purposes
which, in some circumstances, may involve the execution of such orders two
business days following the day such orders are placed. The minimum initial
purchase price is $100, with a $50 minimum for subsequent purchases through
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of 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(Service Mark) Program, P.O. Box 30441, New
Brunswick, New Jersey 08989-0441.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value has the
option of purchasing Class A or Class D shares at the sales charge schedule
disclosed in the Prospectus, or if the Retirement Plan meets the following
requirements, then it may purchase Class B shares with a waiver of the CDSC upon
redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
shares. 'Eligible 401(k) Plan' is defined as a retirement plan qualified under
Section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from a
401(a) plan qualified under the Code, provided, however, that each such plan has
the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ('Eligible 401(a) Plan').
Other tax qualified retirement plans within the meaning of Section 401(a) and
403(b) of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a menu of
investments) by independent administration firms contracted through Merrill
Lynch may also purchase Class B shares with a waiver of CDSC. The CDSC also is
waived for any Class B shares which are purchased by an Eligible 401(k) Plan or
Eligible 401(a) Plan and are rolled over into a Merrill Lynch or Merrill Lynch
Trust Company custodied IRA and held in
12
<PAGE>
such account at the time of redemption. The Class B CDSC also is waived for any
Class B shares which are purchased by a Merrill Lynch rollover IRA, that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. The minimum
initial and subsequent purchase requirements are waived in connection with all
the above-referenced Retirement Plans.
DETERMINATION OF NET ASSET VALUE
Reference is made to 'Additional Information--Determination of Net Asset
Value' in the Prospectus for certain information concerning the determination of
net asset value.
The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 4:15 p.m., New York time, on each day during which
the New York Stock Exchange is open for trading. The New York Stock Exchange is
open weekdays except New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies will be
translated into U.S. dollars at the prevailing market rates quoted by one or
more banks or dealers on the day of valuation. Net asset value will also be
calculated on each other day on which there is a sufficient degree of trading in
the Fund's portfolio securities that the net asset value per share might be
materially affected, but only if on such day the Fund receives a request to
purchase or redeem its shares. The 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 received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses of the Fund, including investment advisory
fees and any account maintenance and/or distribution fees, are accrued daily.
The per share net asset value of the Class B, Class C and Class D shares
generally will be lower than the per share net asset value of the Class A shares
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares and the daily expense accruals of the account maintenance fees
applicable with respect to the Class D shares; moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of its Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to the Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will tend to
converge immediately after the payment of dividends or distributions, which will
differ by approximately the amount of the expense accrual differential between
the classes.
In determining net asset value per share, portfolio securities which are
traded on stock exchanges are valued at their last sale prices as of the close
of business on the day the securities are being valued or, lacking any sales on
that day, at the last available bid price. Securities traded in the
over-the-counter market are valued at the last bid prices quoted by one or more
brokers that make markets in the securities at the close of trading on the New
York Stock Exchange. Portfolio securities which are traded both in the
over-the-counter market and on a stock exchange are valued based upon the prices
or quotes obtained from the broadest and most representative market. Securities
for which market quotations are not readily available and other assets are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund.
13
<PAGE>
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gain distributions. Shareholders may make
additions to their Investment Account at any time by mailing a check directly to
the Transfer Agent.
Share certificates are issued only for full shares and only upon the
specific request of the 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.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer, or by mail directly to the Transfer Agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Transfer Agent is authorized
through pre-authorized checks or automated clearing house debits of $50 or more
to charge the regular bank account of the shareholder on a regular basis to
provide systematic additions to the Investment Account of such shareholder. For
investors who buy shares of the Fund through the Merrill Lynch Blueprint(Service
Mark) Program, no minimum charge to the investor's bank account is required.
Investors who maintain CMA(Registered)accounts may arrange to have periodic
investments made in the Fund, in CMA(Registered) accounts or in certain related
accounts in the amounts of $100 or more ($1 for retirement accounts) through the
CMA(Registered) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund, without sales charge, as
of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect in writing to receive either their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on the payment date.
Shareholders may, at any time, notify the Transfer Agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or capital gains distributions reinvested in shares of the Fund
14
<PAGE>
or vice versa and, commencing ten days after the receipt by the Transfer Agent
of such notice, those instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account in the form of payments by check or through automatic
payment by direct deposit to such shareholder's bank account, on either a
monthly or quarterly basis as provided below. Quarterly withdrawals are
available for shareholders who have acquired Class A or Class D 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 Class A or
Class D shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined at the
close of business on the New York Stock Exchange on the 24th day of each month
or the 24th day of the last month of each calendar quarter, whichever is
applicable. If the Exchange is not open for business on such date, the Class A
or Class D shares will be redeemed at the close of business on the following
business day. The check for the withdrawal payment will be mailed, or the direct
deposit for withdrawal payment will be made, on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends and
distributions on all Class A or Class D shares in the Investment Account are
reinvested automatically in Fund Class A or Class D shares, respectively. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Fund, the Fund's Transfer Agent or
the Distributor. Withdrawal payments should not be considered as dividends,
yield or income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be reduced correspondingly. Purchases of additional Class A or Class D
shares concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Fund will not
knowingly accept purchase orders for Class A or Class D shares of the Fund from
investors who maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Periodic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a
CMA(Registered), CBA(Registered) or Retirement Account may elect to have shares
redeemed on a monthly, bi-monthly, quarterly, semiannual or annual basis through
the Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account five business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bi-monthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net value on the next business day. The
Systematic Redemption Program is not available if Fund shares are being
purchased within the account pursuant to the Automatic Investment Program. For
more information on the Systematic Redemption Program, eligible shareholders
should contact their financial consultant.
15
<PAGE>
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as
in other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100 and the minimum subsequent purchase is $1.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plan.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing(Service Mark) System, Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second MLAM-advised mutual
fund if the shareholder holds any Class A shares of the second fund in his
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class B, Class C and
Class D shares will be exchangeable with shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the holding
period for the previously owned shares of the Fund is 'tacked' to the holding
period of the newly acquired shares of the other Fund as more fully described
below. Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically designated
below as available for exchange by holders of Class A, Class B, Class C or Class
D shares. Shares with a net asset value of at least $100 are required to qualify
for the exchange privilege, and any shares utilized in an exchange must have
been held by the shareholder for 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ('outstanding Class A or
Class D shares') for Class A shares or Class D shares of another MLAM-advised
mutual fund ('new Class A or Class D shares') are transacted on the basis of
relative net asset value per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the 'sales charge previously paid' shall include the aggregate of the
sales 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
16
<PAGE>
the exchange privilege, dividend reinvestment Class A or Class D shares shall be
exchanged into the Class A or Class D shares of the other funds or into shares
of the Class A or Class D money market funds without a sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
('outstanding Class B or Class C shares') offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ('new Class B or Class C shares') on the basis of
relative net asset value per Class B or Class C shares, 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 Funds' CDSC schedule if such
schedule is higher than the CDSC schedule relating to the Class B shares of the
fund from which the exchange has been made. For purposes of computing the sales
charge that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C shares is
'tacked' to the holding period of the new Class B or Class C shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ('Special Value Fund') after having held
the Fund Class B shares for two and a half years. The 2% sales charge that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of Special
Value Fund and receive cash. There will be no CDSC due on this redemption, since
by 'tacking' the two and a half year holding period of Fund Class B shares to
the three year holding period for the Special Value Fund Class B shares, the
investor will be deemed to have held the new Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund which were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively, of
any fund offering such shares, in which event the holding period for Class B or
Class C shares of the fund will be aggregated with previous holding periods for
purposes of reducing the CDSC. Thus, for example, an investor may exchange Class
B shares of the Fund for shares of Merrill Lynch Institutional Fund
('Institutional Fund') after having held the Fund Class B shares for two and a
half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Fund been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and a half years,
any subsequent redemption will not incur a CDSC.
17
<PAGE>
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made are as follows:
Funds issuing Class A, Class B, Class C and Class D Shares:
<TABLE>
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MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC............. High current income consistent with a
policy of limiting the degree of
fluctuation in net asset value by
investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and
asset-backed securities.
MERRILL LYNCH AMERICAS INCOME FUND,
INC.............................. A high level of current income,
consistent with prudent investment risk,
by investing primarily in debt
securities denominated in a currency
of a country located in the Western
Hemisphere (i.e., North and South
America and the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Arizona income
taxes as is consistent with prudent
investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from Federal and Arizona
income taxes as is consistent with
prudent investment management.
MERRILL LYNCH ARKANSAS MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series Fund,
whose objective is to provide as high
a level of income exempt from Federal
and Arkansas income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH ASSET GROWTH FUND,
INC. ............................ High total investment return, consistent
with prudent risk, from investment in
United States and foreign equity, debt
and money market securities the
combination of which will be varied
both with respect to types of
securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME FUND,
INC. ............................ A high level of current income through
investment primarily in United States
fixed income securities.
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MERRILL LYNCH BALANCED FUND FOR
INVESTMENT AND RETIREMENT........ As high a level of total investment
return as is consistent with a
relatively low level of risk through
investment in common stock and other
types of securities, including fixed
income securities and convertible
securities.
MERRILL LYNCH BASIC VALUE FUND,
INC.............................. Capital appreciation and, secondarily,
income by investing in securities,
primarily equities, that are
undervalued and therefore represent
basic investment value.
MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of insured income exempt from
Federal and California income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH CALIFORNIA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide shareholders with as high a
level of income exempt from Federal
and California income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade
California Municipal Bonds.
MERRILL LYNCH CALIFORNIA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and California income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CAPITAL FUND, INC.... The highest total investment return
consistent with prudent risk through a
fully managed investment policy
utilizing equity, debt and convertible
securities.
MERRILL LYNCH COLORADO MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Colorado income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CONNECTICUT MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal
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Series Trust, a series fund, whose
objective is to provide as high a
level of income exempt from Federal
and Connecticut income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CORPORATE BOND FUND,
INC.............................. Current income from three separate
diversified portfolios of fixed income
securities.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC................ Long-term appreciation through
investment in securities, principally
equities, of issuers in countries
having smaller capital markets.
MERRILL LYNCH DRAGON FUND, INC..... Capital appreciation primarily through
investment in equity and debt securities
of issuers domiciled in developing
countries located in Asia and Pacific
Basin other than Japan, Australia and
New Zealand.
MERRILL LYNCH EUROFUND............. Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
MERRILL LYNCH FEDERAL SECURITIES
TRUST............................ High current return through investments
in U.S. Government and Government agency
securities, including GNMA
mortgage-backed certificates and other
mortgage-backed Government securities.
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida
intangible personal property taxes
through investment in a portfolio
primarily of intermediate-term
investment grade Florida Municipal
Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
income taxes as is consistent with
prudent investment management while
seeking to offer shareholders the
opportunity to own securities exempt
from Florida intangible personal
property taxes.
MERRILL LYNCH FUNDAMENTAL GROWTH
FUND, INC........................ Long-term growth through investment in a
diversified portfolio of equity
securities in placing particular
</TABLE>
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emphasis on companies that have
exhibited an above-average growth rate
in earnings.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC........................ High total return consistent with
prudent risk, through a fully managed
investment policy utilizing United
States and foreign equity, debt and
money market securities, the
combination of which will be varied
from time to time both with respect to
types of securities and markets in
response to changing market and
economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT........ High total investment return from
investment in government and corporate
bonds denominated in various
currencies and multi-national currency
units.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC........................ High total return from investment
primarily in an internationally
diversified portfolio of convertible
debt securities, convertible preferred
stock and 'synthetic' convertible
securities consisting of a combination
of debt securities or preferred stock
and warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, INC.
(residents of Arizona must meet
investor suitability
standards)....................... The highest total investment return
consistent with prudent risk through
worldwide investment in an
internationally diversified portfolio
of securities.
MERRILL LYNCH GLOBAL RESOURCES
TRUST............................ Long-term growth and protection of
capital from investment in securities of
domestic and foreign companies that
possess substantial natural resource
assets.
MERRILL LYNCH GLOBAL SMALLCAP FUND,
INC.............................. Long-term growth of capital by investing
primarily in equity securities of
companies with relatively small market
capitalizations located in various
foreign countries and in the United
States.
MERRILL LYNCH GLOBAL UTILITY FUND,
INC.............................. Capital appreciation and current income
through investment of at least 65% of
its total assets in equity and debt
securities issued by domestic and
foreign companies primarily engaged in
the ownership or operation of
facilities used to generate, transmit
or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT........ Growth of capital and, secondarily,
income from investment in a diversified
portfolio of equity
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securities placing principal emphasis
on those securities which management
of the fund believes to be
undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents of Wisconsin must meet
investor suitability
standards)....................... Capital appreciation through worldwide
investment in equity securities of
companies that are expected to derive
a substantial portion of their sales
from products and services in
healthcare.
MERRILL LYNCH INTERNATIONAL EQUITY
FUND............................. Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of
issuers located in countries other
than the United States.
MERRILL LYNCH LATIN AMERICA FUND,
INC.............................. Capital appreciation by investing
primarily in Latin American equity and
debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Maryland income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MASSACHUSETTS LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Massachusetts
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and
Massachusetts income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MICHIGAN LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Michigan
income
</TABLE>
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taxes as is consistent with prudent
investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Michigan income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MINNESOTA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Minnesota personal income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH MUNICIPAL BOND FUND,
INC.............................. Tax-exempt income from three separate
diversified portfolios of municipal
bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND.......... Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level as possible of income
exempt from Federal income taxes by
investing in investment grade
obligations with a dollar weighted
average maturity of five to twelve
years.
MERRILL LYNCH NEW JERSEY LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and New Jersey
income taxes as is consistent with
prudent investment management through
a portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and New Jersey state income taxes as
is consistent with prudent investment
management.
</TABLE>
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MERRILL LYNCH NEW MEXICO MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and New Mexico income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade New
York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal,
New York State and New York City
income taxes as is consistent with
prudent investment management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and North Carolina income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH OHIO MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and
Ohio income taxes as is consistent
with prudent investment management.
MERRILL LYNCH OREGON MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and
Oregon income taxes as is consistent
with prudent investment management.
MERRILL LYNCH PACIFIC FUND, INC.... Capital appreciation by investing in
equity securities of corporations
domiciled in Far Eastern and Western
</TABLE>
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Pacific countries, including Japan,
Australia, Hong Kong, Singapore and
the Philippines.
MERRILL LYNCH PENNSYLVANIA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Pennsylvania
income taxes as is consistent with
prudent investment management through
investment in a portfolio of
intermediate-term investment grade
Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Pennsylvania state income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH PHOENIX FUND, INC.... Long-term growth of capital by investing
in equity and fixed income securities,
including tax-exempt securities, of
issuers in weak financial condition or
experiencing poor operating results
believed to be undervalued relative to
the current or prospective condition
of such issuer.
MERRILL LYNCH SHORT-TERM GLOBAL
INCOME FUND, INC................. As high a level of current income as is
consistent with prudent investment
management from a global portfolio of
high quality debt securities
denominated in various currencies and
multi-currency units having remaining
maturities not exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND,
INC.............................. Long-term growth of capital from
investments in securities, primarily
common stocks, of relatively small
companies believed to have special
investment value and emerging growth
companies regardless of size.
MERRILL LYNCH STRATEGIC DIVIDEND
FUND............................. Long-term total return from investment
in dividend paying common stocks which
yield more than Standard & Poor's 500
Composite Stock Price Index.
MERRILL LYNCH TECHNOLOGY FUND...... Long-term capital appreciation through
worldwide investment in equity
securities of companies that, in the
opinion of management, derive or are
expected
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to derive a substantial portion of
their sales from products and services
in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from Federal income
taxes as is consistent with prudent
investment management by investing
primarily in a portfolio of long-term,
investment grade obligations issued by
the State of Texas, its political
subdivisions, agencies and
instrumentalities.
MERRILL LYNCH UTILITY INCOME FUND,
INC.............................. High current income through investment
primarily in equity and debt securities
issued by companies primarily engaged
in the ownership or operation of
facilities used to generate, transmit
or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME FUND,
INC.............................. High current income by investing in a
global portfolio of fixed income
securities denominated in various
currencies, including multinational
currencies.
Class A Share Money Market Funds:
MERRILL LYNCH READY ASSETS TRUST... Preservation of capital, liquidity and
the highest possible current income
consistent with the foregoing
objectives from the short-term money
market securities in which the Trust
invests.
MERRILL LYNCH RETIREMENT RESERVES
MONEY FUND (available only for
exchanges within certain
retirement plans)................ Currently the only portfolio of Merrill
Lynch Retirement Series Trust, a series
fund, whose objectives are current
income, preservation of capital and
liquidity available from investing in
a diversified portfolio of short-term
money market securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES......................... Preservation of capital, current income
and liquidity available from investing
in direct obligations of the U.S.
Government and repurchase agreements
relating to such securities.
MERRILL LYNCH U.S. TREASURY
MONEY FUND....................... Preservation of capital, liquidity and
current income through investment
exclusively in a diversified portfolio
of short-term marketable securities
which are direct obligations of the
U.S. Treasury.
</TABLE>
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Class B; Class C and Class D Share
Money Market Funds:
MERRILL LYNCH GOVERNMENT FUND...... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in securities issued or guaranteed by
the U.S. Government, its agencies and
instrumentalities and in repurchase
agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL FUND... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide maximum
current income consistent with
liquidity and the maintenance of a
high-quality portfolio of money market
securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND.................. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income exempt from Federal income
taxes, preservation of capital and
liquidity available from investing in
a diversified portfolio of short-term,
high quality municipal bonds.
MERRILL LYNCH TREASURY FUND........ A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in direct obligations of the U.S.
Treasury and up to 10% of its total
assets in repurchase agreements
secured by such obligations.
</TABLE>
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares 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.
27
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DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to continue to qualify as a regulated investment company
(a 'RIC') under the provisions of the Code. If so qualified, the Fund will not
be subject to Federal income tax on that part of its net investment income and
net realized capital gains which it distributes to shareholders. To qualify for
such tax treatment, the Fund must, among other things and in general, derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of securities, and certain other related income and derive less than
30% of its gross income from gains (without deduction for losses) from the sale
or other disposition of securities held for less than three months.
Even if reinvested in additional Fund shares, dividends paid by the Fund
from its ordinary income and distributions of the Fund's net realized short-term
capital gains are taxable to shareholders as ordinary income but may be eligible
in part for the 70% dividends received deduction allowed to corporations
provided under the Code if certain requirements are met. Not later than sixty
days after the end of each fiscal year, the Fund will send to its shareholders a
written notice required by the Code designating the amount of any distributions
made during such year which may be taken into account by corporate shareholders
for purposes of that deduction. 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 Securities and Exchange Commission's exemptive order
permitting the issuance and sale of multiple classes of stock) that is based on
the average daily net assets of each class [(taking into account the incremental
expenses of the Class B shares)] during the taxable year, or such other method
as the Internal Revenue Service may prescribe.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends and distributions on Class A and Class D shares as a
result of the account maintenance, distribution and higher transfer agency fees
applicable with respect to the Class B and Class C shares; similarly, the per
share dividends and distributions on Class D shares will be lower than the per
share dividends and distributions on Class A shares as a result of the account
maintenance fees applicable with respect to the Class D shares. See
'Determination of Net Asset Value.'
Under the Code, any distributions attributable to the Fund's net realized
long-term capital gains are taxable to shareholders (even if reinvested in
additional Fund shares) as long-term capital gains, regardless of the holding
period of shares of the Fund. However, a loss incurred by the shareholder upon
the sale or other disposition of shares of the Fund held for six months or less
will, to the extent the shareholder has received capital gains distributions, be
treated as a long-term capital loss. Such distributions of long-term capital
gains will be designated as a capital gains distribution in a written notice to
shareholders which accompanies the distribution payment.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares for 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 of 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 the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new shares
28
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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.
Under certain provisions of the Code, some shareholders may be subject to
31% withholding on ordinary income dividends, capital gains distributions and
redemption payments ('back-up withholding'). Generally, shareholders subject to
back-up withholding will be those for whom a certified taxpayer identification
number is not 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 he is not
otherwise subject to back-up withholding.
Dividends and short-term capital gains distributions paid by the Fund to
shareholders who are non-resident aliens or foreign entities generally are
subject to withholding at the rate of 30% unless a reduced rate of withholding
or a withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state and local taxes. Qualification as a
regulated investment company under the Code for income tax purposes does not
entail government supervision of management or investment policies.
INVESTMENT PRACTICES AND RESTRICTIONS
Lending of Portfolio Securities. As discussed in the Prospectus, the Fund
may from time to time lend its portfolio securities in order to increase the
total yield on its portfolio. Such loans will be effected in accordance with
applicable regulatory guidelines and will at all times be secured by cash
collateral or securities issued or guaranteed by the United States government in
an amount that is at least equal to the market value, determined daily, of the
loaned securities. Cash collateral received by the Fund is invested in
short-term money market securities, and a portion of the yield earned on such
securities is retained by the Fund. Where securities, instead of cash, are
delivered to the Fund as collateral, the Fund earns its return in the form of a
loan premium paid by the borrower. The Fund retains the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Securities loans can be terminated by the Fund at any time. The
Fund may pay reasonable finders', administrative and custodial fees in
connection with such loans. In the event that the borrower defaults on its
obligation to return borrowed securities, because of insolvency or otherwise,
the Fund could experience delays and costs in gaining
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access to collateral and could suffer a loss to the extent that the value of the
collateral falls below the market value of the securities.
Writing of Covered Call Options. As discussed in the Prospectus, the Fund
may from time to time sell (i.e., 'write') covered call options on its portfolio
securities. The term option, as used herein, means a call option issued by The
Options Clearing Corporation (the 'Clearing Corporation') and traded on a
national securities exchange. A call option gives the purchaser of the option
the right to buy and obligates the writer (seller) to sell the underlying
security at the exercise price during the option period. When the Fund writes an
option it receives a premium. This premium is the price of such option on the
exchange on which it is traded. At the time the option is written, the exercise
price of the option may be lower, equal to or higher than the market price of
the security on which the option is written.
A covered call option is an option where the Fund already owns securities
subject to the option ('underlying securities') or has an absolute and immediate
right to acquire that security without additional cash consideration upon
conversion or exchange of other securities held in its portfolio. By writing a
covered call option, the Fund, in return for the premium income realized from
the sale of the option, gives up the opportunity to profit from any increase in
the price of the underlying security above the option exercise price during the
period until the option expires, is exercised or the Fund effects a 'closing
purchase transaction' as described below. For example, assume that the Fund
owned 100 shares of stock that was trading at $50. If the Fund were to write a
call option on such stock with an exercise price of $50 for which it received
premium income of $500, in the event that the price of the underlying stock were
to increase to $55 during the term of the option, the option would most likely
be exercised and the Fund would be required to sell the underlying stock at $50
per share. If the price of the stock were to decline to below $50, however, the
option would most likely expire unexercised in which case the Fund would be able
to retain the underlying stock. In addition, the Fund will not be able to sell
the security during the period of the option without taking special steps
described below which will involve expense. If the option expires unexercised,
the Fund realizes a gain (short-term capital gain for Federal income tax
purposes) in the amount of the premium received for the option. This gain may be
offset by a decline in the market price of the underlying security during the
option period.
The Fund can terminate its obligation under an option prior to the
expiration date of the option by effecting a 'closing purchase transaction.'
This is done by purchasing on an exchange an option of the same series (i.e.,
same underlying security, exercise price and expiration date) as the option
previously written. This can be done, however, only on an exchange which
provides a secondary market for an option of the same series and there is no
assurance that a secondary market will exist for any particular option. In the
event the Fund is unable to effect a closing purchase transaction, it will not
be able to dispose of the underlying securities until the option expires or
until the underlying securities are delivered upon exercise of the option, with
the result that the Fund will be subject to the risk of decline in the price of
the underlying securities during such period. The Fund writes options on
securities only if management believes that secondary markets will exist on an
exchange for options of the same series which will permit the Fund to effect
closing purchase transactions. Depending on the premium paid by the Fund in
effecting a closing transaction and transaction costs, the cost of a closing
purchase transaction may exceed the premium received by the Fund from writing
the original option, in which case the transaction will result in a loss to the
Fund.
30
<PAGE>
The Fund may not write a covered call option on any of its portfolio's
securities if, as a result of writing such option, portfolio securities having a
value in excess of 15% of the Fund's total assets would be subject to such
options.
Repurchase Agreements. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or a primary dealer in U.S. Government
securities or an affiliate thereof. Under such agreements, the bank or primary
dealer or an affiliate thereof agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, 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. Repurchase
agreements usually cover short periods, such as under one week. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. The Fund will
require the seller to provide additional collateral if the market value of the
securities falls below the repurchase price at any time during the term of the
repurchase agreement. 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 price. Therefore, the Fund may suffer time delays and
incur costs or possible losses in connection with the disposition of the
collateral.
Restricted Securities. The Fund may purchase securities that are not
registered ('restricted securities') under the Securities Act of 1933, as
amended (the 'Securities Act'), but can be offered and sold to 'qualified
institutional buyers' under Rule 144A under the Securities Act. However, the
Fund will not invest more than 5% of its net assets in illiquid investments,
which includes securities for which there is no readily available market,
securities subject to contractual restrictions on resale, certain investments in
asset-backed and receivable-backed securities and restricted securities, unless
the Fund's Board of Directors continuously determines, based on the trading
markets for the specific restricted security, that it is liquid. The Board of
Directors may adopt guidelines and delegate to the Investment Adviser the daily
function of determining and monitoring liquidity of restricted securities. The
Board of Directors, however, will retain sufficient oversight and be ultimately
responsible for the determinations.
The Board of Directors monitors the Fund's investments in these securities
purchased pursuant to Rule 144A, focusing on such factors, among others, as
valuation, liquidity and availability of information. These investments in
securities purchased pursuant to Rule 144A could have the effect of increasing
the level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
Portfolio Turnover. The Fund has not placed any limit on its rate of
portfolio turnover and securities may be sold without regard to the time they
have been held when, in the opinion of the Investment Adviser, investment
considerations warrant such action. As a result, the portfolio turnover rate may
vary greatly from year to year or during periods within a year. Also, the use of
covered call options at times when the underlying securities are appreciating in
value may result in higher portfolio turnover than would otherwise be the case.
The Fund pays brokerage commissions in connection with writing call options and
effecting closing purchase transactions, as well as in connection with purchases
and sales of portfolio securities. A high rate of portfolio turnover would
result in correspondingly greater brokerage commission expenses. The Fund's
portfolio turnover rate for the fiscal years ended January 31, 1994 and January
31, 1993 were 48.63% and 40.58%, respectively. Portfolio turnover rate is
calculated by dividing the lesser of the Fund's annual sales or purchases of
portfolio
31
<PAGE>
securities (exclusive of securities, including options, whose maturities or
expiration dates, at the time of acquisition, were one year or less) by the
monthly average value of the securities in the Fund's portfolio during the year.
Portfolio Brokerage. Subject to policies established by the Board of
Directors of the Fund, the Investment Adviser is responsible for the Fund's
portfolio decisions and the placing of orders to effect the Fund's portfolio
transactions. With respect to such transactions, the Investment Adviser seeks to
obtain the best net results for the Fund taking into account such factors as
price (including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. While the Investment
Adviser generally seeks reasonably competitive commission rates, the Fund will
not necessarily be paying the lowest commission or spread available. The Fund
has no obligation to deal with any broker or dealer in the execution of its
portfolio transactions. The Fund has been informed by Merrill Lynch that it will
not attempt to influence or control the placing by the Investment Adviser or by
the Fund of orders for brokerage transactions. Consistent with the Rules of Fair
Practice of the NASD, the Investment Adviser may consider sales of shares of the
Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions of the Fund.
Brokers and dealers, including Merrill Lynch, who provide supplemental
investment research (such as economic data and market forecasts) to the
Investment Adviser may receive orders for transactions by the Fund. Information
so received is in addition to, and not in lieu of, the services required to be
performed by the Investment Adviser under the Advisory Agreement with the Fund.
If in the judgment of the Investment Adviser the Fund will be benefitted by
supplemental research services, the Investment Adviser is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions which another broker may have charged for effecting the same
transaction. The expenses of the Investment Adviser are not necessarily reduced
as a result of the receipt of such supplemental information. Supplemental
investment research received by the Investment Adviser may also be used in
connection with other investment advisory accounts of the Investment Adviser and
its affiliates.
The Fund may invest in securities traded in the over-the-counter market.
Transactions in the over-the-counter market are generally principal transactions
with dealers and the costs of such transactions involve dealer spreads rather
than brokerage commissions. With respect to over-the-counter transactions, the
Fund deals directly with dealers who make markets in the securities involved
where possible, except in circumstances where better prices and execution are
available elsewhere. Under the Investment Company Act, Merrill Lynch and its
affiliates are generally prohibited from dealing with the Fund as principal in
the purchase and sale of securities. Since transactions in the over-the-counter
market usually involve transactions with dealers acting as principal for their
own account, neither Merrill Lynch nor any affiliate of Merrill Lynch may serve
as the Fund's dealer in connection with such transactions. However, such
companies may serve as broker for the Fund in over-the-counter transactions
conducted on an agency basis.
The aggregate dollar amounts of brokerage commissions paid by the Fund for
the fiscal years ended January 31, 1994, January 31, 1993 and January 31, 1992
were $526,282, $539,478 and $547,753, respectively. For these periods, brokers
providing research services received $508,466, $461,717 and $462,807,
respectively, in commissions on portfolio transactions effected for the Fund.
The aggregate dollar amounts of such portfolio transactions were $310,251,162,
$319,206,559 and $360,708,239, respectively. During those periods, the aggregate
dollar amounts of brokerage commissions paid by the Fund to Merrill Lynch were
$29,058, $25,500
32
<PAGE>
and $12,000, respectively. These amounts represent 5.5%, 4.7% and 2.1%,
respectively, of the Fund's aggregate brokerage commissions paid to all brokers
during those periods. The Fund's aggregate dollar amounts of transactions
involving the payment of commissions effected through Merrill Lynch during those
periods were 4.9%, 5.7% and 2.3%, respectively, of the aggregate dollar amount
of all Fund transactions involving the payment of commissions.
The Fund, and one or more of the other investment companies or accounts
which the Investment Adviser or its affiliate FAM manage, may own the same
investments from time to time. Similarly, a particular security may be bought
for one or more companies or accounts at the same time that one or more
companies or accounts are selling the same security. If purchases or sales of
securities for the Fund and other companies or accounts arise for consideration
at or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective companies and accounts in a manner deemed
equitable to all. To the extent that transactions on behalf of more than one
company or account 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 the price of the security being purchased or sold for the Fund.
Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Fund on the floor of any
national securities exchange, provided that prior authorization of such
transactions is obtained and Merrill Lynch furnishes a statement to the Fund at
least annually setting forth the compensation it has received in connection with
such transactions. Pursuant to prior Section 11(a) and Rule 11a2-2(T)
thereunder, Merrill Lynch was not permitted to execute transactions for the Fund
on the floor of any national securities exchange, but was allowed to effect such
transactions through transmitting orders for execution, providing for clearance
and settlement and arranging for the performance of such functions. Under prior
Section 11(a) and as permitted by the Rule, the Fund entered into an agreement
with the Investment Adviser and Merrill Lynch which permitted Merrill Lynch to
retain compensation for effecting transactions for the Fund on national
securities exchanges, and provided, among other things, that Merrill Lynch must
furnish the Fund at least annually with a statement setting forth the total
amount of all compensation retained by Merrill Lynch under the agreement. For
the fiscal year ended January 31, 1994, the Fund effected 12 such portfolio
transactions pursuant to such contract and received $29,058 as compensation in
connection with such transactions. Because the recent amendments to Section
11(a) obviate the need for this type of agreement, the agreement has been
terminated.
Current Investment Restrictions. The Fund has adopted certain fundamental
investment restrictions which may not be changed without the prior approval of
the holders of the majority of the Fund's outstanding shares. A majority for
this purpose means: (a) more than 50% of the outstanding shares, or (b) 67% of
the shares represented at a meeting where more than 50% of the outstanding
shares are represented, whichever is less. These fundamental investment
restrictions include three restrictions set forth in the Prospectus, as well as
the 12 restrictions set forth below. For purposes of the following restrictions
and the restrictions set forth in the Prospectus, all percentage limitations
apply immediately after a purchase or initial investment and any subsequent
change in any applicable percentage resulting from market fluctuations does not
require elimination of any security from the Fund's portfolio. Under its
fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of the value of its total assets in the
securities of issuers in any single industry.
33
<PAGE>
2. Invest in companies for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that the Fund may invest in
securities secured by real estate or interests therein or issued
by companies, including real estate investment trusts, which
invest in real estate or interests therein.
4. Purchase or sell commodities or commodity contracts.
5. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
6. Make short sales of securities or maintain a short position in any
security.
7. Lend money to other persons, except through the purchase of debt
obligations and repurchase agreements consistent with the Fund's
investment policies.
8. Lend securities in an amount exceeding 33 1/3% of the value of the
Fund's total assets, taken at market value at the time any such
loan is made.
9. Enter into a repurchase agreement maturing in more than seven days
if, as a result, such repurchase agreement, together with
restricted securities and securities for which there are no
readily available markets, would constitute more than 10% of the
value of the Fund's total assets.
10. Underwrite securities of other issuers except insofar as the Fund
may technically be deemed an underwriter under the Securities Act
of 1933 in selling portfolio securities.
11. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets.
12. Issue senior securities as defined in the Act, except that this
restriction shall not be deemed to prohibit the Fund from
borrowing money, lending its portfolio securities or entering into
repurchase agreements.
The following additional investment restrictions have been adopted by the
Fund and may be changed by the Board of Directors. Under these restrictions, the
Fund may not:
1. Purchase or sell interests in oil, gas or other mineral
exploration or development programs, except that the Fund may
invest in the securities of companies which invest in such
interests or sponsor such programs.
2. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except that the Fund may write 'covered call
options' as described in the Prospectus.
3. Invest in warrants if at the time of acquisition more than 2% of
the value of the Fund's assets, taken at market value, would be
invested in warrants. (For purposes of this restriction, warrants
acquired by the Fund in units or attached to securities are deemed
to have no value.)
34
<PAGE>
4. Invest in the securities of any issuer if, to the knowledge of the
Fund, any officer or Director of the Fund or its Investment
Adviser owns more than 1/2 of 1% of the outstanding securities of
such issuer and such officers and directors who own more than 1/2
of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer. (The Fund has a policy of not
purchasing securities of companies in which Directors or
management personnel of the Fund, ML & Co. or any subsidiary
thereof have a substantial beneficial interest.)
5. Enter into a repurchase agreement if, as a result, more than 5% of
its assets are invested in repurchase agreements.
6. Invest in the securities of a foreign issuer if at the time of the
acquisition more than 25% of the value of the Fund's total assets
would be invested in such securities.
In addition, the Fund has undertaken with a State Securities Commission
that it will not invest in real estate limited partnerships or in oil, gas or
other mineral leases.
Proposed Uniform Investment Restrictions. As discussed in the Prospectus
under 'Investment Objective and Policies--Investment Restrictions,' the Board of
Directors of the Fund has approved the replacement of the Fund's existing
investment restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have been
proposed for adoption by all of the non-money market MLAM-advised mutual funds.
The investment objective and policies of the Fund will be unaffected by the
adoption of the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securites directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities,
35
<PAGE>
provided that the lending of portfolio securities may be made only in
accordance with applicable law and the guidelines set forth in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the 'Securities Act') in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the proposed non-fundamental investment restrictions, the Fund
may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales 'against the box.'
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall 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.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (a 'Rule 144A security') and determined to be liquid by the Fund's
Board of Directors are not subject to the limitations set forth in this
investment restriction (c). Nothwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize
36
<PAGE>
Rule 144A securities as securities that are free of restrictions as to
resale. To the extent required by Ohio law, the Fund will not invest more
than 5% of its total assets in securities of issuers that are restricted as
to disposition, including Rule 144A securities.
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or American Stock Exchange or a major foreign
exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securites may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Investment Adviser, the directors of such general partner or
the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental restriction (7) above, borrow amounts
in excess of 5% of the Fund's assets.
------------------
Because of the affiliation of Merrill Lynch with the Fund, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch except
pursuant to a permissive order or otherwise in compliance with the provisions of
the Investment Company Act and the rules and regulations thereunder. Included
among such restricted transactions are purchases from or sales to Merrill Lynch
of securities in transactions in which it acts as principal and purchases of
securities from underwriting syndicates of which Merrill Lynch is a member.
37
<PAGE>
ADDITIONAL INFORMATION
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 investors. Total return figures are based on
the Fund's historical performance and are not intended to indicate future
performance. Average annual total return is determined separately for Class A,
Class B, Class C and Class D shares in accordance with a formula specified by
the Securities and Exchange 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 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 each specified period in the case of Class B and Class C shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) the rates of return calculated will not be average annual rates,
but rather, actual annual, annualized or aggregate total return and (2) the
maximum applicable sales charges will not be included with respect to annual or
annualized rates of return calculations. Aside from the impact on the
performance calculation 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.
Set forth below is total return information for both Class A and Class B
shares of the Fund for the periods indicated. Since Class C and Class D shares
have not been issued prior to the date of this Statement of Additional
Information, performance information concerning Class C and Class D shares is
not yet provided.
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<TABLE>
<CAPTION>
REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT AT
ON A HYPOTHETICAL THE END OF THE
PERIOD $1,000 INVESTMENT PERIOD
- ------------------------------ ----------------- --------------------
<S> <C> <C>
CLASS A SHARES
One Year Ended July 31,
1994.......................... (1.93)% $ 980.70
Five Years Ended July 31,
1994.......................... 4.72 % $1,259.10
*Commencement of Operations to
July 31, 1994................. 8.54 % $1,603.40
CLASS B SHARES
One Year Ended July 31,
1994.......................... (1.11)% $ 988.90
Five Years Ended July 31,
1994.......................... 4.77 % $1,262.30
Ten Years Ended July 31,
1994.......................... 11.73 % $3,031.50
</TABLE>
- ------------------
*Commencement of Operations of Class A shares was October 26, 1988.
38
<PAGE>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
--------------------------------------------- ---------------------------------------------
REDEEMABLE VALUE OF REDEEMABLE VALUE OF
EXPRESSED AS A A HYPOTHETICAL EXPRESSED AS A A HYPOTHETICAL
PERCENTAGE BASED ON $1,000 INVESTMENT AT PERCENTAGE BASED ON $1,000 INVESTMENT AT
A HYPOTHETICAL THE END OF THE A HYPOTHETICAL THE END OF THE
$1,000 INVESTMENT PERIOD $1,000 INVESTMENT PERIOD
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JULY
31, 1994...................... (11.57)% $ 884.30 (12.03)% $ 879.70
FOR YEAR ENDED JANUARY 31,
1994.......................... 15.78 % $1,157.80 14.60 % $1,146.00
1993.......................... 4.79 % 1,047.90 3.75 % 1,037.50
1992.......................... 28.35 % 1,283.50 26.96 % 1,269.60
1991.......................... 6.64 % 1,066.40 5.59 % 1,055.90
1990.......................... 10.92 % 1,109.20 9.77 % 1,097.70
1989.......................... 3.90 %* 1,039.00 22.11 % 1,221.10
1988.......................... (8.63)% 913.70
1987.......................... 26.99 % 1,269.90
1986.......................... 15.87 % 1,158.70
1985.......................... 20.33 %** 1,203.30
</TABLE>
- ------------------
*Commencement of Operations of Class A shares was October 26, 1988.
**Commencement of Operations of Class B shares was March 5, 1984.
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<TABLE>
<S> <C> <C> <C> <C>
Commencement of Operations*
to July 31, 1994............ 60.34% $1,603.40
Commencement of Operations to
July 31, 1994**............. 204.06% $3,040.60
</TABLE>
- ------------------
*Commencement of Operations for Class A shares was October 26, 1988.
**Commencement of Operations for Class B shares was March 5, 1984.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under 'Purchase of Shares'
and 'Redemptions,' respectively, the total return data quoted by the Fund, in
advertisements directed to such investors, may not take into account the
contingent deferred sales charge and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses may be deducted.
From time to time, the Fund may include the Fund's Morningstar's
risk-adjusted performance rating in advertisements or supplemental sales
literature.
Common Stock. The Fund has authorized capital of 400,000,000 shares of
Common Stock, par value $0.10 per share, divided into four classes, designated
Class A, Class B, Class C and Class D Common Stock, each of
39
<PAGE>
which consists of 100,000,000 shares. Class A, Class B, Class C and Class D
Common Stock represent an interest in the same assets of the Fund and are
identical in all respects except that the Class B, Class C and Class D shares
bear certain expenses related to the account maintenance and/or distribution of
such shares and have exclusive voting rights with respect to matters relating to
such account maintenance and/or distribution expenditures. Voting rights are not
cumulative. This means that the holders of more than 50% of the shares can elect
all of the Directors of the Fund if they choose to do so and, in such event, the
holders of the remaining less than 50% of the shares voting will not be able to
elect any person or persons to the Board of Directors. 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; or (iv) ratification of selection of
independent auditors. Generally, under Maryland law, a meeting of shareholders
may be called for any purpose on the written request of the holders of at least
25% of the outstanding shares of the Fund. Shares are issued fully paid and
nonassessable and have no preemptive rights.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on September 30, 1994.
Computation of Offering Price Per Share. The offering price for Class A
and Class B shares of the Fund, based on the value of the Fund's net assets and
number of shares outstanding as of July 31, 1994, is calculated as set forth
below. Information is not provided for Class C or Class D shares since no Class
C or Class D shares were publicly offered prior to the date of this Statement of
Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B
---------- ------------
<S> <C> <C>
Net Assets........................................ $9,233,373 $316,014,647
---------- ------------
---------- ------------
Number of Shares Outstanding...................... 673,117 23,279,054
---------- ------------
---------- ------------
Net Asset Value Per Share (net assets divided by
number of shares outstanding)................... $ 13.72 $ 13.58
Sales Charge (for Class A shares: 5.25% of
offering price; 5.54% of net asset value)*...... $ .76 $ --
---------- ------------
Offering Price.................................... $ 14.48 $ 13.58
---------- ------------
---------- ------------
</TABLE>
- ------------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
Independent Auditors. Deloitte & Touche LLP, 117 Campus Drive, Princeton,
New Jersey 08540, has been selected as the independent auditors of the Fund. The
independent auditors are responsible for auditing the annual financial
statements of the Fund.
Custodian. The Bank of New York, 90 Washington Street, 12th floor, New
York, New York 10286, acts as custodian of the Fund's assets. The Custodian is
responsible for, among other things, 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.
40
<PAGE>
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
'The Fund and Its Management--Transfer Agency Services Fee' in the Prospectus.
Reports to Shareholders. The Fund's fiscal year ends on January 31 of each
year. The Fund distributes reports at least semi-annually to its shareholders.
Each year an annual report, containing financial statements audited by the
Fund's independent auditors, is sent to shareholders.
Legal Counsel. Shereff, Friedman, Hoffman & Goodman, 919 Third Avenue, New
York, New York 10022, is counsel for the Fund.
Registration Statement. This Statement of Additional Information and the
Prospectus do not contain all of the information set forth in the Registration
Statement the Fund has filed with the Securities and Exchange Commission. The
complete Registration Statement may be obtained from the Securities and Exchange
Commission upon payment of the fee prescribed by the rules and regulations of
the Commission.
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MERRILL LYNCH FUND FOR TOMORROW, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Fund For Tomorrow, Inc., as of
January 31, 1994, the related statements of operations for the year then ended
and changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and the financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at January
31, 1994, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Fund
For Tomorrow, Inc. as of January 31, 1994, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
March 4, 1994
42
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Value Percent of
Concept Tomorrow Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Computer Technologies
Personal Computer 150,000 Apple Computer, Inc. $ 7,677,505 $ 4,912,500 1.2%
Components 70,000 ++Creative Technology, Ltd. (Ordinary) 1,965,000 2,362,500 0.6
Semiconductor 100,000 Intel Corp. 6,537,500 6,525,000 1.6
Components 50,000 ++Valence Technology, Inc. 1,003,374 987,500 0.2
Information Systems 100,000 ++Wonderware Corp. 2,050,000 2,300,000 0.6
------------ ------------ ----
19,233,379 17,087,500 4.2
Demographic Trends
Insurance 100,000 AFLAC Inc. 1,219,738 2,787,500 0.7
Personal Healthcare 43,100 Bausch & Lomb Inc. 1,962,798 2,268,138 0.6
Health & Fitness 307,350 CML Group Inc. 5,535,775 5,570,719 1.4
Insurance 324,400 Capital Holding Corp. 12,447,224 11,759,500 2.9
Health & Fitness 16,600 ++Cobra Golf Inc. 348,600 535,350 0.1
Specialty Services 100,000 Sotheby's Holdings, Inc. (Class A) 1,228,352 1,650,000 0.4
Financial Services 50,000 SunAmerica Inc. 2,276,925 2,043,750 0.5
Leisure & Entertainment 50,000 ++Video Lottery Technologies, Inc. 811,885 1,087,500 0.3
Leisure & Entertainment 100,000 ++WMS Industries Inc. 2,696,774 2,487,500 0.6
------------ ------------ ----
28,528,071 30,189,957 7.5
Developing Foreign
Economies
Automotive 43,500 Brilliance China Automotive Holdings Ltd. 969,269 712,313 0.2
Construction 50,000 ++Bufete Industrial S.A. (ADR)* 1,213,155 2,525,000 0.6
Food & Beverage 150,000 Compania Cervecerias Unidas S.A. (ADR)* 2,182,500 4,762,500 1.2
Food & Beverage 4,500 ++Cristalerias de Chile S.A. (ADR)* 107,437 128,250 0.0
Automotive 25,000 Ek Chor China Motorcycle Co., Ltd. 525,000 871,875 0.2
Multi-Industry 390,000 Grupo Carso S.A. de C.V. A1 1,512,623 4,510,631 1.1
Leisure & Entertainment 50,000 ++Grupo Televisa, S.A. de C.V. (GDS)** 3,200,000 3,550,000 0.9
Home Furnishings 115,000 ++Industrie Natuzzi S.p.A. (ADR)* 1,725,000 3,047,500 0.7
Telecommunications 140,000 Telefonos de Mexico, S.A. de C.V. (ADR)* 4,245,211 10,342,500 2.5
Energy 100,000 YPF S.A. (ADR)* 2,698,460 2,887,500 0.7
------------ ------------ ----
18,378,655 33,338,069 8.1
Environmental
Solutions
Pollution Technology 200,000 ++Molten Metal Technology, Inc. 3,085,894 5,050,000 1.2
Pollution Technology 100,000 ++Purus Inc. 1,414,126 1,175,000 0.3
Pollution Technology 180,000 ++Thermo Electron Corp. 6,840,000 7,717,500 1.9
------------ ------------ ----
11,340,020 13,942,500 3.4
Future Retailing
Specialty Retail 50,000 Authentic Fitness Corp. 1,556,250 1,381,250 0.3
Specialty Retail 105,700 ++Barnes & Noble, Inc. 2,517,000 2,272,550 0.6
Specialty Retail 50,000 ++Books-A-Million, Inc. 1,150,000 1,012,500 0.2
Private Label 160,000 ++Cott Corp. 5,005,001 4,300,000 1.1
Specialty Retail 70,000 ++Discount Auto Parts, Inc. 1,788,375 1,925,000 0.5
Private Label 119,100 ++Nutramax Products, Inc. 1,598,300 1,458,975 0.3
Private Label 170,000 ++The Perrigo Company, Inc. 3,787,810 5,142,500 1.3
Specialty Retail 50,000 ++Sports & Recreation, Inc. 1,225,000 1,950,000 0.5
Specialty Retail 200,000 Wal-Mart Stores, Inc. 5,258,570 5,300,000 1.3
------------ ------------ ----
23,886,306 24,742,775 6.1
</TABLE>
43
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Value Percent of
Concept Tomorrow Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Global Market
Expansion
Financial Services 335,000 American Express Co. $ 10,153,775 $ 10,971,250 2.7%
Food & Beverage 199,600 CPC International, Inc. 8,965,425 9,755,450 2.4
Household Products 74,600 Colgate-Palmolive Co. 1,548,919 4,448,025 1.1
Food & Beverage 5,000 Nestle AG 2,943,330 4,878,549 1.2
Food & Beverage 180,000 PepsiCo, Inc. 4,562,124 7,267,500 1.8
Multi-Industry 100,000 York International Corp. 3,950,630 3,775,000 0.9
------------ ------------ ----
32,124,203 41,095,774 10.1
Healthcare Cost
Containment
Health Maintenance 100,000 ++FHP International Corp. 2,275,000 2,675,000 0.6
Medical Products 100,000 United States Surgical Corp. 6,799,013 3,187,500 0.8
------------ ------------ ----
9,074,013 5,862,500 1.4
Healthcare Technology
Biotechnology 25,000 ++Amgen Inc. 1,043,750 1,212,500 0.3
Biotechnology 197,200 ++Cambridge Biotech Corp. 1,683,640 640,900 0.2
Biotechnology 65,000 ++Chiron Corp. 3,681,187 6,191,250 1.5
Pharmaceuticals 100,900 Merck & Co., Inc. 4,232,024 3,682,850 0.9
Pharmaceuticals 100,000 Pfizer, Inc. 3,038,128 6,462,500 1.6
Pharmaceuticals 137,200 Schering-Plough Corp. 3,180,566 8,643,600 2.1
Pharmaceuticals 200,000 Wellcome PLC (ADR)* 3,050,000 2,000,000 0.5
------------ ------------ ----
19,909,295 28,833,600 7.1
Industrial Outsourcing
Automotive Components 81,600 ++Breed Technologies, Inc. 1,384,575 2,152,200 0.5
Automotive Components 50,000 Hayes Wheels International, Inc. 1,176,725 1,618,750 0.4
Specialty Services 32,400 ++Interim Services, Inc. 648,000 814,050 0.2
Automotive Components 210,000 Magna International, Inc. 3,191,250 10,526,250 2.6
------------ ------------ ----
6,400,550 15,111,250 3.7
Industrial Renaissance
Automobile 350,000 Chrysler Corp. 9,780,250 21,525,000 5.3
Automobile 100,000 Ford Motor Co. 4,590,380 6,700,000 1.6
Automobile 200,000 General Motors Corp. 7,896,900 12,275,000 3.0
Information Processing 150,000 International Business Machines Corp. 8,780,004 8,512,500 2.1
------------ ------------ ----
31,047,534 49,012,500 12.0
</TABLE>
44
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Value Percent of
Concept Tomorrow Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Multi-Media
Wireless Cable
Television 55,000 ++American Telecasting, Inc. $ 990,000 $ 1,251,250 0.3%
Wireless Cable
Television 125,000 ++CableMaxx, Inc. 1,506,875 1,562,500 0.4
Leisure &
Entertainment 100,000 ++LodgeNet Entertainment Corp. 1,451,730 1,350,000 0.3
Broadcasting &
Publishing 225,000 The News Corp. Ltd. (ADR)* 9,030,250 12,993,750 3.2
Wireless Cable
Television 44,000 ++Preferred Entertainment, Inc. 821,500 858,000 0.2
Leisure &
Entertainment 125,000 Time Warner, Inc. 3,491,400 5,000,000 1.2
Specialty Retail 50,000 ++ValueVision International, Inc.
(Class A) 663,125 600,000 0.2
Leisure &
Entertainment 175,000 The Walt Disney Co. 4,583,031 8,268,750 2.0
------------ ------------ ----
22,537,911 31,884,250 7.8
Progressive Education
Education 100,000 ++Broderbund Software, Inc. 3,459,375 3,650,000 0.9
Education 71,000 ++Education Alternatives, Inc. 2,607,490 2,556,000 0.6
Education 140,000 ++Scholastic Corporation 6,019,125 5,915,000 1.5
------------ ------------ ----
12,085,990 12,121,000 3.0
Strategic Growth
Opportunities
Textile & Apparel 200,000 ++Burlington Industries, Inc. 2,671,075 2,925,000 0.7
Apparel 150,000 ++Chic by H.I.S., Inc. 1,917,934 2,025,000 0.5
Retail Stores 50,000 Dayton Hudson Corp. 3,441,500 3,287,500 0.8
Housing 156,400 Kaufman and Broad Home Corp. 2,809,055 3,636,300 0.9
Housing 120,000 Lennar Corp. 2,831,580 4,230,000 1.0
Specialty Retail 150,000 The Limited, Inc. 3,962,130 2,662,500 0.7
Apparel 150,000 Liz Claiborne, Inc. 5,454,429 3,112,500 0.8
Broadcasting &
Publishing 237,900 The New York Times Co. 7,789,967 6,780,150 1.6
Footwear 100,000 Reebok International Ltd. 2,528,595 3,212,500 0.8
------------ ------------ ----
33,406,265 31,871,450 7.8
Telecommunications
Long Distance Telephone 215,000 ++ALC Communications Corp. 3,216,750 6,880,000 1.7
Components 100,000 ++ANTEC Corp. 2,292,650 2,525,000 0.6
Regional Telephone 100,000 Bell Atlantic Corp. 4,699,600 5,675,000 1.4
Regional Telephone 50,000 BellSouth Corp. 2,384,250 3,075,000 0.8
Components 35,400 ++BroadBand Technologies, Inc. 637,200 1,062,000 0.3
Components 150,000 ++Inter-Tel, Inc. 1,383,862 1,331,250 0.3
Long Distance Telephone 100,000 MCI Communications Corp. 2,764,060 2,750,000 0.7
Regional Telephone 50,000 ++MFS Communications Co., Inc. 1,113,100 1,925,000 0.5
Paging Systems 100,000 ++Metrocall, Inc. 1,347,502 1,725,000 0.4
Components 100,000 Northern Telecom Ltd. 2,771,630 3,250,000 0.8
Regional Telephone 100,000 Pacific Telesis Group 2,791,355 5,762,500 1.4
Cellular Telephone 200,000 ++Pactel Corp. 4,600,000 5,050,000 1.2
------------ ------------ ----
30,001,959 41,010,750 10.1
Total Common Stocks 297,954,151 376,103,875 92.3
</TABLE>
45
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Value Percent of
Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Commercial $15,000,000 Corporate Asset Funding, Inc., 3.05%
Paper*** due 3/03/1994 $ 14,961,875 $ 14,961,875 3.7%
12,244,000 General Electric Capital Corp., 3.15%
due 2/01/1994 12,244,000 12,244,000 3.0
Total Short-Term Securities 27,205,875 27,205,875 6.7
Total Investments $325,160,026 403,309,750 99.0
============
Other Assets
Less Liabilities 4,056,235 1.0
------------ -----
Net Assets $407,365,985 100.0%
============ =====
<FN>
* American Depositary Receipts (ADR).
** Global Depositary Shares (GDS).
*** Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
++ Non-income producing securities.
</TABLE>
See Notes to Financial Statements.
46
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of January 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$325,160,026) (Note 1a) $403,309,750
Receivables:
Securities sold $ 11,571,509
Dividends 540,095
Capital shares sold 221,065 12,332,669
------------
Prepaid registration fees and other assets (Note 1e) 22,723
------------
Total assets 415,665,142
------------
Liabilities: Payables:
Securities purchased 4,682,119
Capital shares redeemed 1,564,587
Distributor (Note 2) 332,822
Investment adviser (Note 2) 222,314 6,801,842
Accrued expenses and other liabilities ------------ 1,497,315
------------
Total liabilities 8,299,157
------------
Net Assets: Net assets $407,365,985
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 66,741
Consist of: Class B Common Stock, $0.10 par value, 100,000,000 shares authorized 2,432,299
Paid-in capital in excess of par 309,663,231
Undistributed realized capital gains on investments and foreign currency
transactions--net 17,063,594
Unrealized appreciation on investments and foreign currency
transactions--net 78,140,120
------------
Net assets $407,365,985
============
Net Asset Class A--Based on net assets of $10,942,174 and 667,410 shares outstanding $ 16.39
Value: Class B--Based on net assets of $396,423,811 and 24,322,986 shares ============
outstanding $ 16.30
============
</TABLE>
See Notes to Financial Statements.
47
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended January 31, 1994
<S> <C> <C> <C>
Investment Dividends (net of $115,733 foreign withholding tax) $ 6,696,939
Income Interest and discount earned 910,396
Notes (1c & 1d): Other income 256,079
------------
Total income 7,863,414
------------
Expenses: Distribution fees--Class B (Note 2) $ 4,173,391
Investment advisory fees (Note 2) 2,782,877
Transfer agent fees--Class B (Note 2) 660,871
Printing and shareholder reports 107,083
Accounting services (Note 2) 88,054
Custodian fees 65,398
Registration fees (Note 1e) 56,799
Professional fees 54,276
Directors' fees and expenses 31,896
Amortization of organization expenses (Note 1e) 23,611
Transfer agent fees--Class A (Note 2) 14,014
Other 9,086
Total expenses ------------ 8,067,356
------------
Investment loss--net (203,942)
------------
Realized & Realized gain (loss) from:
Unrealized Investments--net 46,408,273
Gain (Loss) Foreign currency transactions (123,253) 46,285,020
on Investments Change in unrealized appreciation/depreciation on: ------------
& Foreign Investments--net 9,234,247
Currency Foreign currency transactions (6,804) 9,227,443
Transactions-- Net realized and unrealized gain on investments and ------------ ------------
Net (Notes 1b, foreign currency transactions 55,512,463
1d & 3): ------------
Net Increase in Net Assets Resulting from Operations $ 55,308,521
============
</TABLE>
See Notes to Financial Statements.
48
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended
January 31,
1994 1993
Increase (Decrease) in Net Assets:
<S> <C> <C> <C>
Operations: Investment income (loss)--net $ (203,942) $ 1,809,446
Realized gain on investments and foreign currency transactions--net 46,285,020 35,711,125
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net 9,227,443 (21,732,568)
------------ ------------
Net increase in net assets resulting from operations 55,308,521 15,788,003
------------ ------------
Dividends & Investment income--net:
Distributions to Class A -- (140,584)
Shareholders Class B -- (1,649,597)
(Note 1f): Realized gain on investments--net:
Class A (1,437,834) (626,121)
Class B (52,604,277) (28,893,222)
Net decrease in net assets resulting from dividends ------------ ------------
and distributions to shareholders (54,042,111) (31,309,524)
------------ ------------
Capital Share Net decrease in net assets derived from capital share transactions (52,481,091) (10,849,719)
Transactions ------------ ------------
(Note 4):
Net Assets: Total decrease in net assets (51,214,681) (26,371,240)
Beginning of year 458,580,666 484,951,906
------------ ------------
End of year $407,365,985 $458,580,666
============ ============
</TABLE>
See Notes to Financial Statements.
49
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights
The following per share data and ratios have been derived Class A
from information provided in the financial statements.
For the Year Ended January 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 16.29 $ 16.84 $ 15.49 $ 15.26 $ 14.96
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .15 .25 .36 .41 .30
Realized and unrealized gain on investments
and foreign currency transactions--net(1) 2.18 .49 3.74 .59 1.45
-------- -------- -------- -------- --------
Total from investment operations 2.33 .74 4.10 1.00 1.75
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.23) (.35) (.40) (.41)
Realized gain on investments--net (2.23) (1.06) (2.40) (.37) (1.04)
-------- -------- -------- -------- --------
Total dividends and distributions (2.23) (1.29) (2.75) (.77) (1.45)
-------- -------- -------- -------- --------
Net asset value, end of year $ 16.39 $ 16.29 $ 16.84 $ 15.49 $ 15.26
======== ======== ======== ======== ========
Total Invest- Based on net asset value per share 15.78% 4.79% 28.35% 6.64% 10.92%
ment Return:* ======== ======== ======== ======== ========
Ratios to Expenses .88% .90% .95% .96% .89%
Average ======== ======== ======== ======== ========
Net Assets: Investment income--net .95% 1.35% 1.81% 2.58% 2.20%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 10,942 $ 11,394 $ 8,846 $ 5,478 $ 4,466
Data: ======== ======== ======== ======== ========
Portfolio turnover 48.63% 40.58% 48.28% 25.57% 15.23%
======== ======== ======== ======== ========
<FN>
* Total investment returns exclude the effects of sales loads.
(1) Foreign currency transaction amounts have been reclassified to conform to the 1994 presentation.
</TABLE>
See Notes to Financial Statements.
50
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights (concluded)
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended January 31,
Increase (Decrease) in Net Asset Value: 1994++ 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 16.28 $ 16.82 $ 15.48 $ 15.24 $ 14.94
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.01) .06 .14 .24 .21
Realized and unrealized gain on
investments and foreign currency
transactions--net(1) 2.17 .52 3.77 .60 1.36
-------- -------- -------- -------- --------
Total from investment operations 2.16 .58 3.91 .84 1.57
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.06) (.17) (.23) (.23)
Realized gain on investments--net (2.14) (1.06) (2.40) (.37) (1.04)
-------- -------- -------- -------- --------
Total dividends and distributions (2.14) (1.12) (2.57) (.60) (1.27)
-------- -------- -------- -------- --------
Net asset value, end of year $ 16.30 $ 16.28 $ 16.82 $ 15.48 $ 15.24
======== ======== ======== ======== ========
Total Invest- Based on net asset value per share 14.60% 3.75% 26.96% 5.59% 9.77%
ment Return:* ======== ======== ======== ======== ========
Ratios to Expenses, excluding distribution fees .91% .92% .98% 1.00% .93%
Average ======== ======== ======== ======== ========
Net Assets: Expenses 1.91% 1.92% 1.98% 2.00% 1.93%
======== ======== ======== ======== ========
Investment income (loss)--net (.07%) .36% .83% 1.53% 1.20%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $396,424 $447,186 $476,106 $442,944 $516,402
Data: ======== ======== ======== ======== ========
Portfolio turnover 48.63% 40.58% 48.28% 25.57% 15.23%
======== ======== ======== ======== ========
<FN>
++ Based on average shares outstanding during the period.
* Total investment returns exclude the effects of sales loads.
(1) Foreign currency transaction amounts have been reclassified to conform to the 1994 presentation.
</TABLE>
See Notes to Financial Statements.
51
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Fund For Tomorrow, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, open-end
investment management company. The Fund offers both Class A and Class
B Shares. Class A Shares are sold with a front-end sales charge. Class
B Shares may be subject to a contingent deferred sales charge. Both
classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B
Shares bear certain expenses related to the distribution of such shares
and have exclusive voting rights with respect to matters relating to such
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at their last sale prices as of the
close of business on the day the securities are being valued or,
lacking any sales on that day, at the mean between closing bid and
asked prices. Securities traded in the over-the-counter market are
valued at the last bid prices quoted by brokers that make markets
in the securities at the close of trading on the New York Stock
Exchange. Portfolio securities which are traded both in the over-
the-counter market and on a stock exchange are valued based upon the
prices or quotes obtained from the broadest and most representative
market. Securities and other assets for which market quotations are
not readily available are valued at fair value as determined in good
faith by or under the direction of the Board of Directors of the Fund.
Short-term securities are valued at amortized cost which approximates
market.
(b) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at
the exchange rate at the end of the period. Foreign currency transactions
are the result of settling (realized) or valuing (unrealized) such
transactions expressed in foreign currencies into US dollars. Realized
and unrealized gains or losses from investments include the effects of
foreign exchange rates on investments.
The Fund is authorized to enter into forward foreign exchange contracts
as a hedge against either specific transactions or portfolio positions.
Such contracts are not entered on the Fund's records. However, the effect
on operations is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
(c) Income taxes--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies
and to distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provision is required.
Under the applicable foreign tax law, a withholding tax may be imposed
on interest, dividends and capital gains at various rates.
(d) Security transactions and investment income--Security transactions
are recorded on the dates the transactions are entered into (the trade
dates). Dividend income is recorded on the ex-dividend date except that
if the ex-dividend date has passed, certain dividends from foreign
securities are recorded as soon as the funds are informed of the ex-
dividend date. Interest income (including amortization of discount) is
recognized on the accrual basis. Realized gains and losses on security
transactions are determined on the identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--Costs
related to the organization of the second class of shares are charged to
expense over a period not exceeding five years. Prepaid registration fees
are charged to expense as the related shares are issued.
(f) Dividends and distributions to shareholders--Dividends and distributions
paid by the Fund are recorded on the ex-dividend dates.
(g) Reclassifications--Certain 1993 amounts have been reclassified to
conform to the 1994 presentation. Accumulated investment loss--net, in
the amount of $248,221, has been reclassified to undistributed realized
gains.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management, L.P. ("MLAM"). Effective January 1, 1994, the
investment advisory business of MLAM was reorganized from a corporation
to a limited partnership. Both prior to and after the reorganization,
ultimate control of MLAM
52
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner
of MLAM is Princeton Services, Inc., an indirect wholly-owned subsidiary of
ML & Co. The limited partners are ML & Co. and Merrill Lynch Investment
Management, Inc. ("MLIM"), which is also an indirect wholly-owned
subsidiary of ML & Co. The Fund has also entered into a Distribution
Agreement and a Distribution Plan with Merrill Lynch Funds Distributor,
Inc. ("MLFD" or "Distributor"), a wholly-owned subsidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio and pro-
vides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the
Fund pays a monthly fee based upon the average daily value of the Fund's
net assets at the following annual rates: 0.65% of the average daily net
assets not exceeding $750 million; 0.60% of the average daily net assets
exceeding $750 million but not exceeding $1 billion; and 0.55% of the
average daily net assets exceeding $1 billion. The Investment Advisory
Agreement obligates MLAM to reimburse the Fund to the extent the Fund's
expenses (excluding interest, taxes, distribution fees, brokerage fees
and commissions, and extraordinary items) exceed 2.5% of the Fund's first
$30 million of average daily net assets, 2.0% of the next $70 million of
average daily net assets, and 1.5% of the average daily net assets in
excess thereof. No fee payment will be made to the Investment Adviser
which would result in Fund expenses exceeding on a cumulative annualized
basis the most restrictive applicable expense limitation in effect at the
time of such payment.
The Fund has adopted a Plan of Distribution (the "Plan") in accordance
with Rule 12b-1 under the Investment Company Act of 1940 pursuant to
which MLFD receives a fee from the Fund at the end of each month at the
annual rate of 1.0% of the average daily net assets of the Class B Shares
of the Fund. This fee is to compensate the Distributor for services it
provides and the expenses borne by the Distributor under the Distribution
Agreement. As authorized by the Plan, the Distributor has entered into
an agreement with Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"),
which provides for the compensation of MLPF&S for providing distribution-
related services to the Fund.
During the year ended January 31, 1994, MLFD earned underwriting
discounts of $2,638, and MLPF&S earned dealer concessions of $42,082
on sales of the Fund's Class A Shares.
MLPF&S also received contingent deferred sales reporting charges of
$172,596 relating to transactions in Class B Shares and $29,058 in
commissions on the execution of portfolio security transactions for
the Fund during the year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended January 31, 1994 were $191,934,157 and $295,335,066,
respectively.
Net realized and unrealized gains (losses) as of January 31, 1994 were
as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $46,408,273 $78,149,724
Foreign currency
transactions (123,253) (9,604)
----------- -----------
Total $46,285,020 $78,140,120
=========== ===========
As of January 31, 1994, net unrealized appreciation for Federal income
tax purposes aggregated $78,149,724, of which $95,859,715 related to
appreciated securities and $17,709,991 related to depreciated securities.
The aggregate cost of investments at January 31, 1994 for Federal income
tax purposes was $325,160,026.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$52,481,091 and $10,849,719 for the years ended January 31, 1994 and
January 31, 1993, respectively.
53
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. January 31, 1994
NOTES TO FINANCIAL STATEMENTS (concluded)
Transactions in capital shares for Class A and Class B
Shares were as follows:
Class A Shares for the Year Dollar
Ended January 31, 1994 Shares Amount
Shares sold 188,941 $ 3,088,274
Shares issued to shareholders
in reinvestment of dividends
and distributions 82,693 1,266,935
--------- ------------
Total issued 271,634 4,355,209
Shares redeemed (303,511) (4,894,524)
--------- ------------
Net decrease (31,877) $ (539,315)
========= ============
Class A Shares for the Year Dollar
Ended January 31, 1993 Shares Amount
Shares sold 440,206 $ 7,150,770
Shares issued to shareholders
in reinvestment of dividends
and distributions 42,882 680,591
--------- ------------
Total issued 483,088 7,831,361
Shares redeemed (309,233) (5,086,052)
--------- ------------
Net increase 173,855 $ 2,745,309
========= ============
Class B Shares for the Year Dollar
Ended January 31, 1994 Shares Amount
Shares sold 2,491,455 $ 40,734,290
Shares issued to shareholders
in reinvestment of dividends
and distributions 3,009,988 45,992,774
---------- ------------
Total issued 5,501,443 86,727,064
Shares redeemed (8,646,525) (138,668,840)
---------- ------------
Net decrease (3,145,082) $(51,941,776)
========== ============
Class B Shares for the Year Dollar
Ended January 31, 1993 Shares Amount
Shares sold 3,307,518 $ 54,848,135
Shares issued to shareholders
in reinvestment of dividends
and distributions 1,691,582 26,706,346
---------- ------------
Total issued 4,999,100 81,554,481
Shares redeemed (5,842,097) (95,149,509)
---------- ------------
Net decrease (842,997) $(13,595,028)
========== ============
5. Loaned Securities:
At January 31, 1994, the Fund held US Treasury Notes as collateral
for portfolio securities loaned, each having a market value of
approximately $15,500,000.
54
<PAGE>
The following semi-annual financial statements for the Fund for the period
ended July 31, 1994 are unaudited.
These unaudited interim financial statements reflect all adjustments which
are, in the opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a normal recurring
nature.
55
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Value Percent of
Concept Tomorrow Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Computer Technologies
Personal Computers 100,000 Apple Computer, Inc. $ 4,868,130 $ 3,362,500 1.0%
Components 140,000 ++Creative Technology, Ltd. (Ordinary) 1,965,000 2,922,500 0.9
Semiconductors 50,000 Intel Corp. 3,193,750 2,950,000 0.9
Information Systems 50,000 ++Sun Microsystems, Inc. 1,096,250 1,112,500 0.3
Components 1,400,000 ++Videologic Group PLC (a) 968,625 906,990 0.3
Information Systems 100,000 ++Wonderware Corp. 2,050,000 1,425,000 0.5
------------ ------------ ------
14,141,755 12,679,490 3.9
Demographic Trends
Specialty Services 200,000 ++ADT Ltd. 1,987,000 2,075,000 0.6
Health & Fitness 307,350 CML Group Inc. 5,535,775 2,919,825 0.9
Insurance 124,400 Providian Corp. (b) 4,921,913 3,840,850 1.2
Specialty Services 100,000 Rollins, Inc. 2,508,573 2,400,000 0.7
Specialty Services 100,000 Sotheby's Holdings, Inc. (Class A) 1,228,352 1,262,500 0.4
Financial Services 50,000 SunAmerica Inc. 2,276,925 2,268,750 0.7
Leisure & Entertainment 100,000 ++Video Lottery Technologies, Inc. 1,541,885 925,000 0.3
Leisure & Entertainment 100,000 ++WMS Industries Inc. 2,696,774 1,750,000 0.6
------------ ------------ ------
22,697,197 17,441,925 5.4
Developing Foreign
Economies
Multi-Industry 300,000 Grupo Carso S.A. de C.V. "A1" 1,192,885 3,084,730 1.0
Financial Services 60,100 Istituto Mobiliare Italiano S.p.A. (ADR)* 1,363,199 1,164,438 0.4
Financial Services 914,000 Manhattan Card Co. Ltd. 364,454 377,446 0.1
Telecommunications 190,000 Telefonos de Mexico, S.A. de C.V. (ADR)* 7,183,836 11,542,500 3.6
Telecommunications 90,000 Thai Telephone & Telecommunication PLC (a) 520,034 543,382 0.1
Energy 100,000 YPF S.A. (ADR)* 2,698,460 2,537,500 0.7
------------ ------------ ------
13,322,868 19,249,996 5.9
Environmental Solutions
Energy 50,000 Kenetech Corp. 895,000 800,000 0.3
Pollution Technology 250,000 ++Molten Metal Technology, Inc. 4,087,770 4,375,000 1.3
Pollution Technology 100,000 ++Purus Inc. 1,414,127 350,000 0.1
Pollution Technology 180,000 Thermo Electron Corp. 6,840,000 7,177,500 2.2
Waste Management 150,000 WMX Technologies, Inc. 3,605,880 4,368,750 1.3
------------ ------------ ------
16,842,777 17,071,250 5.2
Extended Economic
Cycles
Metals 50,000 ++Bethlehem Steel Corp. 1,137,500 1,112,500 0.3
Machinery 25,000 Caterpillar, Inc. 2,695,962 2,709,375 0.8
Machinery 50,000 Deere & Co. 3,405,500 3,506,250 1.1
Chemicals 50,000 Rohm & Haas Co. 3,329,500 3,237,500 1.0
------------ ------------ ------
10,568,462 10,565,625 3.2
</TABLE>
56
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Value Percent of
Concept Tomorrow Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Future Retailing
Specialty Retail 100,000 Authentic Fitness Corp. $ 1,556,250 $ 1,337,500 0.4%
Specialty Retail 55,700 ++Barnes & Noble, Inc. 1,517,000 1,392,500 0.4
Private Label 160,000 Cott Corp. 5,005,002 1,900,000 0.6
Specialty Retail 50,800 ++Discount Auto Parts, Inc. 1,302,423 1,149,350 0.4
Private Label 115,300 ++Nutramax Products, Inc. 1,548,900 980,050 0.3
Private Label 160,000 The Perrigo Company, Inc. 3,566,092 2,200,000 0.7
Specialty Retail 75,000 ++Variflex, Inc. 1,152,500 1,200,000 0.4
Specialty Retail 200,000 Wal-Mart Stores, Inc. 5,258,570 5,000,000 1.5
------------ ------------ ------
20,906,737 15,159,400 4.7
Global Market Expansion
Financial Services 135,000 American Express Co. 2,897,406 3,577,500 1.1
Energy 100,000 Amoco Corp. 5,665,900 5,987,500 1.9
Household Products 74,600 Colgate-Palmolive Co. 1,548,920 3,981,775 1.2
Energy 100,000 Mobil Oil Corp. 7,973,380 8,387,500 2.6
Food & Beverage 280,000 PepsiCo, Inc. 7,943,124 8,540,000 2.6
Consumer Appliances 50,000 Whirlpool Corp. 2,543,663 2,543,750 0.8
------------ ------------ ------
28,572,393 33,018,025 10.2
Healthcare Cost
Containment
Biotechnology 65,000 ++Chiron Corp. 3,681,187 3,477,500 1.1
Health Maintenance 100,000 ++FHP International Corp. 2,275,000 2,400,000 0.7
Pharmaceuticals 150,900 Merck & Co., Inc. 5,685,639 4,470,413 1.4
Pharmaceuticals 100,000 Pfizer, Inc. 3,038,128 6,200,000 1.9
Biotechnology 105,000 Procyte Corp. 1,391,250 984,375 0.3
Pharmaceuticals 137,200 Schering-Plough Corp. 3,180,566 8,797,950 2.7
Medical Equipment 100,000 Thermotrex Corp. 1,529,330 1,287,500 0.4
Medical Equipment 100,000 United States Surgical Corp. 6,799,013 2,225,000 0.7
------------ ------------ ------
27,580,113 29,842,738 9.2
Industrial Outsourcing
Automotive Components 50,000 Hayes Wheels International, Inc. 1,176,725 1,237,500 0.4
Specialty Services 32,400 Interim Services, Inc. 648,000 761,400 0.2
Automotive Components 210,000 Magna International, Inc. 3,191,250 8,715,000 2.7
Specialty Services 100,000 Olsten Corp. 3,190,200 3,375,000 1.0
------------ ------------ ------
8,206,175 14,088,900 4.3
Industrial Renaissance
Automobile 350,000 Chrysler Corp. 9,780,250 16,843,750 5.2
Automobile 200,000 Ford Motor Co. 4,590,380 6,350,000 1.9
Automobile 200,000 General Motors Corp. 7,896,900 10,275,000 3.2
Information Systems 200,000 International Business Machines Corp. 11,614,254 12,350,000 3.8
------------ ------------ ------
33,881,784 45,818,750 14.1
</TABLE>
57
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
Value Percent of
Concept Tomorrow Shares Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Multimedia
Wireless Cable Television 55,000 ++American Telecasting, Inc. $ 990,000 $ 673,750 0.2%
Wireless Cable Television 102,000 CAI Wireless Systems, Inc. 1,172,000 1,020,000 0.3
Wireless Cable Television 75,000 ++CableMaxx, Inc. 906,875 487,500 0.2
Leisure & Entertainment 100,000 ++LodgeNet Entertainment Corp. 1,451,730 825,000 0.3
Broadcasting & Publishing 225,000 The News Corp. Ltd. (ADR)* 9,030,250 11,587,500 3.6
Wireless Cable Television 50,000 ++Preferred Entertainment, Inc. 938,500 700,000 0.2
Leisure & Entertainment 125,000 Time Warner, Inc. 3,491,400 4,640,625 1.4
Leisure & Entertainment 104,400 The Walt Disney Co. 2,734,106 4,437,000 1.3
------------ ------------ ------
20,714,861 24,371,375 7.5
Progressive Education
Education 100,000 ++Broderbund Software, Inc. 3,459,375 4,825,000 1.5
Education 175,000 ++Education Alternatives, Inc. 5,308,522 2,581,250 0.8
Education 140,000 ++Scholastic Corporation 6,019,125 6,090,000 1.9
------------ ------------ ------
14,787,022 13,496,250 4.2
Strategic Growth
Opportunities
Textile & Apparel 100,000 ++Burlington Industries, Inc. 1,399,950 1,487,500 0.5
Apparel 225,000 ++Chic by H.I.S., Inc. 2,846,058 2,925,000 0.9
Financial Services 100,000 Household International Inc. 3,138,738 3,425,000 1.1
Specialty Retail 150,000 The Limited, Inc. 3,962,130 2,962,500 0.9
Apparel 150,000 Liz Claiborne, Inc. 5,454,429 3,187,500 0.9
Broadcasting & Publishing 137,900 The New York Times Co. 4,681,665 3,257,888 1.0
------------ ------------ ------
21,482,970 17,245,388 5.3
Telecommunications
Telecommunications 165,000 ++ALC Communications Corp. 2,504,250 5,341,875 1.6
Components 100,000 ++ANTEC Corp. 2,292,650 2,800,000 0.9
Cellular Communications 300,000 AirTouch Communications, Inc. 5,772,230 7,800,000 2.4
Components 35,400 ++BroadBand Technologies, Inc. 637,200 893,850 0.3
Components 150,000 ++Inter-Tel, Inc. 1,383,862 1,406,250 0.4
Telecommunications 150,000 MCI Communications Corp. 3,895,310 3,393,750 1.0
Telecommunications 100,000 ++MFS Communications Co., Inc. 2,536,850 2,925,000 0.9
Paging Systems 225,000 ++Metrocall, Inc. 3,473,126 2,981,250 0.9
Paging Systems 300,000 USA Mobile Communications Holdings, Inc. 2,837,500 2,175,000 0.7
------------ ------------ ------
25,332,978 29,716,975 9.1
Total Common Stocks 279,038,092 299,766,087 92.2
</TABLE>
58
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Value Percent of
Amount Short-Term Securities Cost (Note 1A) Net Assets
<S> <C> <C> <C> <C> <C>
Commercial $10,991,000 General Electric Capital Corp., 4.20%
Paper** due 8/01/1994 $ 10,988,436 $ 10,988,436 3.4%
10,000,000 Transamerica Finance Corp., 4.37% due 8/19/1994 9,975,722 9,975,722 3.0
Total Short-Term Securities 20,964,158 20,964,158 6.4
Total Investments $300,002,250 320,730,245 98.6
============
Other Assets Less
Liabilities 4,517,775 1.4
------------ ------
Net Assets $325,248,020 100.0%
============ ======
<FN>
(a) Restricted securities. The value of the Fund's investment in
restricted securities was approximately $1,450,000, representing
0.4% of net assets.
(b) Formerly Capital Holding Co.
* American Depositary Receipts (ADR).
** Commercial Paper is traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by
the Fund.
++ Non-income producing securities.
</TABLE>
See Notes to Financial Statements.
59
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of July 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$300,002,250) (Note 1a) $320,730,245
Cash 69
Receivables:
Securities sold $ 19,047,708
Dividends 230,189
Capital shares sold 195,028 19,472,925
------------
Prepaid registration fees and other assets (Note 1e) 22,724
------------
Total assets 340,225,963
------------
Liabilities: Payables:
Securities purchased 13,314,626
Capital shares redeemed 1,048,238
Distributor (Note 2) 250,378
Investment adviser (Note 2) 167,560 14,780,802
------------
Accrued expenses and other liabilities 197,141
------------
Total liabilities 14,977,943
------------
Net Assets: Net assets $325,248,020
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 67,312
Consist of: Class B Common Stock, $0.10 par value, 100,000,000 shares authorized 2,327,905
Paid-in capital in excess of par 293,141,779
Accumulated investment loss--net (626,046)
Undistributed realized capital gains and foreign currency transactions--net 9,611,421
Unrealized appreciation on investments and foreign currency
transactions--net 20,725,649
------------
Net assets $325,248,020
============
Net Asset Class A--Based on net assets of $9,233,373 and 673,117 shares outstanding $ 13.72
Value: ============
Class B--Based on net assets of $316,014,647 and 23,279,054 shares outstanding $ 13.58
============
</TABLE>
See Notes to Financial Statements.
60
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Six Months Ended July 31, 1994
<S> <C> <C> <C>
Investment Dividends (net of $46,115 foreign withholding tax) $ 2,041,670
Income Interest and discount earned 435,318
(Notes 1c Other income 235,361
& 1d): ------------
Total income 2,712,349
------------
Expenses: Distribution fees--Class B (Note 2) $ 1,695,239
Investment advisory fees (Note 2) 1,133,774
Transfer agent fees--Class B (Note 2) 298,290
Printing and shareholder reports 74,700
Accounting services (Note 2) 37,038
Registration fees (Note 1e) 30,249
Professional fees 28,684
Custodian fees 22,291
Directors' fees and expenses 8,043
Transfer agent fees--Class A (Note 2) 7,186
Other 2,901
------------
Total expenses 3,338,395
------------
Investment loss--net (626,046)
------------
Realized & Realized gain from:
Unrealized Investments--net 9,613,836
Gain (Loss) Foreign currency transactions--net 3,013 9,616,849
on Investments ------------
& Foreign Change in unrealized appreciation/depreciation on:
Currency Investments--net (57,421,729)
Transactions Foreign currency transactions--net 7,258 (57,414,471)
- --Net ------------ ------------
(Notes 1b, Net realized and unrealized loss on investments and foreign
1d & 3): currency transactions (47,797,622)
------------
Net Decrease in Net Assets Resulting from Operations $(48,423,668)
============
</TABLE>
See Notes to Financial Statements.
61
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Six For the Year
Months Ended Ended
July 31, January 31,
1994 1994
Increase (Decrease) in Net Assets:
<S> <C> <C> <C>
Operations: Investment loss--net $ (626,046) $ (203,942)
Realized gain on investments and foreign currency transactions--net 9,616,849 46,285,020
Change in unrealized appreciation/depreciation on investments and
foreign currency transactions--net (57,414,471) 9,227,443
------------ ------------
Net increase (decrease) in net assets resulting from operations (48,423,668) 55,308,521
------------ ------------
Distribu- Realized gain on investments--net:
tions to Class A (493,267) (1,437,834)
Shareholders Class B (16,575,755) (52,604,277)
(Note 1f): ------------ ------------
Net decrease in net assets resulting from distributions to shareholders (17,069,022) (54,042,111)
------------ ------------
Capital Net decrease in net assets derived from capital share transactions (16,625,275) (52,481,091)
Share Trans- ------------ ------------
actions
(Note 4):
Net Assets: Total decrease in net assets (82,117,965) (51,214,681)
Beginning of period 407,365,985 458,580,666
------------ ------------
End of period* $325,248,020 $407,365,985
============ ============
<FN>
*Accumulated investment loss--net $ (626,046) $ 0
============ ============
</TABLE>
See Notes to Financial Statements.
62
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights
Class A
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
July 31, For the Year Ended January 31,
Increase (Decrease) in Net Asset Value: 1994++ 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 16.39 $ 16.29 $ 16.84 $ 15.49 $ 15.26
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .05 .15 .25 .36 .41
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net(1) (1.97) 2.18 .49 3.74 .59
-------- -------- -------- -------- --------
Total from investment operations (1.92) 2.33 .74 4.10 1.00
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.23) (.35) (.40)
Realized gain on investments--net (.75) (2.23) (1.06) (2.40) (.37)
-------- -------- -------- -------- --------
Total dividends and distributions (.75) (2.23) (1.29) (2.75) (.77)
-------- -------- -------- -------- --------
Net asset value, end of period $ 13.72 $ 16.39 $ 16.29 $ 16.84 $ 15.49
======== ======== ======== ======== ========
Total Based on net asset value per share (11.57%)+++ 15.78% 4.79% 28.35% 6.64%
Investment ======== ======== ======== ======== ========
Return:**
Ratios to Expenses .91%* .88% .90% .95% .96%
Average ======== ======== ======== ======== ========
Net Assets: Investment income--net .64%* .95% 1.35% 1.81% 2.58%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 9,233 $ 10,942 $ 11,394 $ 8,846 $ 5,478
Data: ======== ======== ======== ======== ========
Portfolio turnover 26.12% 48.63% 40.58% 48.28% 25.57%
======== ======== ======== ======== ========
<FN>
* Annualized.
** Total investment returns exclude the effects of sales loads.
++ Based on average shares outstanding during the period.
+++ Aggregate total investment return.
(1) Foreign currency transaction amounts have been reclassified
to conform to the 1994 presentation.
</TABLE>
See Notes to Financial Statements.
63
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights (concluded)
Class B
For the
The following per share data and ratios have been derived Six Months
from information provided in the financial statements. Ended
July 31, For the Year Ended January 31,
Increase (Decrease) in Net Asset Value: 1994++ 1994++ 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 16.30 $ 16.28 $ 16.82 $ 15.48 $ 15.24
Operating -------- -------- -------- -------- --------
Performance: Investment income (loss)--net (.03) (.01) .06 .14 .24
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net(1) (1.96) 2.17 .52 3.77 .60
-------- -------- -------- -------- --------
Total from investment operations (1.99) 2.16 .58 3.91 .84
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- -- (.06) (.17) (.23)
Realized gain on investments--net (.73) (2.14) (1.06) (2.40) (.37)
-------- -------- -------- -------- --------
Total dividends and distributions (.73) (2.14) (1.12) (2.57) (.60)
-------- -------- -------- -------- --------
Net asset value, end of period $ 13.58 $ 16.30 $ 16.28 $ 16.82 $ 15.48
======== ======== ======== ======== ========
Total Based on net asset value per share (12.03%)+++ 14.60% 3.75% 26.96% 5.59%
Investment ======== ======== ======== ======== ========
Return:**
Ratios to Expenses, excluding distribution fees .94%* .91% .92% .98% 1.00%
Average ======== ======== ======== ======== ========
Net Assets: Expenses 1.94%* 1.91% 1.92% 1.98% 2.00%
======== ======== ======== ======== ========
Investment income (loss)--net (.39%)* (.07%) .36% .83% 1.53%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $316,015 $396,424 $447,186 $476,106 $442,944
Data: ======== ======== ======== ======== ========
Portfolio turnover 26.12% 48.63% 40.58% 48.28% 25.57%
======== ======== ======== ======== ========
<FN>
* Annualized.
** Total investment returns exclude the effects of sales loads.
++ Based on average shares outstanding during the period.
+++ Aggregate total investment return.
(1) Foreign currency transaction amounts have been reclassified to
conform to the 1994 presentation.
</TABLE>
See Notes to Financial Statements.
64
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Fund For Tomorrow, Inc. (the "Fund") is
registered under the Investment Company Act of 1940
as a diversified, open-end management investment com-
pany. The Fund offers both Class A and Class B Shares.
Class A Shares are sold with a front-end sales charge.
Class B Shares may be subject to a contingent deferred
sales charge. Both classes of shares have identical vot-
ing, dividend, liquidation and other rights and the same
terms and conditions, except that Class B Shares bear
certain expenses related to the distribution of such
shares and have exclusive voting rights with respect to
matters relating to such distribution expenditures.
The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which
are traded on stock exchanges are valued at their last
sale prices as of the close of business on the day the
securities are being valued or, lacking any sales on that
day, at the last available bid price. Securities traded in
the over-the-counter market are valued at the last bid
prices quoted by brokers that make markets in the
securities at the close of trading on the New York Stock
Exchange. Portfolio securities which are traded both in
the over-the-counter market and on a stock exchange
are valued based upon the prices or quotes obtained
from the broadest and most representative market.
Securities and other assets for which market quotations
are not readily available are valued at fair value as
determined in good faith by or under the direction
of the Board of Directors of the Fund. Short-term
securities are valued at amortized cost which approxi-
mates market.
(b) Foreign currency transactions--Transactions denom-
inated in foreign currencies are recorded at the exchange
rate prevailing when recognized. Assets and liabilities
denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency
transactions are the result of settling (realized) or valu-
ing (unrealized) such transactions expressed in foreign
currencies into US dollars. Realized and unrealized
gains or losses from investments include the effects of
foreign exchange rates on investments.
The Fund is authorized to enter into forward foreign
exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are
not entered on the Fund's records. However, the effect
on operations is recorded from the date the Fund enters
into such contracts. Premium or discount is amortized
over the life of the contracts.
(c) Income taxes--It is the Fund's policy to comply
with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to
distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provi-
sion is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends
and capital gains at various rates.
(d) Security transactions and investment income--
Security transactions are recorded on the dates the
transactions are entered into (the trade dates). Dividend
income is recorded on the ex-dividend date except that
if the ex-dividend date has passed, certain dividends
from foreign securities are recorded as soon as the funds
are informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the
accrual basis. Realized gains and losses on security
transactions are determined on the identified cost basis.
(e) Prepaid registration fees--Prepaid registration fees
are charged to expense as the related shares are issued.
(f) Dividends and distributions to shareholders--
Dividends and distributions paid by the Fund are
recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory
Agreement with Merrill Lynch Asset Management, L.P.
("MLAM"). The general partner of MLAM is Princeton
Services, Inc., an indirect wholly-owned subsidiary of
Merrill Lynch and Co., Inc. ("ML & Co.") The limited
65
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
partners are ML & Co. and Merrill Lynch Investment
Management, Inc. ("MLIM"), which is also an indirect
wholly-owned subsidiary of ML & Co. The Fund has
also entered into Distribution Agreements and a
Distribution Plan with Merrill Lynch Funds Distributor,
Inc. ("MLFD" or "Distributor"), a wholly-owned subsidi-
ary of MLIM.
MLAM is responsible for the management of the Fund's
portfolio and provides the necessary personnel, facili-
ties, equipment and certain other services necessary to
the operations of the Fund. For such services, the Fund
pays a monthly fee based upon the average daily value
of the Fund's net assets at the following annual rates:
0.65% of the average daily net assets not exceeding
$750 million; 0.60% of the average daily net assets
exceeding $750 million but not exceeding $1 billion;
and 0.55% of the average daily net assets exceeding
$1 billion. The Investment Advisory Agreement obli-
gates MLAM to reimburse the Fund to the extent the
Fund's expenses (excluding interest, taxes, distribution
fees, brokerage fees and commissions, and extraordi-
nary items) exceed 2.5% of the Fund's first $30 million
of average daily net assets, 2.0% of the next $70 million
of average daily net assets, and 1.5% of the average daily
net assets in excess thereof. No fee payment will be
made to the Investment Adviser which would result in
Fund expenses exceeding on a cumulative annualized
basis the most restrictive applicable expense limitation
in effect at the time of such payment.
Pursuant to a distribution plan (the "Distribution Plan")
adopted by the Fund in accordance with Rule 12b-1
under the Investment Company Act of 1940, the Fund
pays the Distributor an ongoing account maintenance
fee and distribution fee, which are accrued daily and
paid monthly at the annual rate of 0.25% and 0.75%,
respectively, of the average daily net assets of the
Class B Shares of the Fund. This fee is to compensate
the Distributor for services it provides and the expenses
borne by the Distributor under the Distribution
Agreement. As authorized by the Plan, the Distributor
has entered into an agreement with Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), which
provides for the compensation of MLPF&S for providing
distribution-related services to the Fund.
During the six months ended July 31, 1994, MLFD earned
underwriting discounts of $456, and MLPF&S earned
dealer concessions of $5,895 on sales of the Fund's
Class A Shares.
MLPF&S also received contingent deferred sales report-
ing charges of $53,188 relating to transactions in Class
B Shares and $10,500 in commissions on the execution
of portfolio security transactions for the Fund during
the period.
Financial Data Services, Inc. ("FDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM
at cost.
Certain officers and/or directors of the Fund are officers
and/or directors of MLAM, MLIM, MLPF&S, FDS, MLFD,
and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-
term securities, for the six months ended July 31, 1994
were $86,801,212 and $115,331,147, respectively.
Net realized and unrealized gains (losses) as of July 31,
1994 were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $9,613,875 $ 20,727,995
Short-term investments (39) --
Foreign currency transactions 3,013 (2,346)
---------- ------------
Total $9,616,849 $ 20,725,649
========== ============
As of July 31, 1994, net unrealized appreciation for
Federal income tax purposes aggregated $20,727,995, of
which $53,440,147 related to appreciated securities and
$32,712,152 related to depreciated securities. The aggre-
gate cost of investments at July 31, 1994 for Federal
income tax purposes was $300,002,250.
66
<PAGE>
Merrill Lynch Fund For Tomorrow, Inc. July 31, 1994
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Share Transactions:
Net decrease in net assets derived from capital share
transactions was $16,625,275 and $52,481,091 for the
six months ended July 31, 1994 and the year ended
January 31, 1994, respectively.
Transactions in capital shares for Class A and Class B
Shares were as follows:
Class A Shares for the Six Months Dollar
Ended July 31, 1994 Shares Amount
Shares sold 68,553 $ 1,038,019
Shares issued to shareholders
in reinvestment of
distributions 33,364 441,736
----------- ------------
Total issued 101,917 1,479,755
Shares redeemed (96,210) (1,404,411)
----------- ------------
Net increase 5,707 $ 75,344
=========== ============
Class A Shares for the Year Dollar
Ended January 31, 1994 Shares Amount
Shares sold 188,941 $ 3,088,274
Shares issued to shareholders
in reinvestment of
distributions 82,693 1,266,935
----------- ------------
Total issued 271,634 4,355,209
Shares redeemed (303,511) (4,894,524)
----------- ------------
Net decrease (31,877) $ (539,315)
=========== ============
Class B Shares for the Six Months Dollar
Ended July 31, 1994 Shares Amount
Shares sold 607,510 $ 9,146,215
Shares issued to shareholders
in reinvestment of
distributions 1,105,991 14,499,536
----------- ------------
Total issued 1,713,501 23,645,751
Shares redeemed (2,757,433) (40,346,370)
----------- ------------
Net decrease (1,043,932) $(16,700,619)
=========== ============
Class B Shares for the Year Dollar
Ended January 31, 1994 Shares Amount
Shares sold 2,491,455 $ 40,734,290
Shares issued to shareholders
in reinvestment of
distributions 3,009,988 45,992,774
----------- ------------
Total issued 5,501,443 86,727,064
Shares redeemed (8,646,525) (138,668,840)
----------- ------------
Net decrease (3,145,082) $(51,941,776)
=========== ============
5. Loaned Securities:
At July 31, 1994, the Fund held US Treasury Notes
having an aggregate value of approximately $16,991,000
as collateral for portfolio securities loaned having a
market value of approximately $15,713,000.
67
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Investment Objective and Policies.......... 2
Management of the Fund..................... 2
The Investment Adviser................... 2
The Advisory Agreement................... 2
Directors and Officers..................... 3
Purchase of Shares......................... 5
Initial Sales Charge Alternatives--
Class A and Class D Shares............. 5
Reduced Initial Sales Charges............ 6
Distribution Plans....................... 10
Limitations on the Payment of Deferred
Sales Charges.......................... 10
Redemptions................................ 11
Deferred Sales Charge--
Class B Shares......................... 12
Determination of Net Asset Value........... 13
Shareholder Services....................... 14
Investment Account....................... 14
Automatic Investment Plans............... 14
Automatic Reinvestment of Dividends and
Capital Gains Distributions............ 14
Systematic Withdrawal Plans--
Class A and Class D Shares............. 15
Retirement Plans......................... 16
Exchange Privilege....................... 16
Dividends, Distributions and Taxes......... 28
Investment Practices and Restrictions...... 29
Additional Information..................... 38
Performance Data......................... 38
Common Stock............................. 39
Computation of Offering Price per Share.. 40
Independent Auditors..................... 40
Custodian................................ 40
Transfer Agent........................... 41
Reports to Shareholders.................. 41
Legal Counsel............................ 41
Registration Statement................... 41
Independent Auditors' Report............... 42
Financial Statements....................... 43
Financial Statements (unaudited)........... 55
</TABLE>
Code # 10228-1094
[LOGO]
MERRILL LYNCH FUND
FOR TOMORROW, INC.
[ART]
Statement of
Additional Information
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission File due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
