<PAGE> 1
As filed with the Securities and Exchange Commission on February 24, 1997
SECURITIES ACT FILE NO. 33-10794
INVESTMENT COMPANY ACT FILE NO. 811-4934
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 14 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 15 [X]
(Check appropriate box or boxes)
------------------------
MERRILL LYNCH GROWTH FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
P.O. BOX 9011
PRINCETON, NEW JERSEY 08536-9011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
JOEL H. GOLDBERG, ESQ. MERRILL LYNCH ASSET MANAGEMENT, L.P.
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP P.O. BOX 9011
919 THIRD AVENUE PRINCETON, N.J. 08543-9011
NEW YORK, NEW YORK 10022
</TABLE>
------------------------
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
[X] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
------------------------
The Registrant has registered an indefinite number of its shares of
beneficial interest under the Securities Act of 1933 pursuant to Rule 24f-2
under the Investment Company Act of 1940. The notice required by such rule for
the Registrant's most recent fiscal year was filed on December 23, 1996.
================================================================================
<PAGE> 2
MERRILL LYNCH GROWTH FUND
POST-EFFECTIVE AMENDMENT NO. 14 TO REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- ---------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............................. Cover Page
Item 2. Synopsis............................... Fee Table
Item 3. Condensed Financial Information........ Financial Highlights; Performance Data
Investment Objectives and Policies;
Item 4. General Description of Registrant...... Additional Information
Fee Table; Management of the Fund;
Inside
Item 5. Management of the Fund................. Back Cover Page
Item 5A. Management's Discussion of Fund
Performance............................ Not Applicable
Item 6. Capital Stock and Other Securities..... Cover Page; Additional Information
Cover Page; Fee Table; Merrill Lynch
Select
Pricing(SM) System; Purchase of Shares;
Additional Information; Inside Back
Item 7. Purchase of Securities Being Offered... Cover Page
Item 8. Redemption or Repurchase............... Fee Table; Merrill Lynch Select
Pricing(SM)
System; Purchase of Shares; Redemption
of Shares
Item 9. Pending Legal Proceedings.............. Not Applicable
PART B
Item 10. Cover Page............................. Cover Page
Item 11. Table of Contents...................... Back Cover Page
Item 12. General Information and History........ Not Applicable
Item 13. Investment Objectives and Policies..... Investment Objectives and Policies
Item 14. Management of the Fund................. Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities.......................... Management of the Fund
Item 16. Investment Advisory and Other
Services............................... Management of the Fund;
Purchase of Shares; General Information
Item 17. Brokerage Allocation................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities..... General Information
Item 19. Determination of Net Asset Value;
Purchase, Purchase of Shares; Redemption of
Shares;
Redemption and Pricing of Securities
Being Determination of Net Asset Value;
Offered................................ Shareholder Services
Item 20. Tax Status............................. Dividends, Distributions and Taxes
Item 21. Underwriters........................... Purchase of Shares
Item 22. Calculation of Performance Data........ Performance Data
Item 23. Financial Statements................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this post-effective amendment to the
Registration Statement.
<PAGE> 3
PROSPECTUS
FEBRUARY 24, 1997
MERRILL LYNCH GROWTH FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Growth Fund (the "Fund") is a mutual fund seeking to provide
shareholders with growth of capital and, secondarily, income by investing in a
diversified portfolio of primarily equity securities placing principal emphasis
on those securities that management of the Fund believes to be undervalued. The
portfolio of the Fund generally will be managed without regard to tax
considerations applicable to distributions to shareholders and therefore its
shares may appeal particularly to investors for whom current tax liability is
not a major consideration, such as employee benefit plans and individual
retirement accounts ("IRAs"). There can be no assurance that the investment
objectives of the Fund will be realized. For more information on the Fund's
investment objective and policies, please see "Investment Objective and
Policies" on page 12.
------------------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081, (609)
282-2800, or from securities dealers that have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund dated February 24, 1997, (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission and is
available, without charge, by calling or by writing the Fund at the above
telephone number or address. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C CLASS D
---------- ------------------------------------- -------------------- --------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)..................... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments....................... None None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower).............................. None(d) 4.0% during the first 1% for one year(f) None(d)
year, decreasing 1.0%
annually thereafter to 0.0% after
the fourth year(e)
Exchange Fee.......................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS).....
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...................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Fees(i)....... 0.16% 0.17% 0.19% 0.15%
Other............................... 0.02% 0.02% 0.02% 0.02%
------ ----- ----- -----
Total Other Expenses.............. 0.19% 0.20% 0.22% 0.18%
------ ----- ----- -----
Total Fund Operating Expenses(j)........ 0.84% 1.85% 1.87% 1.08%
====== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
fee-based programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 23 and "Shareholder
Services -- Fee-Based Programs" -- page 34.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares-Deferred Sales Charge
Alternatives -- Class B and Class C Shares" -- page 25.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A or Class D purchases of $1,000,000 or
more may not be subject to an initial sales charge. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares" -- page 23.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with redemptions to fund participation in
certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs" -- page 34.
(e) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs" -- page 34.
(f) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs" -- page 34.
2
<PAGE> 5
The Manager has voluntarily agreed to waive a portion of its management
fee so that such fee is equal to 0.65% of average daily net assets not
exceeding $1 billion; 0.625% of average daily net assets exceeding $1 billion
but not exceeding $1.5 billion; and 0.60% of average daily net assets
exceeding $1.5 billion.
(g) See "Management of the Fund -- Management and Advisory Arrangements" -- page
18.
(h) See "Purchase of Shares -- Distribution Plans" -- page 28.
(i) See "Management of the Fund -- Transfer Agency Services" -- page 20.
(j) As of October 31, 1996, the Manager voluntarily waived a portion of the
management fees due from the Fund. The Fee Table has been restated to assume
the absence of any waiver because the Manager may discontinue or reduce such
waiver of fees at any time without notice. During the fiscal year ended
October 31, 1996, the Manager waived management fees totaling .04% for Class
A shares, .03% for Class B shares, .03% for Class C shares and .03% for
Class D shares, after which the Fund's total expense ratio was .80% for
Class A shares, 1.82% for Class B shares, 1.84% for Class C shares and 1.05%
for Class D shares.
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including the maximum $52.50 initial sales
charge (Class A and Class D shares only) and assuming
(1) the Total Fund Operating Expenses for each class
set forth on page 2, (2) a 5% annual return throughout
the periods and (3) redemption at the end of the
period:
Class A............................................. $ 61 $78 $ 97 $151
Class B............................................. $ 59 $78 $ 100 $197*
Class C............................................. $ 29 $59 $ 101 $219
Class D............................................. $ 63 $85 $ 109 $177
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 $78 $ 97 $151
Class B............................................. $ 19 $58 $ 100 $197*
Class C............................................. $ 19 $59 $ 101 $219
Class D............................................. $ 63 $85 $ 109 $177
</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 (the "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 own 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. (the "NASD"). Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases and redemptions directly through the Fund's transfer agent are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares".
3
<PAGE> 6
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM") or an
affiliate of MLAM, Fund Asset Management, L.P. ("FAM"). Funds advised by MLAM or
FAM which utilize the Merrill Lynch Select Pricing(SM) System are referred to
herein as "MLAM-advised mutual funds".
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, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on the Class D shares, are imposed directly against those
classes and not against all assets of the Fund and, accordingly, such charges do
not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares are calculated in the same manner at the same time and will
differ only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the 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.
4
<PAGE> 7
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial in the investor's particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase of
Shares".
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert to
years, D shares automatically
at a rate of 4.0% during after approximately
the first year, decreasing eight years(5)
1.0%
annually to 0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but,
instead may be subject to a 1.0% CDSC if redeemed within one year. Such CDSC
may be waived in connection with certain fee-based programs. A .75% sales
charge for 401(k) purchases over $100,000,000 will apply. See "Class A" and
"Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
Class A:Class A shares incur an initial sales charge when they are purchased and
bear no ongoing distribution or account maintenance fees. Class A shares
are offered to a limited group of investors and also will be issued upon
reinvestment of dividends on outstanding Class A shares. Investors who
currently own Class A shares of the Fund in a shareholder account are
entitled to purchase additional Class A shares of the Fund in that
account. Other eligible investors include certain retirement plans and
participants in certain fee-based programs. In addition, Class A shares
will be offered at net asset value to Merrill Lynch & Co., Inc. ("ML &
Co.") and its subsidiaries (the term "subsidiaries", when used herein
with respect to ML & Co., includes MLAM, FAM and certain other entities
5
<PAGE> 8
directly or indirectly wholly-owned and controlled by ML & Co.), and
their directors and employees and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge is 5.25%,
which is reduced for purchases of $25,000 and over and waived for
purchases by certain retirement plans and participants in connection with
certain fee-based programs. Purchases of $1,000,000 or more may not be
subject to an initial sales charge but if the initial sales charge is
waived such purchases may be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Such CDSC may be waived in
connection with certain fee-based programs. Sales charges also are
reduced under a right of accumulation that takes into account the
investor's holdings of all classes of all MLAM-advised mutual funds. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares."
Class B:Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to the Class B shares, and a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with certain fee-based programs. Approximately eight years after
issuance, Class B shares will convert automatically to Class D shares of
the Fund, which are subject to an account maintenance fee of 0.25% 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, as will the Class D account maintenance fee of
the acquired fund upon the conversion, 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 to Class D shares will
occur at least once a month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares, and the conversion and holding periods for certain
retirement plans, were 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 average net assets attributable to
Class C shares. Class C shares are also subject to a CDSC of 1.0% if
they are redeemed within one year of purchase. Such CDSC may be waived
in connection with certain fee-based programs. Although Class C shares
are subject to a CDSC for only one year (as compared to four years for
Class B), Class C shares have no conversion feature and, accordingly, an
investor who purchases Class C shares will be subject to higher
distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Fund's Board of
Trustees 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.
6
<PAGE> 9
Class D shares are not subject to an ongoing distribution fee or any
CDSC when they are redeemed. Purchases of $1,000,000 or more may not be
subject to an initial sales charge but if the initial sales charge is
waived such purchases may be subject to a CDSC of 1.0% if the shares
are redeemed within one year of purchase. Such CDSC may be waived in
connection with certain fee-based programs. The schedule of initial
sales charges and reductions for Class D shares is the same as the
schedule for Class A shares, except that there is no waiver for
purchases in connection with certain fee-based programs. Class D shares
also will be issued upon conversion of Class B shares as described
above under "Class B". See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares".
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial in the
investor's particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors who previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation 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
7
<PAGE> 10
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".
8
<PAGE> 11
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the fiscal
year ended October 31, 1996, and the independent auditors' report thereon are
included in the Statement of Additional Information. 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 by writing
the Fund at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the Fund's audited financial statements.
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1996++ 1995++ 1994++ 1993 1992
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 23.13 $ 19.19 $ 19.22 $ 14.79 $ 15.31
------- ------ ------ ------ ------
Investment income--net....................................... .31 .23 .08 .02 .02
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net.......................... 5.63 4.01 2.01 4.86 .65
------- ------ ------ ------ ------
Total from investment operations............................. 5.94 4.24 2.09 4.88 .67
------- ------ ------ ------ ------
Less dividends and distributions:
Investment income--net.................................... (.35) -- -- -- --
Realized gain on investments--net......................... (1.85) (.30) (2.12) (.45) (1.19)
------- ------ ------ ------ ------
Total dividends and distributions............................ (2.20) (.30) (2.12) (.45) (1.19)
------- ------ ------ ------ ------
Net asset value, end of period............................... $ 26.87 $ 23.13 $ 19.19 $ 19.22 $ 14.79
======= ====== ====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................... 28.15% 22.60% 12.50% 33.97% 5.77%
======= ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................... .80% .82% .82% .81% .84%
======= ====== ====== ====== ======
Expenses..................................................... .84% .84% .82% .81% .84%
======= ====== ====== ====== ======
Investment income--net....................................... 1.28% 1.10% .44% .29% .28%
======= ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..................... $1,056,870 $670,164 $382,077 $229,709 $138,456
======= ====== ====== ====== ======
Portfolio turnover........................................... 30.01% 37.42% 4.22% 33.21% 21.20%
======= ====== ====== ====== ======
Average Commission rate paid##............................... $ .0539 -- -- -- --
======= ====== ====== ====== ======
<CAPTION>
1991 1990 1989+
-------- ------- -------
<S> <C<C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 10.61 $ 12.52 $ 9.61
------ ------ ------
Investment income--net....................................... .01 .13 .21
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net.......................... 4.82 (1.92) 3.15
------ ------ ------
Total from investment operations............................. 4.83 (1.79) 3.36
------ ------ ------
Less dividends and distributions:
Investment income--net.................................... -- (.11) (.19)
Realized gain on investments--net......................... (.13) (.01) (.26)
------ ------ ------
Total dividends and distributions............................ (.13) (.12) (.45)
------ ------ ------
Net asset value, end of period............................... $ 15.31 $ 10.61 $ 12.52
====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........................... 45.88% (14.42)% 36.21%#
====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement............................... .87% .89% .91%*
====== ====== ======
Expenses..................................................... .87% .89% .91%*
====== ====== ======
Investment income--net....................................... .46% .80% 1.84%*
====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..................... $ 92,494 $21,431 $ 4,581
====== ====== ======
Portfolio turnover........................................... 27.86% 19.65% 35.24%
====== ====== ======
Average Commission rate paid##............................... -- -- --
====== ====== ======
</TABLE>
- ------------------------
<TABLE>
<C> <S>
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class A shares commenced operations on November 28, 1988.
++ Based on an average number of shares outstanding during the period.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per
share for purchases and sales of equity securities. The "Average Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted in U.S. dollars using the prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
</TABLE>
9
<PAGE> 12
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
1996++ 1995++ 1994++ 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 21.60 $ 18.12 $ 18.43 $ 14.35 $ 15.03
---------- ---------- ---------- ---------- ----------
Investment income--net................................... .06 .01 (.10) (.11) (.10)
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net...................... 5.26 3.77 1.91 4.64 .61
---------- ---------- ---------- ---------- ----------
Total from investment operations......................... 5.32 3.78 1.81 4.53 .51
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net.................................. (.04) -- -- -- --
Realized gain on investments--net....................... (1.85) (.30) (2.12) (.45) (1.19)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions........................ (1.89) (.30) (2.12) (.45) (1.19)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period........................... $ 25.03 $ 21.60 $ 18.12 $ 18.43 $ 14.35
========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....................... 26.84% 21.37% 11.41% 32.54% 4.74%
========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................... 1.82% 1.84% 1.84% 1.83% 1.87%
========== ========== ========== ========== ==========
Expenses................................................. 1.85% 1.87% 1.84% 1.83% 1.87%
========== ========== ========== ========== ==========
Investment income (loss)--net............................ .26% .04% (.58)% (.78)% (.76)%
========== ========== ========== ========== ==========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $2,916,507 $1,920,451 $1,433,051 $1,049,190 $ 758,061
========== ========== ========== ========== ==========
Portfolio turnover....................................... 30.01% 37.42% 4.22% 33.21% 21.20%
========== ========== ========== ========== ==========
Average Commission rate paid##........................... $ .0539 -- -- -- --
========== ========== ========== ========== ==========
<CAPTION>
1991 1990 1989 1988 1987
-------- -------- -------- -------- --------
<S> <<C> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 10.53 $ 12.49 $ 10.03 $ 8.85 $ 10.00
-------- -------- -------- -------- --------
Investment income--net................................... (.06) (.04) .10 .15 .16
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net...................... 4.69 (1.87) 2.72 1.28 (1.25)
-------- -------- -------- -------- --------
Total from investment operations......................... 4.63 (1.91) 2.82 1.43 (1.09)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net.................................. -- (.04) (.10) (.19) (.06)
Realized gain on investments--net....................... (.13) (.01) (.26) (.06) --
-------- -------- -------- -------- --------
Total dividends and distributions........................ (.13) (.05) (.36) (.25) (.06)
-------- -------- -------- -------- --------
Net asset value, end of period........................... $ 15.03 $ 10.53 $ 12.49 $ 10.03 $ 8.85
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share....................... 44.32% (15.31)% 29.25% 16.64% (10.98)%#
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement........................... 1.90% 1.93% 1.97% 1.93% 1.99%*
======== ======== ======== ======== ========
Expenses................................................. 1.90% 1.93% 1.97% 1.93% 1.99%*
======== ======== ======== ======== ========
Investment income (loss)--net............................ (.53%) (.29)% .78% 1.52% 2.86%*
======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................. $824,007 $436,556 $493,623 $511,776 $613,034
======== ======== ======== ======== ========
Portfolio turnover....................................... 27.86% 19.65% 35.24% 4.86% 8.62%
======== ======== ======== ======== ========
Average Commission rate paid##........................... -- -- -- -- --
======== ======== ======== ======== ========
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Class B shares commenced operations on March 27, 1987.
++ Based on an average number of shares outstanding during the period.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted in U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
10
<PAGE> 13
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS C++
----------------------------------------------
FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED OCT. 21, 1994+
OCT. 31, OCT. 31, TO OCT. 31,
1996 1995 1994
---------- ---------- --------------
<S> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................................... $ 21.59 $ 18.12 $17.45
---------- ---------- -----
Investment income--net............................................................. .06 .03 --
Realized and unrealized gain on investments
and foreign currency transactions--net............................................ 5.23 3.74 .67
---------- ---------- -----
Total from investment operations................................................... 5.29 3.77 .67
---------- ---------- -----
Less dividends and distributions:
Investment income--net............................................................ (.14) -- --
Realized gain on investments--net................................................. (1.85) (.30) --
---------- ---------- -----
Total dividends and distributions.................................................. (1.99) (.30) --
---------- ---------- -----
Net asset value, end of period..................................................... $ 24.89 $ 21.59 $18.12
========== ========== ============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................................................. 26.84% 21.32% 3.84%#
========== ========== ============
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..................................................... 1.84% 1.86% 2.52%*
========== ========== ============
Expenses........................................................................... 1.87% 1.89% 2.52%*
========== ========== ============
Investment income (loss)--net...................................................... .25% .14% (1.17)%*
========== ========== ============
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................................... $187,221 $ 85,486 $1,381
========== ========== ============
Portfolio turnover................................................................. 30.01% 37.42% 4.22%
========== ========== ============
Average Commission rate paid##..................................................... $ .0539% -- --
========== ========== ============
<CAPTION>
CLASS D++
----------------------------------------------
FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED OCT. 21, 1994+
OCT. 31, OCT. 31, TO OCT. 31,
1996 1995 1994
---------- ---------- --------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................................... $ 23.06 $ 19.18 $18.47
---------- ---------- -----
Investment income--net............................................................. .24 .22 --
Realized and unrealized gain on investments
and foreign currency transactions--net............................................ 5.63 3.96 .71
---------- ---------- -----
Total from investment operations................................................... 5.87 4.18 .71
---------- ---------- -----
Less dividends and distributions:
Investment income--net............................................................ (.29) -- --
Realized gain on investments--net................................................. (1.85) (.30) --
---------- ---------- -----
Total dividends and distributions.................................................. (2.14) (.30) --
---------- ---------- -----
Net asset value, end of period..................................................... $ 26.79 $ 23.06 $19.18
========== ========== ============
TOTAL INVESTMENT RETURN:**
Based on net asset value per share................................................. 27.83% 22.29% 3.84%#
========== ========== ============
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..................................................... 1.05% 1.08% 1.77%*
========== ========== ============
Expenses........................................................................... 1.08% 1.10% 1.77%*
========== ========== ============
Investment income (loss)--net...................................................... 1.03% 1.00% (.54)%*
========== ========== ============
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................................... $932,811 $614,357 $1,186
========== ========== ============
Portfolio turnover................................................................. 30.01% 37.42% 4.22%
========== ========== ============
Average Commission rate paid##..................................................... $ .0539% -- --
========== ========== ============
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on an average number of shares outstanding during the period.
# Aggregate total investment return.
## For fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases and
sales of equity securities. The "Average Commission Rate Paid" includes
commissions paid in foreign currencies, which have been converted in U.S.
dollars using the prevailing exchange rate on the date of the transaction.
Such conversions may significantly affect the rate shown.
11
<PAGE> 14
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Fund are to seek growth of capital and,
secondarily, income by investing in a diversified portfolio of primarily equity
securities placing principal emphasis on those securities that management of the
Fund believes to be undervalued. Undervalued issues include securities selling
at discounts from the price-to-book value ratios and price/earnings ratios
computed with respect to the popular stock market averages (primarily the
Standard & Poor's 400 Industrials Stock Price Index). The Fund may also consider
as undervalued securities selling at a discount from their historic
price-to-book value or price/earnings ratios, even though these ratios may be
above the ratios for the stock market averages. Securities offering dividend
yields higher than the yields for the popular stock market averages or higher
than such securities' historic yields may also be considered to be undervalued.
It is anticipated that, within the context of selecting securities believed to
be undervalued, the securities of issuers having a stock market capitalization
of $500 million or more will be emphasized, but attention will be given as well
to identifying and investing in smaller capitalization issues with value
characteristics. There can be no assurance that the investment objectives of the
Fund will be realized. The investment objectives of the Fund set forth in the
first sentence of this paragraph are a fundamental policy of the Fund which may
not be changed without a vote of a majority of its outstanding shares as defined
below.
The Fund is classified as a non-diversified fund under the Investment
Company Act of 1940, as amended (the "Investment Company Act") and, accordingly,
is not subject to the diversification requirements of the Investment Company
Act. This policy is fundamental and may only be changed by shareholder vote.
Accordingly, the Fund may invest more than 5% of the value of its assets in the
obligations of a single issuer and may acquire more than 10% of the voting
securities of a single issuer. However, the Fund remains subject to the
diversification requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), in order to qualify as a regulated investment
company (a "RIC") for U.S. federal income tax purposes. In order to qualify as a
RIC under the Code, the Fund must comply with certain requirements, including
limiting its investments so that at the close of each quarter of the taxable
year (i) not more than 25% of the market value of the Funds's total assets are
invested in the securities of a single issuer, or any two or more issuers which
are controlled by the Fund and engaged in the same, similar or related
businesses, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets are invested in
the securities of a single issuer, and the Fund does not own more than 10% of
the outstanding voting securities of a single issuer. Investment in the
securities of the U.S. Government, its agencies and instrumentalities are not
included within the definition of "issuer" for purposes of the diversification
requirements of the Code, while foreign government securities are included
within such definition.
Although operating as a non-diversified fund increases the flexibility with
which MLAM manages the Fund's assets, to the extent the Fund invests a
relatively high percentage of its assets in obligations of a limited number of
issuers, the Fund may be more susceptible than would be a more widely
diversified fund to any single economic, political or regulatory occurrence or
to changes in an issuer's financial condition or in the market's assessment of
the issuers.
The investment policy of the Fund is based on the belief that the pricing
mechanism of the securities markets lacks total efficiency and has a tendency to
inflate prices of securities in favorable market climates and depress prices of
securities in unfavorable climates. Based on this premise, management of the
Fund
12
<PAGE> 15
believes that favorable changes in market prices are more likely to begin when
securities are selling at what appear to be prices below their inherent value.
The Fund may invest up to 40% of its total assets in securities of foreign
issuers with the foregoing characteristics. Investments in securities of foreign
issuers involve certain risks, including, but not limited to, the possibility of
expropriation of assets, confiscatory taxation, fluctuations in foreign exchange
rates, future political and economic developments, and the possible imposition
of exchange controls or other foreign or U.S. governmental laws or restrictions
applicable to such investments. There may be less publicly available information
about a foreign financial instrument than about a United States instrument, and
foreign entities may not be subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which United States
entities are subject. As a result, traditional investment measurements such as
price earnings ratios, as used in the United States, may not be applicable in
certain capital markets. Foreign capital markets, while growing in volume,
typically have substantially less volume than United States markets, and
securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. Brokerage
commissions, custodial services, and other costs relating to investment in
foreign capital markets are generally more expensive than in the United States.
Foreign markets also have different clearance and settlement procedures and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays or problems with settlement could affect the
liquidity of the Fund's portfolio and adversely affect the Fund's performance.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities. The
inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges, financial
institutions and issuers in foreign countries than there is in the United
States. To the extent foreign investments are subject to withholding or other
taxes or to regulations relating to repatriation of assets, the Fund's
distributable income will be reduced. The prices of securities in different
countries are subject to different economic, financial, political and social
factors.
Since the Fund may invest in securities denominated or quoted in currencies
other than the United States dollar, changes in foreign currency exchange rates
may affect the value of investments in the portfolio and the unrealized
appreciation or depreciation of investments insofar as United States investors
are concerned. Changes in foreign currency exchange rates relative to the U.S.
dollar will affect the U.S. dollar value of the Fund's assets denominated in
that currency and the Fund's yield on such assets. The rate of exchange between
the dollar and other currencies is determined by forces of supply and demand in
the foreign exchange markets. These forces are, in turn, affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation, and other factors. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments
position. Also, many of the securities held by the Fund will not be registered
with the Commission nor will the issuers thereof be subject to the reporting
requirements of such agency.
Some countries prohibit or impose substantial restrictions on investment in
their capital markets, particularly their equity markets, by foreign entities
such as the Fund. As illustrations, certain countries require governmental
approval prior to investment by foreign persons, or limit the amount of
investment by
13
<PAGE> 16
foreign persons in a particular company, or limit the investment by foreign
persons to only a specific class of securities of a company which may have less
advantageous terms than securities of the company available for purchase by
nationals.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") or other securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by an American bank or trust
company that evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs, which are issued in registered form, are
designed for use in the United States securities markets and EDRs, which are
issued in bearer form, are designed for use in European securities markets. GDRs
are tradeable both in the U.S. and Europe and are designed for use throughout
the world.
The Fund may invest in securities of smaller capitalization issuers.
Investments in securities of smaller capitalization issuers involve special
considerations and risks not typically associated with investments in securities
of larger capitalization issuers, including limited product lines, markets or
financial resources, or they may be dependent on a limited management group. In
addition, many smaller capitalization stocks trade less frequently and in
smaller volume, and may be subject to more abrupt or erratic price movements,
than stocks of larger companies. The securities of smaller companies may also be
more sensitive to market changes than the securities of larger companies.
The Fund generally will invest without regard to tax considerations
applicable to distributions to shareholders and therefore its shares may appeal
particularly to investors for whom current tax liability is not a major
consideration, such as employee benefit plans and individual retirement accounts
("IRAs"). Because the Fund is designed for investors for whom current tax
liability is not a consideration, the Fund has the flexibility to take advantage
of short-term investment opportunities when determined appropriate by the Fund's
manager, Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager"), and,
accordingly, the Fund may experience high portfolio turnover. The portfolio
turnover rate is generally not expected to exceed 100%. For the fiscal years
ended October 31, 1996 and October 31, 1995, the Fund's portfolio turnover rates
were 30.01% and 37.42%, respectively. A higher turnover rate increases brokerage
costs.
Investment emphasis will be on equities, primarily common stocks and, to a
lesser extent, securities convertible into common stocks. The Fund may invest up
to 5% of its total assets in debt securities rated investment grade or rated
below investment grade by a nationally recognized rating agency (e.g., rated
below Baa by Moody's Investors Services, Inc. ("Moody's") or BBB by Standard &
Poor's Ratings Group ("S&P")) or in unrated debt securities which, in the
judgment of MLAM, possess similar credit characteristics as debt securities
rated investment grade or debt securities rated below investment grade (commonly
known as "junk bonds"). The Fund will not invest in debt securities rated in the
lowest rating categories (Ca or lower for Moody's and CC or lower for S&P)
unless MLAM believes that the financial condition of the issuer or the
protection afforded the particular securities is stronger than would otherwise
be indicated by such low ratings. For a description of ratings of debt
securities, see the Appendix to the Statement of Additional Information.
The Fund also may invest as a temporary defensive measure in nonconvertible
preferred stocks and debt securities and utilize options and the other
investment practices described below. The Fund at all times, except
14
<PAGE> 17
during temporary defensive periods, will maintain at least 65% of its total
assets invested in equity securities. The Fund also reserves the right as a
temporary defensive measure to hold other types of securities, including
short-term U.S. Government securities, money market securities, including
repurchase agreements, or cash, in such proportions as, in the opinion of the
Manager, prevailing market or economic conditions warrant. The Fund reserves the
right to hold short-term U.S. Government securities, money market securities,
including repurchase agreements, or cash for redemptions. Except during
extraordinary periods, the Fund would not expect that such securities or cash
held for redemptions would exceed 20% of its total assets.
Inasmuch as the Fund is authorized to invest in bonds and other
fixed-income securities, it is important to note that the portion of the Fund's
net asset value attributable to such securities may fall when interest rates
rise and rise when interest rates fall. In general, fixed-income securities with
longer maturities will be subject to greater volatility resulting from interest
rate fluctuations than will fixed-income securities with shorter maturities.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Strategies Involving Options, Futures and Foreign Exchange
Transactions. The Fund may use certain derivative instruments, including options
and futures and may purchase and sell foreign exchange. Transactions involving
such instruments expose the Fund to certain risks. The Fund's use of these
instruments and the associated risks are described in detail in the Appendix
attached to this Prospectus.
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain of
such exchanges. Where possible, the Fund will deal directly with the dealers who
make a market in the securities involved except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve either brokerage commissions
or transfer taxes. Securities firms may receive brokerage commissions on certain
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon exercise of
options. The Fund has no obligation to deal with any broker in the execution of
transactions in portfolio securities. Under the Investment Company Act, persons
affiliated with the Fund, including Merrill Lynch, are prohibited from dealing
with the Fund as a principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Affiliated persons of the Fund, and affiliated persons of such affiliated
persons, may serve as its broker in transactions conducted on an exchange and in
over-the-counter transactions conducted on an agency basis. In addition,
consistent with the NASD Conduct Rules, the Fund may consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund. It is expected that the majority of the shares of the
Fund will be sold by Merrill Lynch. Costs associated with transactions in
foreign securities are generally higher than with transactions in U.S.
securities, although the Fund will endeavor to achieve the best net results in
effecting such transactions.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
15
<PAGE> 18
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other liquid debt or equity securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the amount of its commitment in
connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. At the time of entering
into the agreement, the Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued, which is typically approximately 0.5% of
the aggregate purchase price of the security that the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price
considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 90 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 15% of its
total assets taken at the time of acquisition of such commitment or security.
The Fund will at all times maintain a segregated account with its custodian of
cash, cash equivalents, U.S. Government securities or other high grade liquid
debt securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Repurchase Agreements. The Fund may invest in money market securities
pursuant to repurchase agreements. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System or 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 insulates
the Fund from fluctuations in the market value of the underlying security during
such period, although, to the extent the repurchase agreement is not denominated
in U.S. dollars, the Fund's return may be effected by currency fluctuations. The
Fund may not invest more than 15% of its total assets in repurchase agreements
maturing in more than seven days. In the event of default by the seller under a
repurchase agreement, the Fund may suffer time delays and incur costs or
possible losses in connection with the disposal of the collateral.
16
<PAGE> 19
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 and receive
collateral in cash or securities issued or guaranteed by the United States
Government. Such collateral will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. During
the period of this loan, the Fund receives the income on the loaned securities
and either receives the income on the collateral or other compensation (i.e.,
negotiated loan premium or fee) for entering into the loan and thereby increases
its yield. 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 access to the collateral and could suffer
a loss to the extent that the value of the collateral falls below the market
value of the borrowed securities.
Illiquid Securities. The Fund may invest up to 15% of its total assets in
illiquid securities. Pursuant to this restriction the Fund may not invest in
securities which cannot be readily resold because of legal or contractual
restrictions or which cannot otherwise be marketed, redeemed, put to the issuer
or a third party, or which do not mature within seven days, or which the Board
of Trustees has not determined to be liquid, if, regarding all such securities,
more than 15% of its total assets, taken at market value, would be invested in
such securities.
The Fund may purchase, without regard to the above limitation, securities
that are not registered under the Securities Act of 1933, as amended (the
"Securities Act") but that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act, provided that the Fund's Board
of Trustees, or the Manager pursuant to guidelines adopted by the Board,
continuously determines, based on the trading markets for the specific Rule 144A
security, that it is liquid. The Board of Trustees retains oversight and is
ultimately responsible for the determinations. The Board of Trustees monitors
the Fund's investments in these securities, focusing on such factors, among
others, as valuation, liquidity and availability of information. This investment
practice could have the effect of increasing the level of illiquidity in the
Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing these securities.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, some of which are fundamental
policies and may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act. Among its significant restrictions, the Fund may not
invest more than 25% of its total assets (taken at market value at the time of
each investment) in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
Non-fundamental policies of the Fund (which may be changed by vote of the
Board of Trustees) include policies that (i) notwithstanding a more lenient
fundamental investment restriction concerning borrowing, prohibit the Fund from
borrowing amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary measure
for extraordinary or emergency purposes, such as redemption of Fund shares, and
further prohibit purchases of securities while borrowings are outstanding except
to honor prior commitments and to exercise subscription rights; and (ii) limit
investment 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. Securities purchased in
17
<PAGE> 20
accordance with Rule 144A under the Securities Act and determined to be liquid
by the Board of Trustees are not subject to the 15% limitation set forth in
clause (ii).
In addition, although not a fundamental policy, the Fund will include
over-the-counter ("OTC") options and the securities underlying such options (to
the extent provided under "Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Strategic Instruments" in the Appendix to this
Prospectus) in calculating the amount of its assets subject to the limitation
set forth in clause (ii) above. However, as discussed in the Appendix, the Fund
may treat the securities it uses as cover for written OTC options as liquid and,
therefore, such securities will be excluded from this limitation, provided the
Fund follows a specified procedure. The Fund will not change or modify this
policy prior to the change or modification by the Commission staff of its
position regarding OTC options, as discussed above.
The Statement of Additional Information contains a description of those
restrictions and policies under "Investment Objectives and
Policies -- Investment Restrictions".
MANAGEMENT OF THE FUND
TRUSTEES
The Trustees of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act. The
Trustees are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors of investment
companies by the Investment Company Act.
The Trustees are:
ARTHUR ZEIKEL* -- President of MLAM and its affiliate, FAM; President and
Director of Princeton Services, Inc. ("Princeton Services"); Executive
Vice President of ML & Co.; and Director of the Distributor.
JAMES H. BODURTHA -- Executive Vice President and Director, The China
Business Group, Inc.
HERBERT I. LONDON -- John M. Olin Professor of Humanities, Gallatin
Division of New York University.
ROBERT R. MARTIN -- Former Chairman, Kinnard Investments, Inc.
JOSEPH L. MAY -- Attorney in private practice.
ANDRE F. PEROLD -- Professor, Harvard Business School.
- ---------------
* Interested person, as defined by the Investment Company Act, of the Fund.
MANAGEMENT AND ADVISORY ARRANGEMENTS
MLAM, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey 08536
(mailing address: P.O. Box 9011, Princeton, New Jersey 08543-9011), acts as the
manager for the Fund and provides the Fund with management and investment
advisory services. MLAM is owned and controlled by ML & Co., a financial
services holding company and the parent of Merrill Lynch. The Manager or an
affiliate of the Manager, FAM, acts as the investment adviser for more than 130
registered investment companies. The Manager also offers
18
<PAGE> 21
portfolio management and portfolio analysis services to individual and
institutional accounts. As of January 31, 1997, the Manager and FAM had a total
of $235 billion in investment company and other portfolio assets under
management, including accounts of certain affiliates of the Manager.
The management agreement with the Manager (the "Management Agreement")
provides that, subject to the direction of the Trustees of the Fund, the Manager
is responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular security
rests with
the Manager, subject to review by the Trustees. The Fund may pay brokerage
commissions to Merrill Lynch, an affiliated person of the Fund. In allocating
brokerage transactions, the Manager may take into consideration the sale of
shares of the Fund. The Manager also is obligated to provide administrative
services necessary for the operation of the Fund and all of the office space,
facilities, equipment and necessary personnel for management of the Fund.
Stephen C. Johnes is the portfolio manager for the Fund. Mr. Johnes is a
Vice President of the Manager and has been employed by the Manager in this
capacity since 1987.
The Fund pays the Manager a monthly fee at the annual rate of 0.65% of the
average daily net assets of the Fund. The Manager has voluntarily agreed to
waive a portion of its management fee so that such fee is equal to 0.65% of
average daily net assets not exceeding $1 billion; 0.625% of average daily net
assets exceeding $1 billion but not exceeding $1.5 billion; and 0.60% of average
daily net assets exceeding $1.5 billion. For the fiscal year ended October 31,
1996, the fee paid by the Fund, net of fee waiver, to the Manager was
$26,198,720 (based on average net assets of approximately $4.0 billion). In
addition, the Management Agreement obligates the Fund to pay certain expenses
incurred in its operations, including, among other things, the management fee,
legal and audit fees, registration fees, unaffiliated Trustees' fees and
expenses, custodian and transfer agency fees, accounting costs, the costs of
issuing and redeeming shares and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information
distributed to shareholders. Accounting services are provided to the Fund by the
Manager and the Fund reimburses the Manager for its costs in connection with
such services. For the fiscal year ended October 31, 1996, the Fund reimbursed
the Manager $219,719 for accounting services. For the fiscal year ended October
31, 1996, the ratio of total expenses to average net assets was 0.84%, 1.85%,
1.87% and 1.08% for Class A, Class B, Class C and Class D shares, respectively.
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML&Co. and
an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a fee
for providing investment advisory services to the Manager with respect to the
Fund in an amount to be determined from time to time by the Manager and MLAM
U.K., but in no event in excess of the amount that the Manager actually receives
for providing services to the Fund pursuant to the Management Agreement.
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Act which incorporates the Code of Ethics of the Manager (together,
the "Codes"). The Codes significantly restrict the personal investing activities
of all employees of the Manager and, as described below, impose additional, more
onerous, restrictions on Fund investment personnel.
19
<PAGE> 22
The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch 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 and Class D shareholder account and $14.00 per Class
B and Class C shareholder account and the Transfer Agent is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For the fiscal year ended October 31, 1996, the Fund paid the
Transfer Agent $6,439,658 pursuant to the Transfer Agency Agreement for
providing transfer agency services.
PURCHASE OF SHARES
The Distributor, an affiliate of the Manager and of Merrill Lynch, acts as
the distributor of 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 that 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(SM) 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 the close of business on the New York
Stock Exchange ("NYSE") (generally 4:00 P.M., New York time), which includes
orders received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor in
turn receives orders from the securities dealer prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received prior to 30 minutes after the close of business on the NYSE, 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
20
<PAGE> 23
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 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(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a 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(SM) System is set forth
under "Merrill Lynch Select Pricing(SM) System" on page 4.
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, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Fund and, accordingly, such charges do not
affect the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each class
of shares are calculated in the same manner at the same time and 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.
21
<PAGE> 24
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 4 0.25% 0.75% B shares convert to D shares
years, at a rate of 4.0% automatically after
during the first year, approximately eight years(5)
decreasing 1.0% annually to
0.0%(4)
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(6) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs 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 "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain fee-based
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but if the initial sales charge is
waived, may be subject to a 1.0% CDSC for one year. A .75% sales charge for
401(k) purchases over $1,000,000 will apply.
(4) The CDSC may be modified in connection with redemptions to fund
participation in certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans was modified. Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten year conversion period. If Class B shares of the Fund are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with redemptions to fund participation
in certain fee-based programs.
22
<PAGE> 25
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS
PERCENTAGE SALES LOAD AS DISCOUNT TO
OF PERCENTAGE* OF SELECTED DEALERS
OFFERING THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED THE OFFERING PRICE
- ----------------------------------------------------- ------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000.................................... 5.25 % 5.54 % 5.00 %
$25,000 but less than $50,000........................ 4.75 4.99 4.50
$50,000 but less than $100,000....................... 4.00 4.17 3.75
$100,000 but less than $250,000...................... 3.00 3.09 2.75
$250,000 but less than $1,000,000.................... 2.00 2.04 1.80
$1,000,000 and over**................................ 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more and on Class A purchases in connection with certain
investment programs. If the sales charge is waived in connection with a
purchase of $1,000,000 or more, such purchases will be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. A sales charge of 0.75%
will be charged on purchases of $1,000,000 or more of Class A and Class D
shares by certain Employer Sponsored Retirement or Savings Plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act"). During the fiscal year ended October 31,
1996, the Fund sold 15,856,881 Class A shares for aggregate net proceeds of
$374,683,538. The gross sales charges for the sale of Class A shares of the Fund
for that year were $209,100, of which $13,960 and $195,140 were received by the
Distributor and Merrill Lynch, respectively. During such year, no CDSCs were
received with respect to Class A shares, for which the initial sales charge was
waived.
During the fiscal year ended October 31, 1996, the Fund sold 8,855,195
Class D shares for aggregate net proceeds of $208,171,714. The gross sales
charges for the sale of Class D shares of the Fund for that year were
$1,560,492, of which $100,325 and $1,460,167 were received by the Distributor
and Merrill Lynch, respectively. No CDSCs were received with respect to Class D
shares, for which the initial sales charge was waived, during the fiscal year
ended October 31, 1996.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account, including participants in the Merrill Lynch
Blueprint(SM) Program, are entitled to purchase additional Class A shares of the
Fund in that account. Certain Employer Sponsored
23
<PAGE> 26
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 TMA(SM) Managed Trusts to which Merrill Lynch
Trust Company provides discretionary trustee services, collective investment
trusts for which Merrill Lynch Trust Company serves as trustee and certain
purchases made in connection with certain fee-based programs. In addition, Class
A shares are offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares of
certain MLAM-advised closed-end funds in their initial offerings and 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). In addition, Class A shares of the Fund and certain other MLAM-advised
mutual funds are offered at net asset value to shareholders of Merrill Lynch
Senior Floating Rate Fund, Inc. ("Senior Floating Rate Fund") who wish to
reinvest the net proceeds from a sale of certain of their shares of common stock
pursuant to a tender offer conducted by such fund in shares of the Fund and
certain other MLAM-advised mutual funds.
Shareholders already owning Class A shares who wish to reinvest the net
proceeds from a tender of the Merrill Lynch High Income Municipal Bond Fund,
Inc. ("High Income Fund") or the Merrill Lynch Municipal Strategy Fund, Inc.
("Municipal Strategy Fund") may purchase Class A shares at net asset value
rather than Class D shares provided that (i) the shares to be purchased are held
in the same account as the Class A shares that the shareholder already owns, and
(ii) all other requirements pertaining to the reinvestment privilege are met.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under "Eligible Class A Investors". See
"Shareholder Services -- Fee-Based Programs."
Class A and Class D shares are offered at net asset value to Employee
Access Accounts(SM) available through qualified employers which provide
employer-sponsored retirement and savings plans that are eligible to purchase
such shares at net asset value. Subject to certain conditions, Class A and Class
D shares are offered at net asset value to shareholders of Municipal Strategy
Fund and High Income Fund and Class A shares are offered at net asset value to
shareholders of Senior Floating Rate Fund who wish to reinvest in shares of the
Fund the net proceeds from a sale of certain of their shares of common stock,
pursuant to tender offers conducted by those funds.
Class D shares 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, if certain
conditions set forth in the Statement of Additional Information are met.
24
<PAGE> 27
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(SM) Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES-CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted to Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under "Distribution Plans".
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 to 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 to 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.
25
<PAGE> 28
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 costs 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
YEAR SINCE PERCENTAGE OF
PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
--------------------------------------------------------------------- -----------------
<S> <C>
0-1.................................................................. 4.00 %
1-2.................................................................. 3.00
2-3.................................................................. 2.00
3-4.................................................................. 1.00
4 and thereafter..................................................... 0.00
</TABLE>
For the fiscal year ended October 31, 1996, the Distributor received CDSCs of
$2,000,859 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
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 a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase for shares purchased on or
after October 21, 1994).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by certain
eligible 401(a) and eligible 401(k) plans and in connection with certain group
plans placing orders through the Merrill Lynch Blueprint(SM) Program. The CDSC
also is waived for any Class B shares that 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 and for any Class B shares that were acquired and held at the
26
<PAGE> 29
time of the redemption in an Employee Access Account(SM) available through
employers providing eligible 401(k) plans. The Class B CDSC is also waived for
any Class B shares that are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information. The terms of the CDSC may be modified in
connection with certain fee-based programs. See "Shareholder Services -- Fee
Based Programs."
Contingent Deferred Sales Charges -- Class C Shares. Class C shares that
are redeemed within one year 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. No Class C CDSC will be assessed in
connection with certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
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.
For the fiscal year ended October 31, 1996, the Distributor received CDSCs
of $75,039 with respect to redemptions of Class C shares, all of which were paid
to Merrill Lynch.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
to 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 to
Class D shares will occur at least once each month (on the "Conversion Date") on
the basis of the relative net asset values of the shares of the two classes on
the Conversion Date, without the imposition of any sales load, fee or other
charge. Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.
Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not 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.
27
<PAGE> 30
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 that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.
The Conversion Period may also be modified for retirement plan investors
who participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each 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.
28
<PAGE> 31
For the fiscal year ended October 31, 1996, the Fund paid the Distributor
$23,190,613 pursuant to the Class B Distribution Plan (based on the average net
assets subject to such Class B Distribution Plan of approximately $2.3 billion),
all of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended October 31, 1996, the Fund paid the Distributor
$1,311,384 pursuant to the Class C Distribution Plan (based on average net
assets subject to such Class C Distribution Plan of approximately $131.1
million) all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended October 31, 1996, the Fund paid the
Distributor $1,880,370 pursuant to the Class D Distribution Plan relating to the
Class D shares (based on average net assets subject to such Class D Distribution
Plan of $752.1 million), all of which was paid to Merrill Lynch for providing
account maintenance activities in connection with Class D shares.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, the distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, the distribution fees and
CDSCs and the expenses consist of financial consultant compensation. With
respect to Class B shares, as of December 31, 1995, the last date at which fully
allocated accrual data is available, the fully allocated accrual expenses
received by the Distributor and Merrill Lynch exceeded fully allocated accrual
revenues for the period since the Fund commenced operations on March 27, 1987 by
approximately $5,904,000 (.29% of Class B net assets at that date). With respect
to Class B shares, as of October 31, 1996, direct cash revenues for the period
since the commencement of operations exceeded direct cash expenses by
$64,445,931 (2.21% of Class B net assets at that date). Similar fully allocated
accrual data for Class C shares is not presented because such revenues and
expenses for the period from October 21, 1994 (commencement of operations), to
December 31, 1995 are de minimis. As of October 31, 1996, with respect to Class
C shares, direct cash revenues for the period since October 21, 1994
(commencement of operations) exceeded direct cash expenses by $970,964 (.52% of
Class C 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 the Class B, Class C and Class D shares, and there is no
assurance that the Trustees 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 Trustees will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or distribution
of each class of shares separately. The initial sales charges, the account
maintenance fee, the distribution fee and/or the CDSCs received with respect to
one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares to Class D shares as set forth under
29
<PAGE> 32
"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 NASD Conduct Rules imposes a
limitation on certain asset-based sales charges such as the Fund's distribution
fee and the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges) plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
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 net asset value of the Fund's shares at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Fund's Transfer Agent, Merrill Lynch Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests delivered other than by mail
should be delivered to Merrill Lynch Financial Data Services, Inc., 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484. Redemption requests should
not be sent to the Fund. A redemption request requires the signature(s) of all
persons in whose name(s) the shares are registered, signed exactly as his
(their) name(s) appear(s) on the
30
<PAGE> 33
Transfer Agent's register or on the certificate, as the case may be. The
signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" as such term 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.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payments will be mailed within seven days of receipt of a
proper notice of redemption.
At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (i.e., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Fund will also 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 NYSE (generally 4:00 P.M., New York time) on the day
received and is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE in
order to obtain that day's closing price. These repurchase arrangements are for
the convenience of shareholders and do not involve a charge by the Fund (other
than any applicable CDSC). Securities firms which do not have selected dealer
agreements with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch
may charge its customers a processing fee (presently $4.85) to confirm a
repurchase of shares. Repurchases directly through the Fund's Transfer Agent are
not subject to the processing fee. The Fund reserves the right to reject any
order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. A shareholder
whose order for repurchase is rejected by the Fund, however, may redeem shares
as set forth above.
REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares of
the Fund, as the case may be, at net asset value without a sales charge up to
the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. Alternatively, the
reinstatement privilege may be exercised through the investor's Merrill Lynch
Financial Consultant within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. The reinstatement will be
made at the net asset value per share next determined after the notice of
reinstatement is received and cannot exceed the amount of the redemption
proceeds.
31
<PAGE> 34
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in its shares.
Certain of such services are not available to investors who place purchase
orders for the Fund's shares through the Merrill Lynch BlueprintSM Program. Full
details as to each of such services, copies of the various plans described below
and instructions as to how to participate in the various services or plans, or
to change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page hereof or from the Distributor or Merrill
Lynch. Certain of these services are available only to U.S. investors.
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. Shareholders also may maintain their accounts through
Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage
account, an account in the transferring shareholder's name will be opened
automatically, without charge, at the Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take delivery
of shares of the 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 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.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
EXCHANGE PRIVILEGE
U.S. 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
32
<PAGE> 35
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(SM) 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.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable for shares of the same
class of other MLAM-advised mutual funds.
Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period for the newly acquired shares of the other
fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.
33
<PAGE> 36
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share next determined on the ex-dividend date of such dividend
or distribution. A shareholder whose account is maintained through the Transfer
Agent may at any time, by written notification or by telephone (1-800-MER-FUND)
to the Transfer Agent, elect to have subsequent dividends or capital gains
distributions, or both, paid in cash, rather than reinvested, in which event
payment will be mailed on or about the payment date. A shareholder whose account
is accepted through Merrill Lynch may, at any time, by notice to Merrill Lynch,
elect to have both dividends and capital gains distributions paid in cash,
rather than reinvested. 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
distribution.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
checks 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(R), CBA(R) or Retirement Account may elect to
have shares redeemed on a monthly, bi-monthly, quarterly, semiannual or annual
basis through the CMA(R) or CBA(R) Systematic Redemption Program, subject to
certain conditions.
AUTOMATED INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be
made to an investor's Investment Account by prearranged charges of $50 or more
to such investor's regular bank account. Investors who maintain CMA(R) or CBA(R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA(R) accounts or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.
FEE-BASED PROGRAMS
Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares, which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of shares
held therein or the automatic exchange thereof to another class at net asset
value, which may be shares of a money market fund. In addition, upon termination
of participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based upon the
current value of such shares. These Programs also generally prohibit such shares
from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance fees)
in order for the investment not to be subject to Program fees. Additional
information regarding a specific
34
<PAGE> 37
Program (including charges and limitations on transferability applicable to
shares that may be held in such Program) is available in the Program's client
agreement and from Merrill Lynch Investor Services at (800) MER-FUND (637-3863).
TAXES
The Fund intends to continue to elect to qualify for the special tax
treatment afforded regulated investment companies ("RICs") under the Code. If it
so qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
("shareholders"). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options) are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares.
Dividends and distributions are taxable to shareholders even though they
are reinvested 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 dividends or capital gains
distributions. A portion of the Fund's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. The Fund intends to designate a pro rata portion
of such distributions that are paid on the shares as eligible for the dividends
received deduction. If the Fund pays a dividend or distribution in January which
was declared in the previous October, November or December to shareholders of
record on a specified date in one of such months, then such dividend or
distribution will be treated for tax purposes as being paid by the RIC and
received by its shareholders on December 31 of the year in which such dividend
or distribution was declared.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
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. Income tax treaties between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine in advance the effective rate of foreign tax to which
the Fund will be subject, since the amount of Fund assets to be invested in
various countries is not known. Because the Fund limits its investment 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.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains distributions
and redemption payments ("backup withholding"). Generally, shareholders subject
to backup withholding will be those for whom no certified taxpayer
35
<PAGE> 38
identification number is on file with the Fund or who, to the Fund's knowledge,
have furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that the
investor is not otherwise subject to backup withholding.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
A shareholder who holds shares as a capital asset generally will recognize
a capital gain or loss upon the sale of such shares, which will be a long-term
capital gain or loss if such shares were held for more than one year. However,
any loss realized by a shareholder who held shares for six months or less will
be treated as a long-term capital loss to the extent of any distributions of net
capital gains received by the shareholder with respect to such shares.
If a shareholder exercises the exchange privilege within 90 days of
acquiring such 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 charge the shareholder would have owed upon the
purchase of the new shares in the absence of the exchange privilege. Instead,
such sales charge will be treated as an amount paid for the new shares. See
"Shareholder Services -- Exchange Privilege".
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 Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income,
rather than increasing or decreasing the amount of the Fund's net capital gain.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, and any distributions made before the losses were
realized but in the same taxable year would be recharacterized as a return of
capital to shareholders, thereby reducing each shareholder's basis in his Fund
shares and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's tax basis in Fund shares (assuming
the shares were held as a capital asset).
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their tax advisers as to whether any
portion of the dividends they receive from the Fund is exempt from state income
tax and as to any other specific questions as to Federal,
36
<PAGE> 39
foreign, state or local taxes. Foreign investors should consider applicable
foreign taxes in their evaluation of an investment in the Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.
Average annual total return quotations for the specified period will be
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 will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the 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.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the effect 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 distributed to investors whose purchases are subject to
reduced sales charges in the case of Class A and Class D shares or waiver of the
CDSC in the case of Class B shares (such as investors in certain retirement
plans), the performance data may take into account the reduced, and not the
maximum, sales charges or may not take into account the CDSC and therefore may
reflect greater total return since, due to the reduced sales charges or waiver
of the CDSC, a lower amount of expenses is deducted. See "Purchase of Shares".
The Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
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
37
<PAGE> 40
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 the Standard & Poor's
500 Composite Stock Price Index, the Value Line Composite Index or the Dow Jones
Industrial Average, or to data contained in publications such as Lipper
Analytical Services, Inc., Morningstar Publications, Inc. ("Morningstar"), Money
Magazine, U.S. News & World Report, Business Week, Forbes Magazine, Fortune
Magazine and CDA Investment Technology, Inc. From time to time, the Fund may
include the Fund's Morningstar risk-adjusted performance ratings in
advertisements or supplemental sales literature. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute all its net investment income, if
any. Dividends from such net investment income are paid semi-annually. All net
realized long or short-term capital gains, if any, are distributed to the Fund's
shareholders annually. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the calendar year. The per share
dividends and distributions on each class of shares will be reduced as a result
of any account maintenance, distribution and transfer agency fees applicable to
that class. See "Additional Information -- Determination of Net Asset Value".
Dividends and distributions may be reinvested automatically in shares of the
Fund at net asset value. Shareholders may elect in writing to receive any such
dividends or distributions, or both, in cash. Dividends and distributions are
taxable to shareholders as discussed under "Taxes" whether they are reinvested
in shares of the Fund or received in cash.
See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the NYSE (generally
4:00 P.M., New York time) on each day during which the NYSE is open for trading.
Any assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation. The net asset
value per share is computed by dividing the sum of the market value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time,
rounded to the nearest cent. Expenses, including the fees payable to the Manager
and any account maintenance and/or distribution fees payable to the Distributor,
are accrued daily.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
the daily expense accruals of the account maintenance, distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares and
the daily expense
38
<PAGE> 41
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 (although not necessarily meet) immediately after the payment of
dividends or distributions, which will differ by approximately the amount of the
expense accrual differentials among the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Trustees as the primary
market. Securities traded on a stock exchange and the OTC market will be valued
according to the broadest and most representative market. Securities traded in
the OTC market are valued at the last available bid price in the OTC market
prior to the time of valuation. When the Fund writes an option, the amount of
the premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last asked price. Purchased options which are traded on
exchanges are valued at their last sale price or, in the case of purchased
options traded in the OTC market, the last bid price. Other investments,
including futures contracts and related options, are stated at market value.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees of the Fund. Such valuations and procedures will be
reviewed periodically by the Board of Trustees.
ORGANIZATION OF THE FUND
The Fund, an open-end management investment company, was organized on
December 11, 1986 under the laws of the Commonwealth of Massachusetts and is a
business entity commonly known as a "Massachusetts business trust". The Fund is
authorized to issue an unlimited number of shares of beneficial interest of
different classes, $0.10 par value per share. At the date of this Prospectus,
the shares of the Fund are divided into Class A, Class B, Class C and Class D
shares. Class A, Class B, Class C and Class D shares 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 shares. The Trustees of the Fund may classify and reclassify
the shares of the Fund into additional classes of shares at a future date.
The Declaration of Trust of the Fund does not require that the Fund hold an
annual meeting of shareholders. However, the Fund will be required to call
special meetings of shareholders in accordance with the requirements of the
Investment Company Act to seek approval of new management and advisory
arrangements, of a material increase in distribution fees or of a change in the
fundamental policies, objectives or restrictions of the Fund. The Fund also
would be required to hold a special shareholders' meeting to elect
39
<PAGE> 42
new Trustees at such time as less than a majority of the Trustees holding office
have been elected by shareholders. The Declaration provides that a shareholders'
meeting may be called for any reason at the request of 10% of the outstanding
shares of the Fund or by majority of the Trustees.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Merrill Lynch Financial
Data Services, Inc. at 800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
------------------------
The Declaration of Trust establishing the Fund, dated December 11, 1986, a
copy of which, together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Growth Fund" refers to the Trustees under
the Declaration collectively as Trustees, but not as individuals or personally;
and no Trustee, shareholder, officer, employee or agent of the Fund shall be
held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim of said Fund but the
"Trust Property" only shall be liable.
40
<PAGE> 43
MERRILL LYNCH GROWTH FUND AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C shares [ ]
Class D shares
of Merrill Lynch Growth Fund and establish an Investment Account as described in
the Prospectus. In the event that I am not eligible to purchase Class A shares,
I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $.......... payable to Merrill Lynch Financial
Data Services, Inc., as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of paper
if necessary.)
1. .......................................................... 4.
..........................................................
2. .......................................................... 5.
..........................................................
3. .......................................................... 6.
..........................................................
(PLEASE PRINT)
Name............................................................................
First Name Initial Last Name
Name of Co-Owner (if any).......................................................
First Name Initial Last Name
Address.........................................................................
<TABLE>
<S> <C>
..................................................................................... Date.......................................
(Zip Code)
Occupation .........................................
...................................................
Signature of Owner
<CAPTION>
Occupation ......................................... Name and Address of Employer.................................................
<S> <C>
................................................... .............................................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
(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
<TABLE>
<S> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] CHECK
OR [ ] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Growth Fund Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [ ] CHECKING [ ] SAVINGS
Name on your account............................................................
Bank Name.......................................................................
Bank Number ................................................... Account
Number..........................................................................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor ......................................................
Date............................................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
41
<PAGE> 44
MERRILL LYNCH GROWTH FUND AUTHORIZATION FORM
(PART 1) -- (CONTINUED)
3. SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
"Taxes") either because I have not been notified that I am subject thereto as a
result of a failure to report all interest or dividends, or the Internal Revenue
Service ("IRS") has notified me that I am no longer subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Growth Fund 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 Growth Fund
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 Growth Fund held as security.
<TABLE>
<S> <C>
By:.............................................................. ...............................................................
Signature of Owner Signature of Co-Owner (If registered in joint names, both must
sign)
</TABLE>
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
- --- Branch Office, Address, Stamp
- ---
=
=
===
This form when completed should be mailed to:
Merrill Lynch Growth Fund
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases or sales made under a Letter of Intention,
Automatic Investment Plan or Systematic Withdrawal Plan. We guarantee the
shareholder's signature.
...............................................................
Dealer Name and Address
By .............................................................................
Authorized Signature of Dealer
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------- ------------
..............................
- --------- ------------
Branch-Code F/C No. F/C Last Name
- --------- ---------------
- --------- ---------------
Dealer's Customer A/C No.
</TABLE>
42
<PAGE> 45
MERRILL LYNCH GROWTH FUND AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. ACCOUNT REGISTRATION
------------------------------------
Name of Owner.......................................................................
------------------------------------
Social Security No.
or Taxpayer Identification No.
Name of Co-Owner (if any)...........................................................
Address.............................................................................
.................................................................................... Account Number......................
(if existing account)
<CAPTION>
Name of Owner.......................................................................
Name of Co-Owner (if any)...........................................................
Address.............................................................................
....................................................................................
</TABLE>
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [ ] Class A or [ ] Class D shares in Merrill Lynch Growth Fund 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 ............... (month), or as soon as possible thereafter.
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 MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number .............................................................
Account Number..................................................................
Bank Address....................................................................
................................................................................
Signature of Depositor
..............................................................................
Date............................................................................
Signature of Depositor..........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
43
<PAGE> 46
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase: (choose one)
[ ] Class A shares [ ] Class B shares [ ] Class C
shares [ ] Class D shares
of Merrill Lynch Growth Fund subject to the terms set forth below. In the event
that I am not eligible to purchase Class A shares, I understand that Class D
shares will be purchased.
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Growth Fund 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
................................................................................
................................ (month)
or as soon thereafter as possible.
I agree that you are drawing these ACH debits voluntarily at my request and that
you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such check or debit. If I change banks or desire to
terminate or suspend this program, I agree to notify you promptly in writing. I
hereby authorize you to take any action to correct erroneous ACH debits of my
bank account or purchases of fund shares including liquidating shares of the
Fund and credit my bank account. I further agree that if a check or debit is not
honored upon presentation, Merrill Lynch Financial Data Services, Inc. is
authorized to discontinue immediately the Automatic Investment Plan and to
liquidate sufficient shares held in my account to offset the purchase made with
the returned check or dishonored debit.
................. .......................................
Date Signature of Depositor
.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO
HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
To..........................................................................Bank
(Investor's Bank)
Bank Address....................................................................
City............................................ State .......... Zip ..........
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Merrill Lynch
Financial Data Services, Inc. I agree that your rights in respect to each such
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked by me in writing.
Until you receive such notice, you shall be fully protected in honoring any such
debit. I further agree that if any such debit be dishonored, whether with or
without cause and whether intentionally or inadvertently, you shall be under no
liability.
................. .......................................
Date Signature of Depositor
................. .......................................
Bank Account 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.
44
<PAGE> 47
APPENDIX A
The Fund is authorized to use certain derivative instruments, including
options and futures and to purchase and sell foreign exchange, as described
below. Such instruments, which may be regarded as derivatives, are referred to
collectively herein as "Strategic Instruments."
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency Instruments"),
the Manager believes that, because the Fund will only engage in these
transactions for hedging purposes (other than options on securities which may be
used to seek increased return), the options and futures portfolio strategies of
the Fund will not subject the Fund to the risks frequently associated with the
speculative use of options and futures transactions. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of Fund shares, the Fund's net asset value will fluctuate. There can be no
assurance that the Fund's hedging transactions will be effective. Furthermore,
the Fund will only engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when movements in the equity
markets, interest rates or currency exchange rates occur. Reference is made to
the Statement of Additional Information for further information concerning these
strategies.
OPTIONS ON SECURITIES AND SECURITIES INDICES
Purchasing Options. For hedging purposes, the Fund is authorized to
purchase put options on equity securities held in its portfolio or securities
indices the performance of which is substantially correlated with securities
held in its portfolio. When the Fund purchases a put option, in consideration
for an upfront payment (the "option premium") the Fund acquires a right to sell
to another party specified securities owned by the Fund at a specified price
(the "exercise price") on or before a specified date (the "expiration date"), in
the case of an option on securities, or to receive from another party a payment
based on the amount a specified securities index declines below a specified
level on or before the expiration date, in the case of an option on a securities
index. The purchase of a put option limits the Fund's risk of loss in the event
of a decline in the market value of the portfolio holdings underlying the put
option prior to the option's expiration date. If the market value of the
portfolio holdings associated with the put option increases rather than
decreases, however, the Fund will lose the option premium and will consequently
realize a lower return on the portfolio holdings than would have been realized
without the purchase of the put.
The Fund is also authorized to purchase call options on securities held in
its portfolio on which it has written call options, securities it intends to
purchase or securities indices the performance of which substantially correlates
with the performance of the types of securities it intends to purchase. When the
Fund purchases a call option, in consideration for the option premium the Fund
acquires a right to purchase from another party specified securities at the
exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase of
a call option may protect the Fund from having to pay more for a security as a
consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option on a
security, or attempting to identify specific securities in which to invest in a
market the Fund believes to be attractive, in the case of an option on an index
(an "anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium.
A-1
<PAGE> 48
The Fund will not purchase put options on securities or securities indices
if, as a result of such purchase, the aggregate cost of all outstanding options
on securities and securities indices held by the Fund would exceed 5% of the
market value of the Fund's total assets. The Fund is also authorized to purchase
put or call options in connection with closing out put or call options it has
previously sold.
Writing Options. The Fund is authorized to write (i.e., sell) call options
on equity securities held in its portfolio or securities indices the performance
of which is substantially correlated with securities held in its portfolio. When
the Fund writes a call option, in return for an option premium the Fund gives
another party the right to buy specified securities owned by the Fund at the
exercise price on or before the expiration date, in the case of an option on
securities, or agrees to pay to another party an amount based on any gain in a
specified securities index beyond a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write call
options on securities to earn income, through the receipt of option premiums;
the Fund may write call options on securities indices for hedging purposes. In
the event the party to which the Fund has written an option fails to exercise
its rights under the option because the value of the underlying securities is
less than the exercise price, the Fund will partially offset any decline in the
value of the underlying securities through the receipt of the option premium. By
writing a call option, however, the Fund limits its ability to sell the
underlying securities, and gives up the opportunity to profit from any increase
in the value of the underlying securities beyond the exercise price, while the
option remains outstanding. The Fund may not write covered call options in
underlying securities in an amount exceeding 15% of the market value of its
total assets.
The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount based on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options on securities to earn income, through the receipt of option premiums;
the Fund may write put options on securities indices for hedging purposes. In
the event the party to which the Fund has written an option fails to exercise
its rights under the option because the value of the underlying securities is
greater than the exercise price, the Fund will profit by the amount of the
option premium. By writing a put option, however, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of the security at the time of exercise as long as the put option is
outstanding, in the case of an option on a security, or make a cash payment
reflecting any decline in the index, in the case of an option on an index.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying securities falls below the exercise
price, which loss potentially may substantially exceed the amount of option
premium received by the Fund for writing the put option. The Fund will write a
put option on a security or a securities index only if the Fund would be willing
to purchase the security at the exercise price for investment purposes (in the
case of an option on a security) or is writing the put in connection with
trading strategies involving combinations of options - for example, the sale and
purchase of options with identical expiration dates on the same security or
index but different exercise prices (a technique called a "spread").
The Fund is also authorized to sell put or call options in connections with
closing out call options it has previously purchased.
Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to
A-2
<PAGE> 49
such option in the manner described in "Risk Factors in Options, Futures and
Currency Instruments" below. A call option will also be considered covered if
the Fund owns the securities it would be required to deliver upon exercise of
the option (or, in the case of option on a securities index, securities that
substantially correlate with the performance of such index) or owns a call
option, warrant or convertible instrument which is immediately exercisable for,
or convertible into, such security.
Types of Options. The Fund may engage in transactions in the options on
securities or securities indices described above on exchanges and in the
over-the-counter ("OTC") markets. In general, exchange-traded options have
standardized exercise prices and expiration dates and require the parties to
post margin against their obligations, and the performance of the parties'
obligations in connection with such options is guaranteed by the exchange or a
related clearing corporation. OTC options have more flexible terms negotiated
between the buyer and seller, but generally do not require the parties to post
margins and are subject to greater risk of counterparty default. See "Additional
Risk Factors of OTC Transactions; Limitations on the Use of OTC Strategic
Instruments" below.
FUTURES
The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity at
a specified future date at a specified price. No price is paid upon entering a
futures contract. Rather, upon purchasing or selling a futures contract the Fund
is required to deposit collateral ("margin") equal to a percentage (generally
less than 10%) of the contract value. Each day thereafter until the futures
position is closed, the Fund will pay additional margin representing any loss
experienced as a result of the futures position the prior day or be entitled to
a payment representing any profit experienced as a result of the futures
position the prior day.
The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the future's contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive. In
the event that such securities decline in value or the Fund determines not to
complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying commodity
is a currency or securities or interest rate index) purchased or sold for
hedging purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool operator" under regulations
of the Commodity Futures Trading Commission.
A-3
<PAGE> 50
FOREIGN EXCHANGE TRANSACTIONS
The Fund may engage in spot and forward foreign exchange transactions,
purchase and sell options on currencies and purchase and sell currency futures
and related options thereon (collectively, "Currency Instruments") for purposes
of hedging against possible variations in foreign exchange rates. Such
transactions may be effected with respect to hedges on non-U.S. dollar
denominated securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.
Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date (up to one year) set at the time of the contract. Spot
foreign exchange transactions are similar but require current, rather than
future, settlement. The Fund will enter into foreign exchange transactions only
for purposes of hedging either a specific transaction or a portfolio position.
The Fund may enter into a foreign exchange transaction for purposes of hedging a
specific transaction by, for example, purchasing a currency needed to settle a
security transaction or selling a currency in which the Fund has received or
anticipates receiving a dividend or distribution. The Fund may enter into a
foreign exchange transaction for purposes of hedging a portfolio position by
selling forward a currency in which a portfolio position of the Fund is
denominated or by purchasing a currency in which the Fund anticipates acquiring
a portfolio position in the near future.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.
The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through the use of currency options. Currency options
are similar to options on securities, but in consideration for an option premium
the writer of a currency option is obligated to sell (in the case of a call
option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and "Additional
Risk Factors of OTC Transactions; Limitations on the Use of OTC Strategic
Instruments" below.
The Fund will not speculate in Currency Instruments. Accordingly, the fund
will not hedge a currency in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities sales),
or has committed to or anticipates purchasing, which are denominated in such
currency. The Fund may not incur potential net liabilities of more than 20% of
its total assets from foreign currency options, futures or related options. The
Fund will not necessarily attempt to hedge all of its foreign portfolio
positions.
Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective. To the extent that the Fund hedges against
anticipated currency movements which do not occur, the Fund may realize losses,
and decrease its total return, as the result of its hedging transactions.
Furthermore, the Fund will only engage in hedging activities from time to time
and may not be engaging in hedging activities when movements in currency
exchange rates occur. It may not be possible for the Fund to hedge against
currency exchange rate movements, even if correctly anticipated, in the event
that
A-4
<PAGE> 51
(i) the currency exchange rate is so generally anticipated that the Fund is not
able to enter into a hedging transaction at an effective price, or (ii) the
currency exchange rate movement relates to a market with respect to which
Currency Instruments are not available (such as certain developing markets) and
it is not possible to engage in effective foreign currency hedging.
RISK FACTORS IN OPTIONS, FUTURES, AND CURRENCY INSTRUMENTS
Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments and
the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments the fund
will experience a gain or loss which will not be completely offset by movements
in the value of the hedged instruments.
The Fund intends to enter into transactions involving Strategic Instruments
only if there appears to be an illiquid secondary market for such instruments
or, in the case of illiquid instruments traded in OTC transactions, such
instruments satisfy the criteria set forth below under "Additional Risk Factors
of OTC Transactions; Limitations on the Use of OTC Strategic Instruments."
However, there can be no assurance that, at any specific time, either a liquid
secondary market will exist for a Strategic Instrument or the Fund will
otherwise be able to sell such instrument at an acceptable price. It may
therefore not be possible to close a position in a Strategic Instrument without
incurring substantial losses, if at all.
Certain transactions in Strategic Instruments (e.g., forward foreign
exchange transactions, futures transactions, sales of put options) may expose
the Fund to potential losses that exceed the amount originally invested by the
Fund in such instruments. When the Fund engages in such a transaction, the Fund
will deposit in a segregated account at its custodian liquid securities with a
value at least equal to the Fund's exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Securities and
Exchange Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transaction, but will
not limit the Fund's exposure to loss.
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS
Certain Strategic Instruments traded in OTC markets, including OTC options,
may be substantially less liquid than other instruments in which the Fund may
invest. The absence of liquidity may make it difficult or impossible for the
Fund to sell such instruments promptly at an acceptable price. The absence of
liquidity may also make it more difficult for the Fund to ascertain a market
value for such instruments. The Fund will therefore acquire illiquid OTC
instruments (i) if the agreement pursuant to which the instrument is purchased
contains a formula price at which the instrument may be terminated or sold, or
(ii) for which the Manager anticipates the Fund can receive on each business day
at least two independent bids or offers, unless a quotation from only one dealer
is available, in which case that dealer's quotation may be used.
The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding that are held by the Fund,
the market value of the securities underlying OTC call options currently
outstanding that have been sold by the Fund and margin deposits on the Fund's
outstanding OTC
A-5
<PAGE> 52
Moptions exceeds 15% of the total assets of the Fund, taken at market value,
together with all other assets of the Fund that are deemed to be illiquid or are
otherwise not readily marketable. However, if an OTC option is sold by the Fund
to a dealer in U.S. government securities recognized as a "primary dealer" by
the Federal Reserve Bank of New York and the Fund has the unconditional
contractual right to repurchase such OTC option at a predetermined price, then
the Fund will treat as illiquid such amount of the underlying securities as
equal to the repurchase price less the amount by which the option is
"in-the-money" (i.e., current market value of the underlying security minus the
option's exercise price).
Because Strategic Instruments traded in OTC markets are not guaranteed by
an exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in transactions
in Strategic Instruments traded in OTC markets only with financial institutions
which have substantial capital or which have provided the Fund with a
third-party guaranty or other credit enhancement.
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
The Fund may not use any Strategic Instrument to gain exposure to an asset
or class of assets that it would be prohibited by its investment restrictions
from purchasing directly.
A-6
<PAGE> 53
[This page is intentionally left blank.]
<PAGE> 54
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive P2N
North Quincy, Massachusetts 02171
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
<PAGE> 55
- ------
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 REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................. 2
Merrill Lynch Select Pricing(SM) System... 4
Financial Highlights...................... 9
Investment Objectives and Policies........ 12
Other Investment Policies and
Practices............................. 15
Investment Restrictions................. 17
Management of the Fund.................... 18
Trustees................................ 18
Management and Advisory Arrangements.... 18
Code of Ethics.......................... 19
Transfer Agency Services................ 20
Purchase of Shares........................ 20
Initial Sales Charge
Alternatives -- Class A and Class D
Shares................................ 23
Deferred Sales Charge Alternatives --
Class B and Class C Shares............ 25
Distribution Plans...................... 28
Limitations on the Payment of Deferred
Sales Charges......................... 30
Redemption of Shares...................... 30
Redemption.............................. 30
Repurchase.............................. 31
Reinstatement Privilege -- Class A and
Class D Shares........................ 31
Shareholder Services...................... 32
Investment Account...................... 32
Exchange Privilege...................... 32
Automatic Reinvestment of Dividends and
Capital Gains Distributions........... 34
Systematic Withdrawal Plans............. 34
Automated Investment Plans.............. 34
Fee-Based Programs...................... 34
Taxes..................................... 35
Performance Data.......................... 37
Additional Information.................... 38
Dividends and Distributions............. 38
Determination of Net Asset Value........ 38
Organization of the Fund................ 39
Shareholder Reports..................... 40
Shareholder Inquiries................... 40
Authorization Form........................ 41
Appendix A................................ A-1
Code #10479-02967
</TABLE>
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GROWTH FUND
PROSPECTUS
February 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
[MERRILL LYNCH COMPASS ART]
<PAGE> 56
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH GROWTH FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
The investment objectives of Merrill Lynch Growth Fund (the "Fund") are to
seek growth of capital and, secondarily, income by investing in a diversified
portfolio of primarily equity securities placing principal emphasis on those
securities which management of the Fund believes to be undervalued. The
portfolio of the Fund generally will be managed without regard to tax
considerations applicable to distributions to shareholders and therefore its
shares may particularly appeal to investors for whom current tax liability is
not a major consideration, such as employee benefit plans and individual
retirement accounts ("IRAs"). There can be no assurance that the investment
objectives of the Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.
------------------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated
February 24, 1997 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is February 24, 1997.
<PAGE> 57
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Fund are to seek growth of capital and,
secondarily, income by investing in a diversified portfolio of primarily equity
securities placing principal emphasis on those securities that management of the
Fund believes to be undervalued. Reference is made to "Investment Objectives and
Policies" in the Prospectus for a discussion of the investment objectives and
policies of the Fund.
The Fund is classified as a non-diversified fund under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and is not
subject to the diversification requirements of the Investment Company Act. This
policy is fundamental and may only be changed by shareholder vote. Accordingly,
the Fund may invest more than 5% of the value of its assets in the obligations
of a single issuer and may acquire more than 10% of the voting securities of a
single issuer. However, the Fund remains subject to the diversification
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), in order to qualify as a regulated investment company (a "RIC")
for U.S. federal income tax purposes. In order to qualify as a RIC under the
Code, the Fund must comply with certain requirements, including limiting its
investments so that at the close of each quarter of the taxable year (i) not
more than 25% of the market value of the Fund's total assets are invested in the
securities of a single issuer, or any two or more issuers which are controlled
by the Fund and engaged in the same, similar or related businesses, and (ii)
with respect to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets are invested in the securities of a single
issuer, and the Fund does not own more than 10% of the outstanding voting
securities of a single issuer. Investments in the securities of the U.S.
Government, its agencies and instrumentalities are not included within the
definition of "issuer" for purposes of the diversification requirements of the
Code, while foreign government securities are included within such definition.
Although operating as a non-diversified fund increases the flexibility with
which Merrill Lynch Asset Management, L.P., (the "Manager" or "MLAM") manages
the Fund's assets, to the extent the Fund invests a relatively high percentage
of its assets in obligations of a limited number of issuers, the Fund may be
more susceptible than would be a more widely diversified fund to any single
economic, political or regulatory occurrence or to changes in an issuer's
financial condition or in the market's assessment of the issuers.
While the Fund generally does not expect to engage in trading for
short-term gains, it will effect portfolio transactions without regard to
holding period if, in its management's judgment, such transactions are advisable
in light of a change in circumstances of a particular company or within a
particular industry or in general market, economic or financial conditions. As a
result of the Fund's investment policies, under certain market conditions, the
Fund's portfolio turnover may be higher than that of other investment companies.
Accordingly, while the Fund anticipates that its annual turnover rate should not
exceed 100% under normal conditions, it is impossible to predict portfolio
turnover rates. The portfolio turnover rate is calculated by dividing the lesser
of the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of all securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of the securities in the
portfolio during the year. The rates of portfolio turnover for the fiscal years
ended October 31, 1995 and 1996, were 37.42% and 30.01%, respectively.
2
<PAGE> 58
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion in the Appendix to the Prospectus for
information with respect to various portfolio strategies involving options and
futures. The following is further information relating to portfolio strategies
the Fund may utilize involving options and futures.
Writing Options. The Fund is authorized to write (i.e., sell) covered call
options on the equity securities in which it may invest or on securities
indices, the performance of which is substantially correlated with the
securities held in its portfolio. These transactions are described more fully in
the Appendix to the Prospectus. The following is additional information about
covered call options.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security.
As discussed in the Appendix to the Prospectus, the Fund also may write put
options on securities or securities indices. The Fund writes only covered put
options, which means that so long as the Fund is obligated as the writer of the
option, it will, through its custodian, have deposited and maintained cash, cash
equivalents, U.S. Government securities or other liquid securities denominated
in U.S. dollars or non-U.S. currencies with a securities depository with a value
equal to or greater than the exercise price of the underlying securities.
The Fund may engage in closing transactions in order to terminate put or
call options that it has written.
Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the "Clearing Corporation") which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock
Exchange. Options referred to herein and in the Fund's Prospectus may also be
options traded on foreign securities exchanges such as the London Stock Exchange
and the Amsterdam Stock Exchange. An option position may be closed out only on
an exchange which provides a secondary market for an option of the same series.
If a secondary market does not exist, it might not be possible to effect closing
transactions in particular options, with the result, in the case of a covered
call option, that the Fund will not be able to sell the underlying security
until the option expires or until it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
the Clearing Corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by the Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
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The Fund may also enter into over-the-counter put and call option
transactions ("OTC options"), which are two-party contracts with price and terms
negotiated between the buyer and seller. The staff of the Securities and
Exchange Commission (the "Commission") has taken the position that OTC options
and the assets used as cover for written OTC options are illiquid securities.
Purchasing Options. The Fund may purchase put options on securities held in
its portfolio, or on securities indices the performance of which is
substantially correlated with securities held in its portfolio. These
transactions are described more fully in the Appendix to the Prospectus. By
buying a put, the Fund has a right to sell the underlying security at the
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be offset partially by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction cost. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. The
Fund will purchase only put options traded on an exchange. In addition, as
described more fully in the Appendix to the Prospectus, the Fund may also be
authorized to purchase call options on securities held in its portfolio on which
it has written call options, securities it intends to purchase or securities
indices the performance of which substantially correlates with the performance
of the types of securities it intends to purchase. The Fund may purchase either
exchange traded options or OTC options. The Fund will not purchase options on
securities (including options on indices) if, as a result of such purchase, the
aggregate cost of all outstanding options on securities held by the Fund would
exceed 5% of the market value of the Fund's total assets.
Futures. As described in the Appendix to the Prospectus, the Fund will
limit transactions in futures and options on futures to financial futures
contracts (i.e., contracts for which the underlying commodity is a currency or
securities or interest rate index) purchased or sold for hedging purposes
(including anticipatory hedges). See the Appendix to the Prospectus. Set forth
below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
particular commodity, such as a security, or, in the case of an index-based
futures contract, to make and accept a cash settlement for a set price on a
future date. A majority of transactions in futures contracts, however, do not
result in the actual delivery of the underlying instrument or cash settlement,
but are settled through liquidation, i.e., by entering into an offsetting
transaction. Futures contracts have been designed by boards of trade which have
been designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC").
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally less than 10% of the contract amount,
must be deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin", are required to be made on a daily basis as
the price of the futures contracts fluctuates making the long and short
positions in the futures contracts more or less valuable, a process known as
"mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the
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futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the broker and the
purchaser realizes a loss or gain. In addition, a nominal commission is paid on
each completed sale transaction.
The Fund has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act") in connection with its strategy
of investing in futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Fund and commodities brokers with
respect to initial and variation margin. Section 18(f) of the Investment Company
Act prohibits an open-end investment company such as the Fund from issuing a
"senior security" other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a futures contract may be a "senior
security" under the Investment Company Act.
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund permit the Fund's futures and options on futures
transactions to include (i) bona fide hedging transactions without regard to the
percentage of the Fund's assets committed to margin and option premiums, and
(ii) non-hedging transactions, provided that the Fund may not enter into such
transactions for yield enhancement or risk management purposes if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and option premiums would exceed 5% of the market
value of the Fund's liquidating value after taking into account unrealized
profits and unrealized losses on any such transactions. However, the Fund
intends to engage in options and futures transactions only for hedging purposes.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or liquid securities will be deposited in a segregated account with
the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.
Foreign Exchange Transactions. Generally, the foreign exchange transactions
of the Fund will be conducted on a spot (i.e., cash) basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate in
an amount generally less than 0.15% of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to deal
in forward foreign exchange among currencies of the different countries in which
it will invest as a hedge against possible variations in the foreign exchange
rate among these currencies. This is accomplished through contractual agreements
to purchase or sell a specified currency at a specified future date and price
set at the time of the contract. The Fund's dealings in forward foreign exchange
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities, and sale
and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
The Fund may not position hedge with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular foreign currency. If the Fund enters into a position hedging
transaction, its custodian bank will place cash or liquid equity or debt
securities in a separate account of the Fund in an amount equal to the value of
the Fund's total assets committed to the consummation of such forward contract.
If the value of the securities
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placed in the separate account declines, additional cash or securities will be
placed in the account so that the value of the account will equal the amount of
the Fund's commitment with respect to such contracts. The Fund will not attempt
to hedge all of its foreign portfolio positions and will enter into such
transactions only to the extent, if any, deemed appropriate by the Manager. The
Fund will not enter into a forward contract with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
("OTC") foreign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in United States dollars of an investment in a sterling denominated
security. In such circumstances, for example, the Fund may purchase a foreign
currency put option enabling it to sell a specified amount of pounds for dollars
at a specified price by a future date. To the extent the hedge is successful, a
loss in the value of the pound relative to the dollar will tend to be offset by
an increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Fund may also sell a call option which,
if exercised, requires it to sell a specified amount of pounds for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the pound to the
dollar. The Manager believes that "straddles" of the type that may be utilized
by the Fund constitute hedging transactions and are consistent with the policies
described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the prices of futures contracts and movements in the
price of the securities or currency which are the subject of the hedge. If the
price of the futures contract moves more or less than the price of the
securities or currency, the Fund will experience a gain or loss which will not
be completely offset by movements in the price of the hedged securities or
currency which is the subject of the hedge.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an exchange
only if there appears to be a liquid secondary market for such options or
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular call or put option or futures contract at any specific
time. Thus, it may not be possible to close an option or futures position. The
Fund will acquire only OTC options for which management believes the Fund can
receive on each business day at least two independent bids or offers, unless a
quotation from only one dealer is available, in which case that dealer's
quotation may be used. In the
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case of a futures position or an option on a futures position written by the
Fund, in the event of adverse price movements, the Fund would continue to be
required to make daily cash payments of variation margin. In such situations, if
the Fund has insufficient cash, it may have to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. In addition, the Fund may be required to take or make delivery of the
currency underlying futures contracts it holds. The inability to close options
and futures positions also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker or futures commission
merchant with whom the Fund has an open position in a futures contract or
related option.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying currency (whether or not covered) which may
be written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number of contracts that
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Manager does not believe that these
trading and position limits will have any adverse impact on the portfolio
strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Transactions. Since portfolio transactions may be effected on
foreign securities exchanges, the Fund may incur settlement delays on certain of
such exchanges. Where possible, the Fund will deal directly with the dealers who
make a market in the securities involved except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve either brokerage commissions
or transfer taxes. Securities firms may receive brokerage commissions on certain
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon exercise of
options. The Fund has no obligation to deal with any broker in the execution of
transactions in portfolio securities. Under the Investment Company Act, persons
affiliated with the Fund, including Merrill Lynch, are prohibited from dealing
with the Fund as a principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Affiliated persons of the Fund, and affiliated persons of such affiliated
persons, may serve as its broker in transactions conducted on an exchange and in
over-the-counter transactions conducted on an agency basis. In addition,
consistent with the National Association of Securities Dealers, Inc. ("NASD")
Conduct Rules, the Fund may consider sales of shares of the Fund as a factor in
the selection of brokers or dealers to execute portfolio transactions for the
Fund. It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch. Costs associated with transactions in foreign securities are
generally higher than with transactions in U.S. securities, although the Fund
will endeavor to achieve the best net results in effecting such transactions.
When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction.
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Although the Fund has not established any limit on the percentage of its assets
that may be committed in connection with such transactions, the Fund will
maintain a segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies in an aggregate amount equal to the amount
of its commitment in connection with such purchase transactions.
Standby Commitment Agreements. The Fund may from time to time enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security which may
be issued and sold to the Fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. At the time of entering
into the agreement, the Fund is paid a commitment fee, regardless of whether or
not the security is ultimately issued, which is typically approximately 0.5% of
the aggregate purchase price of the security that the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price
considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 90 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 15% of its
total assets taken at the time of acquisition of such commitment or security.
The Fund will at all times maintain a segregated account with its custodian of
cash, cash equivalents, U.S. Government securities or other high grade liquid
debt securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
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 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
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Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of the collateral. In the event of a default under such a
repurchase agreement, instead of the contractual fixed rate of return, the rate
of return to the Fund shall be dependent upon intervening fluctuations of the
market value of such security and the accrued interest on the security. In such
event, the Fund would have rights against the seller for breach of contract with
respect to any losses arising from market fluctuations following the failure of
the seller to perform.
Investment in Lower Rated Debt Securities: As described in the Fund's
Prospectus, the Fund may invest in debt securities rated below investment grade
by a nationally recognized rating agency (e.g., rated below Baa by Moody's
Investors Services, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group
("S&P")) or in unrated debt securities which, in the judgment of MLAM, possess
similar credit characteristics as debt securities rated investment grade or debt
securities rated below investment grade (commonly known as "junk bonds").
Investment in junk bonds involves substantial risk. Securities rated Ba or
lower by Moody's or BB or lower by S&P are considered by those rating agencies
to be predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security, and generally
involve greater volatility of price than securities in higher rating categories.
More specifically, junk bonds may be issued by less creditworthy companies or by
larger, highly leveraged companies and are frequently issued in corporate
restructurings such as mergers and leveraged buyouts. Such securities are
particularly vulnerable to adverse changes in the issuer's industry and in
general economic conditions. Junk bonds frequently are junior obligations of
their issuers, so that in the event of the issuer's bankruptcy, claims of the
holders of junk bonds will be satisfied only after satisfaction of the claims of
senior security holders. While the junk bonds in which the Fund intends to
invest do not include securities which, at the time of investment, are in
default or the issuers of which are in bankruptcy, there can be no assurance
that such events will not occur after the Fund purchases a particular security,
in which case the Fund may experience losses and incur costs.
Junk bonds tend to be more volatile than higher rated fixed income
securities so that adverse economic events may have a greater impact on the
prices of junk bonds than on higher rated fixed income securities. Like higher
rated fixed income securities, junk bonds are generally purchased and sold
through dealers who make a market in such securities for their own accounts.
However, there are fewer dealers in the junk bond market, which may be less
liquid than the market for higher rated fixed income securities even under
normal economic conditions. Also, there may be significant disparities in the
prices quoted for junk bonds by various dealers. Adverse economic conditions or
investor perceptions (whether or not based on economic fundamentals) may impair
the liquidity of this market and may cause the prices the Fund receives for its
junk bonds to be reduced, or the Fund may experience difficulty in liquidating a
portion of its portfolio. Under such conditions, judgment may play a greater
role in valuing certain of the Fund's portfolio securities than in the case of
securities trading in a more liquid market.
Lending of Portfolio Securities. Subject to the investment restrictions
stated below, the Fund may lend securities from its portfolio to approved
borrowers and receive collateral in cash or securities issued or guaranteed by
the United States Government. Such collateral is maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If cash
collateral is received by the Fund, it is invested in short-term money market
securities, and a portion of the yield received in respect of such investment is
retained by the Fund. Alternatively, if securities are delivered to the
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Fund as collateral, the Fund and the borrower negotiate a rate for the loaned
premium to be received by the Fund for lending its portfolio securities. In
either event, the total yield on the Fund's portfolio is increased by loans of
its portfolio securities. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions and policies
relating to the investment of its assets and its activities. The fundamental
restrictions set forth below may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, which for
this purpose and under the Investment Company Act means the lesser of (i) 67% of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares. Under
its fundamental restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a non-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 securities directly or indirectly
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in
governmental obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers' acceptances, repurchase agreements or any
similar instruments shall not be deemed to be the making of a loan, and
except further that the Fund may lend its portfolio securities, provided
that the lending of portfolio securities may be made only in accordance
with applicable law and the guidelines set forth in the Fund's Prospectus
and Statement of Additional Information, as they may be amended from time
to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
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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.
The Fund has also adopted certain non-fundamental investment restrictions,
which may be changed by the Trustees without approval by the shareholders. Under
its 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 Trustees of the Fund have
otherwise determined to be liquid pursuant to applicable law. Securities
purchased in accordance with Rule 144A under the Securities Act and
determined to be liquid by the Fund's Board of Trustees are not subject to
the limitations set forth in this investment restriction.
d. Notwithstanding fundamental restriction (7) above, borrow amounts
in excess of 20% of its total assets, taken at market value (including the
amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
In addition, the Fund will not purchase securities while borrowings are
outstanding except to honor prior commitments and to exercise subscription
rights.
The staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased OTC options and the assets used as cover for
written OTC options are illiquid securities. Therefore, the Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options
(including OTC options on futures contracts) if, as a result of such
transaction, the sum of the market value of OTC options currently outstanding
that are held by the Fund, the market value of the underlying securities covered
by OTC call options currently outstanding that were sold by the Fund and margin
deposits on the Fund's existing OTC options on futures contracts exceeds 15% of
the total assets of the Fund taken at market value, together with all other
assets of the Fund that are illiquid or are not otherwise readily marketable.
However, if the OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (i.e., current market value of the
underlying securities minus the option's strike price). The
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repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money". This policy as to OTC options is
not a fundamental policy of the Fund and may be amended by the Trustees of the
Fund, without the approval of the Fund's shareholders. However, the Fund will
not change or modify this policy prior to the change or modification by the
Commission staff of its position.
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, general
partners, officers or employees, acting as principal, unless pursuant to a rule
or exemptive order under the Investment Company Act.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm, or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions and
Brokerage." Without such an exemptive order, the Fund is prohibited from
engaging in portfolio transactions with Merrill Lynch or its affiliates acting
as principal and from purchasing securities in public offerings which are not
registered under the Securities Act or are not municipal securities as defined
in the Securities Exchange Act of 1934, in which such firms or any of its
affiliates participate as an underwriter or dealer.
12
<PAGE> 68
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Trustee is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64) -- President and Trustee(1)(2) -- President of the
Manager (which term as used herein includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of ML & Co. since 1990; Director of Merrill Lynch Funds Distributor,
Inc. ("MLFD" or the "Distributor") since 1977.
JAMES H. BODURTHA(53) -- Trustee(2) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.
HERBERT I. LONDON (57) -- Trustee(2) -- New York University -- Gallatin
Division, 113-115 University Place, New York, New York 10003. John M. Olin
Professor of Humanities, New York University and Professor thereof since 1973;
Dean, Gallatin Division of New York University from 1978 to 1993 and Director
from 1975 to 1976; Distinguished Fellow, Herman Kahn Chair, Hudson Institute
from 1984 to 1985; Director, Damon Corporation since 1991; Overseer, Center for
Naval Analyses.
ROBERT R. MARTIN (69) -- Trustee(2) -- 513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from 1990
to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989; Director,
Carnegie Capital Management from 1977 to 1985 and Chairman thereof in 1979;
Director, Securities Industry Association from 1981 to 1982 and Public
Securities Association from 1979 to 1980; Chairman of the Board, WTC Industries
Inc., in 1994; Trustee, Northland College since 1992.
JOSEPH L. MAY (67) -- Trustee(2) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman, The
May Corporation (personal holding company) from 1972 to 1983; Director, Signal
Apparel Co. since 1972.
ANDRE F. PEROLD (44) -- Trustee(2) -- Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and Associate
Professor from 1983 to 1989; Trustee, The Common Fund, since 1989; Director,
Quantec Limited since 1991 and TIBCO from 1994 to 1996.
TERRY K. GLENN (56) -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of MLFD since 1986 and
Director thereof since 1991; President of Princeton Administrators, L.P. since
1988.
NORMAN R. HARVEY (63) -- Senior Vice President(1) -- Senior Vice President
of the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
13
<PAGE> 69
DONALD C. BURKE (36) -- Vice President(1)(2) -- Vice President and Director
of Taxation of MLAM since 1990; employee of Deloitte & Touche LLP from 1982 to
1990.
STEPHEN C. JOHNES (60) -- Vice President(1) -- Vice President of the
Manager since 1987; Managing Director of the Trust Company of the West from 1983
to 1986 and Senior Vice President from 1980 to 1982.
ARTHUR MORETTI (33) -- Vice President(1) -- Vice President of MLAM since
1992; Assistant Vice President, Equity Derivatives, First Boston from 1989 to
1991.
GERALD M. RICHARD (47) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993; Treasurer of the Distributor since 1984 and
Vice President since 1981.
JERRY WEISS (38) -- Secretary(1)(2) -- Vice President of the Manager since
1990; Attorney in private practice from 1982 to 1990.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee or officer is a trustee, director or officer of other
investment companies for which the Manager or FAM acts as Manager.
At October 31, 1996, the officers and Trustees of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of common
stock of ML & Co. and owned an aggregate of less than 1% of the outstanding
shares of the Fund.
The Fund pays each Trustee not affiliated with the Manager a fee of $5,000
per year plus $500 per meeting attended, together with such Trustee's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit Committee, which consists of all of the non-
interested Trustees at the rate of $1,000 annually, plus $250 per meeting
attended. For the fiscal year ended October 31, 1996, fees and expenses paid to
non-interested Trustees aggregated $45,397.
The following table sets forth for the fiscal year ended October 31, 1996,
compensation paid by the Fund to the non-interested Trustees and for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
investment companies (including the Fund) advised by MLAM and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-interested Trustees:
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM FUND AND
AGGREGATE PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
NAME OF TRUSTEE FROM FUND PART OF FUND EXPENSES TRUSTEE(1)
- ---------------------------------------- ------------ ---------------------- ----------------
<S> <C> <C> <C>
James H. Bodurtha....................... $9,000 None $148,500
Herbert L. London....................... $9,000 None $148,500
Robert R. Martin........................ $9,000 None $148,500
Joseph L. May........................... $9,000 None $148,500
Andre F. Perold......................... $9,000 None $148,500
</TABLE>
- ---------------
(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Bodurtha (22 registered investment companies consisting of 46 portfolios);
Mr. London (22 registered investment companies consisting of 46 portfolios);
Mr. Martin (22 registered investment companies consisting of 46 portfolios);
Mr. May (22 registered investment companies consisting of 46 portfolios);
and Mr. Perold (22 registered investment companies consisting of 46
portfolios).
14
<PAGE> 70
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Fund -- Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
Securities may be held by, or be appropriate investments for, other funds
or investment advisory clients for which the Manager or its affiliates act as an
adviser. Because of different objectives or other factors, a particular security
may be bought for one or more clients when one or more clients are selling the
same security. If purchases or sales of securities by the Manager for the Fund
or other funds for which it acts as investment adviser or for its advisory
clients arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Manager or its affiliates during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). The Fund pays the Manager a monthly fee at the annual
rate of 0.65% of the average daily net assets of the Fund. The Manager has
voluntarily agreed to waive a portion of its management fee so that such fee is
equal to 0.65% of average daily net assets not exceeding $1 billion; 0.625% of
average daily net assets exceeding $1 billion but not exceeding $1.5 billion;
and 0.60% of average daily net assets exceeding $1.5 billion. For the fiscal
years ended October 31, 1994 and 1995, the fees paid by the Fund to the Manager
were $10,000,754 and $15,372,837, respectively. For the fiscal year ended
October 31, 1996, the fee paid by the Fund, net of fee waiver, to the Manager
was $24,808,434. The Manager is owned and controlled by ML & Co.
The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Trustees of the Fund who are affiliated persons of the Manager or any of its
subsidiaries. The Fund pays all other expenses incurred in the operation of the
Fund, including, among other things, taxes; expenses for legal and auditing
services; costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor); charges of the custodian, any sub-custodian and transfer
agent; expenses of redemption of shares; Securities and Exchange Commission
fees; expenses of registering the shares under Federal, state or foreign laws;
fees and expenses of nonaffiliated Trustees; accounting and pricing costs
(including the daily calculation of net asset value); insurance; interest;
brokerage costs; litigation and other extraordinary or non-recurring expenses;
and other expenses properly payable by the Fund. The Distributor will pay the
promotional expenses of the Fund in connection with the offering of its shares.
Certain expenses will be financed by the Fund pursuant to a distribution plan in
compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Distribution Plans".
The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co.,
and an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K. a
fee for providing investment advisory services to the Manager with respect to
the Fund in an amount to be determined from time to time by the Manager and MLAM
U.K. but in no
15
<PAGE> 71
event in excess of the amount that the Manager actually receives for providing
services to the Fund pursuant to the Management Agreement.
Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees or by a majority of the outstanding shares of the
Fund and (b) by a majority of the Trustees who are not parties to such contract
or interested persons (as defined in the Investment Company Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by the vote
of the shareholders of the Fund.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives and shares of Class B and Class C are sold
to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents an identical interest
in the investment portfolio of the Fund, and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs resulting
from the deferred sales charge arrangements. Class B, Class C and Class D shares
each have exclusive voting rights with respect to the Rule 12b-1 distribution
plan adopted with respect to such class pursuant to which 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(SM) System is used by more than 50
registered investment companies advised by the Manager or an affiliate of the
Manager, FAM. Funds advised by the Manager or FAM which utilize the Merrill
Lynch Select Pricing(SM) System 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 Management 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 years ended
October 31, 1996, 1995 and 1994 were $209,100, $324,057, and $1,400,380,
respectively, of which the Distributor received $13,960, $20,065, and $88,004,
respectively, and Merrill Lynch received $195,140, $303,992, and $1,312,376,
respectively. For the fiscal years ended October 31, 1996 and 1995 the
Distributor received no CDSCs with respect to Class A shares for which the
initial sales charge was waived. For the fiscal year ended October 31, 1994 the
Distributor received CDSCs of $527 with respect to Class A shares for which the
initial sales charge was waived. The gross sales charges for the sale of Class D
shares for the fiscal years ended October 31, 1996, and
16
<PAGE> 72
1995, and for the fiscal period October 21, 1994 (commencement of operations) to
October 31, 1994, were $1,560,492, $1,639,227, and $22,745, respectively, of
which the Distributor received $100,325, $102,417 and $791, respectively, and
Merrill Lynch received $1,460,167, $1,536,810 and $21,954, respectively. For the
fiscal year ended October 31, 1996 and the fiscal period October 21, 1994
(commencement of operations) to October 31, 1994, the distributor received no
CDSCs with respect to Class D shares for which the initial sales charge was
waived. For the fiscal year ended October 31, 1995, the Distributor received
CDSCs of $14,137, with respect to Class D shares for which the initial sales
charge was waived.
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 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
Rights 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 the Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent, Merrill Lynch Financial
Data Services, Inc. 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
17
<PAGE> 73
mutual funds presently held at a 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 execution of such Letter, the difference between
the sales charge on the Class A or Class D shares purchased at the reduced rate
and the sales charge applicable to the shares actually purchased through the
Letter. Class A or Class D shares equal to five percent of the intended amount
will be held in escrow during the 13-month period (while remaining registered in
the name of the purchaser) for this purpose. The first purchase under the Letter
of Intention must be at least five percent of the dollar amount of such Letter.
If a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to 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 mutual fund into the Fund
that creates a sales charge will count toward completing a new or existing
Letter of Intention from the Fund.
Merrill Lynch Blueprint(SM) Program. Class D shares of the Fund are offered
to participants in the Merrill Lynch Blueprint(SM) Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group IRAs and participants in certain affinity
groups such as 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 or Class D shares. 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.
Class A and Class D shares are offered at net asset value, with a waiver of
the front-end sales charge, 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 Employee
Sponsored Retirement and Savings Plans (as defined below) whose Trustee and/or
Plan Sponsor has entered into a Merrill Lynch Directed IRA Rollover Program
Service Agreement. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
18
<PAGE> 74
Employee Access Accounts(SM). Class A or Class D shares are offered at net
asset value to Employee Access Accounts SM available through employers that
provide Employer Sponsored Retirement or Savings Plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500, except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
Purchase Privileges of Certain Persons. Trustees of the Fund, members of
the Boards of other MLAM-advised investment companies, directors and employees
of ML & Co. and its subsidiaries (the term "subsidiaries", when used herein with
respect to 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 are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant 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 they 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 must have been made within 60 days prior to the
investment in the Fund, 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 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 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 they will purchase
Class D shares of the Fund with proceeds from a redemption of such shares of
other mutual funds that have been outstanding for a period of no less than six
months; and second, the investor must also establish that 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 are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("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
notice.
Closed-End Fund Investment Option. Class A shares of the Fund and certain
other MLAM-advised mutual funds ("Eligible Class A shares") are offered at net
asset value to shareholders of certain closed-end funds advised by MLAM or FAM
who purchased such closed-end fund shares prior to October 21, 1994 and
19
<PAGE> 75
wish to reinvest the net proceeds of 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 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 have either been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.
TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
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 readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions
20
<PAGE> 76
restricted or illiquid securities to the extent the Fund does not exceed the
applicable limits on acquisition of such securities set forth under "Investment
Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales charge are due
to the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to separate distribution plans
for Class B, Class C, and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act of the Fund (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.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Trustees 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 Trustees 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 Trustees who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Trustees"), shall be committed to the discretion of the Independent
Trustees then in office. In approving each Distribution Plan in accordance with
Rule 12b-1, the Independent Trustees 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 Trustees or by the
vote of the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to increase
materially the amount to be spent by the Fund without the approval of the
related class of shareholders, and all material amendments are required to be
approved by the vote of Trustees, including a majority of the Independent
Trustees 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.
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<PAGE> 77
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the NASD Conduct Rules imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
The following tables set forth comparative information as of October 31,
1996 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and the Distributor's voluntary maximum for the period March 27, 1987
(commencement of operations of Class B shares) to October 31, 1996, with respect
to Class B shares, and for the period October 21, 1994 (commencement of
operations of Class C shares) to October 31, 1996, with respect to Class C
shares.
DATA CALCULATED AS OF OCTOBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- ---------- ------------ -------- -------------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Under NASD Rule As Adopted.... $2,826,334 $176,646 $ 55,588 $232,234 $ 88,696 $143,538 $ 21,874
Under Distributor's Voluntary
Waiver...................... $2,826,334 $176,646 $ 14,132 $190,778 $ 88,696 $102,082 $ 21,871
CLASS C SHARES
Under NASD Rule As Adopted.... $ 163,375 $ 10,211 $ 849 $11,060 $ 1,339 $ 9,721 $ 1,404
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B shares sold since March 27, 1987
(commencement of operations) and all eligible Class C shares sold since
October 21, 1994 (commencement of operations) other than shares acquired
through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in the Wall Street Journal, plus 1%, 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.
(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.
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<PAGE> 78
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and purchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange is restricted as determined by the
Commission or during which the New York Stock Exchange is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal of
portfolio securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the net asset value of such shares at such
time.
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an IRA or other
retirement plan or following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies are: (a) any partial or complete
redemption in connection with a distribution following retirement under a
tax-deferred retirement plan or attaining age 59 1/2 in the case of an IRA or
other retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for 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 Internal Revenue Code) of a Class B shareholder (including one who owns
the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination of
disability.
For the fiscal years ended October 31, 1996, 1995, and 1994, the
Distributor received CDSCs of $2,000,859, $1,488,167, and $704,451,
respectively, with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. For the fiscal years ended October 31, 1996 and 1995, the
Distributor received CDSCs of $75,039 and $20,243, respectively, with respect to
Class C shares, all of which were paid to Merrill Lynch. For the fiscal period
October 21, 1994 (commencement of operations for Class C shares) to October 31,
1994, the Distributor received no CDSCs with respect to redemption of Class C
shares.
Merrill Lynch Blueprint(SM) Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations, credit
unions and benefit plans. 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 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 is no
23
<PAGE> 79
minimum initial or subsequent purchase requirement for investors who are part of
a Blueprint automatic investment plan. Additional information concerning these
Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint(SM) Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for making the Fund's portfolio decisions,
placing the Fund's brokerage business, evaluating the reasonableness of
brokerage commissions and negotiating the amount of any commissions paid subject
to a policy established by the Fund's Trustees and officers. The Fund has no
obligation to deal with any broker or group of brokers in the execution of
transactions in portfolio securities. Orders for transactions in portfolio
securities are placed for the Fund with a number of brokers and dealers,
including Merrill Lynch. In placing orders, it is the policy of the Fund to
obtain the most favorable net results, taking into account various factors,
including price, commissions, if any, size of the transaction and difficulty of
execution. Where practicable, the Manager surveys a number of brokers and
dealers in connection with proposed portfolio transactions and selects the
broker or dealer which offers the Fund best price and execution or other
services which are of benefit to the Fund. Securities firms also may receive
brokerage commissions on transactions including covered call options written by
the Fund and the sale of underlying securities upon the exercise of such
options. In addition, consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and policies established by the Fund's
Trustees, the Manager may consider sales of shares of the Fund as a factor in
the selection of brokers or dealers to execute portfolio transactions for the
Fund.
For the year ended October 31, 1994, the Fund paid total brokerage
commissions of $1,335,438, of which $69,546 or approximately 5.2% was paid to
Merrill Lynch for effecting 4.4% of the aggregate dollar amount of transactions
in which the Fund paid brokerage commissions. For the fiscal year ended October
31, 1995, the Fund paid total brokerage commissions of $3,781,129, of which
$89,700 or approximately 2.4% was paid to Merrill Lynch for effecting 2.2% of
the aggregate amount of transactions in which the Fund paid brokerage
commissions. For the fiscal year ended October 31, 1996, the Fund paid total
brokerage commissions of $1,930,894, none of which was paid to Merrill Lynch.
The portfolio turnover rate for the fiscal years ended October 31, 1996 and 1995
was 30.01% and 37.42%, respectively.
The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily consist
of assessments and analyses of the business or prospects of a company, industry
or economic sector. Information so received will be in addition to and not in
lieu of the services required to be performed by the Manager under the
Management Agreement. If in the judgment of the Manager the Fund will be
benefited by supplemental research services, the Manager 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 Manager will not necessarily be reduced as a
result of the receipt of such supplemental information, and the Manager may use
such information in servicing its other accounts. For the fiscal year ended
October 31, 1996, the Fund acquired no securities of brokers or dealers which
executed its portfolio transactions during that year.
24
<PAGE> 80
The Fund invests in certain securities traded in the over-the-counter
market and, where possible, deals directly with the dealers who make a market in
the securities involved, except in those circumstances in which better prices
and execution are available elsewhere. Under the Investment Company Act, persons
affiliated with the Fund are prohibited from dealing with the Fund as principal
in purchase and sale of securities. Since transactions in the over-the-counter
market usually involve transactions with dealers acting as principal for their
own accounts, affiliated persons of the Fund, including Merrill Lynch, will not
serve as the Fund's dealer in such transactions. However, affiliated persons of
the Fund may serve as its broker in over-the-counter transactions conducted on
an agency basis.
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.
The Trustees of the Fund have considered the possibility of recapturing for
the benefit of the Fund brokerage commissions, dealer spreads and other expenses
of possible portfolio transactions, such as underwriting commissions, by
conducting such portfolio transactions through affiliated entities, including
Merrill Lynch. For example, brokerage commissions received by Merrill Lynch
could be offset against the management fee paid by the Fund to the Manager.
After considering all factors deemed relevant, the Trustees made a determination
not to seek such recapture. The Trustees will reconsider this matter from time
to time.
DETERMINATION OF NET ASSET VALUE
Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.
The net asset value of the shares of all classes of the Fund is determined
once daily as of 15 minutes after the close of business on the New York Stock
Exchange ("NYSE") (generally 4:00 P.M., New York time) on each day during which
the NYSE is open for trading. The NYSE is not open on New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation. The Fund also will determine its net asset value on any
day in which there is sufficient trading in its portfolio securities that the
net asset value might be affected materially, but only if on any such day the
Fund is required to sell or redeem 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 yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and Distributor and any account maintenance and/or
distribution fees, are accrued daily. The per share net asset value of Class B,
Class C and Class D shares generally will be lower than the per share net asset
value of the Class A shares reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B and Class C shares and the daily expense accruals of the
account maintenance fees applicable with respect to the Class D shares;
moreover, the per share net asset value of the Class B and Class C shares
generally will be lower than the per share net asset value of Class D shares
reflecting the daily expense accruals of the distribution fees and higher
transfer agency fees applicable with
25
<PAGE> 81
respect to Class B and Class C shares of the Fund. It is expected, however, that
the per share net asset value of the classes will tend to converge (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differential among the classes.
Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Trustees as the primary
market. Securities traded on a stock exchange and the over-the-counter ("OTC")
market will be valued according to the broadest and most representative market.
Securities traded in the OTC market are valued at the last available bid price
in the OTC market prior to the time of valuation. When the Fund writes an
option, the amount of the premium received is recorded on the books of the Fund
as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in the
case of options traded in the OTC market, the last asked price. Purchased
options that are traded on exchanges are valued at their last sale price or, in
the case of purchased options traded in the OTC market, the last bid price.
Other investments, including futures contracts and related options, are stated
at market value. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Fund. Such valuations and
procedures will be reviewed periodically by the Board of Trustees.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services described below that are
designed to facilitate investment in its shares. Full details as to each such
service 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 income dividends and
long-term capital gains 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 gains distributions. A shareholder may make
additions to his 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. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent. Shareholders considering
transferring their Class A 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 so that the cash proceeds
26
<PAGE> 82
can be transferred to the account at the new firm or such shareholder must
continue to maintain an Investment Account at the Transfer Agent for those Class
A or Class D shares. Shareholders interested in transferring their Class B or
Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he be issued certificates for his shares, and
then must turn the certificates over to the new firm for re-registration as
described in the preceding sentence. Shareholders considering transferring a
tax-deferred retirement account such as an individual retirement account from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the retirement account is to be transferred will not
take delivery of shares of the Fund, a shareholder must either redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if 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 Fund's
Automatic Investment Plan whereby the Fund 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 Blueprint, no minimum charge to the investors' bank
account is required. Investors whose shares of the Fund are held within a CMA(R)
or CBA(R) account may arrange to have periodic investments made in the Fund, in
their CMA(R) or CBA(R) accounts or in certain related accounts in the amount of
$100 or more ($1 for retirement accounts) through the CMA(R) or CBA(R) Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions 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 or by telephone (1-800-MER-FUND)
to receive either their dividends or capital gains distributions, or both, in
cash, in which event payment will be mailed or direct deposited on or about the
payment date.
Shareholders may, at any time, notify the Transfer Agent in writing that
they no longer wish to have their dividend and/or capital gains distributions
reinvested in shares of the Fund or vice versa and, commencing ten days after
the receipt by the Transfer Agent of such notice, those instructions will be
effected.
SYSTEMATIC WITHDRAWAL PLANS -- CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make withdrawals from an
Investment Account in the form of payments by check or through automatic payment
by direct deposit to such shareholder's bank
27
<PAGE> 83
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 as
described herein on the 24th day of each month or the 24th day of the last month
of each quarter, whichever is applicable. If the New York Stock 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.
Alternatively, a Class A or Class D shareholder whose shares are held
within a CMA(R), CBA(R) or Retirement Account may elect to have shares redeemed
on a monthly, bi-monthly, quarterly, semiannual or annual basis through the
CMA(R)/CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of systematic redemptions will be posted to the
shareholder's account three 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 asset value on the next
business day. The CMA(R)/CBA(R) Systematic Redemption Program is not available
if Fund shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the CMA(R)/CBA(R) Systematic
Redemption Program, eligible shareholders should contact their financial
consultant.
RETIREMENT PLANS
Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and in 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
28
<PAGE> 84
Merrill Lynch. The minimum initial purchase to establish any such plan is $100.
However, there is no minimum for purchases through Blueprint's systematic
investment plans.
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 participations 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. Under the Merrill Lynch Select
Pricing(SM) 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 are 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 are 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 an aggregate net asset
value of at least $100 are required to qualify for the exchange privilege, and
any shares utilized in an exchange must have been held by the shareholder for at
least 15 days.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
dividend reinvestment Class A and Class D shares shall be deemed to have been
sold with a sales charge equal to the sales charge previously paid on the Class
A or Class D shares on which the dividend was paid. Based on this formula, Class
A and Class D shares of the Fund generally may be exchanged into the Class A and
Class D shares of the other funds or into shares of the Class A and Class D
money market funds with a reduced or without a sales charge.
29
<PAGE> 85
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 ("new Class B or
Class C shares"), of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the exchange
privilege. In addition, Class B shares of the Fund acquired through use of the
exchange privilege will be subject to the Fund's CDSC schedule if such schedule
is higher than the CDSC schedule relating to the Class B shares of the Fund from
which the exchange has been made. For purposes of computing the 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 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 Special Value Fund, Inc.
("Special Value Fund") after having held the Fund Class B shares for two and a
half years. The 2% CDSC that generally would apply to a redemption would not
apply to the exchange. Three years later the investor may decide to redeem the
Class B shares of Special Value Fund and receive cash. There will be no CDSC due
on this redemption since by "tacking" the two and a half year holding period of
the Fund's 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 Special
Value Fund 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 Manager 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 D shares, towards satisfaction of the
conversion period. However, shares of a money market fund that were acquired as
a result of an exchange for Class B or Class C shares of the 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 that 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 Inc.
("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,
a subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made. To
exercise the exchange privilege, shareholders should contact their Merrill Lynch
Financial Consultant, who will advise the 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
30
<PAGE> 86
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all its net investment income, if any.
Dividends from such net investment income will be paid semi-annually. All net
realized long- or short-term capital gains, if any, will be distributed to the
Fund's shareholders annually. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with a
Federal income tax requirement that certain percentages of its ordinary income
and capital gains be distributed during the calendar year. See "Shareholder
Services -- Automatic Reinvestment of Dividends and Capital Gains Distributions"
for information concerning the manner in which dividends and distributions may
be reinvested automatically in shares of the Fund. Shareholders may elect in
writing to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders, as discussed below,
whether they are reinvested in shares of the Fund or received in cash. The per
share dividends and distributions on Class B and Class C shares will be lower
than the per share dividends and distributions on Class A and Class D shares as
a result of the account maintenance, distribution and higher transfer agency
fees applicable with respect to the Class B and Class C shares; similarly, the
per share dividends and distributions on Class D shares will be lower than the
per share dividends and distributions on Class A shares as a result of the
account maintenance fees applicable with respect to the Class D shares. See
"Determination of Net Asset Value".
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986, as amended (the "Code"). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders ("shareholders"). The Fund intends to
distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options) are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. A sale or exchange of shares held
for six months or less, however, will be treated as long-term capital loss to
the extent of any long-term capital gains distribution with respect to such
shares.
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
dividends or capital gains distributions. A portion of the Fund's ordinary
income dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. For this purpose,
the Fund will allocate dividends eligible for the dividends received deduction
between the Class A, Class B, Class C and Class D shareholders according to a
method (which it believes is consistent with the Commission exemptive order
permitting the issuance and sale
31
<PAGE> 87
of multiple classes of stock) that is based on the gross income allocable to the
Class A, Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe. If the Fund
pays a dividend in January that was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend or distribution will be treated for tax purposes as being
paid by the RIC and received by its shareholders on December 31 of the year in
which such dividend was declared.
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. Income tax treaties between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to determine in advance the effective rate of foreign tax to which
the Fund will be subject, since the amount of Fund assets to be invested in
various countries is not known. Because the Fund limits its investment 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.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gains distributions
and redemption payments ("backup withholding"). Generally, shareholders subject
to backup 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 such
shareholder is not otherwise subject to backup withholding.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Non-resident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
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.
A shareholder who holds shares as a capital asset generally will recognize
a capital gain or loss upon the sale of such shares, which will be a long-term
capital gain or loss if such shares were held for more than one year. However,
any loss realized by a shareholder who held shares for six months or less will
be treated as a long-term capital loss to the extent of any distributions of net
capital gains received by the shareholder with respect to such shares.
If a shareholder exercises his exchange privilege within 90 days of
acquiring such shares, then the loss he 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 he would have owed upon the purchase of the new shares
in the absence of the exchange privilege. Instead, such sales charge will be
treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period
32
<PAGE> 88
beginning 30 days before and ending 30 days after the date that the shares are
disposed of. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The Fund anticipates that it will make sufficient
timely distributions to avoid imposition of the excise tax.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell options and futures and foreign currency
options and futures, and related options on such futures. Options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each option
or futures contract will be treated as sold for its fair market value on the
last day of the taxable year. Unless such contract is a forward foreign exchange
contract, or is a non-equity option or a regulated futures contract for a
non-U.S. currency for which the Fund elects to have gain or loss treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from transactions in such option and futures contracts will be 60% long-term and
40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Fund's transactions in options, futures and forward foreign
exchange contracts. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions
in options, futures and forward foreign exchange. Similarly, Code Section 1091,
which deals with "wash sales," may cause the Fund to postpone recognition of
certain losses for tax purposes; and Code Section 1258, which deals with
"conversion transactions," may apply to recharacterize certain capital gains as
ordinary income for tax purposes.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the Fund
may be restricted in effecting closing transactions within three months after
entering into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, futures or forward
foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain forward contracts, from
futures contracts that are not "regulated futures contracts" and from unlisted
options will be treated as ordinary income or loss under Code Section 988. In
certain circumstances, the Fund may elect capital gain or loss treatment for
such
33
<PAGE> 89
transactions. In general, however, Code Section 988 gains or losses will
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to shareholders as ordinary income. Additionally, if
Code Section 988 losses exceed other investment company taxable income during a
taxable year, the Fund would not be able to make any ordinary dividend
distributions, and any distributions made before the losses were realized but in
the same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing each shareholder's basis in the Fund shares.
------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and the
Treasury regulations presently in effect. For the complete provisions, reference
should be made to the pertinent Code sections and the Treasury regulations
promulgated thereunder. The Code and the Treasury regulations are subject to
change by legislative or administrative action either prospectively or
retroactively.
Dividends and capital gains distributions and gains on the sale or exchange
of shares in the Fund may also be subject to state and local taxes.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, state, local or foreign taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
PERFORMANCE DATA
From time to time the Fund may include its average annual total return and
other total return data, in advertisements or information furnished to present
or prospective shareholders. Total return is based on the Fund's historical
performance and is not intended to indicate future performance. Average annual
total return is determined separately for Class A, Class B, Class C and Class D
shares in accordance with a formula specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included. 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.
34
<PAGE> 90
Set forth below is total return information for the Class A and Class B
shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES* CLASS B SHARES**
------------------------------------- -------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- -------------------------------------- ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended October 31, 1996....... 21.42% $1,214.20 22.84% $1,228.40
Five Years Ended October 31, 1996..... 18.87% $2,373.10 18.94% $2,380.80
Inception (March 27, 1987) to October
31, 1996............................ 15.25% $3,905.50
Inception (November 28, 1988) to
October 31, 1996.................... 19.25% $4,035.20
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended October 31,
1996....................................... 28.15% $1,281.50 26.84% $1,268.40
1995....................................... 22.60% $1,226.00 21.37% $1,213.70
1994....................................... 12.50% $1,125.00 11.41% $1,114.10
1993....................................... 33.97% $1,339.70 32.54% $1,325.40
1992....................................... 5.77% $1,057.70 4.74% $1,047.40
1991....................................... 45.88% $1,458.80 44.32% $1,443.20
1990....................................... (14.42)% $ 855.80 (15.31)% $ 846.90
1989....................................... -- -- 29.25% $1,292.50
1988....................................... -- -- 16.64% $1,166.40
Inception (November 28, 1988) to October
31, 1989................................. 36.21% $1,362.10 -- --
Inception (March 27, 1987) to October 31,
1987..................................... -- -- (10.98)% $ 890.20
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (March 27, 1987) to October 31,
1996..................................... 290.55% $3,905.50
Inception (November 28, 1988) to October
31, 1996................................. 303.52% $4,035.20
</TABLE>
- ---------------
- Information as to Class A shares is presented for the period November 28,
1988 to October 31, 1996. Prior to November 28, 1988, no Class A shares were
publicly issued.
** Commencement of Operations of Class B shares was March 27, 1987.
Set forth below is total return information for the Class C and Class D
shares of the Fund for the periods indicated.
35
<PAGE> 91
<TABLE>
<CAPTION>
CLASS C SHARES* CLASS D SHARES*
------------------------------------ ------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL HYPOTHETICAL
EXPRESSED AS A $1,000 EXPRESSED AS A $1,000
PERCENTAGE BASED INVESTMENT PERCENTAGE BASED INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------------- ----------------- ---------------- ----------------- ----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended October 31, 1996......... 25.84% $ 1,258.40 21.12% $ 1,211.20
Inception (October 21, 1994) to October
31, 1996.............................. 25.97% $ 1,597.90 23.63% $ 1,538.10
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended October 31,
1996.................................... 26.84% $ 1,268.40 27.83% $ 1,278.30
1995.................................... 21.32% $ 1,213.20 22.29% $ 1,222.90
Inception (October 21, 1994) to October
31, 1994.............................. 3.84% $ 1,038.40 3.84% $ 1,038.40
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 21, 1994) to October
31, 1996.............................. 59.79% $ 1,597.90 53.81% $ 1,538.10
</TABLE>
- ---------------
* Commencement of Operations of Class C and Class D shares was October 21, 1994.
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the contingent deferred sales charge in the case
of Class B or Class C shares applicable to certain investors, as described under
"Purchase of Shares" and "Redemption of Shares", respectively, the total return
data quoted by the Fund in advertisements directed to such investors may take
into account the reduced, and not the maximum, sales charge or may 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 is deducted.
From time to time, the Fund may include the Fund's Morningstar
risk-adjusted performance rating in advertisements or supplemental sales
literature.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, par value
$0.10 per share, of different classes and to divide or combine the shares of
each class into a greater or lesser number of shares without thereby changing
the proportionate beneficial interest in the Fund. At the date of this Statement
of Additional Information, the shares of the Fund are divided into Class A,
Class B, Class C and Class D shares. Under the Declaration of Trust, the
Trustees have the authority to issue separate classes of shares that represent
interests in the assets of the Fund and have identical voting, dividend,
liquidation and other rights and the same terms and conditions except that
expenses related to the account maintenance and distribution of the shares of a
class may be borne solely by such class and a class may have exclusive voting
rights with respect to matters relating to the account maintenance and
distribution expenses being borne only by such class. The Fund has received an
order from the Commission permitting the issuance and sale of multiple classes
of shares. Upon liquidation of the Fund, shareholders of
36
<PAGE> 92
each class are entitled to share pro rata in the net assets of the Fund
available for distribution to shareholders, except for any expenses which may be
attributable only to one class. Shares have no preemptive rights. The rights of
redemption and conversion rights are described elsewhere herein and in the
Prospectus. Shares are fully paid and non-assessable by the Fund.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Trustees (to the
extent hereinafter provided) and on other matters submitted to vote of
shareholders, except that shareholders of the class bearing distribution
expenses as provided above shall have exclusive voting rights with respect to
matters relating to such distribution expenditures. Voting rights are not
cumulative, so that the holders of more than 50% of the shares voting in the
election of Trustees can, if they choose to do so, elect all the Trustees of the
Fund, in which event the holders of the remaining shares are able to elect any
person as a Trustee. No amendment may be made to the Declaration of Trust
without the affirmative vote of a majority of the outstanding shares of the
Fund.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A, Class B, Class C and Class D shares of the
Fund, based on the value of the Fund's net assets and number of outstanding
shares on October 31, 1996, is calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net Assets........................ $1,056,869,634 $2,916,506,463 $187,221,373 $932,811,299
============ ============ ============ ============
Number of Shares Outstanding...... 39,328,841 116,531,634 7,520,629 34,814,502
============ ============ ============ ============
Net Asset Value Per Share (net
assets divided by number of
shares outstanding)............. $26.87 $25.03 $24.89 $26.79
====== ====== ====== ======
Sales Charge (Class A and Class D
shares: 5.25% of offering price
(5.54% of net asset value per
share))*........................ 1.49 ** ** 1.48
------ ------ ------ ------
Offering Price.................... $28.36 $25.03 $24.89 $28.27
====== ====== ====== ======
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" in the Prospectus and
"Redemption of Shares -- Deferred Sales Charge -- Class B Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of the Fund. The independent auditors
are responsible for auditing the annual financial statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, One Heritage Drive P2N, North Quincy,
Massachusetts 02171, acts as the custodian of the Fund's assets. The Custodian
is responsible for safeguarding and controlling the
37
<PAGE> 93
Fund's cash and securities, handling the receipt and delivery of securities and
collecting interest and dividends on the Fund's investment.
TRANSFER AGENT
Merrill Lynch 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
"Management of the Fund -- Transfer Agency Services" in the Prospectus.
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue, New York, New
York 10022, is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements audited
by independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive Federal income tax information regarding
dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act, to which reference is hereby made.
Under a separate agreement Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on February 1, 1997.
------------------------
The Declaration of Trust establishing the Fund, dated as of December 11,
1986, a copy of which, together with all amendments thereto (the "Declaration"),
is on file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Growth Fund" refers to the Trustees under
the Declaration collectively as Trustees, but not as individuals or personally,
and no Trustee, shareholder, officer, employee or agent of the Fund shall be
held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim of said Fund but the
"Trust Property" only shall be liable.
38
<PAGE> 94
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICES, INC.'S ("MOODY'S") CORPORATE RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic category.
39
<PAGE> 95
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and higher
internal cash generation
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternative liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
40
<PAGE> 96
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "a" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of
time.
ba An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "AA" through "B" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S ("STANDARD & POOR'S") CORPORATE
DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
41
<PAGE> 97
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than for debt in higher-rated
categories.
Debt rated BB, B, CCC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payment. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB-rating.
B Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity
or willingness to pay interest or repay principal. The B rating category
is also used for debt subordinated to senior debt that is assigned an
actual or implied BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B-rating.
42
<PAGE> 98
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
43
<PAGE> 99
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+)
sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is expected
to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
<TABLE>
<S> <C>
I. Likelihood of payment-capacity and willingness of the issuer to meet the timely
payment of preferred stock dividends and any applicable sinking fund requirements in
accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy, reorganization, or other
arrangements affecting creditors' rights.
</TABLE>
44
<PAGE> 100
<TABLE>
<S> <C> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock
in this category than for issues in the "A" category.
BB, Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
predominantly
B, speculative with respect to the issuer's capacity to pay preferred stock
obligations. "BB
CCC indicates the lowest degree of speculation and "CCC" the highest degree of
speculation. While such issues will likely have some quality and protection
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue in default on debt
instruments.
</TABLE>
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
PLUS (+) or MINUS (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard & Poor's earnings and
dividend rankings for common stocks.
The ratings are based on current information furnished to Standard & Poor's
by the issuer, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.
45
<PAGE> 101
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of Merrill Lynch Growth Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Growth Fund as of October 31,
1996, the related statements of operations for the year then ended and changes
in net assets for each of the years in the two-year period then ended, and the
financial highlights for 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 October
31, 1996 by correspondence with the custodian. 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 Growth
Fund as of October 31, 1996, the results of its operations, the changes in its
net assets, and the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
December 6, 1996
46
<PAGE> 102
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
Value Percent of
Industries Shares Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Banking & Financial 1,000,000 Republic New York Corp. $ 44,267,281 $ 76,250,000 1.5%
Services 1,000,000 Safra Republic Holdings S.A. (ADR)* 69,529,500 123,000,000 2.4
-------------- -------------- ------
113,796,781 199,250,000 3.9
Biotechnology 1,000,000 ++Affymetrix, Inc. 16,662,627 18,250,000 0.4
2,296,000 ++CytoTherapeutics, Inc. (b) 15,914,783 20,090,000 0.4
434,500 ++CytoTherapeutics, Inc. (Warrants)
(a)(b) 651,750 965,459 0.0
-------------- -------------- ------
33,229,160 39,305,459 0.8
Computer Software 4,500,000 ++Platinum Technology, Inc. (b) 73,064,254 64,687,500 1.3
Diversified Resource 2,109,000 Arcadian Corp. (b) 47,969,951 51,934,125 1.0
Companies 1,500,000 Freeport-McMoRan Copper & Gold,
Inc. (Class A) 36,449,551 43,500,000 0.8
5,000,000 Freeport-McMoRan Copper & Gold,
Inc. (Class B) 107,984,584 151,875,000 3.0
3,750,000 Freeport-McMoRan, Inc. (b) 114,789,644 119,531,250 2.3
1,050,000 IMC Global, Inc. 37,222,924 39,375,000 0.8
-------------- -------------- ------
344,416,654 406,215,375 7.9
Domestic 2,000,000 Anadarko Petroleum Corp. 83,727,914 127,250,000 2.5
Exploration & 9,000,000 ++Santa Fe Energy Resources, Inc. (b) 83,865,388 128,250,000 2.5
Production 3,450,000 ++Seagull Energy Corp. (b) 72,331,809 74,606,250 1.5
3,000,000 Vastar Resources, Inc. 89,836,252 111,375,000 2.2
-------------- -------------- ------
329,761,363 441,481,250 8.7
Electronic 6,255,000 ++Cirrus Logic, Inc. (b) 69,372,447 118,063,125 2.3
Components 650,000 Intel Corp. 33,466,875 71,337,500 1.4
3,500,000 ++Komag, Inc. (b) 72,539,664 96,250,000 1.9
-------------- -------------- ------
175,378,986 285,650,625 5.6
Energy Acquisition & 8,000,000 Apache Corp. (b) 232,123,043 284,000,000 5.6
Exploration 2,200,000 Devon Energy Corp. (b) 34,401,130 76,725,000 1.5
1,000,000 Devon Financing Trust ($3.25
Convertible Preferred) (c) 50,000,000 65,000,000 1.3
2,000,000 ++Newfield Exploration Co. (b) 56,598,373 94,500,000 1.8
-------------- -------------- ------
373,122,546 520,225,000 10.2
International 8,000,000 ++Norcen Energy Resources, Ltd. 120,353,892 171,228,279 3.4
Exploration & (Canadian Shares) (b)
Production
International 1,000,000 ++RAO Gazprom (ADR)* 17,865,451 18,750,000 0.3
Integrated
Natural Gas
Natural Gas 3,117,000 ++TransMontaigne Oil Co. (b) 17,143,500 30,390,750 0.6
Gathering & 2,500,000 Western Gas Resources, Inc. (b) 57,319,428 39,687,500 0.8
Transmission -------------- -------------- ------
74,462,928 70,078,250 1.4
Offshore Drilling 7,300,000 ++Ensco International, Inc. (b) 105,639,352 315,725,000 6.2
Companies 16,300,000 ++Global Marine, Inc. (b) 59,126,323 299,512,500 5.9
-------------- -------------- ------
164,765,675 615,237,500 12.1
Oil Refining 4,000,000 Valero Energy Corp. (b) 86,245,282 95,000,000 1.9
</TABLE>
47
<PAGE> 103
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (continued)
Shares Value Percent of
Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Oilfield Services 5,000,000 ++Nabors Industries, Inc. (b) $ 55,701,065 $ 83,125,000 1.6%
1,100,000 Schlumberger Ltd., Inc. 75,504,657 109,037,500 2.2
3,000,000 ++Weatherford Enterra, Inc. (b) 86,669,086 87,000,000 1.7
2,500,000 ++Western Atlas, Inc. 141,174,253 173,437,500 3.4
-------------- -------------- ------
359,049,061 452,600,000 8.9
Personal 2,000,000 ++Dell Computer Corp. 28,144,538 162,750,000 3.2
Computers
Total Stocks 2,293,656,571 3,542,459,238 69.6
<CAPTION>
Face Amount Short-Term Securities
<S> <C> <C> <C> <C> <C>
Commercial Paper** $20,150,000 Allied-Signal, Inc., 5.25% due
11/05/1996 20,138,246 20,138,246 0.4
60,000,000 American Express Credit Corp.,
5.26% due 12/17/1996 59,596,733 59,596,733 1.1
CSW Credit, Inc.:
37,300,000 5.37% due 11/05/1996 37,277,744 37,277,744 0.7
18,900,000 5.27% due 11/22/1996 18,841,898 18,841,898 0.3
15,000,000 5.27% due 12/06/1996 14,923,146 14,923,146 0.3
CXC Inc.:
40,000,000 5.25% due 11/05/1996 39,976,667 39,976,667 0.8
25,000,000 5.26% due 12/18/1996 24,828,319 24,828,319 0.5
23,000,000 Caterpillar, Inc., 5.25% due
11/14/1996 22,956,396 22,956,396 0.4
Ciesco, L.P.:
36,000,000 5.39% due 11/01/1996 36,000,000 36,000,000 0.7
40,000,000 5.40% due 11/04/1996 39,982,000 39,982,000 0.8
Corporate Asset Funding Co., Inc.:
46,000,000 5.37% due 11/04/1996 45,979,415 45,979,415 0.9
50,000,000 5.32% due 11/06/1996 49,963,055 49,963,055 1.0
60,000,000 Corporate Receivables Corp., 5.43%
due 11/05/1996 59,963,800 59,963,800 1.2
50,000,000 Dean Witter, Discover & Co., 5.28%
due 11/20/1996 49,860,667 49,860,667 1.0
59,187,000 Delaware Funding Corp., 5.25% due
12/13/1996 58,824,480 58,824,480 1.1
50,000,000 Eureka Securitization Inc., 5.40% due
11/08/1996 49,947,500 49,947,500 1.0
36,000,000 Falcon Asset Securitization Corp.,
5.38% due 11/07/1996 35,967,720 35,967,720 0.7
40,000,000 Ford Motor Credit Co., 5.25% due
12/20/1996 39,714,167 39,714,167 0.8
General Motors Acceptance Corp.:
46,058,000 5.56% due 11/01/1996 46,058,000 46,058,000 0.9
50,000,000 5.27% due 12/23/1996 49,619,389 49,619,389 1.0
Goldman Sachs Group, L.P.:
50,000,000 5.30% due 11/14/1996 49,904,305 49,904,305 1.0
50,000,000 5.25% due 11/27/1996 49,810,417 49,810,417 1.0
24,670,000 H.J. Heinz Company, 5.31% due
11/13/1996 24,626,334 24,626,334 0.5
50,000,000 IBM Credit Corp., 5.25% due 12/03/1996 49,766,667 49,766,667 1.0
International Lease Finance Corp.:
50,000,000 5.32% due 11/15/1996 49,896,556 49,896,556 1.0
35,000,000 5.25% due 12/06/1996 34,821,354 34,821,354 0.7
International Securitization Corp.:
50,000,000 5.26% due 11/26/1996 49,817,361 49,817,361 1.0
25,000,000 5.27% due 12/19/1996 24,824,333 24,824,333 0.5
33,000,000 J.P. Morgan & Company, Inc., 5.40%
due 11/08/1996 32,965,350 32,965,350 0.6
Lucent Technologies, Inc.:
15,000,000 5.35% due 11/04/1996 14,993,312 14,993,312 0.3
30,000,000 5.32% due 11/22/1996 29,906,900 29,906,900 0.6
</TABLE>
48
<PAGE> 104
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded)
Face Value Percent of
Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Commercial Paper** $27,500,000 PHH Corp., 5.24% due 11/13/1996 $ 27,451,967 $ 27,451,967 0.5%
(concluded) Preferred Receivables Funding Corp.:
20,000,000 5.42% due 11/18/1996 19,948,811 19,948,811 0.4
20,600,000 5.25% due 12/19/1996 20,455,800 20,455,800 0.4
50,000,000 Riverwoods Funding Corp., 5.24% due
11/26/1996 49,818,056 49,818,056 1.0
40,000,000 Shell Oil Co., 5.23% due 11/12/1996 39,936,078 39,936,078 0.8
Three Rivers Funding:
17,450,000 5.41% due 11/12/1996 17,421,154 17,421,154 0.3
32,550,000 5.26% due 11/19/1996 32,464,393 32,464,393 0.6
25,000,000 Transamerica Corporation, 5.24% due
11/07/1996 24,978,167 24,978,167 0.5
20,000,000 US West Communications, Inc., 5.35%
due 11/15/1996 19,958,389 19,958,389 0.4
25,000,000 WCP Funding Inc., 5.33% due 11/05/1996 24,985,194 24,985,194 0.5
36,363,000 Windmill Funding Corp., 5.26% due
12/05/1996 36,182,357 36,182,357 0.7
25,000,000 Xerox Corp., 5.24% due 12/04/1996 24,879,917 24,879,917 0.5
Total Short-Term Securities 1,550,232,514 1,550,232,514 30.4
Total Investments $3,843,889,085 5,092,691,752 100.0
==============
Other Assets Less Liabilities 717,017 0.0
-------------- ------
Net Assets $5,093,408,769 100.0%
============== ======
<FN>
*American Depositary Receipts (ADR).
**Commercial Paper is traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by the
Fund.
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock. The purchase price and number of shares are
subject to adjustment under certain conditions until the expiration
date.
(b)Investment in an affiliated company (Note 5).
(c)Restricted security as to resale. The value of the Fund's
investment in restricted securities was approximately $65,000,000,
representing 1.3% of net assets.
</TABLE>
<TABLE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Devon Financing Trust
($3.25 Convertible Preferred) 6/27/1996 $50,000,000 $65,000,000
Total $50,000,000 $65,000,000
=========== ===========
</TABLE>
++Non-income producing security.
See Notes to Financial Statements.
49
<PAGE> 105
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Statement of Assets and Liabilities as of October 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$3,843,889,085) (Note 1a) $5,092,691,752
Receivables:
Beneficial interest sold $ 12,841,903
Dividends 1,830,900
Securities sold 461,875
Interest 419,643 15,554,321
--------------
Prepaid registration fees and other assets (Note 1f) 105,436
--------------
Total assets 5,108,351,509
--------------
Liabilities: Payables:
Beneficial interest redeemed 7,295,592
Distributor (Note 2) 2,722,964
Investment adviser (Note 2) 2,550,084 12,568,640
--------------
Accrued expenses and other liabilities 2,374,100
--------------
Total liabilities 14,942,740
--------------
Net Assets: Net assets $5,093,408,769
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 3,932,884
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 11,653,163
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 752,063
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 3,481,450
Paid-in capital in excess of par 3,447,809,043
Undistributed investment income--net 9,982,308
Undistributed realized capital gains on investments and
foreign currency transactions--net 366,995,191
Unrealized appreciation on investments--net 1,248,802,667
--------------
Net assets $5,093,408,769
==============
Net Asset Value: Class A--Based on net assets of $1,056,869,634 and
39,328,841 shares of beneficial interest outstanding $ 26.87
==============
Class B--Based on net assets of $2,916,506,463 and
116,531,634 shares of beneficial interest outstanding $ 25.03
==============
Class C--Based on net assets of $187,221,373 and 7,520,629
shares of beneficial interest outstanding $ 24.89
==============
Class D--Based on net assets of $932,811,299 and 34,814,502
shares of beneficial interest outstanding $ 26.79
==============
</TABLE>
See Notes to Financial Statements.
50
<PAGE> 106
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statement of Operations for the Year Ended October 31, 1996
<S> <S> <C> <C>
Investment Interest and discount earned $ 54,481,074
Income Dividends (net of $511,304 foreign withholding tax) 29,719,095
(Notes 1d & 1e): --------------
Total income 84,200,169
--------------
Expenses: Investment advisory fees (Note 2) $ 26,198,720
Account maintenance and distribution fees--Class B (Note 2) 23,190,613
Transfer agent fees--Class B (Note 2) 3,889,282
Account maintenance fees--Class D (Note 2) 1,880,370
Account maintenance and distribution fees--Class C (Note 2) 1,311,384
Transfer agent fees--Class A (Note 2) 1,212,346
Transfer agent fees--Class D (Note 2) 1,096,887
Registration fees (Note 1f) 727,957
Printing and shareholder reports 377,462
Transfer agent fees--Class C (Note 2) 241,143
Accounting services (Note 2) 219,719
Custodian fees 171,708
Professional fees 85,921
Trustees' fees and expenses 45,397
Pricing fees 1,398
Other 37,335
--------------
Total expenses before reimbursement 60,687,642
Reimbursement of expenses (Note 2) (1,390,286)
--------------
Total expenses after reimbursement 59,297,356
--------------
Investment income--net 24,902,813
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 367,008,111
(Loss) on Foreign currency transactions--net (12,666) 366,995,445
Investments & --------------
Foreign Currency Change in unrealized appreciation on investments--net 622,793,812
Transactions-- --------------
Net (Notes 1b, 1c, Net realized and unrealized gain on investments and
1e & 3): foreign currency transactions 989,789,257
--------------
Net Increase in Net Assets Resulting from Operations $1,014,692,070
==============
</TABLE>
See Notes to Financial Statements.
51
<PAGE> 107
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 24,902,813 $ 9,409,014
Realized gain on investments and foreign currency transactions
--net 366,995,445 282,849,493
Change in unrealized appreciation on investments--net 622,793,812 212,145,489
-------------- --------------
Net increase in net assets resulting from operations 1,014,692,070 504,403,996
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (11,466,384) --
Shareholders Class B (3,656,501) --
(Note 1g): Class C (670,606) --
Class D (8,536,028) --
Realized gain on investments--net:
Class A (54,826,992) (6,083,187)
Class B (168,933,574) (23,093,382)
Class C (7,976,874) (87,568)
Class D (51,112,182) (872,515)
-------------- --------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (307,179,141) (30,136,652)
-------------- --------------
Beneficial Interest Net increase in net assets derived from beneficial
Transactions interest transactions 1,095,437,782 998,495,743
(Note 4): -------------- --------------
Net Assets: Total increase in net assets 1,802,950,711 1,472,763,087
Beginning of year 3,290,458,058 1,817,694,971
-------------- --------------
End of year* $5,093,408,769 $3,290,458,058
============== ==============
<FN>
*Undistributed investment income--net $ 9,982,308 $ 9,409,014
============== ==============
</TABLE>
See Notes to Financial Statements.
52
<PAGE> 108
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 October 31,
Increase (Decrease) in Net Asset Value: 1996++ 1995++ 1994++ 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 23.13 $ 19.19 $ 19.22 $ 14.79 $ 15.31
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net .31 .23 .08 .02 .02
Realized and unrealized gain on
investments and foreign currency
transactions--net 5.63 4.01 2.01 4.86 .65
---------- ---------- ---------- ---------- ----------
Total from investment operations 5.94 4.24 2.09 4.88 .67
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.35) -- -- -- --
Realized gain on investments--net (1.85) (.30) (2.12) (.45) (1.19)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (2.20) (.30) (2.12) (.45) (1.19)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 26.87 $ 23.13 $ 19.19 $ 19.22 $ 14.79
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 28.15% 22.60% 12.50% 33.97% 5.77%
Return:* ========== ========== ========== ========== ==========
Ratios to Expenses, net of reimbursement .80% .82% .82% .81% .84%
Average ========== ========== ========== ========== ==========
Net Assets: Expenses .84% .84% .82% .81% .84%
========== ========== ========== ========== ==========
Investment income--net 1.28% 1.10% .44% .29% .28%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year (in thousands) $1,056,870 $ 670,164 $ 382,077 $ 229,709 $ 138,456
Data: ========== ========== ========== ========== ==========
Portfolio turnover 30.01% 37.42% 4.22% 33.21% 21.20%
========== ========== ========== ========== ==========
Average commission rate paid++++ $ .0539 -- -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average number of shares outstanding during the year.
++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may materially affect the rate shown.
</TABLE>
See Notes to Financial Statements.
53
<PAGE> 109
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights (continued)
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1996++ 1995++ 1994++ 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 21.60 $ 18.12 $ 18.43 $ 14.35 $ 15.03
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income (loss)--net .06 .01 (.10) (.11) (.10)
Realized and unrealized gain on
investments and foreign currency
transactions--net 5.26 3.77 1.91 4.64 .61
---------- ---------- ---------- ---------- ----------
Total from investment operations 5.32 3.78 1.81 4.53 .51
---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.04) -- -- -- --
Realized gain on investments--net (1.85) (.30) (2.12) (.45) (1.19)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (1.89) (.30) (2.12) (.45) (1.19)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 25.03 $ 21.60 $ 18.12 $ 18.43 $ 14.35
========== ========== ========== ========== ==========
Total Investment Based on net asset value per share 26.84% 21.37% 11.41% 32.54% 4.74%
Return:* ========== ========== ========== ========== ==========
Ratios to Average Expenses, net of reimbursement 1.82% 1.84% 1.84% 1.83% 1.87%
Net Assets: ========== ========== ========== ========== ==========
Expenses 1.85% 1.87% 1.84% 1.83% 1.87%
========== ========== ========== ========== ==========
Investment income (loss)--net .26% .04% (.58%) (.78%) (.76%)
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $2,916,507 $1,920,451 $1,433,051 $1,049,190 $ 758,061
========== ========== ========== ========== ==========
Portfolio turnover 30.01% 37.42% 4.22% 33.21% 21.20%
========== ========== ========== ========== ==========
Average commission rate paid++++ $ .0539 -- -- -- --
========== ========== ========== ========== ==========
<FN>
*Total investment returns exclude the effects of sales loads.
++Based on average number of shares outstanding during the year.
++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid inforeign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of thetransaction. Such
conversions may materially affect the rate shown.
</TABLE>
See Notes to Financial Statements.
54
<PAGE> 110
FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Financial Highlights (continued)
Class C++++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year 1994++ to
Ended Oct. 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 21.59 $ 18.12 $ 17.45
Operating ---------- ---------- ----------
Performance: Investment income--net .06 .03 --
Realized and unrealized gain on investments and
foreign currency transactions--net 5.23 3.74 .67
---------- ---------- ----------
Total from investment operations 5.29 3.77 .67
---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.14) -- --
Realized gain on investments--net (1.85) (.30) --
---------- ---------- ----------
Total dividends and distributions (1.99) (.30) --
---------- ---------- ----------
Net asset value, end of period $ 24.89 $ 21.59 $ 18.12
========== ========== ==========
Total Investment Based on net asset value per share 26.84% 21.32% 3.84%+++
Return:** ========== ========== ==========
Ratios to Average Expenses, net of reimbursement 1.84% 1.86% 2.52%*
Net Assets: ========== ========== ==========
Expenses 1.87% 1.89% 2.52%*
========== ========== ==========
Investment income (loss)--net .25% .14% (1.17%)*
========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 187,221 $ 85,486 $ 1,381
Data: ========== ========== ==========
Portfolio turnover 30.01% 37.42% 4.22%
========== ========== ==========
Average commission rate paid++++++ $ .0539 -- --
========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Based on average number of shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may materially affect the rate shown.
+++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
55
<PAGE> 111
FINANCIAL INFORMATION (concluded)
<TABLE>
<CAPTION>
Financial Highlights (concluded)
Class D++++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. For the Year 1994++ to
Ended Oct. 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 23.06 $ 19.18 $ 18.47
Operating ---------- ---------- ----------
Performance: Investment income--net .24 .22 --
Realized and unrealized gain on investments and
foreign currency transactions--net 5.63 3.96 .71
---------- ---------- ----------
Total from investment operations 5.87 4.18 .71
---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.29) -- --
Realized gain on investments--net (1.85) (.30) --
---------- ---------- ----------
Total dividends and distributions (2.14) (.30) --
---------- ---------- ----------
Net asset value, end of period $ 26.79 $ 23.06 $ 19.18
========== ========== ==========
Total Investment Based on net asset value per share 27.83% 22.29% 3.84%+++
Return:** ========== ========== ==========
Ratios to Average Expenses, net of reimbursement 1.05% 1.08% 1.77%*
Net Assets: ========== ========== ==========
Expenses 1.08% 1.10% 1.77%*
========== ========== ==========
Investment income (loss)--net 1.03% 1.00% (.54%)*
========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 932,811 $ 614,357 $ 1,186
Data: ========== ========== ==========
Portfolio turnover 30.01% 37.42% 4.22%
========== ========== ==========
Average commission rate paid++++++ $ .0539 -- --
========== ========== ==========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Based on average number of shares outstanding during the period.
++++++For fiscal years beginning on or after September 1, 1995, the
Fund is required to disclose its average commission rate per share
for purchases and sales of equity securities. The "Average
Commission Rate Paid" includes commissions paid in foreign
currencies, which have been converted into US dollars using the
prevailing exchange rate on the date of the transaction. Such
conversions may materially affect the rate shown.
+++Aggregate total investment return.
</TABLE>
See Notes to Financial Statements.
56
<PAGE> 112
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Growth Fund (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Trustees as the
primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Trustees.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--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 net
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.
* Options--The Fund is authorized to purchase and write covered call
and put options. When the Fund writes an option, an amount equal to
the premium
57
<PAGE> 113
received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
paid or received (or loss or gain to the extent the cost of the
closing transaction is less than or greater than the premium paid or
received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as
required by the exchange on which the transaction is effected.
Pursuant to the contract, the Fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value
of the contract. Such receipts or payments are known as variation
margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
(d) 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.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend date, except if the ex-dividend date has passed, certain
dividends from foreign securities are recorded as soon as the Fund
is informed of the ex-dividend date. Interest income is recognized
on the accrual basis. Realized gains and losses on security
transactions are determined on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the 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. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund is required to pay a monthly fee based upon the
average daily value of the Fund's net assets at an annual rate of
0.65%. As a result of a voluntary waiver of expenses beginning on
December 16, 1994, the Fund will pay 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 on the first $1
billion; 0.625% on the next $500 million; and 0.60% of the average
net assets over $1.5 billion. For the year ended October 31, 1996,
MLAM earned fees of $26,198,720, of which $1,390,286 was voluntarily
waived.
58
<PAGE> 114
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services
to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class B
and Class C shareholders.
For the year ended October 31, 1996, MLFD earned underwriting
discounts and direct commissions, and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares as
follows:
MLFD MLPF&S
Class A $ 13,960 $ 195,140
Class D $100,325 $1,460,167
For the year ended October 31, 1996, MLPF&S received contingent
deferred sales charges of $2,000,859 and $75,039 relating to
transactions in Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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 trustees of the Fund are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended October 31, 1996 were $936,885,742 and
$921,489,691, respectively.
Net realized and unrealized gains (losses) as of October 31, 1996
were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $367,006,920 $1,248,802,667
Short-term investments 1,191 --
Foreign currency
transactions 74,517 --
Forward foreign exchange
contracts (87,183) --
------------ --------------
Total $366,995,445 $1,248,802,667
============ ==============
As of October 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $1,248,802,667, of which
$1,274,811,348 related to appreciated securities and $26,008,681
related to depreciated securities. At October 31, 1996, the
aggregate cost of investments for Federal income tax purposes was
$3,843,889,085.
4. Shares of Beneficial Interest:
Net increase in net assets derived from beneficial interest
transactions was $1,095,437,782 and $998,495,743 for the years ended
October 31, 1996 and October 31, 1995, respectively.
59
<PAGE> 115
NOTES TO FINANCIAL STATEMENTS (concluded)
Transactions inshares of beneficial interest for each
class were as follows:
Class A Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 15,856,881 $374,683,538
Shares issued to share-
holders in reinvestment of
dividends and distributions 2,825,668 60,826,440
------------ ------------
Total issued 18,682,549 435,509,978
Shares redeemed (8,325,117) (196,158,604)
------------ ------------
Net increase 10,357,432 $239,351,374
============ ============
Class A Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 14,567,526 $296,704,905
Shares issued to share-
holders in reinvestment of
distributions 317,795 5,475,610
------------ ------------
Total issued 14,885,321 302,180,515
Shares redeemed (5,824,423) (121,604,069)
------------ ------------
Net increase 9,060,898 $180,576,446
============ ============
Class B Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 40,931,339 $899,830,123
Shares issued to shareholders
in reinvestment of dividends
and distributions 7,878,594 157,479,392
------------ -------------
Total issued 48,809,933 1,057,309,515
Automatic conversion of
shares (2,182,558) (47,330,262)
Shares redeemed (19,023,230) (416,714,283)
------------ ------------
Net increase 27,604,145 $593,264,970
============ ============
Class B Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 45,433,946 $887,607,425
Shares issued to shareholders
in reinvestment of
distributions 1,276,055 20,710,369
------------ ------------
Total issued 46,710,001 908,317,794
Automatic conversion of
shares (22,364,293) (422,714,534)
Shares redeemed (14,507,467) (282,014,523)
------------ ------------
Net increase 9,838,241 $203,588,737
============ ============
Class C Shares for the
Year Ended Dollar
October 31, 1996 Shares Amount
Shares sold 4,661,344 $101,617,191
Shares issued to shareholders
in reinvestment of dividends
and distributions 396,953 7,905,015
------------ ------------
Total issued 5,058,297 109,522,206
Shares redeemed (1,496,367) (32,621,973)
------------ ------------
Net increase 3,561,930 $ 76,900,233
============ ============
Class C Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 4,263,467 $ 85,246,441
Shares issued to shareholders
in reinvestment of
distributions 4,740 76,935
------------ ------------
Total issued 4,268,207 85,323,376
Shares redeemed (385,718) (7,910,688)
------------ ------------
Net increase 3,882,489 $ 77,412,688
============ ============
Class D Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 8,855,195 $208,171,714
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,450,827 52,562,307
Automatic conversion of
shares 2,042,224 47,330,262
------------ ------------
Total issued 13,348,246 308,064,283
Shares redeemed (5,171,860) (122,143,078)
------------ ------------
Net increase 8,176,386 $185,921,205
============ ============
Class D Shares for the Year Dollar
Ended October 31, 1995 Shares Amount
Shares sold 7,989,658 $166,752,965
Shares issued to shareholders
in reinvestment of
distributions 46,313 797,042
Automatic conversion of
shares 21,033,581 422,714,534
------------ ------------
Total issued 29,069,552 590,264,541
Shares redeemed (2,493,288) (53,346,669)
------------ ------------
Net increase 26,576,264 $536,917,872
============ ============
60
<PAGE> 116
<TABLE>
<CAPTION>
Increase Increase Dividend
Industry Affiliate in Shares--Net in Cost--Net Income
<S> <S> <C> <C> <C>
Energy Acquistion & Exploration Apache Corp. 3,000,000 $87,791,921 $1,820,000
Diversified Resource Companies Arcadian Corp. 2,109,000 47,969,951 210,900
Electronic Components Cirrus Logic, Inc. 255,000 5,263,123 ++
Biotechnology CytoTherapeutics,
Inc. 213,000 2,904,158 ++
Biotechnology CytoTherapeutics,
Inc. (Warrants) -- -- ++
Energy Acquisition & Exploration Devon Energy Corp. -- -- 264,000
Offshore Drilling Companies Ensco International,
Inc. 1,300,000 39,449,496 ++
Diversified Resource Companies Freeport-McMoRan,
Inc. -- -- 1,350,000
Offshore Drilling Companies Global Marine, Inc. -- -- ++
Electronic Components Komag, Inc. 2,700,000 48,631,141 ++
Oilfield Services Nabors Industries,
Inc. 5,000,000 55,701,065 ++
Energy Acquisition & Exploration Newfield Exploration
Co. 349,500 10,270,295 ++
International Exploration & Norcen Energy
Production Resources Ltd. 1,025,000 14,483,787 ++
Computer Software Platinum Technology,
Inc. 1,786,248 23,466,337 ++
Domestic Exploration & Production Santa Fe Energy
Resources, Inc. -- -- ++
Domestic Exploration & Production Seagull Energy Corp. 450,000 8,428,812 ++
Natural Gas Gathering & Transmission TransMontaigne
Oil Co. 3,117,000 17,143,500 ++
Oil Refining Valero Energy Corp. -- -- 2,080,000
Oilfield Services Weatherford Enterra,
Inc. 3,000,000 86,669,086 ++
Natural Gas Gathering & Transmission Western Gas
Resources, Inc. -- -- 500,000
<FN>
++Non-income producing security.
</TABLE>
61
<PAGE> 117
(This Page Intentionally Left Blank)
<PAGE> 118
- ------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies.... 2
Portfolio Strategies Involving
Options and Futures.............. 3
Other Investment Policies and
Practices........................ 7
Investment Restrictions............. 10
Management of the Fund................ 13
Trustees and Officers............... 13
Management and Advisory
Arrangements..................... 15
Purchase of Shares.................... 16
Initial Sales Charge Alternatives --
Class A and Class D Shares....... 16
Reduced Initial Sales Charges....... 17
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements..................... 21
Distribution Plans.................. 21
Limitations on the Payment of
Deferred Sales Charges........... 22
Redemption of Shares.................. 23
Deferred Sales Charges -- Class B
and Class C Shares............... 23
Portfolio Transactions and
Brokerage........................... 24
Determination of Net Asset Value...... 25
Shareholder Services.................. 26
Investment Account.................. 26
Automatic Investment Plans.......... 27
Automatic Reinvestment of Dividends
and Capital Gains
Distributions.................... 27
Systematic Withdrawal Plans -- Class
A and Class D Shares............. 27
Retirement Plans.................... 28
Exchange Privilege.................. 29
Dividends, Distributions and Taxes.... 31
Dividends and Distributions......... 31
Taxes............................... 31
Tax Treatment of Options and Futures
Transactions..................... 33
Special Rules for Certain Foreign
Currency Transactions............ 33
Performance Data...................... 34
General Information................... 36
Description of Shares............... 36
Computation of Offering Price Per
Share............................ 37
Independent Auditors................ 37
Custodian........................... 37
Transfer Agent...................... 38
Legal Counsel....................... 38
Reports to Shareholders............. 38
Additional Information.............. 38
Appendix.............................. 39
Independent Auditors' Report.......... 46
Financial Statements.................. 47
</TABLE>
Code #10480-0297
[MERRILL LYNCH LOGO]
MERRILL LYNCH
GROWTH FUND
STATEMENT OF
ADDITIONAL
INFORMATION
February 24, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
[MERRILL LYNCH COMPASS ART]
<PAGE> 119
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.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- --------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>
<PAGE> 120
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the nine-year period
ended October 31, 1996 and for the period March 27, 1987 (commencement of
operations) to October 31, 1987.
Contained in Part B:
Financial Statements:
Schedule of Investments as of October 31, 1996
Statement of Assets and Liabilities as of October 31, 1996
Statement of Operations for the year ended October 31, 1996
Statements of Changes in Net Assets for each of the years in the
two-year period ended October 31, 1996.
Financial Highlights for each of the years in the five-year period
ended October 31, 1996
(b) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- ----------------------------------------------------------------------------------
<S> <C> <C>
1 (a) -- Declaration of Trust of the Registrant.(a)
(b) -- Amendment to Declaration of Trust, dated March 24, 1987.(d)
(c) -- Instrument establishing Class A shares and Class B shares of Registrant.(e)
(d) -- Amendment to Declaration of Trust, dated October 18, 1994.(i)
2 (a) -- By-Laws of Registrant.(a)
2 (b) -- Amended By-Laws of Registrant.
3 -- None.
4 -- Instruments Defining Rights of Shareholders. Incorporated by reference to Exhibits
1 and 2 above.
5 -- Management Agreement between Registrant and Merrill Lynch Asset Management.(a)
6 (a) -- Class B Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(c)
(b) -- Class A Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(i)
(c) -- Class C Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(i)
(d) -- Class D Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc.(i)
7 -- None.
8 -- Custody Agreement between Registrant and State Street Bank and Trust Company.(c)
9 -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agreement
between Registrant and Merrill Lynch Financial Data Services, Inc.(b)
10 -- Opinion of counsel for Registrant.(j)
11 -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
12 -- None.
13 -- Form of certificate of Merrill Lynch Asset Management.(c)
14 -- Not applicable.
15 (a) -- Class B Distribution Plan and Class B Distribution Plan Sub-Agreement.(g)
(b) -- Class C Distribution Plan and Class C Distribution Plan Sub-Agreement.(i)
(c) -- Class D Distribution Plan and Class D Distribution Plan Sub-Agreement.(i)
</TABLE>
C-1
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- ----------------------------------------------------------------------------------
<S> <C> <C>
16 (a) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 (relating to Class A shares).(f)
(b) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 (relating to Class B shares).(e)
(c) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 (relating to Class C shares).(i)
(d) -- Schedule of computation of each performance quotation provided in the Registration
Statement in response to Item 22 (relating to Class D shares).(i)
17 (a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
(e) -- Other Exhibits
Powers of Attorney for Officers and Trustees(h)
Arthur Zeikel
Herbert I. London
Robert R. Martin
Joseph L. May
Andre F. Perold
Gerald M. Richard
(f) -- Power of Attorney for James H. Bodurtha.
18 -- Rule 18f-3 Plan of the Registrant.(k)
</TABLE>
- ---------------
(a) Incorporated by reference to the identically numbered exhibit to
Post-Effective Amendment No. 13 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A. Initially filed as an Exhibit to
Registrant's Registration Statement under the Securities Act of 1933 on Form
N-1A on December 12, 1986.
(b) Incorporated by reference to the identically numbered exhibit to
Post-Effective Amendment No. 13 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A. Initially filed as an Exhibit to
Pre-Effective Amendment No. 1 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A on January 30, 1987.
(c) Incorporated by reference to the identically numbered exhibit to
Post-Effective Amendment No. 13 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A. Initially filed as an Exhibit to
Pre-Effective Amendment No. 2 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A on February 18, 1987.
(d) Incorporated by reference to the identically numbered exhibit to
Post-Effective Amendment No. 13 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A. Initially filed as an Exhibit to
Post-Effective Amendment No. 1 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A on September 4, 1987.
(e) Incorporated by reference to the identically numbered exhibit to
Post-Effective Amendment No. 13 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A. Initially filed as an Exhibit to
Post-Effective Amendment No. 3 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A on November 2, 1988.
(f) Incorporated by reference to the identically numbered exhibit to
Post-Effective Amendment No. 13 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A. Initially filed as an Exhibit to
Post-Effective Amendment No. 5 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A on February 28, 1990.
(g) Incorporated by reference to the identically numbered exhibit to
Post-Effective Amendment No. 13 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A. Initially filed as an
C-2
<PAGE> 122
Exhibit to Post-Effective Amendment No. 9 to Registrant's Registration
Statement under the Securities Act of 1933 on Form N-1A on February 26,
1993.
(h) Incorporated by reference to identically numbered Exhibit to Post-Effective
Amendment No. 10 to Registrant's Registration Statement under the Securities
Act of 1933 on Form N-1A on February 25, 1994.
(i) Incorporated by reference to respective exhibit to Post-Effective Amendment
No. 12 to Registration Statement.
(j) Incorporated by reference to the identically numbered exhibit to
Post-Effective No. 13 to Registrant's Registration Statement under the
Securities Act of 1933 on Form N-1A. Initially filed as an Exhibit to
Post-Effective Amendment No. 3 and Post-Effective Amendment No. 9 to
Registrant's Registration Statement on November 2, 1988 and February 26,
1993, respectively.
(k) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to Registration Statement under the Securities of 1933 on Form N-1A of
Merrill Lynch Multi-State Municipal Series Trust on January 25, 1996 (File
Nos. 2-99473 and 811-4375).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS JANUARY 31, 1997
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per share 79,573
Class B shares of beneficial interest, par value $0.10 per share 214,106
Class C shares of beneficial interest, par value $0.10 per share 24,903
Class D shares of beneficial interest, par value $0.10 per share 69,074
</TABLE>
- ---------------
Note: The number of holders shown above includes holders of record plus
beneficial owners, whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees and agents
(including persons who serve at its request as directors, officers or trustees
of another organization in which it has any interest as a shareholder, creditor
or otherwise) against all liabilities and expenses (including amounts paid in
satisfaction of judgments, in compromise, as fines and penalties and as counsel
fees) reasonably incurred by him in connection with the defense or disposition
of any action, suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while in office or
thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief as
to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no person may satisfy any right of indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The
C-3
<PAGE> 123
Trustees may make advance payments in connection with indemnification under this
Section 5.3 provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently determined
that he is not entitled to such indemnification."
Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made on the following conditions: (i) the advances must be limited to
amounts used, or to be used, for the preparation of presentation of a defense to
the action, including costs connected with the preparation of a settlement; (ii)
advances may be made only upon receipt of a written promise by, or on behalf of,
the recipient to repay that amount of the advance which exceeds the amount to
which it is ultimately determined that he is entitled to receive from the
Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assures that any repayments may be obtained by the Registrant
without delay or litigation, which bond, insurance or other form of security
must be provided by the recipient of the advance, or (b) a majority of a quorum
of the Registrant's disinterested, non-party Trustees, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.
The Registrant has purchased an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against such
officers and Trustees, to the extent such officers and Trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties.
The Management Agreement between Registrant and Merrill Lynch Asset
Management, Inc. (now called Merrill Lynch Asset Management, L.P.) ("MLAM")
limits the liability of MLAM to liabilities arising from willful misfeasance,
bad faith or gross negligence in the performance of their respective duties or
from reckless disregard of their respective duties and obligations.
In Section 9 of the Distribution Agreements relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, against certain types of civil liabilities arising in
connection with the Registration Statement or Prospectus and Statement of
Additional Information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
MLAM also acts as investment adviser for the following open-end investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill
Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Fund for Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value
Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
C-4
<PAGE> 124
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc.
and Merrill Lynch Variable Series Funds, Inc.; and the following closed-end
investment companies: Convertible Holdings, Inc., Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end investment companies: Apex Municipal
Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality
Fund II, Inc., Senior High Income Portfolio, Inc., Taurus MuniCalifornia
Holdings, Inc., Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest
Fund, Inc.
The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager, FAM, Princeton Services, Inc. ("Princeton Services"), and Princeton
Administrators, L.P. ("Princeton Administrators") is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill
Lynch Financial Data Services ("FDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
July 1, 1993, for such person's or entity's own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President, Mr.
Richard is Treasurer and Mr. Glenn is Executive Vice President of all or
substantially all of the investment companies described in the preceding
paragraph. Mr. Zeikel is a director of substantially all of such companies, and
Mr. Glenn is a director of certain of such companies. Messrs. Durnin, Giordano,
Harvey, Hewitt, Kirstein and Monagle are directors or officers of one or more of
such companies.
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<PAGE> 125
Officers and partners of MLAM are set forth as follows;
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
ML & Co........................ Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services............. General Partner General Partner of FAM
Arthur Zeikel.................. President President of FAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.
Terry K. Glenn................. Executive Vice President Executive Vice President of FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of MLFD;
Director of FDS
President of Princeton
Administrators L.P.;
Vincent R. Giordano............ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Elizabeth Griffin.............. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Norman R. Harvey............... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Michael J. Hennewinkel......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
N. John Hewitt................. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Philip L. Kirstein............. Senior Vice President, Senior Vice President, General
General Counsel and Counsel and Secretary of MLAM;
Secretary Senior Vice President, General
Counsel, Director and Secretary
of Princeton Services; Director
of MLFD.
Ronald M. Kloss................ Senior Vice President and Senior Vice President and
Controller Controller of MLAM; Senior Vice
President and Controller of
Princeton Services.
Stephen M.M. Miller............ Senior Vice President Executive Vice President of
Princeton Administrators, L.P.;
Senior Vice President of
Princeton Services.
Joseph T. Monagle, Jr.......... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
</TABLE>
C-6
<PAGE> 126
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
Michael L. Quinn............... Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services; Managing
Director and First Vice President
of Merrill Lynch, Pierce, Fenner
& Smith from 1989 to 1995.
Richard L. Reller.............. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton Services.
Gerald M. Richard.............. Senior Vice President and Senior Vice President and Treasurer
Treasurer of MLAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD.
Ronald L. Welburn.............. Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton
Services.
Anthony Wiseman................ Senior Vice President Senior Vice President of MLAM;
Senior Vice President of
Princeton
Services.
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: Merrill Lynch
EuroFund, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch International Equity Fund and Merrill Lynch
Short-Term Global Income Fund, Inc. The address of each of these investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
MLAM U.K. is Milton Gate, 1 Moor Lane, London ECZY 9HA, England.
Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since July 1,
1994, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert, Bascand, Glenn, Richard
and Yardley are officers of one or more of the registered investment companies
listed in the first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------- ---------------------- --------------------------------------------
<S> <C> <C>
Arthur Zeikel.......... Director and Chairman President of the Manager and FAM; President
and Director of Princeton Services, Director
of MLFD; Executive Vice President of ML &
Co.
Alan J. Albert......... Senior Managing Di- Vice President of the Manager
rector
Terry K. Glenn......... Director Executive Vice President of the Manager and
FAM; Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Adrian Holmes.......... Managing Director Director of Merrill Lynch Global Asset
Management
Andrew John Bascand.... Director Director of Merrill Lynch Global Asset
Management
</TABLE>
C-7
<PAGE> 127
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------- ---------------------- --------------------------------------------
<S> <C> <C>
Edward Gobora.......... Director Director of Merrill Lynch Global Asset
Management
Richard Kilbride....... Director Managing Director of Merrill Lynch Global
Asset Management
Gerald M. Richard...... Senior Vice President Senior Vice President and Treasurer of the
Manager and FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Stephen J. Yardley..... Director Director of Merrill Lynch Global Asset
Management
Carol Ann Langham...... Company Secretary None
Debra Anne Searle...... Assistant Company None
Secretary
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant and for each
of the open-end investment companies referred to in the first paragraph of Item
28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., and also acts as principal
underwriter for the following closed-end funds: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc. and
Merrill Lynch Municipal Strategy Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Officers Aldrich,
Breen, Crook, Fatseas, and Wasel is One Financial Center, 15th Floor, Boston,
Massachusetts 02111-2665.
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- ------------------------------- --------------------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn................. President and Director Executive Vice President
Arthur Zeikel.................. Director President and Trustee
Philip L. Kirstein............. Director None
William E. Aldrich............. Senior Vice President None
Robert W. Crook................ Senior Vice President None
Kevin P. Boman................. Vice President None
Michael J. Brady............... Vice President None
William M. Breen............... Vice President None
Michael G. Clark............... Vice President None
Mark A. DeSario................ Vice President None
James T. Fatseas............... Vice President None
Debra W. Landsman-Yaros........ Vice President None
Michelle T. Lau................ Vice President None
Gerald M. Richard.............. Vice President and Treasurer Treasurer
Salvatore Venezia.............. Vice President None
William Wasel.................. Vice President None
Robert Harris.................. Secretary None
</TABLE>
(c) Not applicable.
C-8
<PAGE> 128
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder will be maintained at the offices of the Registrant, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, and its transfer agent, Merrill Lynch
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption "Management of the
Trust -- Management and Advisory Arrangements" in the Prospectus constituting
Part A of the Registration Statement and under "Management of the
Fund -- Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, Registrant is not
a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) The Registrant will furnish each person to whom a Prospectus is
delivered with a copy of Registrant's latest annual report to shareholders, upon
request and without charge.
C-9
<PAGE> 129
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to this
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 24th day of February, 1997.
MERRILL LYNCH GROWTH FUND
(Registrant)
By: /s/ ARTHUR ZEIKEL
------------------------------------
(Arthur Zeikel, President)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------- ---------------------------------- ------------------
<S> <C> <C>
/s/ ARTHUR ZEIKEL President and Trustee (Principal February 24, 1997
- ----------------------------------- Executive Officer)
(Arthur Zeikel)
* Treasurer (Principal Financial and
- ----------------------------------- Accounting Officer)
(Gerald M. Richard)
* Trustee
- -----------------------------------
(James H. Bodurtha)
* Trustee
- -----------------------------------
(Herbert I. London)
* Trustee
- -----------------------------------
(Robert R. Martin)
* Trustee
- -----------------------------------
(Joseph L. May)
* Trustee
- -----------------------------------
(Andre F. Perold)
*By: /s/ ARTHUR ZEIKEL February 24, 1997
- -----------------------------------
(Arthur Zeikel, Attorney-in-Fact)
</TABLE>
C-10
<PAGE> 130
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C> <C>
2(b) --Amended By-Laws of Registrant
11 --Consent of Deloitte & Touche LLP, independent auditors for Registrant....
17(a) --Financial Data Schedule for Class A Shares...............................
17(b) --Financial Data Schedule for Class B Shares...............................
17(c) --Financial Data Schedule for Class C Shares...............................
17(d) --Financial Data Schedule for Class D Shares...............................
</TABLE>
<PAGE> 1
EXHIBIT 2(b)
================================================================================
AMENDED BY-LAWS
OF
MERRILL LYNCH GROWTH FUND
================================================================================
<PAGE> 2
MERRILL LYNCH GROWTH FUND
AMENDED BY-LAWS
These By-Laws are made and adopted pursuant to Section 2.7 of the
Declaration of Trust establishing MERRILL LYNCH GROWTH FUND, dated December 11,
1986, as from time to time amended (hereinafter called the "Declaration"). All
words and terms capitalized in these By-Laws shall have the meaning or meanings
set forth for such words or terms in the Declaration.
ARTICLE I
Shareholder Meetings
Section 1.1. Chairman. The Chairman, if any, shall act as
chairman at all meetings of the Shareholders; in his absence, the President
shall act as chairman; and in the absence of the Chairman and President, the
Trustee or Trustees present at each meeting may elect a temporary chairman for
the meeting, who may be one of themselves.
Section 1.2. Proxies; Voting. Shareholders may vote either in
person or by duly executed proxy and each full share represented at the meeting
shall have one vote, all as provided in Article X of the Declaration. No proxy
shall be valid after eleven (11) months from the date of its execution, unless
a longer period is expressly stated in such proxy.
Section 1.3. Closing of Transfer Books and Fixing Record Dates.
For the purpose of determining the Shareholders who are entitled to notice of
or to vote or act at any meeting, including any adjournment thereof, or who are
entitled to participate in any dividends, or for any other proper purpose, the
Trustees may from time to time close the transfer books or fix a record
2
<PAGE> 3
date in the manner provided in Section 10.4 of the Declaration. If the
Trustees do not prior to any meeting of Shareholders so fix a record date or
close the transfer books, then the date of mailing notice of the meeting or the
date upon which the dividend resolution is adopted, as the case may be, shall
be the record date.
Section 1.4. Inspectors of Election. In advance of any meeting of
Shareholders, the Trustees may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors of Election are not so
appointed, the Chairman, if any, of any meeting of Shareholders may, and on the
request of any Shareholder or his proxy shall, appoint Inspectors of Election
of the meeting. The number of Inspectors shall be either one or three. If
appointed at the meeting on the request of one or more Shareholders or
proxies, a majority of Shares present shall determine whether one or three
Inspectors are to be appointed, but failure to allow such determination by the
Shareholders shall not affect the validity of the appointment of Inspectors of
Election. In case any person appointed as Inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment made by the
Trustees in advance of the convening of the meeting or at the meeting by the
person acting as chairman. The Inspectors of Election shall determine the
number of Shares outstanding, the Shares represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies, shall
receive votes, ballots or consents, shall hear and determine all challenges and
questions in any way arising in connection with the right to vote, shall count
and tabulate all votes or consents, determine the results, and do such other
acts as may be proper to conduct the election or vote with fairness to all
Shareholders. If there are three Inspectors of Election, the decision, act or
certificate of a majority is effective in all respects as the decision, act or
certificate of all. On request of the Chairman, if any, of the
3
<PAGE> 4
meeting, or of any Shareholder or his proxy, the Inspectors of Election shall
make a report in writing of any challenge or question or matter determined by
them and shall execute a certificate of any facts found by them.
Section 1.5. Records at Shareholder Meetings. At each meeting of
the Shareholders there shall be open for inspection the minutes of the last
previous Shareholder Meeting of the Fund and a list of the Shareholders of the
Fund, certified to be true and correct by the Secretary or other proper agent
of the Fund, as of the record date of the meeting or the date of closing of
transfer books, as the case may be. Such list of Shareholders shall contain
the name of each Shareholder in alphabetical order and the address of and
number of Shares owned by such Shareholder. Shareholders shall have such other
rights and procedures of inspection of the books and records of the Fund as are
granted to shareholders of a Massachusetts business corporation.
ARTICLE II
Trustees
Section 2.1. Annual and Regular Meetings. The Trustees shall hold
an annual meeting for the election of officers and the transaction of other
business which may come before such meeting, on such date as shall be fixed by
the Trustees from time to time. Regular meetings of the Trustees may be held
without call or notice at such place or places and times as the Trustees may by
resolution provide from time to time.
Section 2.2. Special Meetings. Special Meetings of the Trustees
shall be held upon the call of the Chairman, if any, the President, the
Secretary or any two Trustees, at such time, on such day, and at such place, as
shall be designated in the notice of the meeting.
4
<PAGE> 5
Section 2.3. Notice. Notice of a meeting shall be given by mail
or by telegram (which term shall include a cablegram) or delivered personally.
If notice is given by mail, it shall be mailed not later than 48 hours
preceding the meeting and if given by telegram or personally, such telegram
shall be sent or delivery made not later than 48 hours preceding the meeting.
Notice by telephone shall constitute personal delivery for these purposes.
Notice of a meeting of Trustees may be waived before or after any meeting by
signed written waiver. Neither the business to be transacted at, nor the
purpose of, any meeting of the Board of Trustees need be stated in the notice
or waiver of notice of such meeting, and no notice need be given of action
proposed to be taken by unanimous written consent. The attendance of a Trustee
at a meeting shall constitute a waiver of notice of such meeting except where a
Trustee attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting has not been
lawfully called or convened.
Section 2.4. Chairman; Records. The Chairman, if any, shall act
as chairman at all meetings of the Trustees; in his absence the President shall
act as chairman; and, in the absence of the Chairman and the President, the
Trustees present shall elect one of their number to act as temporary chairman.
The results of all actions taken at a meeting of the Trustees, or by unanimous
written consent of the Trustees, shall be recorded by the Secretary.
ARTICLE III
Officers
Section 3.1. Officers of the Fund. The officers of the Fund shall
consist of a Chairman, if any, a President, a Secretary, a Treasurer and such
other officers or assistant officers, including
5
<PAGE> 6
Vice-Presidents, as may be elected by the Trustees. The President also shall
have the power to appoint such assistant officers (including one or more
Assistant Vice Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries) as may be necessary or appropriate to facilitate the
management of the Fund's affairs. Any two or more of the offices may be held
by the same person, except that the same person may not be both President and
Secretary. The Trustees may designate a Vice-President as an Executive
Vice-President and may designate the order in which the other Vice-Presidents
may act. The Chairman and the President shall be Trustees, but no other
officer of the Fund need be a Trustee.
Section 3.2. Election and Tenure. At the initial organizational
meeting and thereafter at each annual meeting of the Trustees, the Trustees
shall elect the Chairman, if any, President, Secretary, Treasurer and such
other officers as the Trustees shall deem necessary or appropriate in order to
carry out the business of the Fund. Such officers shall hold office until the
next annual meeting of the Trustees and until their successors have been duly
elected and qualified. The Trustees may fill any vacancy in office or add any
additional officers at any time.
Section 3.3. Removal of Officers. Any officer may be removed at
any time, with or without cause, by action of a majority of the Trustees. This
provision shall not prevent the making of a contract of employment for a
definite term with any officer and shall have no effect upon any cause of
action which any officer may have as a result of removal in breach of a
contract of employment. Any officer may resign at any time by notice in
writing signed by such officer and delivered or mailed to the Chairman, if any,
President, or Secretary, and such resignation shall take effect immediately
upon receipt by the Chairman, if any, President, or Secretary, or at a later
date according to the terms of such notice in writing.
6
<PAGE> 7
Section 3.4. Bonds and Surety. Any officer may be required by the
Trustees to be bonded for the faithful performance of' his duties in such
amount and with such sureties as the Trustees may determine.
Section 3.5. Chairman, President, and Vice-Presidents. The
Chairman, if any, shall, if present, preside at all meetings of the
Shareholders and of the Trustees and shall exercise and perform such other
powers and duties as may from time to time be assigned to him by the Trustees.
Subject to such supervisory powers, if any, as may be given by the Trustees to
the Chairman, if any, the President shall be the chief executive officer of the
Fund and, subject to the control of the Trustees, shall have general
supervision, direction and control of the business of the Fund and of its
employees and shall exercise such general powers of management as are usually
vested in the office of President of a corporation. In the absence of the
Chairman, if any, the President shall preside at all meetings of the
Shareholders and of the Trustees. The President shall be, ex-officio, a
member of all standing committees, except as otherwise provided in the
resolutions or instruments creating any such committees. Subject to direction
of the Trustees, the Chairman, if any, and the President shall each have power
in the name and on behalf of the Fund to execute any and all loan documents,
contracts, agreements, deeds, mortgages, and other instruments in writing, and
to employ and discharge employees and agents of the Fund. Unless otherwise
directed by the Trustees, the Chairman, if any, and the President shall each
have full authority and power, on behalf of all of the Trustees, to attend and
to act and to vote, on behalf of the Fund at any meetings of business
organizations in which the Fund holds an interest, or to confer such powers
upon any other persons, by executing any proxies duly authorizing such
persons. The Chairman, if any, and the President shall have such further
authorities and duties as
7
<PAGE> 8
the Trustees shall from time to time determine. In the absence or disability
of the President, the Vice-Presidents in order of their rank as fixed by the
Trustees or, if more than one and not ranked, the Vice-President designated by
the Trustees, shall perform all of the duties of the President, and when so
acting shall have all the powers of and be subject to all of the restrictions
upon the President. Subject to the direction of the Trustees, and of the
President, each Vice-President shall have the power in the name and on behalf
of the Fund to execute any and all loan documents, contracts, agreements,
deeds, mortgages and other instruments in writing, and, in addition, shall have
such other duties and powers as shall be designated from time to time by the
Trustees or by the President.
Section 3.6. Secretary. The Secretary shall keep the minutes of
all meetings of, and record all votes of, Shareholders, Trustees and the
Executive Committee, if any. He shall be custodian of the seal of the Fund, if
any, and he (and any other person so authorized by the Trustees) shall affix
the seal or, if permitted, a facsimile thereof, to any instrument executed by
the Fund which would be sealed by a Massachusetts corporation executing the
same or a similar instrument and shall attest the seal and the signature or
signatures of the officer or officers executing such instrument on behalf of
the Fund. The Secretary shall also perform any other duties commonly incident
to such office in a Massachusetts business corporation, and shall have such
other authorities and duties as the Trustees shall from time to time determine.
Section 3.7. Treasurer. Except as otherwise directed by the
Trustees, the Treasurer shall have the general supervision of the monies,
funds, securities, notes receivable and other valuable papers and documents of
the Fund, and shall have and exercise under the supervision of the Trustees and
of the President all powers and duties normally incident to his office. He may
8
<PAGE> 9
endorse for deposit or collection all notes, checks and other instruments
payable to the Fund or to its order. He shall deposit all funds of the Fund in
such depositories as the Trustees shall designate. He shall be responsible for
such disbursement of the funds of the Fund as may be ordered by the Trustees or
the President. He shall keep accurate account of the books of the Fund's
transactions which shall be the property of the Fund, and which together with
all other property of the Fund in his possession, shall be subject at all times
to the inspection and control of the Trustees. Unless the Trustees shall
otherwise determine, the Treasurer shall be the principal accounting officer of
the Fund and shall also be the principal financial officer of the Fund. He
shall have such other duties and authorities as the Trustees shall from time to
time determine. Notwithstanding anything to the contrary herein contained, the
Trustees may authorize any adviser, administrator, manager or transfer agent to
maintain bank accounts and deposit and disburse funds of the Fund.
Section 3.8. Other Officers and Duties. The Trustees may elect
such other officers and assistant officers as they shall from time to time
determine to be necessary or desirable in order to conduct the business of the
Fund. Assistant officers shall act generally in the absence of the officer
whom they assist and shall assist that officer in the duties of his office.
Each officer, employee and agent of the Fund shall have such other duties and
authority as may be conferred upon him by the Trustees or delegated to him by
the President.
9
<PAGE> 10
ARTICLE IV
Miscellaneous
Section 4.1. Custodians. In accordance with Section 7.1 of the
Declaration, the funds of the Fund shall be deposited with such custodian or
custodians as the Trustees shall designate and shall be drawn out on checks,
drafts or other orders signed by such officer, officers, agent or agents
(including any adviser, administrator or manager), as the Trustees may from
time to time authorize.
Section 4.2. Signatures. All contracts and other instruments
shall be executed on behalf of the Fund by such officer, officers, agent or
agents, as provided in these By-Laws or as the Trustees may from time to time
by resolution provide.
Section 4.3. Seal. The seal of the Fund, if any, may be affixed
to any document, and the seal and its attestation may be lithographed, engraved
or otherwise printed on any document with the same force and effect as if it
had been imprinted and attested manually in the same manner and with the same
effect as if done by a Massachusetts business corporation.
ARTICLE V
Share Certificates and Share Transfers
Section 5.1. Share Certificates. Each holder of Shares of the
Fund shall be entitled upon request to have a certificate or certificates, in
such form as shall be approved by the Trustees, representing the number of
Shares owned by him, provided, however, that certificates
10
<PAGE> 11
for fractional Shares shall not be delivered in any case. The certificates
representing Shares shall be signed by or in the name of the Fund by the
President or a Vice-President and by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer and sealed with the seal of the Fund.
Any or all of the signatures or the seal on the certificate may be a facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate shall be
issued, it may be issued by the Fund with the same effect as if such officer,
transfer agent or registrar were still in office at the date of issue.
Section 5.2. Transfer Agents, Registrars and the Like. As
provided in Section 6.6 of the Declaration, the Trustees shall have authority
to employ and compensate such transfer agents and registrars with respect to
the Shares of the Fund as the Trustees shall deem necessary or desirable and
may require all certificates for Shares to bear the signature or signatures of
any of them. In addition, the Trustees shall have power to employ and
compensate such dividend disbursing agents, warrant agents and agents for the
reinvestment of dividends as they shall deem necessary or desirable. Any of
such agents shall have such power and authority as is delegated to any of them
by the Trustees.
Section 5.3. Transfer of Shares. The Shares of the Fund shall be
transferable on the books of the Fund only upon delivery to the Trustees or a
transfer agent of the Fund of proper documentation as provided in Section 6.7
of the Declaration, and on surrender of the certificate or certificates, if
issued, for such Shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. The Fund, or its
transfer agents shall
11
<PAGE> 12
be authorized to refuse any transfer unless and until presentation of such
evidence as may be reasonably required to show that the requested transfer is
proper.
Section 5.4. Registered Shareholders. The Fund may deem and treat
the holder of record of any Share as the absolute owner thereof for all
purposes and shall not be required to take any notice of any right or claim of
right of any other person.
Section 5.5. Regulations. The Trustees may make such additional
rules and regulations, not inconsistent with these By-Laws, as it may deem
expedient concerning the issue, transfer and registration of certificates for
Shares of the Fund.
Section 5.6. Lost, Destroyed or Mutilated Certificates. The
holder of any certificate representing Shares of the Fund shall immediately
notify the Fund of any loss, destruction or mutilation of such certificate, and
the Fund may issue a new certificate in the place of any certificate
theretofore issued by it which the owner thereof shall allege to have been lost
or destroyed or which shall have been mutilated, and the Trustees may, in their
discretion, require such owner or his legal representatives to give the Fund a
bond in such sum, limited or unlimited, and in such form and with such surety
or sureties, as the Trustees in their absolute discretion shall determine, to
indemnify the Fund against any claim that may be made against it on account of
the alleged loss or destruction of any such certificate, or issuance of a new
certificate. Anything herein to the contrary notwithstanding, the Trustees in
their absolute discretion, may refuse to issue any such new certificates,
except pursuant to legal proceedings under the laws of the Commonwealth of
Massachusetts.
12
<PAGE> 13
ARTICLE VI
Amendment of By-Laws
Section 6.1. Amendment and Repeal of By-Laws. In accordance with
Section 2.7 of the Declaration, the Trustees shall have the power to alter,
amend or repeal the By-Laws or adopt new By-Laws at any time. Action by the
Trustees with respect to the By-Laws shall be taken by an affirmative vote of a
majority of the Trustees. The Trustees shall in no event adopt By-Laws which
are in conflict with the Declaration, and any apparent inconsistency shall be
construed in favor of the related provisions in the Declaration.
The Declaration establishing Merrill Lynch Growth Fund, a copy of
which, together with all amendments thereto, is on file in the office of the
Secretary of the Commonwealth of Massachusetts, provides that the name
"Merrill Lynch Growth Fund" refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of Merrill Lynch Growth Fund shall be
held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or otherwise in
connection with the affairs of said Merrill Lynch Growth Fund but the "Trust
Property" only shall be liable.
13
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH GROWTH FUND:
We consent to the use in Post-Effective Amendment No. 14 to Registration
Statement No. 33-10794 of our report dated December 6, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
February 21, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000807907
<NAME> MERRILL LYNCH GROWTH FUND
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 3843889085
<INVESTMENTS-AT-VALUE> 5092691752
<RECEIVABLES> 15554321
<ASSETS-OTHER> 105436
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5108351509
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
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