<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1998
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. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 15
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
[X]
AMENDMENT NO. 16
(CHECK APPROPRIATE BOX OR BOXES)
----------------
MERRILL LYNCH GROWTH FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY
(ADDRESS OF PRINCIPAL (ZIP
EXECUTIVE OFFICES) CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
Counsel for the Fund: Philip L. Kirstein, Esq.
Joel H. Goldberg, Esq. Merrill Lynch Asset Management, L.P.
Shereff, Friedman, Hoffman & Goodman, P.O. Box 9011
LLP Princeton, N.J. 08543-9011
919 Third Avenue
New York, New York 10022
----------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH GROWTH FUND
POST-EFFECTIVE AMENDMENT NO. 15 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
Item 4. General Description of Registrant.... Cover Page; Performance Data;
Investment Objectives and Policies;
Additional Information
Item 5. Management of the Fund............... Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance......................... Not Applicable
Item 6. Capital Stock and Other Securities... Merrill Lynch Select PricingSM System;
Purchase of Shares; Taxes; Additional
Information
Item 7. Purchase of Securities Being Offered. Fee Table; Merrill Lynch Select
PricingSM System; Purchase of Shares;
Shareholder Services; Additional
Information; Inside Back Cover; Cover
Page
Item 8. Redemption or Repurchase............. Fee Table; 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...... General Information
Item 13. Investment Objectives and Policies... Investment Objectives and Policies
Item 14. Management of the Registrant ........ Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities....................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other
Services............................. Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices .......................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities... General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............ Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
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>
PROSPECTUS
JANUARY 30, 1998
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
Objectives 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 other 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, and for participants in certain fee-based programs the minimum initial
purchase is $500 and the minimum subsequent purchase is $50. Merrill Lynch may
charge its customers a processing fee (presently $5.35) for confirming
purchases and repurchases. Purchases and redemptions made directly through
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent") are not
subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the 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 January 30, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and can be obtained, without charge, by calling or by writing
the Fund at the above telephone number or address. The Commission maintains a
Web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information
regarding the Fund. 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>
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 4.0% during the first year,
price or redemption decreasing 1.0%
proceeds, whichever is annually thereafter to 0.0%
lower)................ None(d) after the fourth year(e) 1.0% for one year(f) None(d)
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:
Shareholder Servicing
Fees(i)............... 0.13% 0.15% 0.16% 0.13%
Other.................. 0.03% 0.03% 0.03% 0.03%
----- ----- ----- -----
Total Other Expenses... 0.16% 0.18% 0.19% 0.16%
----- ----- ----- -----
Total Fund Operating 0.81% 1.83% 1.84% 1.06%
Expenses(j)............ ===== ===== ===== =====
</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 35.
(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 that
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 35.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 35.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 35.
(g) 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. See "Management of the Fund--Management and
Advisory Arrangements"--page 18.
2
<PAGE>
(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, 1997, 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, 1997, the Manager waived management fees totaling
.04% for Class A shares, .04% for Class B shares, .04% for Class C shares
and .04% for Class D shares, after which the Fund's total expense ratio
was .77% for Class A shares, 1.79% for Class B shares, 1.80% for Class C
shares and 1.02% 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..................................... $60 $77 $ 95 $147
Class B..................................... $59 $78 $ 99 $195*
Class C..................................... $29 $58 $100 $216
Class D..................................... $63 $84 $108 $175
An investor would pay the following expenses
on the same $1,000 investment assuming no re-
demption at the end of the period:
Class A..................................... $60 $77 $ 95 $147
Class B..................................... $19 $58 $ 99 $195*
Class C..................................... $19 $58 $100 $216
Class D..................................... $63 $84 $108 $175
</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
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
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."
3
<PAGE>
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 registered investment companies advised by Merrill Lynch Asset
Management, L.P. ("MLAM" or the "Manager") or an affiliate of MLAM, Fund Asset
Management, L.P. ("FAM"). Funds advised by MLAM or FAM that use 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 CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on 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 CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.
4
<PAGE>
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(/2/) Maximum 5.25% initial No No No
sales charge(/3/)
- ------------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- ------------------------------------------------------------------------------------------
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 $1,000,000 will apply. See "Class
A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding period for certain retirement plans is modified as described
under "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
Class C Shares--Conversion of Class B Shares to Class D Shares." 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 directly or indirectly
wholly-
5
<PAGE>
owned and controlled by ML & Co.), and their directors and employees and
to members of the Boards of MLAM-advised mutual funds. The maximum
initial sales charge of 5.25% is reduced for purchases of $25,000 and
over and waived for purchases by certain retirement plans and
participants in connection with certain fee-based programs. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but if
the initial sales charge is waived such purchases may be subject to a
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 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, are 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
1.0% CDSC 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. Class D
shares are not subject to an ongoing distribution fee or any CDSC
when they are redeemed. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over. Purchases of
6
<PAGE>
$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 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
7
<PAGE>
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>
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, 1997, 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,
------------------------------------------------------------------------------------------
1997++ 1996++ 1995++ 1994++ 1993 1992 1991 1990 1989+
---------- ---------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PER-
FORMANCE:
Net asset value,
beginning of period..... $ 26.87 $ 23.13 $ 19.19 $ 19.22 $ 14.79 $ 15.31 $ 10.61 $ 12.52 $ 9.61
---------- ---------- -------- -------- -------- -------- -------- ------- -------
Investment income--net.. .53 .31 .23 .08 .02 .02 .01 .13 .21
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net..................... 7.98 5.63 4.01 2.01 4.86 .65 4.82 (1.92) 3.15
---------- ---------- -------- -------- -------- -------- -------- ------- -------
Total from investment
operations.............. 8.51 5.94 4.24 2.09 4.88 .67 4.83 (1.79) 3.36
---------- ---------- -------- -------- -------- -------- -------- ------- -------
Less dividends and
distributions:
Investment income--net. (.44) (.35) -- -- -- -- -- (.11) (.19)
Realized gain on in-
vestments--net......... (1.81) (1.85) (.30) (2.12) (.45) (1.19) (.13) (.01) (.26)
---------- ---------- -------- -------- -------- -------- -------- ------- -------
Total dividends and
distributions........... (2.25) (2.20) (.30) (2.12) (.45) (1.19) (.13) (.12) (.45)
---------- ---------- -------- -------- -------- -------- -------- ------- -------
Net asset value, end of
period.................. $ 33.13 $ 26.87 $ 23.13 $ 19.19 $ 19.22 $ 14.79 $ 15.31 $ 10.61 $ 12.52
========== ========== ======== ======== ======== ======== ======== ======= =======
TOTAL INVESTMENT RE-
TURN:**
Based on net asset value
per share............... 34.03% 28.15% 22.60% 12.50% 33.97% 5.77% 45.88% (14.42)% 36.21%#
========== ========== ======== ======== ======== ======== ======== ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... .77% .80% .82% .82% .81% .84% .87% .89% .91%*
========== ========== ======== ======== ======== ======== ======== ======= =======
Expenses................ .81% .84% .84% .82% .81% .84% .87% .89% .91%*
========== ========== ======== ======== ======== ======== ======== ======= =======
Investment income--net.. 1.84% 1.28% 1.10% .44% .29% .28% .46% .80% 1.84%*
========== ========== ======== ======== ======== ======== ======== ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $1,769,296 $1,056,870 $670,164 $382,077 $229,709 $138,456 $ 92,494 $21,431 $ 4,581
========== ========== ======== ======== ======== ======== ======== ======= =======
Portfolio turnover...... 24.75% 30.01% 37.42% 4.22% 33.21% 21.20% 27.86% 19.65% 35.24%*
========== ========== ======== ======== ======== ======== ======== ======= =======
Average Commission Rate
Paid##.................. $ .0559 $ .0539 -- -- -- -- -- -- --
========== ========== ======== ======== ======== ======== ======== ======= =======
</TABLE>
- ----
*Annualized.
**Total investment returns exclude the effects of sales loads.
+Class A shares commenced operations on November 28, 1988.
++Based on average 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.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------------------------------
1997+ 1996+ 1995+ 1994+ 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of year. $ 25.03 $ 21.60 $ 18.12 $ 18.43 $ 14.35 $ 15.03 $ 10.53 $ 12.49 $ 10.03 $ 8.85
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Investment income
(loss)--net....... .22 .06 .01 (.10) (.11) (.10) (.06) (.04) .10 .15
Realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions--net. 7.39 5.26 3.77 1.91 4.64 .61 4.69 (1.87) 2.72 1.28
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Total from
investment
operations........ 7.61 5.32 3.78 1.81 4.53 .51 4.63 (1.91) 2.82 1.43
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment
income--net...... (.20) (.04) -- -- -- -- -- (.04) (.10) (.19)
Realized gain on
investments--net. (1.81) (1.85) (.30) (2.12) (.45) (1.19) (.13) (.01) (.26) (.06)
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Total dividends
and distributions. (2.01) (1.89) (.30) (2.12) (.45) (1.19) (.13) (.05) (.36) (.25)
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -------- --------
Net asset value,
end of year....... $ 30.63 $ 25.03 $ 21.60 $ 18.12 $ 18.43 $ 14.35 $ 15.03 $ 10.53 $ 12.49 $ 10.03
========== ========== ========== ========== ========== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset
value per share... 32.62% 26.84% 21.37% 11.41% 32.54% 4.74% 44.32% (15.31)% 29.25% 16.64%
========== ========== ========== ========== ========== ======== ======== ======== ======== ========
RATIOS TO AVERAGE
NET ASSETS:
Expenses, net of
reimbursement..... 1.79% 1.82% 1.84% 1.84% 1.83% 1.87% 1.90% 1.93% 1.97% 1.93%
========== ========== ========== ========== ========== ======== ======== ======== ======== ========
Expenses.......... 1.83% 1.85% 1.87% 1.84% 1.83% 1.87% 1.90% 1.93% 1.97% 1.93%
========== ========== ========== ========== ========== ======== ======== ======== ======== ========
Investment income
(loss)--net....... .82% .26% .04% (.58)% (.78)% (.76)% (.53%) (.29)% .78% 1.52%
========== ========== ========== ========== ========== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
year (in
thousands)........ $4,687,523 $2,916,507 $1,920,451 $1,433,051 $1,049,190 $758,061 $824,007 $436,556 $493,623 $511,776
========== ========== ========== ========== ========== ======== ======== ======== ======== ========
Portfolio
turnover.......... 24.75% 30.01% 37.42% 4.22% 33.21% 21.20% 27.86% 19.65% 35.24% 4.86%
========== ========== ========== ========== ========== ======== ======== ======== ======== ========
Average Commission
Rate Paid#........ $ .0559 $ .0539 -- -- -- -- -- -- -- --
========== ========== ========== ========== ========== ======== ======== ======== ======== ========
</TABLE>
- ----
* Total investment returns exclude the effects of sales loads.
+ Based on average 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 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>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CLASS C++ CLASS D++
------------------------------------------- ----------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD FOR THE PERIOD
OCT. 31, OCT. 21, 1994+ FOR THE YEAR ENDED OCT. 31, OCT. 21, 1994+
--------------------------- TO OCT. 31, ------------------------------ TO OCT. 31,
1997 1996 1995 1994 1997 1996 1995 1994
-------- -------- ------- -------------- ---------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 24.89 $ 21.59 $ 18.12 $17.45 $ 26.79 $ 23.06 $ 19.18 $18.47
-------- -------- ------- ------ ---------- -------- -------- ------
Investment income--net.. .22 .06 .03 -- .46 .24 .22 --
Realized and unrealized
gain on investments and
foreign currency
transactions--net....... 7.34 5.23 3.74 .67 7.95 5.63 3.96 .71
-------- -------- ------- ------ ---------- -------- -------- ------
Total from investment
operations.............. 7.56 5.29 3.77 .67 8.41 5.87 4.18 .71
-------- -------- ------- ------ ---------- -------- -------- ------
Less dividends and
distributions:
Investment income--net. (.21) (.14) -- -- (.38) (.29) -- --
Realized gain on
investments--net....... (1.81) (1.85) (.30) -- (1.81) (1.85) (.30) --
-------- -------- ------- ------ ---------- -------- -------- ------
Total dividends and
distributions........... (2.02) (1.99) (.30) -- (2.19) (2.14) (.30) --
-------- -------- ------- ------ ---------- -------- -------- ------
Net asset value, end of
period.................. $ 30.43 $ 24.89 $ 21.59 $18.12 $ 33.01 $ 26.79 $ 23.06 $19.18
======== ======== ======= ====== ========== ======== ======== ======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share............... 32.63% 26.84% 21.32% 3.84%# 33.67% 27.83% 22.29% 3.84%#
======== ======== ======= ====== ========== ======== ======== ======
RATIOS TO AVERAGE NET
ASSETS:
Expenses, net of
reimbursement........... 1.80% 1.84% 1.86% 2.52%* 1.02% 1.05% 1.08% 1.77%*
======== ======== ======= ====== ========== ======== ======== ======
Expenses................ 1.84% 1.87% 1.89% 2.52%* 1.06% 1.08% 1.10% 1.77%*
======== ======== ======= ====== ========== ======== ======== ======
Investment income
(loss)--net............. .81% .25% .14% (1.17)%* 1.59% 1.03% 1.00% (.54)%*
======== ======== ======= ====== ========== ======== ======== ======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands)... $427,377 $187,221 $85,486 $1,381 $1,642,665 $932,811 $614,357 $1,186
======== ======== ======= ====== ========== ======== ======== ======
Portfolio turnover...... 24.75% 30.01% 37.42% 4.22% 24.75% 30.01% 37.42% 4.22%
======== ======== ======= ====== ========== ======== ======== ======
Average Commission Rate
Paid##.................. $ .0559 $ .0539 -- -- $ .0559 $ .0539 -- --
======== ======== ======= ====== ========== ======== ======== ======
</TABLE>
- ----
* Annualized.
** Total investment returns exclude the effects of sales loads.
+ Commencement of Operations.
++ Based on average 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>
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 be changed only 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 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.
12
<PAGE>
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.
Because 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, limit the amount of
investment by 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.
13
<PAGE>
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 MLAM, and, accordingly, the Fund may experience high portfolio turnover. A
higher turnover rate increases brokerage costs. For the fiscal years ended
October 31, 1997 and October 31, 1996, the Fund's portfolio turnover rates
were 24.75% and 30.01%, respectively.
Investment emphasis will be on equities, primarily common stocks and, to a
lesser extent, securities convertible into common stocks, preferred stock and
other instruments the return on which is linked to the performance of a common
stock or a basket or index of common stocks ("equity securities"). The Fund
may invest up to 5% of its total assets 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"). 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 will at all times, except during temporary defensive periods, or
during extraordinary periods to meet redemptions, maintain at least 65% of its
total assets invested in equity securities. The Fund may also invest up to 35%
of its total assets under normal circumstances and in excess of 35% of its
total assets during temporary defensive periods, or during extraordinary
periods to meet redemptions, in other types of securities, including, debt
securities, short-term U.S. Government securities, money market securities,
and repurchase agreements, and cash or cash equivalents, in such proportions
as, in the opinion of the Manager, prevailing market or economic conditions
warrant.
14
<PAGE>
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
may 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. Because 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
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
15
<PAGE>
paid a commitment fee, regardless of whether or not the security is ultimately
issued. 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.
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.
16
<PAGE>
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 that cannot be readily resold because of legal or contractual
restrictions or that cannot otherwise be marketed, redeemed, put to the issuer
or a third party, or that do not mature within seven days, or that 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 that 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 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.
17
<PAGE>
The Statement of Additional Information contains a description of these
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*--Chairman of MLAM and its affiliate, FAM; Chairman and
Director of Princeton Services, Inc. ("Princeton Services"); Executive
Vice President of ML & Co.
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
140 registered investment companies. The Manager also offers portfolio
management and portfolio analysis services to individual and institutional
accounts. As of December 31, 1997, the Manager and FAM had a total of $278.7
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.
18
<PAGE>
Stephen C. Johnes is the portfolio manager for the Fund. Mr. Johnes is
currently a First Vice President of the Manager and has been employed by the
Manager 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, 1997, the fee paid by the Fund, net of fee waiver, to the Manager
was $40,206,766 (based on average net assets of approximately $6.6 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, 1997, the Fund reimbursed the Manager $361,942 for accounting services.
For the fiscal year ended October 31, 1997, the ratio of total expenses to
average daily net assets was 0.81%, 1.83%, 1.84% and 1.06% 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. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y
9HA, England.
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.
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).
19
<PAGE>
TRANSFER AGENCY SERVICES
The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $11.00 per Class
A and Class D account and up to $14.00 per Class B and Class C account and is
entitled to reimbursement for certain transaction charges and out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial interest of a person in the relevant share class on a recordkeeping
system, provided the recordkeeping system is maintained by a subsidiary of ML
& Co. For the fiscal year ended October 31, 1997, the total fee paid by the
Fund to the Transfer Agent pursuant to the Transfer Agency Agreement was
$9,521,651.
PURCHASE OF SHARES
The Distributor, an affiliate of each of the Manager and 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 and except that for participants in certain
fee-based programs the minimum initial purchase is $500 and the minimum
subsequent purchase is $50.
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 on that day, such orders shall be deemed received on the next business
day. The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the Fund.
Neither the Distributor nor the dealers are permitted to withhold placing
orders to benefit themselves by a price change. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a sale of shares to
such customers. Purchases made directly through the Fund's Transfer Agent are
not subject to the processing fee.
20
<PAGE>
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 CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, are imposed directly against those classes and not against
all assets of the 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 (except that Class B shareholders may vote
upon any material changes to expenses charged under the Class D Distribution
Plan). See "Distribution Plans" below. Each class has different exchange
privileges. See "Shareholder Services--Exchange Privilege."
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the 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, that are
eligible to sell shares.
21
<PAGE>
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>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A(/2/) Maximum 5.25% initial No No No
sales charge(/3/)
- -----------------------------------------------------------------------------------------------
B CDSC for a period of 4 years, 0.25% 0.75% B shares convert to D shares
at a rate of 4.0% during the automatically after
first year, decreasing 1.0% approximately eight years(/5/)
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 $1,000,000 will apply.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans is modified as described
under "Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares." 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.
22
<PAGE>
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 DISCOUNT TO
SALES LOAD AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT 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 by certain retirement plan
investors and participants in certain fee-based programs. If the sales
charge is waived in connection with a purchase of $1,000,000 or more, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed within
one year after purchase. Such CDSC may be waived in connection with certain
fee-based programs. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being
redeemed. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A 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.
The proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities. During the fiscal year ended
October 31, 1997, the Fund sold 26,024,620 Class A shares for aggregate net
proceeds of $745,365,301. The gross sales charges for the sale of Class A
shares of the Fund for that year were $209,227, of which $14,470 was received
by the Distributor (including $1,356 in direct commissions) and $194,757 was
received by Merrill Lynch. 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, 1997, the Fund sold 17,348,143
Class D shares for aggregate net proceeds of $497,504,347. The gross sales
charges for the sale of Class D shares of the Fund for that year were
$3,071,068, of which $210,653 was received by the Distributor (including
$14,677 in direct commissions) and $2,860,415 was received by Merrill Lynch.
No CDSCs were received with respect to Class D shares, for which the initial
sales charge was waived, during such year.
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
23
<PAGE>
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 Retirement or Savings
Plans, including eligible 401(k) plans, may purchase Class A shares at net
asset value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs and U.S. branches of foreign banking
institutions provided that the program or branch has $3 million or more
initially invested in MLAM-advised mutual funds. Also eligible to purchase
Class A shares at net asset value are participants in certain investment
programs including 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 investment companies
advised by MLAM or its affiliates, 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 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") and, if certain conditions set forth in the Statement of
Additional Information are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. ("Municipal Strategy Fund") and Merrill Lynch High Income
Municipal Bond Fund, Inc. ("High Income 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 funds 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 High Income Fund or 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."
Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access SM Accounts
available through authorized employers. Subject to certain conditions, Class A
and Class D shares are offered at net asset value to shareholders of 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.
24
<PAGE>
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.
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
which declines each year, while Class C shares are subject only to a one year
1.0% CDSC. On the other hand, approximately eight years after Class B shares
are issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted 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 at an annual rate
of 0.25% of average daily net assets and a distribution fee at an annual rate
of 0.75% of average daily net assets as discussed below under "Distribution
Plans." The proceeds from the account maintenance fees are used to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.
Class B and Class C shares are sold without an initial sales charge so that
the 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.
25
<PAGE>
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations
on the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services--
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds
of redemption or the 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, 1997, the Distributor received CDSCs
of $3,135,480 with respect to redemptions of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the Distributor may have
been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor 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
26
<PAGE>
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 IRA or other retirement plan or
following the death or disability (as defined in 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 that are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption and for any Class B shares that were acquired and held at the time
of the redemption in an Employee Access SM Account available through employers
providing eligible 401(k) plans. The Class B CDSC 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. The Class B CDSC
also is waived for any Class B shares that are purchased within qualifying
Employee Access SM Accounts. 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. The Class C CDSC may be waived in connection
with certain fee-based programs. See "Shareholder Services--Fee-Based
Programs." For the fiscal year ended October 31, 1997, the Distributor
received CDSCs of $96,952 with respect to redemptions of Class C shares, all
of which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted
automatically to Class D shares of the Fund. Class D shares are subject to an
ongoing account maintenance fee at an annual rate of 0.25% of average daily
net assets but are not subject to the distribution fee that is borne by Class
B shares. Automatic conversion of Class B shares 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.
27
<PAGE>
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.
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.
28
<PAGE>
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.
For the fiscal year ended October 31, 1997, the Fund paid the Distributor
$37,000,254 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of approximately $3.7
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, 1997, the Fund paid
the Distributor $2,898,334 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $289.8 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, 1997,
the Fund paid the Distributor $3,109,660 pursuant to the Class D Distribution
Plan (based on average daily net assets subject to such Class D Distribution
Plan of approximately $1.2 billion), 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, 1996, 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 $8,130,000 (.26% of
Class B net assets at that date). With respect to Class B shares, as of
December 31, 1997, direct cash revenues for the period since the commencement
of operations exceeded direct cash expenses by $122,178,923 (2.76% of Class B
net assets at that date). For the Class C shares, as of December 31, 1996, the
fully allocated accrual expenses incurred by the Distributor and Merrill Lynch
since the Class C shares commenced operations on October 21, 1994
29
<PAGE>
exceeded fully allocated accrual revenues for such period by $69,000 (.03% of
Class C assets at that date). As of December 31, 1997, with respect to Class C
shares, direct cash revenues for the period since October 21, 1994
(commencement of operations) exceeded direct cash expenses by $3,455,960 (.82%
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 "Purchase of Shares--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.
REPURCHASE AND REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the net asset value of the Fund's shares at such time.
30
<PAGE>
REPURCHASE
The Fund will also repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares
by wire or telephone from dealers for their customers at the net asset value
next computed after receipt of the 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 such request is received by the Fund from such dealer not
later than 30 minutes after the close of business on the NYSE on the same day.
Dealers have the responsibility of submitting such repurchase requests to
the Fund not later than 30 minutes after the close of business on the NYSE
(generally 4:30 p.m., New York time), in order to obtain that day's closing
price. The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms that do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Fund. Merrill
Lynch may charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through the
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 below.
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 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.
31
<PAGE>
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.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
described below that 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 Blueprint SM Program.
Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or to change options with respect thereto, can be obtained
from the 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, the 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
32
<PAGE>
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, the shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or 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 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 or her account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second
fund. If the Class A shareholder wants to exchange Class A shares for shares
of a second MLAM-advised mutual fund and the shareholder does not hold Class A
shares of the second fund in his or her account at the time of the exchange
and is not otherwise eligible to acquire Class A shares of the second fund,
the shareholder will receive Class D shares of the second fund as a result of
the exchange. Class D shares also may be exchanged for Class A shares of a
second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the
account in which the exchange is made or is otherwise eligible to purchase
Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable 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
33
<PAGE>
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 purchase of the acquired
shares and a sale of the exchanged shares for Federal income tax purposes. For
further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
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 may at any time, by written notification to
Merrill Lynch if the shareholder's account is maintained by Merrill Lynch or
by written notification or telephone call (1-800-MER-FUND) to the Transfer
Agent if the shareholder's account is maintained with the Transfer Agent,
elect to have subsequent dividends or capital gains distributions paid in
cash, rather than reinvested, in which event payment will be mailed on or
about the payment date. The Fund is not responsible for any failure of
delivery to the shareholder's address of record and no interest will accrue on
amounts represented by uncashed distribution or redemption checks. 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 shareholder may elect to receive systematic withdrawal checks from his or
her Investment Account in the form of payments by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis. A shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly, bi-
monthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program, subject to certain conditions. With respect to
redemptions of Class B and Class C shares pursuant to systematic withdrawal
plan, the maximum number of Class B or Class C shares that can be redeemed
from an account annually shall not exceed 10% of the value of shares of such
class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
Charges--Class C Shares." Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares."
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<PAGE>
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 Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in such Program's client agreement and from the Transfer
Agent at (800) MER-FUND or (800) 637-3863.
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 capital gains (i.e.,
the excess of net capital gains from the sale of assets held for more than 12
months over net short-term capital losses, and including long-term gains from
certain transactions in futures and options) are taxable to shareholders as
capital gains, regardless of the length of time the shareholder has owned Fund
shares. Recent legislation created additional categories of capital gains
taxable at different rates. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and,
after such adjusted tax basis is reduced to zero, will constitute capital
gains to such holder (assuming the shares are held as a capital asset).
Although the Fund may invest in certain municipal securities, it is not
anticipated that any portion of the dividends paid by the Fund will qualify
for tax-exempt treatment to shareholders.
35
<PAGE>
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 and designating the various categories of capital gain income in
such capital gain dividends. 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
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. Any such capital gains
derived by individuals may be subject to a reduced rate of tax if the shares
were held for more than 12 months, and a further reduction in the tax rate if
the shares were held for more than 18 months. Any such loss will be a long-
term capital 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.
36
<PAGE>
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, as well as gain on the sale of
shares of the Fund, 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, 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
37
<PAGE>
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 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.
38
<PAGE>
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 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."
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 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 that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Trustees as the primary
market. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. Long positions in securities traded in the OTC market are valued at
the last available bid price in the OTC market prior to the time of valuation.
Short positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. When the
Fund writes
39
<PAGE>
an option, the amount of the premium received is recorded on the books of the
Fund as an asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the option written,
based upon the last sale price in the case of exchange-traded options or, in
the case of options traded in the OTC market, the last asked price. Options
purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of 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 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
40
<PAGE>
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.
41
<PAGE>
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
42
<PAGE>
MERRILL LYNCH GROWTH FUND AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT SM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT SM
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch 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........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with rights of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital
Gains
Select [_] Reinvest Select [_] Reinvest
One: [_] Cash One: [_] Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [_] CHECK
OR [_] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch 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.
43
<PAGE>
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.
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
..................., 19......
Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch 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.
By .................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name............................. (2) Name.............................
Account Number....................... Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp.
We hereby authorize Merrill Lynch
- - - Funds Distributor, 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 ..................................
This form when completed should be Authorized Signature of Dealer
mailed to:
Merrill Lynch Growth Fund [ ][ ][ ] [ ][ ][ ][ ]
c/o Merrill Lynch Financial Branch-Code F/C No. ...............
Data Services, Inc. F/C Last Name
P.O. Box 45289 [ ][ ][ ] [ ][ ][ ][ ][ ]
Jacksonville, FL 32232-5289 Dealer's Customer A/C No.
44
<PAGE>
MERRILL LYNCH GROWTH FUND AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Name of Owner......................
[ ]
Social Security No. or
Name of Co-Owner (if any).......... Taxpayer Identification
Number
Address............................ Account Number ....................
(if existing account)
...................................
- -------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
Merrill Lynch 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 THE AMOUNT OF WITHDRAWAL YOU WOULD LIKE PAID TO YOU (CHECK ONE): [_]
$ of [_] Class A, [_] Class B*, [_] Class C*, or or [_] Class D shares in
the account.
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................
Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)......................................................
Address .......................................................................
..........................................................................
Signature of Owner................................ Date..................
Signature of Co-Owner (if any)............................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
Specify type of account (check one): [_] checking [_] savings
Name on your Account...........................................................
Bank Name......................................................................
Bank Number........................ Account Number............................
Bank Address...................................................................
...............................................................................
Signature of Depositor................................. Date..................
Signature of Depositor.........................................................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
* Annual withdrawal cannot exceed 10% of the value of shares of such class
held in the account at the time the election to join the systematic
withdrawal plan is made.
45
<PAGE>
MERRILL LYNCH GROWTH FUND AUTHORIZATION FORM (PART 2) -- (CONTINUED)
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase: (choose one)
[_] Class A shares [_] Class B shares [_] Class C shares [_] Class D shares
of Merrill Lynch 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 AUTHORIZATION TO HONOR ACH DEBITS
SERVICES, INC. DRAWN BY 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:
To...............................Bank
Amount of each check or ACH debit (Investor's Bank)
$..................................
Account Number .................... Bank Address.........................
City...... State...... Zip Code......
Please date and invest ACH debits on
the 20th of each month beginning 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
.................(month) to Merrill Lynch Financial Data
Services, Inc., I agree that your
or as soon thereafter as possible. rights in respect to each such debit
shall be the same as if it were a
I agree that you are drawing these ACH check drawn on you and signed
debits voluntarily at my request and personally by me. This authority is
that you shall not be liable for any to remain in effect until revoked by
loss arising from any delay in me in writing. Until you receive
preparing or failure to prepare any such notice, you shall be fully
such check or debit. If I change banks protected in honoring any such
or desire to terminate or suspend this debit. I further agree that if any
program, I agree to notify you such debit be dishonored, whether
promptly in writing. I hereby with or without cause and whether
authorize you to take any action to intentionally or inadvertently, you
correct erroneous ACH debits of my shall be under no liability.
bank account or purchases of fund
shares including liquidating shares of ............. ......................
the Fund and credit my bank account. I Date Signature of
further agree that if a check or debit Depositor
is not honored upon presentation,
Merrill Lynch Financial Data Services, ............. ......................
Inc. is authorized to discontinue Bank Account Signature of Depositor
immediately the Automatic Investment Number (If joint account,
Plan and to liquidate sufficient both must sign)
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)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
46
<PAGE>
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>
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 to 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 put option will be considered
covered if the Fund has segregated assets with respect to such option
A-2
<PAGE>
in the manner described in "Risk Factors in Options, Futures and Currency
Instruments" below. A call option will 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 an option on a securities index, securities that
substantially correlate with the performance of such index) or owns a call
option, warrant or convertible instrument that 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>
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
A-4
<PAGE>
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 (i) the currency exchange rate movement is so
generally anticipated that the Fund is not able to enter into a hedging
transaction at an effective price, or (ii) the currency exchange rate movement
relates to a market with respect to which Currency Instruments are not
available (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 that 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 a liquid secondary market for such instruments or,
in the case of illiquid instruments traded in OTC transactions, such
instruments satisfy the criteria set forth below under "Additional Risk
Factors of OTC Transactions; Limitations on the Use of OTC 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 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 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,
A-5
<PAGE>
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 options 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>
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
MANAGER
Merrill Lynch Asset Management, L.P.
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
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>
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
Repurchase and Redemption of Shares........................................ 30
Repurchase............................................................... 31
Redemption............................................................... 31
Reinstatement Privilege--Class A and Class D Shares...................... 32
Shareholder Services....................................................... 32
Investment Account....................................................... 32
Exchange Privilege....................................................... 33
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 34
Systematic Withdrawal Plans.............................................. 34
Automated Investment Plans............................................... 35
Fee-Based Programs....................................................... 35
Taxes...................................................................... 35
Performance Data........................................................... 37
Additional Information..................................................... 39
Dividends and Distributions.............................................. 39
Determination of Net Asset Value......................................... 39
Organization of the Fund................................................. 40
Shareholder Reports...................................................... 40
Shareholder Inquiries.................................................... 41
Authorization Form......................................................... 43
Appendix A................................................................. A-1
</TABLE>
Code #10479-0198
[LOGO] MERRILL LYNCH
MERRILL LYNCH
GROWTH FUND
[ART]
PROSPECTUS
January 30, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This Prospectus should be retained for future reference.
<PAGE>
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 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.
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 January
30, 1998, (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the 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 January 30, 1998.
<PAGE>
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,
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
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 portfolio turnover rates for
the fiscal years ended October 31, 1996 and 1997, were 30.01% and 24.75%,
respectively.
2
<PAGE>
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund is authorized to engage in certain investment practices involving
the use of options, futures and foreign exchange, which may expose the Fund to
certain risks. These investment practices and the associated risks are
described in detail in the Prospectus.
OTHER INVESTMENT POLICIES AND PRACTICES
Portfolio Transactions. Because 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. 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. The Fund will enter into
such agreements only for the purpose of investing in the security underlying
the commitment at a yield and price
3
<PAGE>
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 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").
4
<PAGE>
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 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
5
<PAGE>
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.
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. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the
6
<PAGE>
"fund of funds" provisions) of the Investment Company Act, at any time the
Fund's shares are owned by another investment company that is part of the
same group of investment companies as the Fund.
b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."
c. Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which 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 Commission has taken the position that purchased over-the-
counter ("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
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
7
<PAGE>
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.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
Information about 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 (65)--President and Trustee(1)(2)--Chairman of the Manager and
Fund Asset Management, L.P. ("FAM") (which terms as used herein include their
corporate predecessors) since 1997; President and Manager of MLAM and FAM from
1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton Services")
since 1997; Director of Princeton Services since 1993; President of Princeton
Services from 1993 to 1997; Executive Vice President of ML & Co. since 1990.
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 (58)--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 since 1993 and Professor thereof since 1980;
Dean, Gallatin Division of New York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985;
Trustee, Hudson Institute since 1980 and President since 1997; Director, Damon
Corporation from 1991 to 1995; Overseer, Center for Naval Analyses from 1983
to 1993; Limited Partner, Hypertech LP in 1996.
Robert R. Martin (70)--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 (68)--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.
8
<PAGE>
Andre F. Perold (45)--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 (57)--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 Merrill Lynch Funds Distributor,
Inc. ( the "Distributor") since 1986 and Director thereof since 1991; President
of Princeton Administrators, L.P. since 1988.
Norman R. Harvey (64)--Senior Vice President(1)--Senior Vice President of the
Manager and FAM since 1982; Senior Vice President of Princeton Services since
1993.
Donald C. Burke (37)--Vice President(1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager from 1990 to 1997; Director
of Taxation of MLAM since 1990.
Stephen C. Johnes (61)--Vice President and Portfolio Manager of the Fund
(1)--First Vice President of the Manager since 1997; Vice President of the
Manager from 1987 to 1997; Managing Director of the Trust Company of the West
from 1983 to 1986 and Senior Vice President from 1980 to 1982.
Arthur Moretti (34)--Vice President and Associate Portfolio Manager of the
Fund (1)--Director (Equity Fund Management) since 1997; Vice President of MLAM
from 1992 to 1997; Assistant Vice President, Equity Derivatives, First Boston
from 1989 to 1991.
Gerald M. Richard (48)--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 of the Distributor since 1981.
Ira P. Shapiro (34)--Secretary (1)(2)--Director (Legal Advisory) of the
Manager since 1997; Attorney with the Manager and FAM from 1993 to 1997;
Attorney in private practice prior to 1993.
- --------
(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 January 1, 1998, the officers and Trustees of the Fund as a group (13
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 (each a "non-
affiliated Trustee") 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-affiliated Trustees, at the rate of
$1,000 annually, plus $250 per meeting attended. For the fiscal year ended
October 31, 1997, fees and expenses paid to non-affiliated Trustees aggregated
$45,576.
The following table sets forth for the fiscal year ended October 31, 1997,
compensation paid by the Fund to the non-affiliated Trustees and for the
calendar year ended December 31, 1997, the aggregate compensation paid
9
<PAGE>
by all investment companies (including the Fund) advised by MLAM and its
affiliate, FAM ("MLAM/FAM Advised Funds") to the non-affiliated 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 I. 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>
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(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).
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 year ended October 31, 1995, the fee paid by the Fund to the Manager
was $15,372,837. For the fiscal years ended October 31, 1996 and 1997, the
fees paid by the Fund to the Manager were, net of fee waiver, $24,808,434 and
$40,206,766, respectively. 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
10
<PAGE>
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; 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 is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies. Similarly, the following entities
may be considered "controlling persons" of MLAM U.K.: Merrill Lynch Europe
Limited (MLAM U.K.'s parent), a subsidiary of ML International Holdings, a
subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.
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.
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
11
<PAGE>
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
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege."
The Merrill Lynch Select Pricing SM System is used by more than 50
registered investment companies advised by the Manager or an affiliate of the
Manager, FAM. Funds advised by the Manager or FAM that use 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 fiscal year
ended October 31, 1997 were $209,207 of which the Distributor received $14,470
(including $1,356 in direct commissions) and Merrill Lynch received $194,737.
The gross sales charges for the sale of Class A shares for the fiscal year
ended October 31, 1996 were $209,100, of which the Distributor received
$13,960 and Merrill Lynch received $195,140. The gross sales charges for the
sale of Class A shares for the fiscal year ended October 31, 1995 were
$323,396, of which the Distributor received $19,404 and Merrill Lynch received
$303,992. For the fiscal years ended October 31, 1997, 1996 and 1995 the
Distributor received no CDSCs 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 year ended October 31, 1997 were $3,071,068, of which
the Distributor received $210,653 (including $14,677 in direct commissions)
and Merrill Lynch received $2,860,415. The gross sales charges for the sale of
Class D shares for the fiscal year ended October 31, 1996 were $1,560,492, of
which the Distributor received $100,325 and Merrill Lynch received $1,460,167.
The gross sales charges for the sale of Class D shares for the fiscal year
ended October 31, 1995 were $1,639,227, of which the Distributor received
$102,417 and Merrill Lynch received $1,536,810. For the fiscal years ended
October 31, 1997 and 1996, 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
12
<PAGE>
company that 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 mutual funds presently held, at cost or maximum offering
price (whichever is higher), on the date of the first purchase under the
Letter of Intention, may be included as a credit toward the completion of such
Letter, but the reduced sales charge applicable to the amount covered by such
Letter will be applied only to new purchases. If the total amount of shares
does not equal the amount stated in the Letter of Intention (minimum of
$25,000), the investor will be notified and must pay, within 20 days of the
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
13
<PAGE>
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.
Employee Access SM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee AccessSM Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is
$50.
Purchase Privileges of Certain Persons. Trustees of the Fund, members of the
Boards of other investment companies advised by MLAM or its affiliates,
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.
14
<PAGE>
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 he or she 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 he or she 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 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
15
<PAGE>
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 SMManaged 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 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.
16
<PAGE>
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.
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.
17
<PAGE>
The following tables set forth comparative information as of October 31,
1997 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, 1997, with
respect to Class B shares, and for the period October 21, 1994 (commencement
of operations of Class C shares) to October 31, 1997, with respect to Class C
shares.
DATA CALCULATED AS OF OCTOBER 31, 1997
<TABLE>
<CAPTION>
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
---------- --------- ----------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Under NASD Rule As
Adopted (in thousands). $3,949,441 $246,840 $ 71,531 $318,371 $ 120,530 $197,841 $ 35,156
Under Distributor's Vol-
untary Waiver (in thou-
sands)................. $3,949,441 $246,840 $ 19,747 $266,587 $ 120,530 $146,057 $ 35,156
CLASS C SHARES
Under NASD Rule As
Adopted (in thousands). $ 350,461 $ 21,904 $ 2,218 $ 24,122 $ 3,610 $ 20,512 $ 3,205
</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. See
"Purchase of Shares--Distribution Plans" in the Prospectus. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch
Mutual Funds Advisor ("MFA") program. The CDSC is booked as a contingent
obligation that may be payable if the shareholder terminates participation
in the MFA program. 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.
REDEMPTION OF SHARES
Reference is made to "Repurchase and 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 (the "NYSE") is restricted as
determined by the Commission or during which the NYSE is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Commission,
18
<PAGE>
as a result of which disposal of portfolio securities or determination of the
net asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the 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
certain instances, including 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
in the case of such withdrawals 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, 1997, 1996, and 1995, the Distributor
received CDSCs of $3,135,480, $2,000,859, and $1,488,167, respectively, with
respect to redemptions of Class B shares, all of which were paid to Merrill
Lynch. Additional CDSCs payable to the Distributor may have been waived or
converted to a contingent obligation in connection with a shareholder's
participation in certain fee-based programs. Similarly, for the fiscal years
ended October 31, 1997, 1996 and 1995, the Distributor received CDSCs of
$96,952, $75,039 and $20,243, respectively, with respect to Class C shares,
all of which were paid to Merrill Lynch.
Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in Blueprint. 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 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.
19
<PAGE>
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 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 NASD Conduct Rules 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 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. For the fiscal year ended October 31, 1997,
the Fund paid total brokerage commissions of $5,268,046 of which $441,467 or
approximately 8.4% was paid to Merrill Lynch for effecting 7.7% of the
aggregate amount of transactions in which the Fund paid brokerage commissions.
The portfolio turnover rates for the fiscal years ended October 31, 1997, 1996
and 1995 were 24.75%, 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, 1997, the Fund acquired no securities of brokers or dealers
which executed its portfolio transactions during that year.
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
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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 NYSE (generally
4:00 p.m., New York time) on each day during which the NYSE is open for
trading. The NYSE is not open on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation. 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 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
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or, lacking any sales, at the last available bid price for long positions and
the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Trustees as the primary
market. Portfolio securities that are traded both in the over-the-counter
("OTC") market and on a stock exchange are valued according to the broadest
and most representative market. Long positions in securities traded in the OTC
market are valued at the last available bid price in the OTC market prior to
the time of valuation. Short positions in securities traded in the OTC market
are valued at the last available ask price in the OTC market prior to the time
of valuation. When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last asked price. Options purchased by the Fund are valued at
their last sale price in the case of exchange-traded options or, in the case
of options traded in the OTC market, the last bid price. Other 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 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
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<PAGE>
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 Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) 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. The Fund
is not responsible for any failure of delivery to the shareholder's address of
record and no interest will accrue on amounts represented by uncashed
distribution or redemption checks.
SYSTEMATIC WITHDRAWAL PLANS
A shareholder may elect to make withdrawals from an Investment Account of
Class A, Class B, Class C or Class D shares in the form of payments by check
or through automatic payment by direct deposit to such shareholder's bank
account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are
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<PAGE>
available for shareholders who have acquired shares of the Fund having a
value, based on cost or the current offering price, of $5,000 or more, and
monthly withdrawals are available for shareholders with shares having a value
of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and class of shares to be redeemed. 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 NYSE is not open for business on such date, the shares will be redeemed at
the close of business on the following business day. The check for the
withdrawal payment will be mailed, or the direct deposit 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 shares in the Investment Account are reinvested automatically in shares of
the Fund. A shareholder's systematic withdrawal plan may be terminated at any
time, without a 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 shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase
orders for shares of the Fund from investors who maintain a systematic
withdrawal plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly, bi-
monthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to the
shareholder's account three business days after the date the shares are
redeemed. All redemptions are made at net asset value. A shareholder may elect
to have his or her shares redeemed on the first, second, third or fourth
Monday of each month, in the case of monthly redemptions, or of every other
month, in the case of bi-monthly redemptions. For quarterly, semiannual or
annual redemptions, the shareholder may select the month in which the shares
are to be redeemed and may designate whether the redemption is to be made on
the first, second, third or fourth Monday of the month. If the Monday selected
is not a business day, the redemption will be processed at net asset value on
the next business day. The CMA(R) or CBA(R) Systematic Redemption Program is
not available if Fund shares are being purchased within the account pursuant
to the Automatic Investment Program. For more information on the CMA(R) or
CBA(R) Systematic Redemption Program, eligible shareholders should contact
their Merrill Lynch Financial Consultant.
With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as
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<PAGE>
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
Charges--Class C Shares" in the prospectus. Where the systematic withdrawal
plan is applied to Class B Shares, upon conversion of the last Class B shares
in an account to Class D shares, the systematic withdrawal plan will
automatically be applied thereafter to Class D shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares" in the prospectus; if an
investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her 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 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
U.S. 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 or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, but does not hold Class A shares of the second fund in
his or her account at the time of the exchange and is not otherwise eligible
to acquire Class A shares of the second fund, the shareholder will receive
Class D shares of the second fund as a result of the exchange. Class D shares
also may be exchanged for Class A shares of a second MLAM-advised mutual fund
at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund. Class
B, Class C and Class D shares 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.
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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.
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's Class B shares
for two-and-a-half years and three years later decide to redeem the shares of
Institutional Fund for cash.
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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 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 Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains 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.
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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.
Any net capital gains (i.e., the excess of net capital gains from the sale
of assets held for more than 12 months over net short-term capital losses, and
including such gains from certain transactions in futures and options)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but
not more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
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, and also designating the amounts of
various categories of capital gain income in capital gain dividends. 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 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.
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<PAGE>
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.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will
be treated as short-term capital gain if the shares were held for not more than
12 months, gain taxable at the maximum rate of 28% if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain taxable
at the maximum of 20% if such shares were held for more than 18 months. In the
case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months.
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.
Generally, any 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.
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. h 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
29
<PAGE>
transactions," may apply to recharacterize certain capital gains as ordinary
income for tax purposes, and Code Section 1259, which deals with "constructive
sales" of appreciated financial positions (e.g. stock), may treat the Fund as
having recognized income before the time that such income is economically
recognized by the Fund.
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 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.
30
<PAGE>
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.
31
<PAGE>
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, 1997............... 26.99% $1,269.90 28.62% $1,286.20
Five Years Ended October
31, 1997............... 24.63% $3,007.10 24.70% $3,014.70
Ten Years Ended October
31, 1997 (Class B
Shares)................ 19.26% $5,818.30
Inception (November 28,
1988) to October 31,
1997 (Class A Shares).. 20.82% $5,408.30
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended October 31,
1997.................... 34.03% $1,340.30 32.62% $1,326.20
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 (Class A Shares).. 36.21% $1,362.10 -- --
Inception (March 27,
1987) to October 31,
1987 (Class B Shares).. -- -- (10.98)% $ 890.20
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (March 27,
1987) to October 31,
1997 (Class B Shares).. 417.96% $5,179.60
Inception (November 28,
1988) to October 31,
1997 (Class A Shares).. 440.83% $5,408.30
</TABLE>
- --------
* Information as to Class A shares is presented for the period November 28,
1988 to October 31, 1997. Prior to November 28, 1988, no Class A shares were
publicly issued.
** Commencement of Operations of Class B shares was March 27, 1987.
32
<PAGE>
Set forth below is total return information for the Class C and Class D
shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS C SHARES* CLASS D 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 OF 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, 1997............... 31.63% $1,316.30 26.65% $1,266.50
Inception (October 21,
1994) to
October 31, 1997....... 28.16% $2,119.30 26.85% $2,056.10
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended October 31,
1997.................... 32.63% $1,326.30 33.67% $1,336.70
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
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to
October 31, 1997....... 111.93% $2,119.30 105.61% $2,056.10
</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 Fund was established under Massachusetts law on December 11, 1986, under
the name Merrill Lynch Retirement Equity Fund. On March 1, 1991, the name of
the Fund was changed to Merrill Lynch Growth Fund for Investment and
Retirement. On June 27, 1996, the name of the Fund was changed to Merrill
Lynch Growth Fund. 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
33
<PAGE>
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 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 (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). 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 unable 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, 1997, is calculated as set forth below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Net Assets............. $1,769,296,179 $4,687,522,769 $427,376,567 $1,642,665,476
============== ============== ============ ==============
Number of Shares Out-
standing.............. 53,412,508 153,030,921 14,042,691 49,759,022
============== ============== ============ ==============
Net Asset Value Per
Share (net assets di-
vided by number of $33.13 $30.63 $30.43 $33.01
shares outstanding)... ------ ------ ------ ------
Sales Charge (Class A
and Class D shares:
5.25% of offering
price (5.54% of net
asset value per 1.84 ** ** 1.83
share))*.............. ------ ------ ------ ------
Offering Price......... $34.97 $30.63 $30.43 $34.84
====== ====== ====== ======
</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.
34
<PAGE>
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 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 as of January 1, 1998.
----------------
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.
35
<PAGE>
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.
36
<PAGE>
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.
37
<PAGE>
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.
38
<PAGE>
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.
39
<PAGE>
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.
40
<PAGE>
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:
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.
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."
41
<PAGE>
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,
B, Preferred stock rated "BB," "B," and "CCC" are regarded, on balance, as
CCC predominantly speculative with respect to the issuer's capacity to pay
preferred stock obligations. "BB" 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.
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.
42
<PAGE>
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, 1997, 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, 1997 by correspondence with the custodian and brokers or
other alternative procedures. 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, 1997, 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 5, 1997
43
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Held/ Value Percent of
Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Banking & Financial 1,000,000 Republic New York Corp. $ 44,267,281 $ 105,812,500 1.3%
Services 2,000,000 Safra Republic Holdings S.A. (ADR)* 69,529,500 208,000,000 2.4
-------------- -------------- ------
113,796,781 313,812,500 3.7
Canadian 8,000,000 Norcen Energy Resources, Ltd. (c) 120,353,892 180,308,085 2.1
Exploration &
Production
Diversified Resource 6,000,000 Freeport-McMoRan Copper & Gold, Inc.
Companies (Class A) (c) 156,119,558 138,375,000 1.6
5,000,000 Freeport-McMoRan Copper & Gold, Inc.
(Class B) (c) 107,984,584 119,375,000 1.4
3,750,000 Freeport-McMoRan, Inc. (c) 114,789,644 127,968,750 1.5
8,000,000 IMC Global, Inc. (c) 273,877,204 269,500,000 3.2
-------------- -------------- ------
652,770,990 655,218,750 7.7
Domestic 7,000,000 Burlington Resources, Inc. (c) 336,647,444 342,562,500 4.0
Exploration & 3,500,000 Vastar Resources, Inc. 106,578,685 141,312,500 1.7
Production -------------- -------------- ------
443,226,129 483,875,000 5.7
Electronic $133,500,000 Cirrus Logic, Inc. (Convertible Bond),
Components 6% due 12/15/2003 (b) 123,411,250 117,646,875 1.4
3,500,000 ++Komag, Inc. (c) 72,539,664 60,156,250 0.7
-------------- -------------- ------
195,950,914 177,803,125 2.1
Energy 8,000,000 Apache Corp. (c) 232,123,043 336,000,000 3.9
Acquisition & 2,200,000 Devon Energy Corp. (c) 34,401,130 98,450,000 1.2
Exploitation 1,000,000 Devon Financing Trust
(Convertible Preferred)(b) 50,000,000 80,500,000 0.9
4,000,000 ++Newfield Exploration Co. (c) 56,598,373 108,500,000 1.3
-------------- -------------- ------
373,122,546 623,450,000 7.3
Miscellaneous 1,000,000 ++Affymetrix, Inc. 16,662,627 36,125,000 0.4
2,763,558 ++CytoTherapeutics, Inc. (c) 18,945,059 14,508,680 0.2
434,500 CytoTherapeutics, Inc. (Warrants)(a) 651,750 31,718 0.0
1,665,000 ++Genset (ADR)* 32,285,401 30,594,375 0.3
780,000 ++Pharmacopeia, Inc. 14,903,780 13,747,500 0.2
1,000,000 RAO Gazprom (ADR)*(b) 17,865,451 22,375,000 0.3
261,000 ++Unova, Inc. 5,113,174 4,893,750 0.0
-------------- -------------- ------
106,427,242 122,276,023 1.4
Natural Gas 3,855,434 ++TransMontaigne Oil Co. (c) 27,060,669 66,506,236 0.8
Gathering & 3,500,000 Western Gas Resources, Inc. (c) 74,549,278 86,406,250 1.0
Transmission -------------- -------------- ------
101,609,947 152,912,486 1.8
Offshore Drilling 18,400,000 Ensco International, Inc. (c) 194,651,449 773,950,000 9.1
Companies 16,300,000 ++Global Marine, Inc. (c) 59,126,323 507,337,500 5.9
1,899,200 Santa Fe International Corp. 69,954,258 93,416,900 1.1
-------------- -------------- ------
323,732,030 1,374,704,400 16.1
Oilfield Services 7,000,000 ++Nabors Industries, Inc. (c) 90,192,970 287,875,000 3.4
5,000,000 Schlumberger Ltd., Inc. 223,527,267 437,500,000 5.1
5,000,000 Tidewater, Inc. (c) 206,165,358 328,437,500 3.8
4,600,000 ++Weatherford Enterra, Inc. 135,307,975 234,887,500 2.8
3,833,400 ++Western Atlas, Inc. (c) 232,388,888 330,391,163 3.9
-------------- -------------- ------
887,582,458 1,619,091,163 19.0
</TABLE>
44
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
Value Percent of
Industries Shares Held Long-Term Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Personal Computers 500,000 ++Dell Computer Corp. $ 3,107,425 $ 40,062,500 0.5%
Real Estate 5,400,000 Beacon Properties Corp. (c) 178,620,085 227,475,000 2.6
Investment 4,920,000 Crescent Real Estate Equities, Inc. (c) 124,669,501 177,120,000 2.1
Trusts--Office 2,733,700 Equity Office Properties Trust 74,868,096 83,548,706 1.0
-------------- -------------- ------
378,157,682 488,143,706 5.7
Real Estate 2,000,000 Avalon Properties, Inc. (c) 52,951,219 58,750,000 0.7
Investment 5,500,000 Equity Residential Properties Trust (c) 241,098,763 277,750,000 3.2
Trusts--Residential -------------- -------------- ------
294,049,982 336,500,000 3.9
Real Estate 3,742,000 Federal Realty Investment Trust (c) 102,967,307 94,719,375 1.1
Investment 945,000 New Plan Realty Trust 22,693,960 22,561,875 0.3
Trusts--Retail 7,411,600 Simon DeBartolo Group, Inc. (c) 222,820,235 229,296,375 2.7
1,727,200 Weingarten Realty Investors 71,733,539 68,764,150 0.8
-------------- -------------- ------
420,215,041 415,341,775 4.9
Total Long-Term Investments 4,414,103,059 6,983,499,513 81.9
Face
Amount Short-Term Investments
Commercial $30,000,000 Aesop Funding Corp., 5.53%
Paper** due 11/06/1997 29,976,958 29,976,958 0.3
50,000,000 American Home Products Corp.,
5.50% due 12/12/1997 49,686,806 49,686,806 0.6
Atlantic Asset Securitization Corp.:
28,257,000 5.53% due 11/13/1997 28,204,913 28,204,913 0.3
12,073,000 5.54% due 11/13/1997 12,050,705 12,050,705 0.1
50,000,000 Bell Atlantic Financial Services, Inc.,
5.54% due 11/07/1997 49,953,833 49,953,833 0.6
40,000,000 CSW Credit, Inc., 5.53% due 11/04/1997 39,981,567 39,981,567 0.5
Centric Capital Corp.:
29,200,000 5.55% due 11/13/1997 29,145,980 29,145,980 0.3
58,500,000 5.54% due 11/21/1997 58,319,950 58,319,950 0.7
Clipper Receivables Corp.:
24,363,000 5.52% due 11/06/1997 24,344,322 24,344,322 0.3
25,000,000 5.52% due 11/19/1997 24,931,000 24,931,000 0.3
Corporate Asset Funding Co., Inc.:
50,000,000 5.50% due 11/25/1997 49,816,667 49,816,667 0.6
35,000,000 5.50% due 12/15/1997 34,764,722 34,764,722 0.4
50,000,000 Corporate Receivables Corp., 5.52% due
12/11/1997 49,693,333 49,693,333 0.6
Countrywide Home Loans, Inc.:
40,000,000 5.57% due 12/04/1997 39,795,767 39,795,767 0.5
20,000,000 5.53% due 12/05/1997 19,895,544 19,895,544 0.2
28,890,000 Falcon Asset Securization Corp., 5.51%
due 11/10/1997 28,850,204 28,850,204 0.3
Finova Capital Corp.:
15,000,000 5.53% due 11/14/1997 14,970,046 14,970,046 0.2
20,000,000 5.57% due 11/21/1997 19,938,111 19,938,111 0.2
Fleet Funding Corp.:
50,000,000 5.52% due 11/26/1997 49,808,333 49,808,333 0.6
38,068,000 5.53% due 12/04/1997 37,875,027 37,875,027 0.4
39,530,000 GTE Corp., 5.50% due 11/17/1997 39,433,371 39,433,371 0.5
</TABLE>
45
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Face Amount Short-Term Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Commercial General Motors Acceptance Corp.:
Paper** $10,116,000 5.75% due 11/03/1997 $ 10,112,769 $ 10,112,769 0.1%
(concluded) 70,000,000 5.51% due 12/02/1997 69,667,868 69,667,868 0.8
50,000,000 Goldman Sachs Group, L.P., 5.53%
due 11/24/1997 49,823,347 49,823,347 0.6
International Securitization Corp.:
50,000,000 5.52% due 11/18/1997 49,869,667 49,869,667 0.6
50,000,000 5.56% due 12/04/1997 49,745,167 49,745,167 0.6
Lexington Parker Capital Corp.:
30,212,000 5.54% due 11/03/1997 30,202,701 30,202,701 0.3
25,224,000 5.54% due 11/14/1997 25,173,538 25,173,538 0.3
50,000,000 5.55% due 11/20/1997 49,853,542 49,853,542 0.6
Morgan (J.P.) & Co., Inc.:
50,000,000 5.50% due 12/19/1997 49,633,333 49,633,333 0.6
50,000,000 5.50% due 12/23/1997 49,602,778 49,602,778 0.6
Morgan Stanley Group, Inc.:
50,000,000 5.52% due 11/03/1997 49,984,667 49,984,667 0.6
50,000,000 5.50% due 11/21/1997 49,847,222 49,847,222 0.6
50,329,000 Motorola, Inc., 5.55% due 11/20/1997 50,181,578 50,181,578 0.6
41,150,000 Preferred Receivables Funding Corp.,
5.52% due 11/12/1997 41,080,594 41,080,594 0.5
20,000,000 Riverwoods Funding Corp., 5.50%
due 11/10/1997 19,972,500 19,972,500 0.2
Three Rivers Funding Corp.:
14,054,000 5.53% due 11/19/1997 14,015,141 14,015,141 0.2
20,104,000 5.58% due 12/02/1997 20,007,400 20,007,400 0.2
Transamerica Finance Corp.:
50,000,000 5.52% due 12/03/1997 49,754,667 49,754,667 0.6
50,000,000 5.54% due 12/08/1997 49,715,306 49,715,306 0.6
WCP Funding, Inc.:
25,000,000 5.53% due 11/07/1997 24,976,958 24,976,958 0.3
25,000,000 5.50% due 12/05/1997 24,870,139 24,870,139 0.3
-------------- -------------- ------
1,559,528,041 1,559,528,041 18.3
US Government Federal Home Loan Mortgage Corp.:
Agency 50,000,000 5.415% due 11/12/1997 49,917,271 49,917,271 0.6
Obligations** 20,000,000 5.465% due 12/17/1997 19,860,339 19,860,339 0.2
-------------- -------------- ------
69,777,610 69,777,610 0.8
Total Short-Term Investments 1,629,305,651 1,629,305,651 19.1
Total Investments $6,043,408,710 8,612,805,164 101.0
==============
Liabilities in Excess of Other Assets (85,944,173) (1.0)
-------------- ------
Net Assets $8,526,860,991 100.0%
============== ======
</TABLE>
[FN]
*American Depositary Receipts (ADR).
**Commercial Paper and certain US Government Agency Obligations are
traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
++Non-income producing security.
(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)The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(c)Investment in an affiliated company (Note 5).
See Notes to Financial Statements.
46
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of October 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$6,043,408,710) (Note 1a) $8,612,805,164
Cash 1,899,050
Receivables:
Beneficial interest sold $ 24,678,190
Dividends 4,728,075
Interest 3,461,692 32,867,957
--------------
Prepaid registration fees and other assets (Note 1f) 97,912
--------------
Total assets 8,647,670,083
--------------
Liabilities: Payables:
Securities purchased 96,798,153
Beneficial interest redeemed 11,693,168
Distributor (Note 2) 4,805,240
Investment adviser (Note 2) 4,503,028 117,799,589
--------------
Accrued expenses and other liabilities 3,009,503
--------------
Total liabilities 120,809,092
--------------
Net Assets: Net assets $8,526,860,991
==============
Net Assets Class A Shares of beneficial interest, $0.10 par value,
Consist of: unlimited number of shares authorized $ 5,341,251
Class B Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 15,303,092
Class C Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 1,404,269
Class D Shares of beneficial interest, $0.10 par value,
unlimited number of shares authorized 4,975,902
Paid-in capital in excess of par 5,374,548,046
Undistributed investment income--net 21,998,884
Undistributed realized capital gains on investments and foreign
currency transactions--net 533,893,093
Unrealized appreciation on investments--net 2,569,396,454
--------------
Net assets $8,526,860,991
==============
Net Asset Value: Class A--Based on net assets of $1,769,296,179 and 53,412,508 shares
of beneficial interest outstanding $ 33.13
==============
Class B--Based on net assets of $4,687,522,769 and 153,030,921 shares
of beneficial interest outstanding $ 30.63
==============
Class C--Based on net assets of $427,376,567 and 14,042,691 shares
of beneficial interest outstanding $ 30.43
==============
Class D--Based on net assets of $1,642,665,476 and 49,759,022 shares
of beneficial interest outstanding $ 33.01
==============
See Notes to Financial Statements.
</TABLE>
47
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended October 31, 1997
<S> <S> <C> <C>
Investment Interest and discount earned $ 94,711,657
Income Dividends (net of $565,313 foreign withholding tax) 77,705,992
(Notes 1d & 1e): --------------
Total income 172,417,649
--------------
Expenses: Investment advisory fees (Note 2) $ 42,880,246
Account maintenance and distribution fees--Class B (Note 2) 37,000,254
Transfer agent fees--Class B (Note 2) 5,578,287
Account maintenance fees--Class D (Note 2) 3,109,660
Account maintenance and distribution fees--Class C (Note 2) 2,898,334
Transfer agent fees--Class A (Note 2) 1,812,916
Transfer agent fees--Class D (Note 2) 1,657,466
Registration fees (Note 1f) 922,577
Transfer agent fees--Class C (Note 2) 472,982
Printing and shareholder reports 365,841
Accounting services (Note 2) 361,942
Custodian fees 203,791
Professional fees 80,175
Trustees' fees and expenses 45,576
Pricing fees 1,544
Other 53,416
--------------
Total expenses before reimbursement 97,445,007
Reimbursement of expenses (Note 2) (2,673,480)
--------------
Total expenses after reimbursement 94,771,527
--------------
Investment income--net 77,646,122
--------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 533,893,531
(Loss) on Foreign currency transactions--net (59,658) 533,833,873
Investments & --------------
Foreign Currency Change in unrealized appreciation on investments--net 1,320,593,787
Transactions --------------
(Notes 1b, 1c, Net realized and unrealized gain on investments and foreign
1e & 3): currency transactions 1,854,427,660
--------------
Net Increase in Net Assets Resulting from Operations $1,932,073,782
==============
See Notes to Financial Statements.
</TABLE>
48
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended October 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 77,646,122 $ 24,902,813
Realized gain on investments and foreign currency
transactions--net 533,833,873 366,995,445
Change in unrealized appreciation on investments--net 1,320,593,787 622,793,812
-------------- --------------
Net increase in net assets resulting from operations 1,932,073,782 1,014,692,070
-------------- --------------
Dividends & Investment income--net:
Distributions to Class A (20,060,922) (11,466,384)
Shareholders Class B (27,296,782) (3,656,501)
(Note 1g): Class C (2,319,545) (670,606)
Class D (15,879,973) (8,536,028)
Realized gain on investments--net:
Class A (72,708,025) (54,826,992)
Class B (214,744,463) (168,933,574)
Class C (14,376,468) (7,976,874)
Class D (65,179,339) (51,112,182)
-------------- --------------
Net decrease in net assets resulting from dividends
and distributions to shareholders (432,565,517) (307,179,141)
-------------- --------------
Beneficial Net increase in net assets derived from beneficial
Interest interest transactions 1,933,943,957 1,095,437,782
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 3,433,452,222 1,802,950,711
Beginning of year 5,093,408,769 3,290,458,058
-------------- --------------
End of year* $8,526,860,991 $5,093,408,769
============== ==============
<FN>
*Undistributed investment income--net (Note 1h) $ 21,998,884 $ 9,982,308
============== ==============
See Notes to Financial Statements.
</TABLE>
49
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996++ 1995++ 1994++ 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 26.87 $ 23.13 $ 19.19 $ 19.22 $ 14.79
Performance: ---------- ---------- ---------- ---------- ----------
Investment income--net .53 .31 .23 .08 .02
Realized and unrealized gain on
investments and foreign currency
transactions--net 7.98 5.63 4.01 2.01 4.86
---------- ---------- ---------- ---------- ----------
Total from investment
operations 8.51 5.94 4.24 2.09 4.88
---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net (.44) (.35) -- -- --
Realized gain on
investments--net (1.81) (1.85) (.30) (2.12) (.45)
---------- ---------- ---------- ---------- ----------
Total dividends
and distributions (2.25) (2.20) (.30) (2.12) (.45)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 33.13 $ 26.87 $ 23.13 $ 19.19 $ 19.22
========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:* value per share 34.03% 28.15% 22.60% 12.50% 33.97%
========== ========== ========== ========== ==========
Ratios to Expenses, net of reimbursement .77% .80% .82% .82% .81%
Average ========== ========== ========== ========== ==========
Net Assets: Expenses .81% .84% .84% .82% .81%
========== ========== ========== ========== ==========
Investment income--net 1.84% 1.28% 1.10% .44% .29%
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $1,769,296 $1,056,870 $ 670,164 $ 382,077 $ 229,709
========== ========== ========== ========== ==========
Portfolio turnover 24.75% 30.01% 37.42% 4.22% 33.21%
========== ========== ========== ========== ==========
Average commission
rate paid++++ $ .0559 $ .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 significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
50
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended October 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996++ 1995++ 1994++ 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of year $ 25.03 $ 21.60 $ 18.12 $ 18.43 $ 14.35
Performance: ---------- ---------- ---------- ---------- ----------
Investment income (loss)--net .22 .06 .01 (.10) (.11)
Realized and unrealized gain on
investments and foreign currency
transactions--net 7.39 5.26 3.77 1.91 4.64
---------- ---------- ---------- ---------- ----------
Total from investment
operations 7.61 5.32 3.78 1.81 4.53
---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
Investment income--net (.20) (.04) -- -- --
Realized gain on
investments--net (1.81) (1.85) (.30) (2.12) (.45)
---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (2.01) (1.89) (.30) (2.12) (.45)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 30.63 $ 25.03 $ 21.60 $ 18.12 $ 18.43
========== ========== ========== ========== ==========
Total Investment Based on net asset
Return:* value per share 32.62% 26.84% 21.37% 11.41% 32.54%
========== ========== ========== ========== ==========
Ratios to Average Expenses, net of reimbursement 1.79% 1.82% 1.84% 1.84% 1.83%
Net Assets: ========== ========== ========== ========== ==========
Expenses 1.83% 1.85% 1.87% 1.84% 1.83%
========== ========== ========== ========== ==========
Investment income (loss)--net .82% .26% .04% (.58%) (.78%)
========== ========== ========== ========== ==========
Supplemental Net assets, end of year
Data: (in thousands) $4,687,523 $2,916,507 $1,920,451 $1,433,051 $1,049,190
========== ========== ========== ========== ==========
Portfolio turnover 24.75% 30.01% 37.42% 4.22% 33.21%
========== ========== ========== ========== ==========
Average commission
rate paid++++ $ .0559 $ .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 significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
51
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class C++++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. 1994++ to
For the Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 24.89 $ 21.59 $ 18.12 $ 17.45
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .22 .06 .03 --
Realized and unrealized gain on investments
and foreign currency transactions--net 7.34 5.23 3.74 .67
---------- ---------- ---------- ----------
Total from investment operations 7.56 5.29 3.77 .67
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.21) (.14) -- --
Realized gain on investments--net (1.81) (1.85) (.30) --
---------- ---------- ---------- ----------
Total dividends and distributions (2.02) (1.99) (.30) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 30.43 $ 24.89 $ 21.59 $ 18.12
========== ========== ========== ==========
Total Investment Based on net asset value per share 32.63% 26.84% 21.32% 3.84%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, net of reimbursement 1.80% 1.84% 1.86% 2.52%*
Net Assets: ========== ========== ========== ==========
Expenses 1.84% 1.87% 1.89% 2.52%*
========== ========== ========== ==========
Investment income (loss)--net .81% .25% .14% (1.17%)*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $ 427,377 $ 187,221 $ 85,486 $ 1,381
Data: ========== ========== ========== ==========
Portfolio turnover 24.75% 30.01% 37.42% 4.22%
========== ========== ========== ==========
Average commission rate paid++++++ $ .0559 $ .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 significantly affect the rate shown.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
52
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class D++++
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. 1994++ to
For the Year Ended October 31, Oct. 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 26.79 $ 23.06 $ 19.18 $ 18.47
Operating ---------- ---------- ---------- ----------
Performance: Investment income--net .46 .24 .22 --
Realized and unrealized gain on investments
and foreign currency transactions--net 7.95 5.63 3.96 .71
---------- ---------- ---------- ----------
Total from investment operations 8.41 5.87 4.18 .71
---------- ---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.38) (.29) -- --
Realized gain on investments--net (1.81) (1.85) (.30) --
---------- ---------- ---------- ----------
Total dividends and distributions (2.19) (2.14) (.30) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 33.01 $ 26.79 $ 23.06 $ 19.18
========== ========== ========== ==========
Total Investment Based on net asset value per share 33.67% 27.83% 22.29% 3.84%+++
Return:** ========== ========== ========== ==========
Ratios to Average Expenses, net of reimbursement 1.02% 1.05% 1.08% 1.77%*
Net Assets: ========== ========== ========== ==========
Expenses 1.06% 1.08% 1.10% 1.77%*
========== ========== ========== ==========
Investment income (loss)--net 1.59% 1.03% 1.00% (.54%)*
========== ========== ========== ==========
Supplemental Net assets, end of period (in thousands) $1,642,665 $ 932,811 $ 614,357 $ 1,186
Data: ========== ========== ========== ==========
Portfolio turnover 24.75% 30.01% 37.42% 4.22%
========== ========== ========== ==========
Average commission rate paid++++++ $ .0559 $ .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 significantly affect the rate shown.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
53
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
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 options and
put options. When the Fund writes an option, an amount equal to the premium
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
54
<PAGE>
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).
Merrill Lynch Growth Fund October 31, 1997
NOTES TO FINANCIAL STATEMENTS (continued)
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 dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined 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.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting for foreign currency transactions.
Accordingly, current year's permanent book/tax differences of $72,324 have been
reclassified between undistributed net realized capital gains and undistributed
net investment income. These reclassifications have no effect on net assets or
net asset values per share.
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% of the average net
assets on the next $500 million; and 0.60% of the average net assets over $1.5
billion. For the year ended October 31, 1997, MLAM earned fees of $42,880,246,
of which $2,673,480 was voluntarily waived.
Pursuant to 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% --
55
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
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, 1997, 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 $ 14,470 $ 194,757
Class D $210,653 $2,860,415
For the year ended October 31, 1997, MLPF&S received contingent deferred sales
charges of $4,083,378 and $96,952 relating to transactions in Class B and Class
C Shares, respectively.
In addition, MLPF&S received $441,467 in commissions on the execution of
portfolio security trans-actions for the Fund for the year ended October 31,
1997.
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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1997 were $2,836,110,242 and $1,249,176,758,
respectively.
Net realized and unrealized gains (losses) as of October 31, 1997 were as
follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $533,904,081 $2,569,396,454
Short-term investments (10,550) --
Foreign currency
transactions (59,658) --
------------ --------------
Total $533,833,873 $2,569,396,454
============ ==============
As of October 31, 1997, net unrealized appreciation for Federal income tax
purposes aggregated $2,569,396,454, of which $2,629,138,553 related to
appreciated securities and $59,742,099 related to depreciated securities. At
October 31, 1997, the aggregate cost of investments for Federal income tax
purposes was $6,043,408,710.
4. Shares of Beneficial Interest:
Net increase in net assets derived from beneficial interest transactions was
$1,933,943,957 and $1,095,437,782 for the years ended October 31, 1997 and
October 31, 1996, respectively.
Transactions in shares of beneficial interest for each class were as follows:
Class A Shares for the Year Dollar
Ended October 31, 1997 Shares Amount
Shares sold 26,024,620 $ 745,365,301
Shares issued to shareholders
in reinvestment of dividends
and distributions 3,259,696 85,223,804
------------ --------------
Total issued 29,284,316 830,589,105
Shares redeemed (15,200,649) (431,634,274)
------------ --------------
Net increase 14,083,667 $ 398,954,831
============ ==============
Class A Shares for the Year Dollar
Ended October 31, 1996 Shares Amount
Shares sold 15,856,881 $ 374,683,538
Shares issued to shareholders
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
============ ==============
56
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
Class B Shares
For the Year Ended Dollar
October 31, 1997 Shares Amount
Shares sold 58,873,336 $1,555,413,648
Shares issued to shareholders
in reinvestment of dividends
and distributions 9,170,267 221,585,076
------------ --------------
Total issued 68,043,603 1,776,998,724
Automatic conversion of
shares (3,569,962) (96,367,617)
Shares redeemed (27,974,354) (736,256,154)
------------ --------------
Net increase 36,499,287 $ 944,374,953
============ ==============
Class B Shares
For the Year Ended Dollar
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 C Shares
For the Year Ended Dollar
October 31, 1997 Shares Amount
Shares sold 8,962,055 $ 238,396,273
Shares issued to shareholders
in reinvestment of dividends
and distributions 636,886 15,333,078
------------ --------------
Total issued 9,598,941 253,729,351
Shares redeemed (3,076,879) (81,814,832)
------------ --------------
Net increase 6,522,062 $ 171,914,519
============ ==============
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 D Shares
For the Year Ended Dollar
October 31, 1997 Shares Amount
Shares sold 17,348,143 $ 497,504,347
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,769,334 72,205,886
Automatic conversion of
shares 3,317,532 96,367,617
------------ --------------
Total issued 23,435,009 666,077,850
Shares redeemed (8,490,489) (247,378,196)
------------ --------------
Net increase 14,944,520 $ 418,699,654
============ ==============
Class D Shares
For the Year Ended Dollar
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
============ ==============
57
<PAGE>
Merrill Lynch Growth Fund October 31, 1997
<TABLE>
5. Transactions with Affiliated Companies:
Investment in companies 5% or more of whose outstanding securities
are held by the Fund (such companies are defined as "Affiliated
Companies" in Section 2(a)(3) of the Investment Company Act of 1940)
are as follows:
<CAPTION>
Increase in Increase in Dividend
Industry Affiliate Shares--Net Cost--Net Income
<S> <S> <C> <C> <C>
Energy Acquisition & Exploitation Apache Corp. -- -- $ 2,240,000
Real Estate Investment Trusts-- Avalon Properties, Inc. 2,000,000 $ 52,951,219 3,060,000
Residental
Real Estate Investment Trusts--Office Beacon Properties Corp. 5,400,000 178,620,085 5,983,750
Domestic Exploration & Production Burlington Resources, Inc. 7,000,000 336,647,444 825,000
Real Estate Investment Trusts--Office Crescent Real Estate Equities, Inc. 4,920,000 124,669,501 12,897,949
Miscellaneous CytoTherapeutics, Inc. 467,558 3,030,276 ++
Energy Acquisition & Exploitation Devon Energy Corp. -- -- 440,000
Offshore Drilling Companies Ensco International, Inc. 11,100,000 89,012,097 460,000
Real Estate Investment Trusts-- Equity Residental Properties Trust 5,500,000 241,098,763 11,474,000
Residental
Real Estate Investment Trusts--Retail Federal Realty Investment Trust 3,742,000 102,967,307 4,266,400
Diversified Resource Companies Freeport-McMoRan Copper &
Gold, Inc. (Class A) 4,500,000 119,670,007 2,216,475
Diversified Resource Companies Freeport-McMoRan Copper &
Gold, Inc. (Class B) -- -- 4,500,000
Diversified Resource Companies Freeport-McMoRan, Inc. -- -- 1,350,000
Offshore Drilling Companies Global Marine, Inc. -- -- ++
Diversified Resource Companies IMC Global, Inc. 6,950,000 236,654,280 1,140,000
Electronic Components Komag, Inc. -- -- ++
Oilfield Services Nabors Industries, Inc. 2,000,000 34,491,905 ++
Energy Acquisition & Exploitation Newfield Exploration Co. 2,000,000 -- ++
Canadian Exploration & Production Norcen Energy Resources, Ltd. -- -- 732,864
Real Estate Investment Trusts--Retail Simon DeBartolo Group, Inc. 7,411,600 222,820,235 8,567,775
Oilfield Services Tidewater, Inc. 5,000,000 206,165,358 1,200,000
Natural Gas Gathering & Transmission TransMontaigne Oil Co. 738,434 9,917,169 ++
Oilfield Services Western Atlas, Inc. 1,333,400 91,214,635 ++
Natural Gas Gathering & Transmission Western Gas Resources, Inc. 1,000,000 17,229,850 700,000
</TABLE>
[FN]
++Non-income producing security.
58
<PAGE>
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
TABLE OF CONTENTS
PAGE
----
<TABLE>
<S> <C>
Investment Objectives and Policies ......................................... 2
Portfolio Strategies Involving Options and Futures......................... 3
Other Investment Policies and Practices.................................... 3
Investment Restrictions.................................................... 5
Management of the Fund ..................................................... 8
Trustees and Officers...................................................... 8
Management and Advisory
Arrangements............................................................. 10
Purchase of Shares ......................................................... 11
Initial Sales Charge Alternatives--
Class A and Class D Shares............................................... 12
Reduced Initial Sales Charges.............................................. 13
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements............................................................. 16
Distribution Plans......................................................... 17
Limitations on the Payment of Deferred Sales Charges....................... 17
Redemption of Shares ....................................................... 18
Deferred Sales Charges--
Class B and Class C Shares............................................... 19
Portfolio Transactions and Brokerage ....................................... 20
Determination of Net Asset Value ........................................... 21
Shareholder Services ....................................................... 22
Investment Account......................................................... 22
Automatic Investment Plans................................................. 23
Automatic Reinvestment of Dividends and Capital Gains Distributions........ 23
Systematic Withdrawal Plans ............................................... 23
Retirement Plans........................................................... 25
Exchange Privilege......................................................... 25
Dividends, Distributions and Taxes ......................................... 27
Dividends and Distributions................................................ 27
Taxes...................................................................... 27
Tax Treatment of Options and Futures Transactions.......................... 29
Special Rules for Certain Foreign Currency Transactions.................... 30
Performance Data ........................................................... 31
General Information......................................................... 33
Description of Shares...................................................... 33
Computation of Offering Price Per Share.................................... 34
Independent Auditors ...................................................... 34
Custodian.................................................................. 35
Transfer Agent ............................................................ 35
Legal Counsel.............................................................. 35
Reports to Shareholders.................................................... 35
Additional Information .................................................... 35
Appendix.................................................................... 36
Independent Auditors' Report ............................................... 43
Financial Statements ....................................................... 44
</TABLE>
Code #10480-0198
[LOGO] MERRILL LYNCH
MERRILL LYNCH
GROWTH FUND
[ART]
STATEMENT OF
ADDITIONAL
INFORMATION
January 30, 1998
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a)FINANCIAL STATEMENTS
Contained in Part A:
Financial Highlights for each of the years in the ten-year period
ended October 31, 1997.
Contained in Part B:
Financial Statements:
Schedule of Investments as of October 31, 1997
Statement of Assets and Liabilities as of October 31, 1997
Statement of Operations for the year ended October 31, 1997
Statements of Changes in Net Assets for each of the years in the two-
year period ended October 31, 1997.
Financial Highlights for each of the years in the five-year period
ended October 31, 1997
(b)EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.(o)
(b) --Amended By-Laws of Registrant.(l)
3 --None.
4 --Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.
5(a) --Management Agreement between Registrant and Merrill Lynch Asset
Management.(n)
(b) --Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.
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)
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)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(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
Arthur Zeikel(h)
Herbert I. London(h)
Robert R. Martin(h)
Joseph L. May(h)
Andre F. Perold(h)
Gerald M. Richard(h)
James H. Bodurtha(m)
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 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.
C-2
<PAGE>
(i) Incorporated by reference to the identically numbered exhibit to Post-
Effective Amendment No. 12 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A.
(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 the identically numbered exhibit to Post-
Effective Amendment No. 13 to Registrant's 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).
(l) Incorporated by reference to the identically numbered exhibit to Post-
Effective Amendment No. 14 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A.
(m) Incorporated by reference to exhibit 17(f) to Post-Effective Amendment No.
13 to Registrant's Registration Statement under the Securities Act of 1933
on Form N-1A.
(n) Incorporated by reference to exhibit 5 to Post-Effective Amendment No. 13
to Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A on February 27, 1996. Initially filed as an Exhibit to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A on December 12, 1986.
(o) Incorporated by reference to exhibit 2 to Post-Effective Amendment No. 13
to Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A on February 27, 1996. Initially filed as an Exhibit to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A on December 12, 1986.
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 DECEMBER 31, 1997
-------------- -----------------
<S> <C>
Class A shares of beneficial interest, par value $0.10
per share............................................ 116,594
Class B shares of beneficial interest, par value $0.10
per share............................................ 303,241
Class C shares of beneficial interest, par value $0.10
per share............................................ 41,611
Class D shares of beneficial interest, par value $0.10
per share............................................ 98,533
</TABLE>
- --------
Note: The number of holders shown in the table includes holders of record
plus beneficial owners, whose shares are held of record by Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch").
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
C-3
<PAGE>
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 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, as amended, 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.
C-4
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
MLAM also acts as the investment adviser for the following open-end
registered investment companies: Merrill Lynch Adjustable Rate Securities
Fund, Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset
Builder Program, Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch 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
Growth 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, Inc., Merrill Lynch
Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch Intermediate
Government Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill
Lynch Municipal Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch
Ready Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-
Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill
Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves, Merrill
Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM); and for the following
registered closed-end investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity
Portfolio, two investment portfolios of EQ Advisory Trust.
Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-
State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series
Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill
Lynch Funds for Institutions Series, Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund,
Inc. and The Municipal Fund Accumulation Program, Inc.; and the following
closed-end registered investment companies: Apex Municipal Fund, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Debt
Strategies Fund, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings New York Fund, Inc.,
MuniHoldings New York Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan
Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniYield California Insured Fund, Inc., MuniYield California Insured Fund II,
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund,
Inc., MuniYield Insured Fund, Inc., MuniYield Michigan 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 Intermediate Government Bond Fund is One
Financial Center, 23rd 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
C-5
<PAGE>
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281. The address of Merrill Lynch Financial Data Services ("MLFDS") 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
October 31, 1995, 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 substantially all of the investment companies described in the first two
paragraphs of this Item 28. Mr. Zeikel is a director of substantially all of
such companies, and Mr. Glenn is a director of certain of such companies.
Messrs. Giordano, Harvey, Kirstein and Monagle are directors or officers of
one or more of such companies.
Officers and partners of MLAM are set forth as follows;
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------------- ----------------------------------
<C> <C> <S>
ML & Co. ............... Limited Partner Financial Services Holding Company; Limited
Partner of FAM.
Princeton Services...... General Partner General Partner of FAM.
Arthur Zeikel........... Chairman Chairman of FAM; President of MLAM and FAM
(from 1977 to 1997); Chairman and Director
of Princeton Services; President of
Princeton Services (from 1993 to 1997);
Executive Vice President of ML & Co.
Jeffrey M. Peek......... President President of FAM; President and Director of
Princeton Services (since 1997); Executive
Vice President of ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM; Executive
President Vice President and Director of Princeton
Services; President and Director of MLFD;
Director of MLFDS; President of Princeton
Administrators L.P.
Linda L. Federici....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Michael J. Hennewinkel.. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel and
President, General Secretary of FAM; Senior Vice President,
Counsel and General Counsel, Director and Secretary of
Secretary Princeton Services.
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH THE MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- ------------------------- ----------------------------------
<S> <C> <C>
Ronald M. Kloss......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Debra Landsman-Yaros.... Senior Vice President Senior Vice President of FAM; Vice
President of MLFD; Senior Vice President
of Princeton Services.
Stephen M. M. Miller.... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services.
Joseph T. Monagle, Jr... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Michael L. Quinn........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of
Merrill Lynch, Pierce, Fenner & Smith from
1989 to 1995.
Richard L. Reller....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Director
of MLFD.
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of FAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of MLFD.
Gregory D. Upah......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services.
</TABLE>
(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas
Income Fund Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Consults International Portfolio, Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing Capital
Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund,
Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For Tomorrow,
Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond
Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund,
Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund,
Merrill Lynch Healthcare Fund, Inc., Merrill Lynch International Equity Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa Fund,
Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc., Merrill Lynch World Income Fund, Inc. 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 MLAM U.K. is Milton Gate, 1
Moor Lane, London EC2Y 9HA, England.
C-7
<PAGE>
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 October
31, 1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard are
officers of one or more of the registered investment companies listed in the
first two paragraphs of this Item 28:
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
---- ------------- ----------------------------------
<C> <C> <S>
Arthur Zeikel........... Director and Chairman Chairman of the Manager and FAM; President
of the Manager and FAM (from 1977 to
1997); Chairman and Director of Princeton
Services; President of Princeton Services
(from 1993 to 1997); Executive Vice
President of ML & Co.
Alan J. Albert.......... Senior Managing
Director Vice President of the Manager.
Nicholas C. D. Hall..... Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group.
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of the
Manager and FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD.
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 two paragraphs
of Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc., and MLFD also
acts as principal underwriter for the following closed-end funds: Merrill
Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy
Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
C-8
<PAGE>
(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, 23rd 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
Richard L. Reller.......... Director None
Thomas J. Verage........... 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 J. 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.
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>
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 30th day of January,
1998.
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.
SIGNATURES TITLE DATE
/s/ Arthur Zeikel President and
- ------------------------------------- Trustee (Principal January 30,
(Arthur Zeikel) Executive Officer) 1998
* Treasurer (Principal
- ------------------------------------- Financial and
(Gerald M. Richard) Accounting Officer)
* Trustee
- -------------------------------------
(James H. Bodurtha)
* Trustee
- -------------------------------------
(Herbert I. London)
* Trustee
- -------------------------------------
(Robert R. Martin)
* Trustee
- -------------------------------------
(Joseph L. May)
* Trustee
- -------------------------------------
(Andre F. Perold)
*By /s/ Arthur Zeikel
----------------------------------- January 30,
(Arthur Zeikel, Attorney-in-Fact) 1998
* This amendment has been signed by each of the persons so indicated by the
undersigned as Attorney-in-Fact.
C-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------- ---
<C> <S> <C>
5(b) --Sub-Advisory Agreement between Merrill Lynch Asset Management,
L.P. and Merrill Lynch Asset Management U.K. Limited.
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>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH GROWTH FUND - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 6043408710
<INVESTMENTS-AT-VALUE> 8612805164
<RECEIVABLES> 32867957
<ASSETS-OTHER> 1996962
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8647670083
<PAYABLE-FOR-SECURITIES> 96798153
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24010939
<TOTAL-LIABILITIES> 120809092
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5401572560
<SHARES-COMMON-STOCK> 53412508
<SHARES-COMMON-PRIOR> 39328841
<ACCUMULATED-NII-CURRENT> 21998884
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 533893093
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2569396454
<NET-ASSETS> 1769296179
<DIVIDEND-INCOME> 77705992
<INTEREST-INCOME> 94711657
<OTHER-INCOME> 0
<EXPENSES-NET> (94771527)
<NET-INVESTMENT-INCOME> 77646122
<REALIZED-GAINS-CURRENT> 533833873
<APPREC-INCREASE-CURRENT> 1320593787
<NET-CHANGE-FROM-OPS> 1932073782
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20060922)
<DISTRIBUTIONS-OF-GAINS> (72708025)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 26024620
<NUMBER-OF-SHARES-REDEEMED> (15200649)
<SHARES-REINVESTED> 3259696
<NET-CHANGE-IN-ASSETS> 3433452222
<ACCUMULATED-NII-PRIOR> 9982308
<ACCUMULATED-GAINS-PRIOR> 366995191
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42880246
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 97445007
<AVERAGE-NET-ASSETS> 1363237918
<PER-SHARE-NAV-BEGIN> 26.87
<PER-SHARE-NII> .53
<PER-SHARE-GAIN-APPREC> 7.98
<PER-SHARE-DIVIDEND> (.44)
<PER-SHARE-DISTRIBUTIONS> (1.81)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 33.13
<EXPENSE-RATIO> .81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH GROWTH FUND - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 6043408710
<INVESTMENTS-AT-VALUE> 8612805164
<RECEIVABLES> 32867957
<ASSETS-OTHER> 1996962
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8647670083
<PAYABLE-FOR-SECURITIES> 96798153
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24010939
<TOTAL-LIABILITIES> 120809092
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5401572560
<SHARES-COMMON-STOCK> 153030921
<SHARES-COMMON-PRIOR> 116531634
<ACCUMULATED-NII-CURRENT> 21998884
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 533893093
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2569396454
<NET-ASSETS> 4687522769
<DIVIDEND-INCOME> 77705992
<INTEREST-INCOME> 94711657
<OTHER-INCOME> 0
<EXPENSES-NET> (94771527)
<NET-INVESTMENT-INCOME> 77646122
<REALIZED-GAINS-CURRENT> 533833873
<APPREC-INCREASE-CURRENT> 1320593787
<NET-CHANGE-FROM-OPS> 1932073782
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (27296782)
<DISTRIBUTIONS-OF-GAINS> (214744463)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 58873336
<NUMBER-OF-SHARES-REDEEMED> (31544316)
<SHARES-REINVESTED> 9170267
<NET-CHANGE-IN-ASSETS> 3433452222
<ACCUMULATED-NII-PRIOR> 9982308
<ACCUMULATED-GAINS-PRIOR> 366995191
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42880246
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 97445007
<AVERAGE-NET-ASSETS> 3700025380
<PER-SHARE-NAV-BEGIN> 25.03
<PER-SHARE-NII> .22
<PER-SHARE-GAIN-APPREC> 7.39
<PER-SHARE-DIVIDEND> (.20)
<PER-SHARE-DISTRIBUTIONS> (1.81)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 30.63
<EXPENSE-RATIO> 1.83
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH GROWTH FUND - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 6043408710
<INVESTMENTS-AT-VALUE> 8612805164
<RECEIVABLES> 32867957
<ASSETS-OTHER> 1996962
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8647670083
<PAYABLE-FOR-SECURITIES> 96798153
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24010939
<TOTAL-LIABILITIES> 120809092
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5401572560
<SHARES-COMMON-STOCK> 14042691
<SHARES-COMMON-PRIOR> 7520629
<ACCUMULATED-NII-CURRENT> 21998884
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 533893093
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2569396454
<NET-ASSETS> 427376567
<DIVIDEND-INCOME> 77705992
<INTEREST-INCOME> 94711657
<OTHER-INCOME> 0
<EXPENSES-NET> (94771527)
<NET-INVESTMENT-INCOME> 77646122
<REALIZED-GAINS-CURRENT> 533833873
<APPREC-INCREASE-CURRENT> 1320593787
<NET-CHANGE-FROM-OPS> 1932073782
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2319545)
<DISTRIBUTIONS-OF-GAINS> (14376468)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8962055
<NUMBER-OF-SHARES-REDEEMED> (3076879)
<SHARES-REINVESTED> 636886
<NET-CHANGE-IN-ASSETS> 3433452222
<ACCUMULATED-NII-PRIOR> 9982308
<ACCUMULATED-GAINS-PRIOR> 366995191
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42880246
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 97445007
<AVERAGE-NET-ASSETS> 289833382
<PER-SHARE-NAV-BEGIN> 24.89
<PER-SHARE-NII> .22
<PER-SHARE-GAIN-APPREC> 7.34
<PER-SHARE-DIVIDEND> (.21)
<PER-SHARE-DISTRIBUTIONS> (1.81)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 30.43
<EXPENSE-RATIO> 1.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH GROWTH FUND - CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 6043408710
<INVESTMENTS-AT-VALUE> 8612805164
<RECEIVABLES> 32867957
<ASSETS-OTHER> 1996962
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8647670083
<PAYABLE-FOR-SECURITIES> 96798153
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24010939
<TOTAL-LIABILITIES> 120809092
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5401572560
<SHARES-COMMON-STOCK> 49759022
<SHARES-COMMON-PRIOR> 34814502
<ACCUMULATED-NII-CURRENT> 21998884
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 533893093
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2569396454
<NET-ASSETS> 1642665476
<DIVIDEND-INCOME> 77705992
<INTEREST-INCOME> 94711657
<OTHER-INCOME> 0
<EXPENSES-NET> (94771527)
<NET-INVESTMENT-INCOME> 77646122
<REALIZED-GAINS-CURRENT> 533833873
<APPREC-INCREASE-CURRENT> 1320593787
<NET-CHANGE-FROM-OPS> 1932073782
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (15879973)
<DISTRIBUTIONS-OF-GAINS> (65179339)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20665675
<NUMBER-OF-SHARES-REDEEMED> (8490489)
<SHARES-REINVESTED> 2769334
<NET-CHANGE-IN-ASSETS> 3433452222
<ACCUMULATED-NII-PRIOR> 9982308
<ACCUMULATED-GAINS-PRIOR> 366995191
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42880246
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 97445007
<AVERAGE-NET-ASSETS> 1243864246
<PER-SHARE-NAV-BEGIN> 26.79
<PER-SHARE-NII> .46
<PER-SHARE-GAIN-APPREC> 7.95
<PER-SHARE-DIVIDEND> (.38)
<PER-SHARE-DISTRIBUTIONS> (1.81)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 33.01
<EXPENSE-RATIO> 1.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.5b
SUB-ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of October, 1997, by and between MERRILL
LYNCH ASSET MANAGEMENT, L.P., a Delaware limited partnership (hereinafter
referred to as "MLAM"), and MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED, a
corporation organized under the laws of England and Wales (hereinafter referred
to as "MLAM U.K.").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, MERRILL LYNCH GROWTH FUND (the "Fund") is a Massachusetts business
trust engaged in business as a diversified, open-end investment company
registered under the Investment Company Act of 1940, as amended (hereinafter
referred to as the "Investment Company Act"); and
WHEREAS, MLAM and MLAM U.K. are engaged principally in rendering investment
advisory services and are registered as investment advisers under the Investment
Advisers Act of 1940, as amended; and
WHEREAS, MLAM U.K. is regulated by the Investment Management Regulatory
Organization, a self-regulating organization recognized under the Financial
Services Act of 1986 of the United Kingdom (hereinafter referred to as "IMRO"),
and the conduct of its investment business is regulated by IMRO; and
<PAGE>
WHEREAS, MLAM has entered into a management agreement (the "Management
Agreement") dated February 4, 1987, pursuant to which MLAM provides management
and investment and advisory services to the Fund; and
WHEREAS, MLAM U.K. is willing to provide investment advisory services to
MLAM in connection with the Fund's operations on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, MLAM U.K. and MLAM hereby agree as follows:
ARTICLE I
---------
Duties of MLAM U.K.
-------------------
MLAM hereby employs MLAM U.K. to act as investment adviser to MLAM and to
furnish, or arrange for affiliates to furnish, the investment advisory services
described below, subject to the broad supervision of MLAM and the Fund, for the
period and on the terms and conditions set forth in this Agreement. MLAM U.K.
hereby accepts such employment and agrees during such period, at its own
expense, to render, or arrange for the rendering of, such services and to assume
the obligations herein set forth for the compensation provided for herein. MLAM
and its affiliates shall for all purposes herein be deemed a Non-private
Customer as defined under the rules promulgated by IMRO (hereinafter referred to
as the "IMRO Rules"). MLAM U.K. and its affiliates shall for all purposes herein
be deemed to be an independent contractor and
2
<PAGE>
shall, unless otherwise expressly provided or authorized, have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
MLAM U.K. shall have the right to make unsolicited calls on MLAM and shall
provide MLAM with such investment research, advice and supervision as the latter
may from time to time consider necessary for the proper supervision of the
assets of the Fund; shall make recommendations from time to time as to which
securities shall be purchased, sold or exchanged and what portion of the assets
of the Fund shall be held in the various securities in which the Fund invests,
options, futures, options on futures or cash; all of the foregoing subject
always to the restrictions of the Articles of Incorporation and By-Laws of the
Fund, as they may be amended and/or restated from time to time, the provisions
of the Investment Company Act and the statements relating to the Fund's
investment objective, investment policies and investment restrictions as the
same are set forth in the currently effective prospectus and statement of
additional information relating to the shares of the Fund under the Securities
Act of 1933, as amended (the "Prospectus" and "Statement of Additional
Information", respectively). MLAM U.K. shall make recommendations and effect
transactions with respect to foreign currency matters, including foreign
exchange contracts, foreign currency options, foreign currency futures and
related options on foreign currency futures and forward foreign currency
3
<PAGE>
transactions. MLAM U.K. shall also make recommendations or take action as to
the manner in which voting rights, rights to consent to corporate action and any
other rights pertaining to the portfolio securities of the Fund shall be
exercised.
MLAM U.K. will not hold money on behalf of MLAM or the Fund, nor will MLAM
U.K. be the registered holder of the registered investments of MLAM or the Fund
or be the custodian of documents or other evidence of title.
ARTICLE II
----------
Allocation of Charges and Expenses
----------------------------------
MLAM U.K. assumes and shall pay for maintaining the staff and personnel
necessary to perform its obligations under this Agreement and shall at its own
expense provide the office space, equipment and facilities which it is obligated
to provide under Article I hereof and shall pay all compensation of officers of
the Fund and all Directors of the Fund who are affiliated persons of MLAM U.K.
ARTICLE III
-----------
Compensation of MLAM U.K.
-------------------------
For the services rendered, the facilities furnished and expenses assumed by
MLAM U.K., MLAM shall pay to MLAM U.K. a fee in an amount to be determined from
time to time by MLAM and MLAM U.K. but in no event in excess of the amount that
MLAM actually receives for providing services to the Fund pursuant to the
Management Agreement.
4
<PAGE>
ARTICLE IV
----------
Limitation of Liability of MLAM U.K.
------------------------------------
MLAM U.K. shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
performance of sub-advisory services rendered with respect to the Fund, except
for willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties
hereunder. As used in this Article IV, MLAM U.K. shall include any affiliates of
MLAM U.K. performing services for MLAM contemplated hereby and directors,
officers and employees of MLAM U.K. and such affiliates.
ARTICLE V
---------
Activities of MLAM U.K.
-----------------------
The services of MLAM U.K. to the Fund are not to be deemed to be exclusive,
MLAM U.K. and any person controlled by or under common control with MLAM U.K.
(for purposes of this Article V referred to as "affiliates") being free to
render services to others. It is understood that Trustees, officers, employees
and shareholders of the Fund are or may become interested in MLAM U.K. and its
affiliates, as directors, officers, employees and shareholders or otherwise and
that directors, officers, employees and shareholders of MLAM U.K. and its
affiliates are or may become similarly interested in the Fund, and that MLAM
U.K. and directors, officers, employees, partners and shareholders of its
5
<PAGE>
affiliates may become interested in the Fund as shareholders or otherwise.
ARTICLE VI
----------
MLAM U.K. Statements Pursuant to IMRO Rules
-------------------------------------------
Any complaints concerning MLAM U.K. should be in writing addressed to the
attention of the Managing Director of MLAM U.K. MLAM has the right to obtain
from MLAM U.K. a copy of the IMRO complaints procedure and to approach IMRO and
the Investment Ombudsman directly.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding Investments Not Readily Realisable
(as that term is used in the IMRO Rules) or investments denominated in a
currency other than British pound sterling. There can be no certainty that
market makers will be prepared to deal in unlisted or thinly traded securities
and an accurate valuation may be hard to obtain. The value of investments
recommended by MLAM U.K. may be subject to exchange rate fluctuations which may
have favorable or unfavorable effects on investments.
MLAM U.K. may make recommendations, subject to the investment restrictions
referred to in Article I herein, regarding options, futures or contracts for
differences. Markets can be highly volatile and such investments carry a high
degree of risk of loss exceeding the original investment and any margin on
deposit.
6
<PAGE>
ARTICLE VII
-----------
Duration and Termination of this Agreement
------------------------------------------
This Agreement shall become effective as of the date first above written
and shall remain in force until the date of termination of the Management
Agreement (but not later than two years after the date hereof) and thereafter,
but only so long as such continuance is specifically approved at least annually
by (i) the Trustees of the Fund or by the vote of a majority of the outstanding
voting securities of the Fund and (ii) a majority of those Trustees who are not
parties to this Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval.
This Agreement may be terminated at any time, without the payment of any
penalty, by MLAM or by vote of a majority of the outstanding voting securities
of the Fund, or by MLAM U.K., on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment or
in the event of the termination of the Management Agreement. Any termination
shall be without prejudice to the completion of transactions already initiated.
7
<PAGE>
ARTICLE VIII
------------
Amendments of this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (i) the Trustees of the Fund or by the vote of a
majority of outstanding voting securities of the Fund and (ii) a majority of
those Trustees who are not parties to this Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval. (i) the Directors of the Fund or by the vote of a majority of
outstanding voting securities of the Fund and (ii) a majority of those Directors
who are not parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on such approval.
ARTICLE IX
----------
Definitions of Certain Terms
----------------------------
The terms "vote of a majority of the outstanding voting securities",
"assignment", "affiliated person" and "interested person", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act and the rules and regulations thereunder, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act.
ARTICLE X
---------
Governing Law
-------------
This Agreement shall be construed in accordance with the laws of the State
of New York and the applicable provisions of the Investment Company Act. To the
extent that the applicable laws of the State of New York, or any of the
provisions herein,
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conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By /s/ Arthur Zeikel
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Title:
MERRILL LYNCH ASSET MANAGEMENT U.K. LIMITED
By /s/ Alan Albert
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Title:
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EXHIBIT 99.11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Growth Fund:
We consent to the use in Post-Effective Amendment No. 15 to Registration
Statement No. 33-10794 of our report dated December 5, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
January 29, 1998
