<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 12, 1994
SECURITIES ACT FILE NO. 33-14517
INVESTMENT COMPANY ACT FILE NO. 811-5178
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 8 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 10 /X/
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH STRATEGIC DIVIDEND FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800
ARTHUR ZEIKEL
MERRILL LYNCH STRATEGIC DIVIDEND FUND
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
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN P.O. BOX 9011
919 THIRD AVENUE PRINCETON, N.J. 08543-9011
NEW YORK, NEW YORK 10022
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/X/ on October 21, 1994 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursant to paragraph (a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES OF
BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR
THE REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON SEPTEMBER 20, 1994.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
AMOUNT OF PROPOSED PROPOSED
SHARES MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING OFFERING AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial
Interest (par value,
$.10 per share)..... 7,394,946 $11.76 $289,989 $100
</TABLE>
*(1) The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2 under the Investment Company Act of 1940 and was based upon an
offering price of $11.76 per share, equal to the net asset value as of the
close of business on October 7, 1994.
(2) The total amount of securities redeemed or repurchased during Registrant's
previous fiscal year was 7,370,287 Shares of Beneficial Interest.
(3) None of the Shares described in (2) above have been used for reduction
pursuant to Rule 24e-2(a) or Rule 24f-2(c) under the Investment Company Act
of 1940 in previous filings during Registrant's current fiscal year.
(4) 7,370,287 of the Shares redeemed during Registrant's previous fiscal year
are being used for the reduction of the registration fee in this amendment
to the Registration Statement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MERRILL LYNCH STRATEGIC DIVIDEND FUND
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- -------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page..................... Cover Page
Item 2. Synopsis....................... Fee Table
Item 3. Condensed Financial
Information.................. Financial Highlights;
Performance Data
Item 4. General Description of
Registrant................... Investment Objective 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................... Cover Page; Additional
Information
Item 7. Purchase of Securities Being
Offered...................... Cover Page; Merrill Lynch
Select Pricing(Service Mark)
System; Fee Table; Purchase
of Shares; Redemption of
Shares; Additional
Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase....... Merrill Lynch Select
Pricing(Service Mark) System;
Fee Table; Purchase of
Shares; Redemption of Shares
Item 9. Pending Legal Proceedings...... Not Applicable
PART B
Item 10. Cover Page..................... Cover Page
Item 11. Table of Contents.............. Back Cover Page
Item 12. General Information and
History...................... Not Applicable
Item 13. Investment Objectives and
Policies..................... Investment Objective and
Policies
Item 14. Management of the Fund......... Management of the Fund
Item 15. Control Persons and Principal
Holders of Securities........ Management of the Fund
Item 16. Investment Advisory and Other
Services..................... Management of the Fund;
Purchase of Shares; General
Information
Item 17. Brokerage Allocation........... Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other
Securities................... General Information
Item 19. Determination of Net Asset
Value; Purchase, Redemption
and Pricing of Securities
Being Offered................ Purchase of Shares; Redemption
of Shares; Determination of Net
Asset Value; Shareholder
Services
Item 20. Tax Status..................... 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
OCTOBER 21, 1994
MERRILL LYNCH STRATEGIC DIVIDEND FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Strategic Dividend Fund (the "Fund") is a mutual fund seeking
to provide shareholders with long-term total return by investing primarily in a
diversified portfolio of dividend-paying common stocks which yield more than the
Standard & Poor's 500 Composite Stock Price Index. Total return is the aggregate
of income and capital value changes. The strategy of the Fund's manager, Merrill
Lynch Asset Management, is based on the belief that stocks which have above
average dividend yields will provide attractive long-term total return and
greater price stability than stocks which have below average dividend yields
during periods of downward movements in market prices. There can be no assurance
that the investment objective of the Fund will be realized.
------------------------
Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, the Fund
offers four classes of shares, each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. See "Merrill Lynch Select Pricing(Service Mark)
System" on page 3.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the Fund's
transfer agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
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 October 21, 1994 (the "Statement of Additional Information"), has
been filed with the Securities and Exchange Commission and is available, without
charge, by calling or by writing the Fund at the above telephone number or
address. The Statement of Additional Information is hereby incorporated by
reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A) CLASS B(B) CLASS C(C) CLASS D(C)
----------- ------------------------------------------ ----------- -----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)...................... 5.25%(d) None None 5.25%(d)
Sales Charge Imposed on Dividend
Reinvestments........................ None None None None
Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower)............................... None(e) 4.0% during the first year, decreasing 1% for one None(e)
1.0% annually thereafter to 0.0% after the year
fourth year
Exchange Fee........................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)(F):
Investment Advisory Fees(g)............ 0.60% 0.60% 0.60% 0.60%
12b-1 Fees(h):
Account Maintenance Fees............. None 0.25% 0.25% 0.25%
Distribution Fees.................... None 0.75% 0.75% None
(Class B shares convert to Class D
shares automatically
after approximately eight years and cease
being subject to distribution fees)
Other Expenses:
Custodian Fees..................... 0.01% 0.01% 0.01% 0.01%
Shareholder Servicing Fees(i)...... 0.10% 0.13% 0.13% 0.10%
Other.............................. 0.14% 0.14% 0.14% 0.14%
Total Other Expenses............. 0.25% 0.28% 0.28% 0.25%
TOTAL FUND OPERATING EXPENSES........ 0.85% 1.88% 1.88% 1.10%
</TABLE>
- ------------------
<TABLE>
<S> <C>
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and investment programs. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares"--page 21.
(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 22.
(c) Prior to the date of this Prospectus, the Fund has not offered its Class C
and Class D shares to the public.
(d) Reduced for purchases of $25,000 and over. Class A or Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares"--page 21.
(e) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that purchases of $1,000,000 or more which may not
be subject to an initial sales charge will instead be subject to a CDSC of
1.0% of amounts redeemed within the first year of purchase.
(f) Information for Class A and Class B shares is stated for the fiscal year
ended July 31, 1994. Information under "Other Expenses" for Class C and
Class D shares is estimated for the fiscal year ending July 31, 1995.
(g) See "Management of the Fund--Management and Advisory Arrangements"--page
18.
(h) See "Purchase of Shares--Distribution Plans"--page 25.
(i) See "Management of the Fund--Transfer Agency Services"--page 18.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE
PERIOD OF:
----------------------------------
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment
including the maximum $52.50 initial
sales charge (Class A and Class D
shares only) and assuming (1) the
Total Fund Operating Expenses for each
class set forth above, (2) a 5% annual
return throughout the periods and (3)
redemption at the end of the period:
Class A............................ $ 61 $ 78 $ 97 $ 152
Class B............................ $ 59 $ 79 $ 102 $ 201 *
Class C............................ $ 29 $ 59 $ 102 $ 220
Class D............................ $ 63 $ 86 $ 110 $ 179
An investor would pay the following
expenses on the same $1,000 investment
assuming no redemption at the end of
the period:
Class A............................ $ 61 $ 78 $ 97 $ 152
Class B............................ $ 19 $ 59 $ 102 $ 201 *
Class C............................ $ 19 $ 59 $ 102 $ 220
Class D............................ $ 63 $ 86 $ 110 $ 179
</TABLE>
- ------------------
* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission (the 'Commission') regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B and Class C
shareholders who own their shares for an extended period of time may pay more in
Rule 12b-1 distribution fees than the economic equivalent of the maximum
front-end sales charge permitted under the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. ('NASD') Merrill Lynch may
charge its customers a processing fee (presently $4.85) for confirming purchases
and redemptions. Purchases and redemptions directly through the Fund's transfer
agent are not subject to the processing fee. See 'Purchase of Shares' and
'Redemption of Shares'.
MERRILL LYNCH SELECT PRICING(SERVICE MARK) SYSTEM
The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System. The shares of each class may be purchased at a
price equal to the next determined net asset value per share subject to the
sales charges and ongoing fee arrangements described below. Shares of Class A
and Class D are sold to investors choosing the initial sales charge
alternatives, and shares of Class B and Class C are sold to investors choosing
the deferred sales charge alternatives. The Merrill Lynch Select Pricing(Service
Mark) System is used by more than 50 mutual funds advised by Merrill Lynch Asset
Management, L.P., doing business as Merrill Lynch Asset Management ('MLAM' or
the 'Manager') or an affiliate of MLAM, Fund Asset Management, L.P. ('FAM').
Funds advised by MLAM or FAM are referred to herein as 'MLAM-advised mutual
funds'.
3
<PAGE>
Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
the Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of shares
will be calculated in the same manner at the same time and will differ only to
the extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege'.
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System, followed by a more detailed description of each class a a discussion of
the factors that investors should consider in determining the method of
purchasing shares under the Merrill Lynch Select Pricing(Service Mark) System
that the investor believes is the most beneficial under the investor's
particular circumstances. More detailed information as to each class of shares
is set forth under 'Purchase of Shares'.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(2)(3)
B CDSC for a period of 4 years, 0.25 % 0.75 % B shares
at a rate of 4.0% during the convert to D
first year, decreasing 1.0% shares
annually to 0.0% automatically
after
approximately
eight
years(4)
C 1.0% CDSC for one year 0.25 % 0.75 % No
D Maximum 5.25% initial sales 0.25 % No No
charge(3)
</TABLE>
- ------------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. Contingent deferred sales charges ('CDSCs') are imposed
if the redemption occurs within the applicable CDSC time period. The charge
will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed.
(Notes continued on next page.)
4
<PAGE>
(2) Offered only to eligible investors. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors'.
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year. See 'Class
A' and 'Class D' below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares in a shareholder accounts
are entitled to purchase additional Class A shares in that account.
Other eligible investors include certain retirement plans and
participants in certain investment programs. In addition, Class A
shares will be offered to directors and employees of Merrill Lynch &
Co., Inc. and its subsidiaries (the term 'subsidiaries', when used
herein with respect to Merrill Lynch & Co., Inc., includes MLAM, FAM
and certain other entities directly or indirectly wholly-owned and
controlled by Merrill Lynch & Co., Inc.), and to members of the Boards
of MLAM-advised mutual funds. The maximum initial sales charge is
5.25%, which is reduced for purchases of $25,000 and over. Purchases of
$1,000,000 or more may not be subject to an initial sales charge but if
the initial sales charge is waived such purchases will be subject to a
CDSC of 1.0% if the shares are redeemed within one year after purchase.
Sales charges are also reduced under a right of accumulation which
takes into account the investor's holdings of all classes of all
MLAM-advised mutual funds. See 'Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares'.
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to the Class B shares, and a CDSC if they are redeemed
within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but no
distribution fee; Class B shares of certain other MLAM-advised mutual
funds into which exchanges may be made convert into Class D shares
automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares
acquired. Automatic conversion of Class B shares into Class D shares
will occur at least once a month on the basis of the relative net asset
values of the shares of the two classes on the conversion date, without
the imposition of any sales load, fee or other charge. Conversion of
Class B shares to Class D shares will not be deemed a purchase or sale
of the shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares and for certain retirement plans is modified as
described under 'Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares'.
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC if they are redeemed within one year of purchase. Although Class C
shares are subject to a 1.0% CDSC for only one year (as
5
<PAGE>
compared to four years for Class B), Class C shares have no conversion
feature and, accordingly, an investor that purchases Class C shares
will be subject to distribution fees that will be imposed on Class C
shares for an indefinite period subject to annual approval by the
Fund's Board of 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. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares. Class D shares also will be issued upon conversion
of Class B shares as described above under 'Class B'. See 'Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D Shares'.
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(Service Mark) System that the investor believes is most beneficial under
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 of the account maintenance fee imposed
on Class D shares. Investors qualifying for significantly reduced initial sales
charges may find the initial sales charge alternative particularly attractive
because similar sales charge reductions are not available with respect to the
deferred sales charges imposed in connection with purchases of Class B or Class
C shares. Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the account
maintenance fee. Although some investors that previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other
MLAM-advised mutual funds, those previously purchased Class A shares, together
with Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for reduced initial sales charges on
new initial sales charge purchases. In addition, the ongoing Class B and Class C
account maintenance and distribution fees will cause Class B and Class C shares
to have higher expense ratios, pay lower dividends and have lower total returns
than the initial sales charge shares. The ongoing Class D account maintenance
fees will cause Class D shares to have a higher expense ratio, pay lower
dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Fund after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
6
<PAGE>
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See 'Purchase of Shares--Limitations on the Payment of Deferred
Sales Charges'.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the audits of the financial statements of the Fund by Deloitte
& Touche LLP, independent auditors. Financial statements for the year ended July
31, 1994, and the independent auditors' report thereon are included in the
Statement of Additional Information. The following per share data and ratios
have been derived from information provided in the financial statements.
Financial Highlights are not presented for Class A shares for the period
November 25, 1987 to November 29, 1988, since no shares of that class were
outstanding during such period, and financial information is not presented for
Class C or Class D shares, since no shares of those classes are publicly issued
as of the date of this Prospectus. Further information about the performance of
the Fund is contained in the Fund's most recent annual report to shareholders
which may be obtained, without charge, by calling or by writing the Fund at the
telephone number or address on the front cover of this Prospectus.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------------ ---------
FOR THE FOR THE
PERIOD YEAR
NOV. 29, ENDED
FOR THE YEAR ENDED JULY 31, 1988+ TO JULY 31,
----------------------------------------------------- JULY 31, ---------
1994 1993 1992 1991 1990 1989 1994
--------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 13.60 $ 12.79 $ 11.90 $ 11.80 $ 12.38 $ 10.71 $ 13.59
--------- --------- --------- --------- --------- ----------- ---------
Investment income--net...................... .41 .44 .44 .55 .76 .39 .33
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net(1)...................... (.12) .81 .93 .14 (.61) 1.88 (.18)
--------- --------- --------- --------- --------- ----------- ---------
Total from investment operations............. .29 1.25 1.37 .69 .15 2.27 .15
--------- --------- --------- --------- --------- ----------- ---------
Less dividends and distributions:
Investment income--net...................... (.46) (.44) (.48) (.59) (.73) (.46) (.32)
Realized gain on investments--net........... (.65) -- -- -- -- (.14) (.65)
--------- --------- --------- --------- --------- ----------- ---------
Total dividends and distributions............ (1.11) (.44) (.48) (.59) (.73) (.60) (.97)
--------- --------- --------- --------- --------- ----------- ---------
Net asset value, end of period............... $ 12.78 $ 13.60 $ 12.79 $ 11.90 $ 11.80 $ 12.38 $ 12.77
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... 2.38% 10.03% 11.96% 6.25% 1.20% 22.02%++ 1.30%
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses excluding distribution fees......... .85% .81% .88% .88% .86% 1.04%* .88%
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
Expenses..................................... .85% .81% .88% .88% .86% 1.04%* 1.88%
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
Investment income--net....................... 3.42% 3.38% 3.75% 4.83% 6.17% 4.89%* 2.39%
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $ 21,854 $ 34,228 $ 31,512 $ 33,916 $ 37,499 $ 24,002 $ 167,889
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
Portfolio turnover........................... 22.75% 25.23% 29.17% 10.50% 16.99% 33.66% 22.75%
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
<CAPTION>
CLASS B
----------------------------------------------------------------
FOR THE
PERIOD
NOV. 25,
1987+ TO
JULY 31,
1993 1992 1991 1990 1989 1988
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 12.78 $ 11.88 $ 11.78 $ 12.37 $ 10.76 $ 10.00
--------- --------- --------- --------- --------- ---------
Investment income--net...................... .31 .34 .45 .60 .51 .33
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net(1)...................... .81 .91 .12 (.58) 1.89 .68
--------- --------- --------- --------- --------- ---------
Total from investment operations............. 1.12 1.25 .57 .02 2.40 1.01
--------- --------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net...................... (.31) (.35) (.47) (.61) (.52) (.25)
Realized gain on investments--net........... -- -- -- -- (.27) --
--------- --------- --------- --------- --------- ---------
Total dividends and distributions............ (.31) (.35) (.47) (.61) (.79) (.25)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period............... $ 13.59 $ 12.78 $ 11.88 $ 11.78 $ 12.37 $ 10.76
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........... 8.90% 10.85% 5.14% 0.15% 23.48% 10.13%++
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses excluding distribution fees......... .84% .91% .90% .89% .98% 1.08%*
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Expenses..................................... 1.84% 1.91% 1.90% 1.89% 1.98% 2.08%*
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Investment income--net....................... 2.37% 2.74% 3.81% 5.14% 5.05% 5.15%*
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..... $ 227,089 $ 239,048 $ 284,869 $ 337,072 $ 289,599 $ 160,045
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Portfolio turnover........................... 25.23% 29.17% 10.50% 16.99% 33.66% 42.36%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of sales loads; total investment
returns would be lower if sales loads were included.
+ Commencement of Operations.
++ Aggregate total investment return.
(1) Foreign currency transactions have been reclassified to conform to 1994
presentation.
8
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term total return by
investing primarily in a diversified portfolio of dividend-paying common stocks
which yield more than the Standard & Poor's 500 Composite Stock Price Index.
Total return is the aggregate of income and capital value changes. The strategy
of the Fund's manager, Merrill Lynch Asset Management, L.P. ('MLAM' or the
'Manager'), is based on the belief that stocks which have above average yields
will provide attractive long-term total return and greater price stability than
stocks which have below average dividend yields during periods of downward
movements in market prices. While the Fund generally will invest in companies
with a continuous record of paying dividends, it may also invest in companies
which only recently have commenced payment of dividends. The Fund may engage in
various portfolio strategies involving options and futures to seek to increase
its return and to hedge its portfolio against movements in the equity markets,
interest rates and exchange rates between currencies. Because the Fund will seek
long-term total return (i.e., income and capital growth) by emphasizing
investments in dividend-paying common stocks, it will not have as much
investment flexibility as total return funds which may pursue their objective by
investing in both income and capital growth stocks without such an emphasis.
There can be no assurance that the investment objective of the Fund will be
realized.
The Fund at all times, except during temporary defensive periods, will
maintain at least 65% of its total assets invested in dividend-paying common
stocks. The Fund may also invest in securities convertible into common stocks,
non-convertible preferred stocks and debt securities and utilize the other
investment practices described below. The Fund has established no rating
criteria for debt securities or preferred stock that it may hold. As a result,
the Fund's investments in such securities are permitted to include securities
which are in default or have major risk exposures to adverse conditions. The
Fund, however, does not intend to invest in securities with such characteristics
or in debt securities not within the four highest quality ratings as determined
by either Moody's Investors Service, Inc. (currently Aaa, Aa, A and Baa for
bonds) or Standard & Poor's Ratings Group (currently AAA, AA, A and BBB for
bonds). The Fund reserves the right to hold, as a temporary defensive measure or
as a reserve for redemptions, short-term U.S. Government securities, money
market securities, including repurchase agreements, or cash in such proportions
as, in the opinion of the Manager, prevailing market or economic conditions
warrant. Except during temporary defensive periods, such securities or cash will
not exceed 20% of its total assets. The investment objective of the Fund set
forth in the first sentence of the above paragraph and the 65% requirement with
respect to dividend-paying common stocks are fundamental policies of the Fund
which may not be changed without a vote of a majority of its outstanding shares
as defined below.
The Fund may invest up to 25% of its total assets in securities of foreign
issuers of the foregoing types and with the foregoing characteristics.
Investments in securities of foreign entities and securities denominated in
foreign currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or other
foreign or United States governmental laws or restrictions applicable to such
investments. Since the Fund may invest in securities denominated or quoted in
currencies other than the United States dollar, changes in foreign currency
exchange rates may affect the value of investments in the portfolio and the
unrealized appreciation or depreciation of investments insofar as United States
investors are concerned. Changes in foreign currency exchange rates relative to
the U.S. dollar will affect the U.S. dollar value of the Fund's assets
denominated in that currency and the Fund's yield on such assets. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets. These forces are, in turn, affected by the
international balance of payments and other economic and financial conditions,
government intervention,
9
<PAGE>
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.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
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 of United States entities. In addition, certain
foreign investments may be subject to foreign withholding taxes. Foreign
financial markets, while growing in volume, have, for the most part,
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. The foreign markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of 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. Costs associated with transactions in foreign
securities are generally higher than with transactions in United States
securities. There is generally less government supervision and regulation of
exchanges, financial institutions and issuers in foreign countries than there is
in the United States.
The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in United States securities
since the expenses of the Fund, such as custodial costs, are higher.
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) 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 a United States bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in Europe
which evidence a similar ownership arrangement. 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. In a sponsored ADR or EDR arrangement, the foreign
issuer assumes the obligation to pay some or all of the depositary's transaction
fees, whereas in an unsponsored arrangement the foreign issuer assumes no
obligations and the depositary's transaction fees are paid by the ADR or EDR
holders. Foreign issuers in respect of whose securities unsponsored ADRs or EDRs
have been issued are not necessarily obligated to disclose material information
in the markets in which the unsponsored ADRs or EDRs are traded and, therefore,
there may not be a correlation between such information and the market value of
such securities.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
The Fund may engage in various portfolio strategies to seek to increase its
return through the use of options on portfolio securities and to hedge its
portfolio against movements in the equity markets, interest rates and exchange
rates between currencies. The Fund has authority to write (i.e., sell) covered
call options on its portfolio
10
<PAGE>
securities, purchase put options on securities and engage in transactions in
stock index options, stock index futures and financial futures, and related
options on such futures. The Fund may also deal in forward foreign exchange
transactions, foreign currency options and futures, and related options on such
futures. Each of these portfolio strategies is described below. Although certain
risks are involved in options and futures transactions (as discussed below in
'Risk Factors in Options and Futures Transactions'), the Manager believes that,
because the Fund will (i) write only covered call options on portfolio
securities and (ii) engage in other options and futures transactions only for
hedging purposes, 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.
Writing Covered Call Options. The Fund is authorized to write (i.e., sell)
covered call options on the equity securities in which it may invest and to
enter into closing purchase transactions with respect to certain of such
options. A covered call option is an option where the Fund in return for a
premium gives another party a right to buy specified securities owned by the
Fund at a specified future date and price set at the time of the contract. The
principal reason for writing call options is to attempt to realize, through the
receipt of premiums, a greater return than would be realized on the securities
alone. By writing covered call options, the Fund gives up the opportunity, while
the option is in effect, to profit from any price increase in the underlying
security above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction. A closing purchase
transaction cancels out the Fund's position as the writer of an option by means
of an offsetting purchase of an identical option prior to the expiration of the
option it has written. Covered call options serve as a partial hedge against the
price of the underlying security declining. The Fund may not write covered call
options in underlying securities in an amount exceeding 15% of the market value
of its assets.
Purchasing Put Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its equity securities. By buying
a put option the Fund has a right to sell the underlying security at the
exercise price, thus limiting the Fund's risk of loss through a decline in the
market value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Fund's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. The
Fund will not purchase put options on securities if, as a result of such
purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.
Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures and related options on such futures. The Fund may purchase or
write call options and purchase put options on stock indices to hedge against
the risks of market-wide stock price movements in the securities in which the
Fund invests. The effectiveness of the hedge will depend on
11
<PAGE>
the degree of diversification of the Fund's portfolio and the sensitivity of the
securities comprising the portfolio to factors influencing the market as a
whole. Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular stock, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of prices in the stock market generally or in an
industry or market segment rather than movements in the price of a particular
stock. Currently, stock index options traded include the S&P 100 Index, the S&P
500 Index, the NYSE Composite Index, the AMEX Market Value Index, the National
Over-the-Counter Index and other standard, broadly based stock market indices.
The Fund may also purchase and sell stock index futures contracts and
financial futures contracts ('futures contracts') as a hedge against adverse
changes in the market value of its portfolio securities and interest rates, as
described below. A futures contract is an agreement between two parties which
obligates the purchaser of the futures contract to buy and the seller of a
futures contract to sell a security for a set price on a future date. Unlike
most other futures contracts, a stock index futures contract does not require
actual delivery of securities but results in cash settlement based upon the
difference in value of the index between the time the contract was entered into
and the time of its settlement. The Fund may effect transactions in stock index
futures contracts in securities and financial futures contracts in United States
government and agency securities and corporate debt securities. Transactions by
the Fund in stock index futures and financial futures are subject to limitations
as described below under 'Restrictions on the Use of Futures Transactions'.
The Fund may sell stock index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. When the Fund is not
fully invested in the securities markets and anticipates a significant market
advance, it may purchase stock index futures in order to gain rapid market
exposure that may in part or entirely offset increases in the cost of securities
that the Fund intends to purchase. As such securities purchases are made, an
equivalent amount of stock index futures contracts will be terminated by
offsetting sales. The Fund does not consider purchases of futures contracts to
be a speculative practice under these circumstances. It is anticipated that, in
a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position is the purchase of a stock index futures contract or the purchase of a
call option on a stock index future, but under unusual circumstances (e.g., the
Fund experiences a significant amount of redemptions), a long futures position
may be terminated without the corresponding purchase of securities.
The Fund may sell financial futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of debt securities which may be held by the Fund will
fall, thus reducing the net asset value of the Fund. However, as interest rates
rise, the value of the Fund's short position in the futures contract will also
tend to increase, thus offsetting all or a portion of the depreciation in the
market value of the Fund's investments which are being hedged. While the Fund
will incur commission expenses in selling and closing out futures positions,
these commissions are generally less than the transaction expenses which would
have been incurred had the Fund sold portfolio securities in order to reduce its
exposure to increases in interest rates. The Fund also may purchase financial
futures contracts in anticipation of a decline in interest rates when it is not
fully invested in a particular market in which it intends to make investments to
gain market exposure that may in part or entirely offset an increase in the cost
of securities it intends to purchase. It is anticipated that, in a substantial
majority of these transactions, the Fund will purchase securities upon
termination of the futures contract.
12
<PAGE>
The Fund also has authority to purchase and write call and put options on
futures contracts in connection with its hedging activities. Generally, these
strategies are utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) in which the Fund
enters into futures transactions. The Fund may purchase put options or write
call options on futures contracts rather than selling the underlying futures
contract in anticipation of a decrease in the market value of a security or an
increase in interest rates. Similarly, the Fund may purchase call options, or
write put options on futures contracts, as a substitute for the purchase of such
futures to hedge against the increased cost resulting from an increase in the
market value or a decline in interest rates of securities which the Fund intends
to purchase.
The Fund may engage in options and futures transactions on exchanges and
options in the over-the-counter markets ('OTC options'). In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller. See
'Restrictions on OTC Options' below for information as to restrictions on the
use of OTC options.
Foreign Currency Hedging. The Fund has authority to deal in forward
foreign exchange among currencies of the different countries in which it will
invest as a hedge against possible variations in the foreign exchange rates
among these currencies. This is accomplished through contractual agreements to
purchase or sell a specified currency at a specified future date (up to one
year) and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends and distributions by the Fund. Position hedging is the sale of forward
foreign currency with respect to portfolio security positions denominated or
quoted in such foreign currency. The Fund will not speculate in foreign forward
exchange. The Fund will not attempt to hedge all of its foreign portfolio
positions. The Fund may not commit more than 15% of its assets to position
hedging contracts.
The Fund is also authorized to 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-U.S. dollar denominated securities owned by the Fund, sold by the Fund
but not yet delivered, or committed or anticipated to be purchased by the Fund.
As an illustration, the Fund may use such techniques to hedge the stated value
in United States dollars of an investment in a pound sterling denominated
security. In such circumstances, for example, the Fund may purchase a foreign
currency put option enabling it to sell a specified amount of pounds for dollars
at a specified price by a future date. To the extent the hedge is successful, a
loss in the value of the pound relative to the dollar will tend to be offset by
an increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Fund may also sell a call option which,
if exercised, requires it to sell a specified amount of pounds for dollars at a
specified price by a future date (a technique called a 'straddle'). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the pound to the
dollar. The Manager believes that 'straddles' of the type which may be utilized
by the Fund constitute hedging transactions and are consistent with the policies
described above.
13
<PAGE>
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date (with exchange-traded
contracts and OTC options having the characteristics described above). A futures
contract on a foreign currency is an agreement between two parties to buy and
sell a specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade of
futures exchanges. The Fund will not speculate in foreign currency options,
futures or related options. Accordingly, the Fund will not hedge a currency
substantially in excess of the market value of securities which it has committed
or anticipates to purchase which are denominated in such currency, and in the
case of securities which have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated 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.
Restrictions on the Use of Futures Transactions. Under regulations of the
Commodity Futures Trading Commission ('CFTC'), the futures trading activities
described herein will not result in the Fund being deemed to be a 'commodity
pool operator' as defined under such regulations, provided that the Fund adheres
to certain restrictions. In particular, the Fund may (i) purchase and sell
futures contracts and options thereon for bona fide hedging purposes, as defined
under CFTC regulations, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) the Fund may enter into
non-hedging transactions, provided that the Fund not enter into such non-hedging
transactions if, immediately thereafter, the sum of the amount of the initial
margin deposits on the Fund's existing futures positions and option premiums
would exceed 5% of the market value of the Fund's liquidating value, after
taking into account unrealized profits and unrealized losses on any such
transactions. However, the Fund intends to engage in futures transactions and
options thereon only for hedging purposes. Margin deposits may consist of cash
or securities acceptable to the broker and the relevant contract market.
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Fund's Custodian so that the amount
so segregated, plus the amount of initial and variation margin held in the
account of its broker, equals the market value of the futures contracts, thereby
ensuring that the use of such futures is unleveraged.
Restrictions on OTC Options. The Fund will engage in OTC options,
including over-the-counter foreign currency options and options on foreign
currency futures, only with member banks of the Federal Reserve System and
primary dealers in United States Government securities or with affiliates of
such banks or dealers which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
The Fund will acquire only those OTC options for which the Manager believes the
Fund can receive on each business day at least two independent bids or offers
(one of which will be from an entity other than a party to the option).
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the 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 which are held by the Fund, the market value
of the underlying securities covered by OTC call options currently outstanding
which were sold by the Fund (except as provided below) and margin deposits on
the Fund's existing OTC options on futures contracts exceed 10% of the total
assets of the Fund, taken at market value, together with all other assets of the
Fund which are illiquid or are not otherwise readily marketable. However, if the
OTC option is sold by the Fund
14
<PAGE>
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 security minus the option's strike
price). The repurchase price with the primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option, plus the amount by which the option is 'in-the-money'. This policy 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.
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions to hedge the portfolio involves the risk of imperfect
correlation in movements in the price of options and futures prices and
movements in the price of the securities, interest rates or currencies which are
the subject of the hedge. If the price of the options or futures moves more or
less than the price of the subject of the hedge, the Fund will experience a gain
or loss which will not be completely offset by movements in the price of the
subject of the hedge.
The Fund intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures or, in the case of over-the-counter
transactions, the Manager believes the Fund can receive on each business day at
least two independent bids or offers. However, there can be no assurance that a
liquid secondary market will exist at any specific time. Thus, it may not be
possible to close an options or futures position. The inability to close options
and futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or a related
option.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). 'Trading limits' are imposed on the maximum number of
contracts which any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
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
United States 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. The Fund may not invest more than 10% of its net 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 disposition of the collateral.
15
<PAGE>
Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33% 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 which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. This limitation is a
fundamental policy, and it 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 of 1940, as amended (the 'Investment Company Act').
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 will 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.
INVESTMENT RESTRICTIONS
The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities, 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 the more significant restrictions, the Fund may not:
o Invest in the securities of any one issuer if, immediately after and as a
result of such investment, the value of the holdings of the Fund in the
securities of such issuer exceeds 5% of the Fund's total assets, taken at market
value, except that such restriction shall not apply to securities issued or
guaranteed by the Government of the United States or any of its agencies or
instrumentalities.
o Invest in the securities of any single issuer if, immediately after and
as a result of such investment, the Fund owns more than 10% of the outstanding
voting securities of such issuer.
o 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.
Among other restrictions, the Fund may not 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. The Fund will not purchase securities while borrowings are
outstanding. Other fundamental policies include policies which (i) limit the
Fund's authority to mortgage, pledge, hypothecate or in any manner transfer as
security for indebtedness any securities owned or held by the Fund so as not to
exceed 10% of assets (collateral arrangements with respect to options and
futures transactions are not deemed to be a pledge of assets); and (ii) limit
investments in securities which cannot be readily resold because of legal or
contractual restrictions or which are not otherwise readily marketable,
including repurchase agreements and purchase and sale contracts maturing in more
than seven days, if, regarding all such securities, more than 10% of its net
assets, taken at market value, would be invested in such securities. Although
not a fundamental policy, the Fund will include OTC options and the securities
underlying such options (to the extent provided under 'Investment Objective and
Policies--Portfolio Strategies Involving Options and Futures') in calculating
the amount of its net assets subject to the limitation set forth in clause (ii)
above. 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.
16
<PAGE>
The Trustees of the Fund, at a meeting held on August 4, 1994, approved
certain changes to the fundamental and non-fundamental investment restrictions
of the Fund. These changes were proposed in connection with the cereation of a
set of standard fundamental and non-fundamental investment restrictions that
would be adopted, subject to shareholder approval, by substantially all of the
non-money market mutual funds advised by MLAM or FAM. The proposed uniform
investment restrictions are designed to provide each of these funds, including
the Fund, with as much investment flexibility as possible under the Investment
Company Act and applicable state securities regulations, help promote
operational efficiencies and facilitate monitoring of compliance. The investment
objectives and policies of the Fund will be unaffected by the adoption of the
proposed investment restrictions.
The full text of the proposed investment restrictions is set forth under
'Investment Objective and Policies-- Proposed Uniform Investment Restrictions'
in the Statement of Additional Information. Shareholders of the Fund are
currently considering whether to approve the proposed revised investment
restrictions. If such shareholder approval is obtained, the Fund's current
investment restrictions will be replaced by the proposed restrictions, and the
Fund's Propectus and Statement of Additional Information will be supplemented to
reflect such change.
MANAGEMENT OF THE FUND
TRUSTEES
The Trustees of the Fund consist of six individuals, five of whom are not
'interested persons' of the Fund as defined in the Investment Company Act. The
Trustees are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors of investment
companies by the Investment Company Act.
The Trustees are:
ARTHUR ZEIKEL*--President and Chief Investment Officer of the Manager and
FAM; President and Director of Princeton Services, Inc.; Executive Vice
President of Merrill Lynch & Co., Inc. ('ML & Co.') and Executive Vice President
of Merrill Lynch; Director of Merrill Lynch Funds Distributors, Inc.
RONALD W. FORBES--Professor of Finance, School of Business, State
University of New York at Albany.
CYNTHIA A. MONTGOMERY--Professor, Harvard Business School.
CHARLES C. REILLY--Self-employed financial consultant; Adjunct Professor,
Columbia University Graduate School of Business; Former President and Chief
Investment Officer of Verus Capital, Inc.; Former Senior Vice President of
Arnhold and S. Bleichroeder, Inc.
KEVIN A. RYAN--Professor of Education at Boston University; founder and
current director of the Boston University Center for the Advancement of Ethics
and Character.
RICHARD R. WEST--Professor of Finance, and Dean from 1984 to 1993, New York
University Leonard N. Stern School of Business Administration.
- ------------------
* Interested person, as defined by the Investment Company Act, of the Fund.
17
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS
Merrill Lynch Asset Management, L.P. ('MLAM' or the 'Manager'), which is
owned and controlled by ML & Co., acts as the manager for the Fund and provides
the Fund with management and investment advisory services. The principal offices
of the Manager are located at 800 Scudders Mill Road, Plainsboro, New Jersey
(mailing address: P.O. Box 9011, Princeton, New Jersey 08543-9011). The Manager
or an affiliate of the Manager, FAM, acts as the investment adviser for more
than 100 registered investment companies. The Manager also offers portfolio
management and portfolio analysis services to individuals and institutions. As
of August 31, 1994, the Manager and FAM had a total of approximately $165.7
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the 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 Manager provides
the portfolio manager for the Fund, Walter D. Rogers, who considers analyses
from various sources (including brokerage firms with which the Fund does
business), makes the necessary decisions, and places transactions accordingly.
Mr. Rogers is a Vice President of the Manager and has been employed by the
Manager or its predecessor in this capacity since 1987. Mr. Rogers also acts as
portfolio manager of other registered investment companies sponsored by the
Manager, including Merrill Lynch Global Utility Fund, Inc. and Merrill Lynch
Utility Income Fund, Inc. 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.
The Fund pays the Manager a monthly fee at the annual rate of 0.60% of the
average daily net assets of the Fund. For the fiscal year ended July 31, 1994,
the Manager received a fee of $1,381,980 (based on average net assets of
approximately $231.0 million). 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 on a semi-annual basis. For the fiscal year ended
July 31, 1994, the amount of such reimbursement was $51,945. For the fiscal year
ended July 31, 1994, the ratio of total expenses to average net assets was 0.85%
for the Class A shares and 1.88% for the Class B shares; no Class C or Class D
shares were issued as of such date.
TRANSFER AGENCY SERVICES
Financial Data Services, Inc. (the 'Transfer Agent'), which is a
wholly-owned subsidiary of ML & Co., acts as the Fund's transfer agent pursuant
to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the 'Transfer Agency Agreement'). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives
a fee of $11.00 per Class A and Class D shareholder account and $14.00 per Class
B and Class C shareholder account and is entitled to reimbursement for
out-of-pocket expenses incurred by it under the Transfer Agency Agreement. For
the fiscal year ended July 31, 1994, $300,411 was paid to the Transfer Agent
pursuant to the Transfer Agency Agreement. At August 31, 1994, the Fund had 91
Class A shareholder accounts, 692 Class B
18
<PAGE>
shareholder accounts, no Class C shareholder accounts and no Class D shareholder
accounts. At this level of accounts, the annual fee payable to the Transfer
Agent would aggregate approximately $10,689 plus out-of-pocket expenses.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the 'Distributor'), an affiliate of
both 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 for retirement plans the minimum initial
purchase is $100, and the minimum subsequent purchase is $1.
The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing(Service Mark) System, as described below. The applicable offering price
for purchase orders is based upon the net asset value of the Fund next
determined after receipt of the purchase orders by the Distributor. As to
purchase orders received by securities dealers prior to 4:15 P.M., New York
time, which includes orders received after the determination of net asset value
as of 4:15 P.M., New York time, on the day the orders are placed with the
Distributor, provided the orders are received by the Distributor prior to 4:30
P.M., New York time, on that day. If the purchase orders are not received prior
to 4:30 P.M., New York time, such orders shall be deemed received on the next
business day. The Fund or the Distributor may suspend the continuous offering of
the Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the Fund. Neither
the Distributor nor the dealers are permitted to withhold placing orders to
benefit themselves by a price change. Merrill Lynch may charge its customers a
processing fee (presently $4.85) to confirm a sale of shares to such customers.
Purchasers directly through the Transfer Agent are not subject to the processing
fee.
The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(Service Mark) System, which permits each investor to choose the method
of purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are sold
to investors choosing the initial sales charge alternatives, and Class B shares
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(Service Mark) System is set forth under
'Merrill Lynch Select Pricing(Service Mark) System' on page 3.
Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges and account maintenance fees that are imposed on Class B
and Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, will be imposed
19
<PAGE>
directly against those classes and not against all assets of the Fund and,
accordingly, such charges will not affect the net asset value of any other class
or have any impact on investors choosing another sales charge option. Dividends
paid by the Fund for each class of shares will be calculated in the same manner
at the same time and will differ only to the extent that account maintenance and
distribution fees and any incremental transfer agency costs relating to a
particular class are borne exclusively by that class. Class B, Class C and Class
D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid. See 'Distribution Plans' below.
Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege'.
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Fund. The distribution-related revenues paid
with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(Service Mark)
System.
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(2)(3)
B CDSC for a period of 4 years, 0.25% 0.75% B shares
at a rate of 4.0% during the convert to D
first year, decreasing 1.0% shares
annually to 0.0% automatically
after
approximately
eight
years(4)
C 1.0% CDSC for one year 0.25% 0.75% No
D Maximum 5.25% initial sales 0.25% No No
charge(3)
</TABLE>
- ------------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs may be imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See 'Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors'.
(3) Reduced for purchases of $25,000 or more. Class A and Class D share
purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead will be subject to a 1.0% CDSC for one year.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans is modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Fund are exchanged for Class B
shares of another MLAM-advised mutual fund, the conversion period applicable
to the Class B shares acquired in the exchange will apply, and the holding
period for the shares exchanged will be tacked onto the holding period for
the shares acquired.
20
<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
SALES LOAD PERCENTAGE* OF DISCOUNT TO
AS PERCENTAGE THE SELECTED DEALERS
OF NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- --------------------------- -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000.......... 5.25% 5.54% 5.00%
$25,000 but less than
$50,000.................. 4.75 4.99 4.50
$50,000 but less than
$100,000................. 4.00 4.17 3.75
$100,000 but less than
$250,000................. 3.00 3.09 2.75
$250,000 but less than
$1,000,000............... 2.00 2.04 1.80
$1,000,000 and over**...... 0.00 0.00 0.00
</TABLE>
- ------------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994. If the sales charge is
waived, such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. Class A purchases made prior to
October 21, 1994 may be subject to a CDSC, in lieu of an initial sales
charge, if the shares are redeemed within one year of purchase at the
following rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on
purchases of $2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to
$5,000,000; and 0.25% on purchases of more than $5,000,000. The charge will
be assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. A sales charge of 0.75% will be
charged on purchases of $1 million or more of Class A or Class D shares by
certain 401(k) plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the 'Securities Act'). During the fiscal year ended July 31, 1994,
the Fund sold 565,272 Class A shares for aggregate net proceeds of $7,579,456.
The gross sales charges for the sale of Class A shares of the Fund for that year
were $80,525, of which $4,364 and $76,161 were received by the Distributor and
Merrill Lynch, respectively. During the fiscal year ended July 31, 1994, no
CDSCs were received with respect to Class A shares for which the initial sales
charge was waived.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares in a
shareholder account, including participants in the Merrill Lynch
Blueprint(Service Mark) Program, are entitled to purchase additional Class A
shares in that account. Certain employer sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available at net asset value to corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised mutual funds. Also eligible to purchase Class A shares
at net asset value are participants in certain investment programs including
TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services and certain purchases made in connection with the
Merrill Lynch Mutual Fund Adviser program. In addition, Class A shares will be
offered at net asset value to ML & Co. and its subsidiaries and their directors
and employees and to members of the Boards of MLAM-advised investment companies,
including the Fund. Certain persons who acquired shares of certain MLAM-advised
closed-end funds who wish to reinvest the net proceeds from a sale of
21
<PAGE>
their closed-end fund shares of common stock in shares of the Fund also
may purchase Class A and Class D shares of the Fund if certain conditions
set forth in the Statement of Additional Information are met for closed-end
funds that commenced operations prior to October 21, 1994. For example, Class
A shares of the Fund and certain other MLAM-advised mutual funds are offered
at net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. who wish to reinvest the net proceeds from a sale of certain of their
shares of common stock of Merrill Lynch Senior Floating Rate Fund, Inc. in
shares of such funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.
Class A shares are offered at net asset value to certain eligible Class A
investors as set forth above under 'Eligible Class A Investors'.
Class D shares are offered at net asset value to an investor who has a
business relationship with a financial consultant who joined Merrill Lynch from
another investment firm within six months prior to the date of purchase if
certain conditions set forth in the Statement of Additional Information are met.
Class D shares may be offered at net asset value in connection with the
acquisition of assets of other investment companies. Class D shares 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 (i)
invested in a mutual fund sponsored by a non-Merrill Lynch company for which
Merrill Lynch has served as a selected dealer and where Merrill Lynch has either
received or given notice that such arrangement will be terminated, or (ii)
invested in a mutual fund sponsored by a non-Merrill Lynch company for which
Merrill Lynch has not served as a selected dealer, if certain conditions set
forth in the Statement of Additional Information are met.
Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
Blueprint(Service Mark) Program.
Additional information concerning these reduced initial sales charges,
including information regarding investments by Employee Sponsored Retirement or
Savings Plans, is set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See 'Conversion of Class B
Shares to Class D Shares' below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under 'Distribution Plans.'
Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See 'Distribution
Plans' below.
22
<PAGE>
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. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B and
Class C shares without a sales charge being deducted at the time of purchase.
Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See 'Limitations on
the Payment of Deferred Sales Charges' below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Fund
exercising the exchange privilege described under 'Shareholder
Services--Exchange Privilege' will continue to be subject to the Fund's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC AS A
PERCENTAGE OF
YEAR SINCE 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 July 31, 1994, the Distributor received CDSCs of
$122,226 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
23
<PAGE>
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000), and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to the CDSC because of dividend reinvestment. With respect to the
remaining 40 shares, the CDSC is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase).
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
('IRA') or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans and in connection with certain group plans placing
orders through the Merrill Lynch Blueprint(Service Mark) Program. The CDSC also
is waived for any Class B shares which are purchased by eligible 401(k) or
eligible 401(a) plans which are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. Additional information concerning the
waiver of the Class B CDSC is set forth in the Statement of Additional
Information.
Contingent Deferred Sales Charges--Class C Shares. Class C shares which
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the 'Conversion Period'), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25 % of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
'Conversion Date') on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to
Class D shares of the Fund in a single account will result in less than
$50 worth of Class B shares being left in the account, all of the Class B shares
of the Fund held in the account on the Conversion Date will be converted to
Class D shares of the Fund.
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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 which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ('Class B Retirement Plans').
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.
DISTRIBUTION PLANS
The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
'Distribution Plan') with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Fund in that the deferred sales charges provide for the financing
of the distribution of the Fund's Class B and Class C shares.
Prior to July 6, 1993, the Fund paid the Distributor an ongoing
distribution fee, accrued daily and payable monthly, at the annual rate of 1.0%
of average daily net assets of the Class B shares of the Fund under a
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distribution plan previously adopted by the Fund (the 'Prior Plan') to
compensate the Distributor and Merrill Lynch for providing account maintenance
and distribution-related activities and services to the Class B shareholders.
The fee rate payable and the services provided under the Prior Plan are
identical to the aggregate fee rate payable and the services provided under the
Class B Distribution Plan, the difference being that the account maintenance and
distribution services have been unbundled.
For the fiscal year ended July 31, 1994, the Fund paid the Distributor
account maintenance fees of $503,429 and distribution fees of $1,510,287 (based
on average net assets of the Class B shares of approximately $201.9 million)
under the Class B Distribution Plan. The Fund did not begin to offer shares of
Class C or Class D publicly until the date of this Prospectus. Accordingly, no
payments have been made pursuant to the Class C or Class D Distribution Plans
prior to the date of this Prospectus.
The payments under the Distribution Plans are based 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 revenues and expenses is presented
to the Trustees each year for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a 'fully allocated accrual' basis and quarterly on a 'direct expense and
revenue/cash' basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSC and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the distribution fees and CDSCs, and the expenses consist of
financial consultant compensation. At December 31, 1993, the last date at which
fully allocated data is available, the fully allocated accrual revenues received
by the Distributor and Merrill Lynch exceeded fully allocated accrual expenses
for the period since the Fund commenced operations on November 25, 1987 by
approximately $3,184,000 (1.5% of Class B net assets at that date). As of
December 31, 1993, direct cash revenues for the period exceeded direct cash
expenses by $13,725,110 (6.53% of Class B net assets at that date). As of July
31, 1994, direct cash revenues for the period since the Fund commenced
operations exceeded direct cash expenses by $13,734,817 (8.2% of Class B net
assets at that date).
The Fund has no obligation with respect to distribution-related and/or
account maintenance-related expenses incurred by the Distributor and Merrill
Lynch in connection with Class B, Class C and Class D shares, and there is no
assurance that the 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 the
distribution of each class of shares separately. The initial sales charges, the
account maintenance fee, distribution fee and/or the CDSCs received with respect
to one class will not be used to subsidize the sale of shares of another class.
Payments of the distribution fee on Class B shares will terminate upon
conversion of those Class B shares into Class D shares as set forth under
'Deferred Sales Charge Alternatives--Class B and Class C Shares--Conversion of
Class B Shares to Class D Shares'.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares, but not
the account maintenance fee. The maximum sales charge rule is applied separately
to each class. As applicable to the Fund, the maximum sales charge rule limits
the aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
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separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being
the maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the 'voluntary maximum') in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances, the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.
REDEMPTION OF SHARES
The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC which may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the net asset value of the Fund's shares at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, 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 Financial Data Services, Inc., Transfer Agency Mutual
Fund Operations, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Redemption requests should not be sent to the Fund. 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 is defined in rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended, the existence and validity of which may be verified as 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 it has assured itself that 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.
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REPURCHASE
The Fund will also repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange on the day received and is received by the Fund from such
dealer not later than 4:30 P.M., New York time, on the same day. Dealers have
the responsibility of submitting such repurchase requests to the Fund not later
than 4:30 P.M., New York time, in order to obtain that day's closing price.
The repurchase arrangements are for the convenience of shareholders and do
not involve a charge by the Fund (other than any applicable CDSC); securities
firms which do not have selected dealer agreements with the Distributor,
however, may impose a charge on the shareholder for transmitting the notice of
repurchase to the Fund. Merrill Lynch may charge its customers a processing fee
(presently $4.85) to confirm a repurchase of shares. Redemptions directly
through the Transfer Agent are not subject to the processing fee. The Fund
reserves the right to reject any order for repurchase, which right of rejection
might adversely affect shareholders seeking redemption through the repurchase
procedure. However, a shareholder whose order for repurchase is rejected by the
Fund may redeem shares as set forth above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Fund at net asset value without a sales
charge up to the dollar amount redeemed. The reinstatement privilege may be
exercised by sending a notice of exercise along with a check for the amount to
be reinstated to the Transfer Agent within 30 days after the date the request
for a 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. The reinstatement privilege is a one-time privilege and
may be exercised by the Class A or Class D shareholder only the first time such
shareholder makes a redemption.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services and investment plans
designed to facilitate investment in its shares. Full details as to each of such
services, copies of the various plans described below and instructions as to how
to participate in the various 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 or from the Distributor or Merrill Lynch. Included in such
services are the following:
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive, at least quarterly, statements from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gain distributions. A shareholder may
make additions to his 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
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shareholder's name may be opened at the Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A or Class D
shares (paying any applicable CDSC) so that the cash proceeds can be transferred
to the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder at the Transfer Agent. Shareholders
considering transferring a tax-deferred retirement account such as an individual
retirement account from Merrill 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.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds. There is currently no limitation
on the number of times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated at any time in accordance with
the rules of the Commission.
Under the Merrill Lynch Select Pricing(Service Mark) System, Class A
shareholders may exchange Class A shares of the Fund for Class A shares of a
second MLAM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second fund.
If the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange, the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares will be exchangeable with shares of the
same class of other MLAM-advised mutual funds.
Shares of the Fund which are subject to a CDSC will be exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is 'tacked' to the holding period of the newly acquired shares of the
other Fund.
Class A, Class B, Class C and Class D shares also will be exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B,
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<PAGE>
Class C or Class D shares. The period of time that Class A, Class B, Class C or
Class D shares are held in a money market fund, however, will not count toward
satisfaction of the holding period requirement for reduction of any CDSC imposed
on such shares, if any, and, with respect to Class B shares, toward satisfaction
of the Conversion Period.
Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see 'Shareholder Services--Exchange
Privilege' in the Statement of Additional Information.
The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares under the Merrill Lynch Mutual Fund Adviser ('MFA')
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D shares
of a MLAM-advised mutual fund for Class A or Class D shares of the Fund will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Fund being acquired in the
exchange under the MFA program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined on the ex-dividend date of such dividend or distribution. A
shareholder may at any time, by written notification or by telephone
1-800-MER-FUND to the Transfer Agent, elect to have subsequent dividends or
capital gains distributions, or both, paid in cash, rather than reinvested, in
which event payment will be mailed on the payment date. A shareholder whose
account is maintained at Merrill Lynch may, at any time, by written notification
to Merrill Lynch, elect to have both dividends and capital gains distributions
paid in cash rather than reinvested. Cash payments can also be directly
deposited to the shareholder's bank account. No CDSC will be imposed upon
redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions.
SYSTEMATIC WITHDRAWAL PLANS
A Class A or Class D shareholder may elect to receive systematic withdrawal
payments from his Investment Account through automatic payment by check or
through automatic payment by direct deposit to his bank account on either a
monthly or quarterly basis. A Class A or Class D shareholder whose shares are
held within a CMA(Registered), CBA(Registered) or Retirement Account may elect
to have shares redeemed on a monthly, bimonthly, quarterly, semi-annual or
annual basis through the Systematic Redemption Program, subject to certain
conditions.
AUTOMATIC INVESTMENT PLANS
Regular additions of Class A, Class B, Class C or Class D shares may be
made to an investor's Investment Account by pre-arranged charges of $50 or more
to his regular bank account. Investors who maintain CMA(Registered) accounts may
arrange to have periodic investments made in the Fund in amounts of $100 or more
through the CMA(Registered) Automated Investment Program.
RETIREMENT PLANS
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Self-directed individual retirement accounts ('IRAs') and other retirement
plans are available from Merrill Lynch. Under these plans, investments may be
made in the Fund and certain other mutual funds whose shares are distributed by
the Distributor, as well as in other securities. Merrill Lynch charges an
initial establishment fee and an annual custodial fee for each account. The
minimum initial purchase to establish any such plan is $100 and the minimum
subsequent purchase is $1.
Shareholders considering transferring a tax-deferred retirement account
such as an IRA from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the retirement account is
to be transferred will not take delivery of shares of the 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.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the Fund seeks to obtain the best net
results, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution,
operational facilities of the firm involved and the firm's risk in positioning a
block of securities. While the Fund generally seeks reasonably competitive
commission rates, the Fund does not necessarily pay the lowest commission or
spread available. The Fund contemplates that, consistent with its policy of
obtaining the best net results, it will place orders for transactions with a
number of brokers and dealers, including Merrill Lynch, an affiliate of the
Manager. Subject to obtaining the best price and execution, brokers who provide
supplemental investment research to the Fund may receive orders for transactions
by the Fund. Information so received will be in addition to, and not in lieu of,
the services required to be performed by the Manager, and the expenses of the
Manager will not necessarily be reduced as a result of the receipt of such
supplemental information. See 'Management of the Fund--Management and Advisory
Arrangements'. In addition, consistent with the Rules of Fair Practice of the
NASD, 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.
It is expected that the majority of the shares of the Fund will be sold by
Merrill Lynch.
The Fund anticipates that its brokerage transactions involving securities
of companies domiciled in countries other than the United States will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States, although the Fund will
endeavor to achieve the best net results in effecting such transactions.
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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 a
formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Fund with respect to
all shares, to the extent any dividends are paid, will be calculated in the same
manner at the same time on the same day and will be in the same amount, except
that account maintenance fees and distribution charges and any incremental
transfer agency costs relating to each class of shares will be borne exclusively
by that class. The Fund will include performance data for all classes of shares
of the Fund in any advertisement or information including performance data of
the Fund.
The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return, and (2) the maximum applicable sales charge will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements distributed to investors whose purchases are subject to waiver
of the CDSC in the case of Class B and Class C shares (such as investors in
certain retirement plans) or to reduced sales loads in the case of Class A and
Class D shares, performance data may take into account the reduced, and not the
maximum, sales charge or may not take into account the CDSC and therefore may
reflect greater total return since, due to the reduced sales charges or waiver
of the CDSC, a lower amount of expenses is deducted. See 'Purchase of Shares.'
The Fund's total return may be expressed either as a percentage or as a dollar
amount in order to illustrate such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.
Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.
On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Composite Stock Price Index, the Value Line Composite Index, the Dow
Jones Industrial Average, or performance data published by Lipper Analytical
Services, Inc., Morningstar Publications, Inc., Money Magazine, U.S. News and
World Report, Business Week, CDA Investment Technology, Inc., Forbes Magazine
and Fortune Magazine. From time to time, the Fund may include the Fund's
Morningstar risk-adjusted performance ratings in advertisements or
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supplemental sales literature. As with other performance data, performance
comparisons should not be considered representative of the Fund's relative
performance for any future period.
TAXES
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ('RICs') under the Internal Revenue Code
of 1986, as amended (the 'Code'). If it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the 'shareholders'). The
Fund intends to distribute substantially all of such income.
Dividends paid by the Fund from its ordinary income, and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as 'ordinary income dividends') are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options) are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares.
Dividends and distributions are taxable to shareholders even though they
are reinvested in additional shares of the Fund. Not later than 60 days after
the close of its taxable year, the Fund will provide its shareholders with a
written notice designating the amounts of any ordinary income dividends or
capital gains distributions. A portion of the Fund's ordinary income dividends
may be eligible for the dividends-received deduction allowed to corporations
under the Code, if certain requirements are met. If the Fund pays a dividend in
January which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend or distribution will be treated for tax purposes as being paid by the
Fund and received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident aliens or foreign entities will generally 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. Nonresident
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 such
investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses 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,
33
<PAGE>
rather than increasing or decreasing the amount of the Fund's net capital gains.
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 the basis of each shareholder's Fund
shares.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an 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 sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
A loss on the sale or exchange of shares of the Fund held by a shareholder
for less than 6 months will be a capital loss to the extent of any long term
capital gains distributions paid with respect to such shares.
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.
Ordinary income and capital gains dividends may also be subject to state
and local taxes.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
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 quarterly. All net
realized long or short-term capital gains, if any, are distributed to the Fund's
shareholders at least annually. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to comply
with a Federal income tax requirement that a certain percentage of its ordinary
income and capital gains be distributed during the calendar year. The per share
dividends and distributions on each class of shares will be reduced as a result
of any account maintenance, distribution and transfer agency fees applicable to
that class. See 'Additional Information--Determination of Net Asset Value.'
Dividends and distributions may be reinvested automatically in shares of the
Fund at net asset value. Shareholders may elect in writing to receive any such
dividends or distributions, or both, in cash. Dividends and distributions are
taxable to shareholders as discussed under 'Taxes' whether they are reinvested
in shares of the Fund or received in cash.
34
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily at 4:15 P.M., New York time, following the close of
trading on the New York Stock Exchange on each day during which the New York
Stock Exchange is open for trading. The net asset value per share 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
investment advisory 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 the Class B and Class
C shares. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions, which will differ by approximately the amount of the expense
accrual differentials among the classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the last available bid price. Securities
traded in the over-the-counter market are valued at the last quoted bid prices
as at the close of trading on the New York Stock Exchange on each day by brokers
that make markets in the securities. Portfolio securities which are traded both
in the over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market. Any assets and liabilities
initially expressed in terms of non-U.S. Dollar currencies are translated into
U.S. Dollar currencies at the prevailing market rates as quoted by one or more
banks or dealers on the day of valuation. 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 Trustees of the Fund.
When the Fund sells an option, an amount equal to the premium received by
the Fund is included in the Fund's Statement of Assets and Liabilities as a
deferred credit. The amount of such liability subsequently will be
marked-to-market to reflect the current market value of the option written. If
current market value exceeds the premium received there is an unrealized loss;
conversely, if the premium exceeds current market value there is an unrealized
gain. The current market value of a traded option is the last sale price or, in
the absence of a sale, the last offering price. If an option expires on its
stipulated expiration date or if the Fund enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option will be extinguished. If an option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security and the proceeds of sales are increased by the premium originally
received.
ORGANIZATION OF THE FUND
The Fund was organized on May 14, 1987 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, $.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
35
<PAGE>
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 beneficial interest at a
future date. Shares have the conversion rights described in this Prospectus.
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 or account maintenance fees
or of a change in the fundamental policies, objective 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 of Trust 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 a 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:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or 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 May 14, 1987, 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 Strategic Dividend 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.
36
<PAGE>
MERRILL LYNCH STRATEGIC DIVIDEND FUND--AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
Note: This form may not be used for purchases through the Merrill Lynch
Blueprint(Service Mark) Program. You may request a Merrill Lynch
Blueprint(Service Mark) Program application by calling toll free (800)
637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Strategic Dividend 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 Financial Data Services,
Inc., as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: (Please list all funds. Use a separate sheet of paper
if necessary.)
1.................................... 4.......................................
2.................................... 5.......................................
3.................................... 6.......................................
Name .........................................................................
First Name Initial Last Name
Name of Co-Owner (if any) ....................................................
First Name Initial Last Name
Address ...............................
........................................
(Zip Code)
Occupation.............. Name and Address of Employer ......................
...................................... .....................................
...................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Long-Term Capital Gains
Dividends
Select / / Reinvest Select / / Reinvest
One: / / Cash One: / / Cash
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
/ / Check or / / Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Strategic Dividend 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 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.
37
<PAGE>
- --------------------------------------------------------------------------------
3. SOCIAL SECURITY NUMBER OR TAXPAYER INDENTIFICATION NUMBER
/ / / / / / / / / / / /
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is my
correct Social Security Number or Taxpayer Identification Number and (2) that I
am not subject to backup withholding (as discussed in the Prospectus under
'Additional Information--Taxes') either because I have not been notified that I
am subject thereto as a result of a failure to report all interest or dividends,
or the Internal Revenue Service ('IRS') has notified me that I am no longer
subject thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND IF
YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
...................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
.............................. , 19 ......
Date of initial purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Strategic Dividend 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 Strategic Dividend
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 Strategic Dividend Fund held as security.
By ...................................... ....................................
Signature of Owner Signature of Co-Owner
(If registered in joint parties,
both must sign)
In making purchases under this letter, the following are the related accounts
on which reduced offering prices are to apply:
(1) Name................................ (2) Name..............................
Account Number.......................... Account Number........................
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp.
[INDICIA]
This form when completed should be mailed to:
Merrill Lynch Strategic Dividend Fund
c/o Financial Data Services, Inc.
Transfer Agency Mutual Funds Operations
P.O. Box 45289
Jacksonville, Florida 32232-5289
We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the shareholder's signature.
...............................................................................
Dealer Name and Address
By..............................................................................
Authorized Signature of Dealer
/ / / / / / / / / .....................
Branch-Code F/C No. F/C Last Name
/ / / / / / / / / /
Dealer's Customer Account No.
38
<PAGE>
- --------------------------------------------------------------------------------
MERRILL LYNCH STRATEGIC DIVIDEND 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.
Name of Co-Owner (if any) ...................... or Taxpayer Identification No.
Address .............................................
............................. Account Number .................................
(if existing account)
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN--CLASS A AND D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Strategic
Dividend Fund at cost or current offering price. Withdrawals to be made either
(check one) / / Monthly on the 24th day of each month, or M Quarterly on the
24th day of March, June, September and December. If the 24th falls on a weekend
or holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ............. (month), or as soon as possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE):
/ / $ ......... or / / ......... % of the current value of / / Class A or
/ / Class D shares in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of ......................................................
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (please print) ...................................................
Address .......................................................................
.......................................................................
Signature of Owner ....................... Date ..............................
Signature of Co-Owner (if any) .................................................
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your account ..........................................................
Bank Name ......................................................................
Bank Number .......................... Account Number .......................
Bank Address ..................................................................
...............................................................................
Signature of Depositor ................... Date ..............................
Signature of Depositor ........................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED 'VOID' OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
39
<PAGE>
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw an automated
clearing house ('ACH') debit on my checking account as described below each
month to purchase (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D shares
of Merrill Lynch Strategic Dividend 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.
FINANCIAL DATA SERVICES, INC.
You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Strategic Dividend Fund as indicated below:
Amount of each check or ACH debit $ ...........................................
Account Number ................................................................
Please date and invest ACH debits on the 20th of each month beginning
......................... or as soon thereafter as possible.
(month)
I agree that you are preparing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of fund shares including liquidating shares of the Fund and
credit my bank account. I further agree that if a debit is not honored upon
presentation, Financial Data Services, Inc. is authorized to discontinue
immediately the Automatic Investment Plan and to liquidate sufficient shares
held in my account to offset the purchase made with the dishonored debit.
.................... ........................................
Date Signature of Depositor
........................................
Signature of Depositor
(If joint account, both must
sign)
AUTHORIZATION TO
HONOR ACH DEBITS
DRAWN BY FINANCIAL DATA SERVICES, INC.
To ....................................................................... Bank
(Investor's Bank)
Bank Address ..................................................................
City ............ State ............ Zip Code ...............................
As a convenience to me, I hereby request and authorize you to pay and charge to
my account ACH debits drawn on my account by and payable to Financial Data
Services, Inc., I agree that your rights in respect to each such debit shall be
the same as if it were a check drawn on you and signed personally by me. This
authority is to remain in effect until revoked by me in writing. Until you
receive such notice, you shall be fully protected in honoring any such debit. I
further agree that if any such debit be dishonored, whether with or without
cause and whether intentionally or inadvertently, you shall be under no
liability.
.................... ....................................
Date Signature of Depositor
.................... ....................................
Bank Account Number Signature of Depositor
(If joint account, both must
sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
'VOID' SHOULD ACCOMPANY THIS APPLICATION.
40
<PAGE>
MANAGER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive P2N
North Quincy, Massachusetts 02171
TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, New York 10022
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER, OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Fee Table......................................... 2
Merrill Lynch Select Pricing System............... 3
Financial Highlights.............................. 8
Investment Objective and Policies................. 9
Management of the Fund............................ 17
Trustees........................................ 17
Management and Advisory Arrangements............ 18
Transfer Agency Services........................ 18
Purchase of Shares................................ 19
Initial Sales Charge Alternatives--Class A and
Class D Shares............................... 21
Deferred Sales Charge Alternatives--Class B and
Class C Shares............................... 22
Distribution Plans.............................. 25
Limitation on the Payment of Deferred Sales
Charges...................................... 27
Redemption of Shares.............................. 27
Redemption...................................... 27
Repurchase...................................... 28
Reinstatement Privilege--Class A and Class D
Shares....................................... 28
Shareholder Services.............................. 28
Portfolio Transactions............................ 31
Performance Data.................................. 32
Taxes............................................. 33
Additional Information............................ 34
Dividends and Distributions..................... 34
Determination of Net Asset Value................ 35
Organization of the Fund........................ 35
Shareholder Reports............................. 36
Shareholder Inquiries........................... 36
Authorization Form................................ 37
</TABLE>
Code # 10559-1094
Prospectus
[ART]
- ------------------------------------------------------
MERRILL LYNCH
STRATEGIC DIVIDEND
FUND
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH STRATEGIC DIVIDEND FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
----------------------
The investment objective of Merrill Lynch Strategic Dividend Fund (the
'Fund'), is to seek long-term total return by investing primarily in a
diversified portfolio of dividend-paying common stocks which yield more than the
Standard & Poor's 500 Composite Stock Price Index. Total return is the aggregate
of income and capital value changes. The strategy of the Fund's manager, Merrill
Lynch Asset Management, is based on the belief that stocks which have above
average yields will provide attractive long-term total return and greater price
stability than stocks which have below average dividend yields during periods of
downward movements in market prices. There can be no assurance that the
investment objective of the Fund will be realized.
Pursuant to the Merrill Lynch Select Pricing(Service Mark) System, the Fund
offers four classes of shares each with a different combination of sales
charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(Service Mark) System permits an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances.
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 October
21, 1994 (the 'Prospectus'), which has been filed with the Securities and
Exchange Commission and can be obtained, without charge, by calling or by
writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
----------------------
MERRILL LYNCH ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
----------------------
The date of this Statement of Additional Information is October 21, 1994.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term total return by
investing primarily in a diversified portfolio of dividend-paying common stocks
which yield more than the Standard & Poor's 500 Composite Stock Price Index.
Total return is the aggregate of income and capital value changes. The strategy
of the Fund's manager, Merrill Lynch Asset Management, L.P., doing business as
Merrill Lynch Asset Management ('MLAM' or the 'Manager'), is based on the belief
that stocks which have above average yields will provide attractive long-term
total return and greater price stability than stocks which have below average
dividend yields during periods of downward movements in market prices. Reference
is made to 'Investment Objective and Policies' in the Prospectus for a
discussion of the investment objective and policies of the Fund.
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 Fund's portfolio turnover rates for the fiscal
years ended July 31, 1993 and 1994 were 25.23% and 22.75%, respectively.
PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES
Reference is made to the discussion under the caption 'Investment Objective
and Policies--Portfolio Strategies Involving Options and Futures' in the
Prospectus for information with respect to various portfolio strategies
involving options and futures. The Fund may seek to increase its return through
the use of options on portfolio securities and to hedge its portfolio against
movements in the equity markets, interest rates and exchange rates between
currencies. The Fund has authority to write (i.e., sell) covered call options on
its portfolio securities, purchase put options on securities and engage in
transactions in stock index options, stock index futures and financial futures,
and related options on such futures. The Fund may also deal in forward foreign
exchange transactions and foreign currency options and futures, and related
options on such futures. Each of such portfolio strategies is described in the
Prospectus. Although certain risks are involved in options and futures
transactions (as discussed in the Prospectus and below), the Manager believes
that, because the Fund will write only covered call options on portfolio
securities and engage in other options and futures transactions only for hedging
purposes, 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. The following is further information
relating to portfolio strategies the Fund may utilize involving options and
futures.
Writing Covered Call Options. The Fund is authorized to write (i.e., sell)
covered call options on the equity securities in which it may invest and to
enter into closing purchase transactions with respect to certain of such
options. A covered call option is an option where the Fund, in return for a
premium, gives another party a
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right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. The principal reason for writing call
options is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. By writing covered call
options, the Fund gives up the opportunity, while the option is in effect, to
profit from any price increase in the underlying security above the option
exercise price. In addition, the Fund's ability to sell the underlying security
will be limited while the option is in effect unless the Fund effects a closing
purchase transaction. A closing purchase transaction cancels out the Fund's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options serve as a particular hedge against the price of the underlying
security declining. The Fund may not write covered call options on underlying
securities in an amount exceeding 15% of the market value of its total assets.
The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer realizes a gain or loss from the sale of the underlying security.
Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the 'Clearing Corporation') which
are currently traded on the Chicago Board Options Exchange, American Stock
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock
Exchange. An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. If a secondary
market does not exist, it might not be possible to effect closing transactions
in particular options, with the result, in the case of a covered call option,
that the Fund will not be able to sell the underlying security until the option
expires or until it delivers the underlying security upon exercise. Reasons for
the absence of a liquid secondary market on an exchange include the following:
(i) there may be insufficient trading interest in certain options; (ii)
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Clearing
Corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by the
Clearing Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may also enter into over-the-counter put and call option
transactions ('OTC options'), which are two party contracts with price and terms
negotiated between the buyer and seller. The Fund will only enter into
over-the-counter option transactions with respect to portfolio securities for
which management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option). The staff of the Securities and Exchange Commission (the
'Commission') has taken the position that OTC options and the assets used as
cover for written OTC options are illiquid securities to the extent set forth
under 'Investment Objective and Policies--Portfolio Strategies Involving Options
and Futures' in the Prospectus.
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<PAGE>
Purchasing Put Options. The Fund may purchase put options to hedge against
a decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will purchase only put options traded on
an exchange. The Fund will not purchase put options on securities if, as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
Stock Index Options and Futures and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
options and futures and financial futures and related options on such futures.
Set forth below is further information concerning futures transactions.
A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and accept
a cash settlement for a set price on a future date. A majority of transactions
in futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement, but are settled through liquidation,
i.e., by entering into an offsetting transaction. Futures contracts have been
designed by boards of trade which have been designated 'contracts markets' by
the Commodity Futures Trading Commission ('CFTC').
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as 'initial margin' and
represents a 'good faith' deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called 'variation margin', are required to be made on a daily basis as
the price of the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
'mark to the market'. At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
The Fund has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the 'Investment Company Act') in connection with its strategy
of investing in futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Fund and commodities brokers with
respect to initial and variation margin. Section 18(f) of the Investment Company
Act prohibits an open-end investment company such as the Fund from issuing a
'senior security' other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a futures contract may be a 'senior
security' under the Investment Company Act.
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<PAGE>
Restrictions on Use of Futures Transactions. Regulations of the CFTC
applicable to the Fund permit the Fund's futures and options on futures
transactions to include (i) bona fide hedging transactions without regard to the
percentage of the Fund's assets committed to margin and option premiums, and
(ii) non-hedging transactions, provided that the Fund not enter into such
non-hedging transactions if, immediately thereafter, the sum of the amount of
initial margin deposits on the Fund's existing futures positions and option
premiums would exceed 5% of the market value of the Fund's liquidating value
after taking into account unrealized profits and unrealized losses on any such
transactions. However, the Fund intends to engage in futures transactions and
options thereon only for hedging purposes.
When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or short-term, high-grade, fixed income securities will be deposited
in a segregated account with the Fund's custodian so that the amount so
segregated, plus the amount of initial and variation margin held in the account
of its broker, equals the market value of the futures contract, thereby ensuring
that the use of such futures is unleveraged.
Foreign Currency Hedging. Generally, the foreign exchange transactions of
the Fund will be conducted on a spot, i.e., cash, basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate in
an amount generally less than 0.15% of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to deal
in forward foreign exchange among currencies of the different countries in which
it will invest as a hedge against possible variations in the foreign exchange
rate among these currencies. This is accomplished through contractual agreements
to purchase or sell a specified currency at a specified future date and price
set at the time of the contract. The Fund's dealings in forward foreign exchange
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities, the sale
and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Fund will not speculate in forward foreign exchange.
The Fund may not position hedge with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or quoted
in that particular foreign currency. If the Fund enters into a position hedging
transaction, its custodian bank will place cash or liquid equity or debt
securities in a separate account of the Fund in an amount equal to the value of
the Fund's total assets committed to the consummation of such forward contract.
If the value of the securities placed in the separate account declines,
additional cash or securities will be placed in the account so that the value of
the account will equal the amount of the Fund's commitment with respect to such
contracts. The Fund will not attempt to hedge all of its foreign portfolio
positions and will enter into such transactions only to the extent, if any,
deemed appropriate by the Manager. The Fund will not enter into a position
hedging commitment if, as a result thereof, the Fund would have more than 15% of
the value of its assets committed to such contracts. The Fund will not enter
into a forward contract with a term of more than one year.
The Fund is also authorized to purchase or sell listed or over-the-counter
('OTC') foreign currency options, foreign currency futures and related options
on foreign currency futures as a short or long hedge against possible variations
in foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
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<PAGE>
value in United States dollars of an investment in a pound sterling denominated
security. In such circumstances, for example, the Fund may purchase a foreign
currency put option enabling it to sell a specified amount of pounds for dollars
at a specified price by a future date. To the extent the hedge is successful, a
loss in the value of the pound relative to the dollar will tend to be offset by
an increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Fund may also sell a call option which,
if exercised, requires it to sell a specified amount of pounds for dollars at a
specified price by a future date (a technique called a 'straddle'). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the pound to the
dollar. The Manager believes that 'straddles' of the type which may be utilized
by the Fund constitute hedging transactions and are consistent with the policies
described above.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in foreign currency transactions varies with such factors as the
currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Options and Futures Transactions. Utilization of futures
transactions involves the risk of imperfect correlation in movements in the
prices of futures contracts and movements in the price of the underlying
security which is the subject of the hedge. If the price of the futures contract
moves more or less than the price of the underlying security, the Fund will
experience a gain or loss which will not be completely offset by movements in
the price of the underlying security which is the subject of the hedge.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an exchange
only if there appears to be a liquid secondary market for such options or
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular call or put option or futures contract at any specific
time. Thus, it may not be possible to close an option or futures position. The
Fund will acquire only OTC options for which management believes the Fund can
receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option). In the case of a
futures position or an option on a futures position written by the Fund in the
event of adverse price movements, the Fund would continue to be required to make
daily cash payments of variation margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Fund may be required to take or make delivery of the security
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
hedge effectively its portfolio. There is also the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options of the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with
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others (regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). 'Trading limits' are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose other sanctions or restrictions. The Manager does not believe that these
trading and position limits will have any adverse impact on the portfolio
strategies for hedging the Fund's portfolio.
OTHER INVESTMENT POLICIES AND PRACTICES
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.
Lending of Portfolio Securities. Subject to investment restriction (10)
below, the Fund may lend securities from its portfolio to approved borrowers and
receive therefor collateral in cash or securities issued or guaranteed by the
United States Government which are 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.
Restricted Securities. While the Fund will not purchase illiquid
securities in an amount exceeding 10% of its net assets, the Fund may purchase,
without regard to that 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 continuously
determines, based on the trading markets for the specific restricted security,
that it is liquid. The
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<PAGE>
Board of Trustees may adopt guidelines and delegate to the Investment Adviser
the daily function of determining and monitoring liquidity of restricted
securities. The Board of Trustees, however, will retain sufficient oversight and
be ultimately responsible for the determinations.
The Board of Trustees carefully monitors the Fund's investments in these
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. These
investments in securities purchased pursuant to Rule 144A could have the effect
of increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
CURRENT INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and policies relating to
the investment of its assets and its activities, 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 (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). The Fund may not:
(1) Invest more than 5% of its total assets (taken at market value at the
time of each investment) in securities of any one issuer, except that such
restriction shall not apply to securities backed by the United States Government
or its agencies or instrumentalities.
(2) Invest in the securities of any single issuer if, immediately after and
as a result of such investment, the Fund owns more than 10% of the outstanding
voting securities of such issuer.
(3) 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.
(4) Make investments for the purpose of exercising control or management.
(5) Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved and only if immediately thereafter not more than 10% of
the Fund's total assets, taken at market value, would be invested in such
securities.
(6) Purchase or sell real estate; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
(7) Purchase any securities on margin, except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities. (The deposit or payment by the Fund of initial or
variation margin in connection with futures or related options transactions, if
applicable, is not considered the purchase of a security on margin.)
(8) Make short sales of securities or maintain short position.
(9) Make loans to other persons (except as provided in (10) below);
provided, that for purposes of this restriction an investment in repurchase
agreements and purchase and sale contracts shall not be deemed to be the making
of a loan.
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(10) Lend its portfolio securities in excess of 33% of its total assets,
taken at market value; provided that such loans shall be made in accordance with
the guidelines set forth in the Prospectus and this Statement of Additional
Information.
(11) Issue senior securities, borrow money or pledge its assets in excess
of 20% of its total assets taken at market value (including the amount borrowed)
and then only from a bank as a temporary measure for extraordinary or emergency
purposes. Usually only 'leveraged' investment companies may borrow in excess of
5% of their assets; however, the Fund will not borrow to increase income but
only to meet redemption requests which may otherwise require untimely
dispositions of Fund securities. The Fund will not purchase securities while
borrowings are outstanding except to honor prior commitments and to exercise
subscription rights. Interest paid on such borrowings will reduce net income.
(See restriction (12) below regarding the exclusion from this restriction of
arrangements with respect to options, futures contracts and options on futures
contracts.)
(12) Mortgage, pledge, hypothecate or in any manner transfer as security
for indebtedness any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in (11) above, and then such
mortgaging, pledging or hypothecating may not exceed 10% of its total assets,
taken at market value. (For the purpose of this restriction and restriction (11)
above, collateral arrangements with respect to the writing of options, futures
contracts, options on futures contracts, and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge of assets,
and neither such arrangements nor the purchase and sale of options, futures or
related options are deemed to be the issuance of a senior security.)
(13) Invest in securities which cannot be readily resold because of legal
or contractual restrictions or which are not otherwise readily marketable,
including repurchase agreements and purchase and sale contracts maturing in more
than seven days, if, regarding all such securities, more than 10% of its net
assets, taken at market value, would be invested in such securities.
(14) Act as an underwriter of securities, except to the extent that the
Fund may technically be deemed an underwriter when investing in repurchase
agreements and purchase and sale contracts or insofar as the Fund may be deemed
an underwriter under the Securities Act of 1933 in selling portfolio securities.
(15) Purchase or sell interests in oil, gas or other mineral exploration or
development programs except that the Fund may invest in securities issued by
companies that engage in oil, gas or other mineral exploration or development
activities.
Additional investment restrictions adopted by the Fund, which may be
changed by the Trustees, provide that the Fund may not:
(i) Invest in warrants if at the time of acquisition its investments in
warrants, valued at the lower of cost or market value, would exceed 5% of the
Fund's net assets; included within such limitations, but not to exceed 2% of the
Fund's net assets, are warrants which are not listed on the New York or American
Stock Exchange. For purposes of this restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without value.
(ii) Purchase or sell commodities or commodity contracts, except that the
Fund may deal in forward foreign exchange between currencies of the different
countries in which it may invest and purchase and sell stock index and currency
options, stock index futures, financial futures and currency futures contracts
and related options on such futures.
(iii) Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more than 5%
of its total assets would be invested in such securities.
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(iv) Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent described in the Fund's Prospectus
and in this Statement of Additional Information, as amended from time to time.
(v) Purchase or retain the securities of any issuer, if those individual
Trustees, officers and directors of the Fund, the Manager or any subsidiary
thereof, each owning beneficially more than of 1% of the securities of such
issuer, own in the aggregate more than 5% of the securities of such issuer.
(vi) Purchase or sell OTC options and the securities underlying such
options if, as a result of such transactions, such options, together with all
other illiquid securities or securities which are not readily marketable, exceed
10% of the net assets of the Fund, taken at market value except that with
respect to OTC options sold by the Fund to primary U.S. Government securities
dealers who agree that the Fund may repurchase such options at a predetermined
price (which may be based upon a formula), the Fund will treat as illiquid an
amount equal to the repurchase price less the amount by which the option is
in-the-money.
(vii) Invest in (a) real estate limited partnerships and (b) oil, gas or
other mineral leases.
Proposed Uniform Investment Restrictions. As discussed in the Prospectus
under 'Investment Objective and Policies--Investment Restrictions,' the Board of
Trustees of the Fund has approved the replacement of the Fund's existing
investment restrictions with the fundamental and non-fundamental investment
restrictions set forth below. These uniform investment restrictions have been
proposed for adoption by all of the non-money market mutual funds advised by the
Manager or an affiliate of the Manager, Fund Asset Management, L.P. ('FAM'). The
investment objective and policies of the Fund will be unaffected by the adoption
of the proposed investment restrictions.
Shareholders of the Fund are currently considering whether to approve the
proposed revised investment restrictions. If such shareholder approval is
obtained, the Fund's current investment restrictions will be replaced by the
proposed restrictions, and the Fund's Prospectus and Statement of Additional
Information will be supplemented to reflect such change.
Under the proposed fundamental investment restrictions, the Fund may not:
1. Make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act.
2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in 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 government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Fund may lend its portfolio securities, 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.
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6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Fund may borrow up
to an additional 5% of its total assets for temporary purposes, (iii) the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the Fund
may purchase securities on margin to the extent permitted by applicable
law. The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Fund's investment policies as
set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.
8. Underwrite securities of other issuers except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933,
as amended (the 'Securities Act') in selling portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under the proposed non-fundamental investment restrictions, the Fund may
not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Fund currently does not
intend to engage in short sales, except short sales 'against the box.'
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Trustees of the Fund has
otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (a 'Rule 144A security') and determined to be liquid by the Fund's
Board of Trustees are not subject to the limitations set forth in this
investment restriction (c). Notwithstanding the fact that the Board may
determine that a Rule 144A security is liquid and not subject to
limitations set forth in this investment restriction (c), the State of Ohio
does not recognize Rule 144A securities as securities that are free of
restrictions as to resale. To the extent required by Ohio law, the Fund
will not invest more than 5% of its total assets in securities of
issuers that are restricted as to disposition, including Rule 144A
securities.
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or
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American Stock Exchange or a major foreign exchange. For purposes of this
restriction, warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Manager, the directors of such general partner or the
officers and directors of any subsidiary thereof each owning beneficially
more than one-half of one percent of the securities of such issuer own in
the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental restriction (7) above, borrow amounts
in excess of 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 exercise subscription
rights.
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 Merrill Lynch or its affiliates
except for brokerage transactions permitted under the Investment Company Act
involving only usual and customary commissions or transactions permitted
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 of 1933 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
The Trustees and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Trustee is P.O. Box
9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL--President and Trustee(1)(2)--President of the Manager (which
term as used herein includes its corporate predecessors), since 1977 and Chief
Investment Officer thereof since 1976; President and Chief Investment Officer of
FAM (which term as used herein includes its corporate predecessors), since 1977;
President and Director of Princeton Services, Inc. ('Princeton Services') since
1993; Executive Vice President
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of Merrill Lynch & Co., Inc. ('ML & Co.') since 1990; Executive Vice President
of Merrill Lynch since 1990 and Senior Vice President thereof from 1985 to 1990;
Director of Merrill Lynch Funds Distributor, Inc. ('MLFD' or the 'Distributor').
RONALD W. FORBES--Trustee(2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York at
Albany, since 1989.
CYNTHIA A. MONTGOMERY--Trustee(2)--Harvard Business School, Soldiers Field
Road, Boston, Massachusetts 12163. Professor, Harvard Business School since
1989; Associate Professor, J.L.--Kellogg Graduate School of Management,
Northwestern University, 1985-1989; Assistant Professor, Graduate School of
Business Administration, the University of Michigan, 1979-1985; Director, UNUM
Corporation.
CHARLES C. REILLY--Trustee(2)--9 Hampton Harbor Road, Hampton Bays, N.Y.
11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business since 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, since 1990; Director,
Harvard Business School Alumni Association.
KEVIN A. RYAN--Trustee(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Professor of Education at Boston University since 1982.
Founder and current Director of The Boston University Center for Advancement of
Ethics & Character. Formerly taught on the faculties of the University of
Chicago, Stanford University and The Ohio State University.
RICHARD R. WEST--Trustee(2)--482 Tepi Drive, Southbury, Connecticut 06488.
Professor of Finance, and Dean from 1984 to 1993, New York University Leonard N.
Stern School of Business Administration; Professor of Finance at the Amos Tuck
School of Business Administration from 1976 to 1984 and Dean from 1976 to 1983;
Director of Vornado, Inc. (real estate holding corporation), Constar
International, Inc., Re Capital Corp. (reinsurance holding corporation), Smith
Corona Corporation (manufacturer of typewriters and word processors) and
Alexander's, Inc.
TERRY K. GLENN--Executive Vice President(1)(2)--Executive Vice President of
the Manager and FAM since 1983; Executive Vice President of Princeton Services
since 1993; President of the Distributor since 1986 and Director thereof since
1991.
NORMAN R. HARVEY--Senior Vice President(1)(2)--Senior Vice President of the
Manager and FAM since 1982.
DONALD C. BURKE--Vice President(1)(2)--Vice President and Director of
Taxation of the Manager since 1990; Employee of Deloitte & Touche LLP from 1982
until 1990.
WALTER D. ROGERS--Vice President(1)--Vice President of the Manager since
1987.
GERALD M. RICHARD--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; Vice President of the Distributor since 1981 and Treasurer
since 1984; employee of the Distributor since 1978.
ROBERT HARRIS--Secretary(1)(2)--Vice President of the Manager since 1984
and attorney associated with the Manager since 1980; Secretary of the
Distributor since 1982.
- ------------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or its affiliate, FAM, acts as
investment adviser.
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As of September 30, 1994, the officers and Trustees of the Fund as a group
(12 persons) owned an aggregate of less than 1/4 of 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.
Pursuant to the terms of the management agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees of all Trustees who are affiliated persons of ML & Co. or its
subsidiaries. The Fund pays each Trustee not affiliated with the Manager a fee
of $1,000 per year plus $400 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 and Nominating Committee, which consists of all
the nonaffiliated Trustees with a fee of $1,000 per year; the Chairman of the
Audit and Nominating Committee receives an additional annual fee of $1,000 per
year. For the fiscal year ended July 31, 1994, fees and expenses paid to
nonaffiliated Trustees aggregated $27,474.
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'). As discussed in the Prospectus, the Manager receives
for its services to the Fund monthly compensation at the annual rate of 0.60% of
the average daily net assets of the Fund. For the fiscal years ended July 31,
1992, 1993 and 1994, the total management fees paid by the Fund to the Manager
aggregated $1,718,249, $1,546,576 and $1,381,980, respectively.
The State of California imposes limitations on the expenses of the Fund. At
the date of this Statement of Additional Information, these annual expense
limitations require that the Manager reimburse the Fund in any amount necessary
to prevent the aggregate ordinary operating expenses (excluding interest, taxes,
brokerage fees and commissions, distribution fees and extraordinary charges such
as litigation costs) from exceeding in any fiscal year 2.5% of the Fund's first
$30 million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of the remaining average net assets. Such reimbursement, if any,
will be subtracted from the monthly management fee. To date, such reimbursement
has not been required. No fee payment will be made to the Manager during any
fiscal year which will cause such expenses to exceed the expense limitation at
the time of such payment.
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
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<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, shareholders reports and prospectuses and statements of additional
information (except to the extent paid by the Distributor); charges of the
custodian, any sub-custodian and transfer agent, expenses of redemption of
shares; Securities and Exchange Commission fees; expenses of registering the
shares under Federal, state or foreign laws; fees and expenses of nonaffiliated
Trustees; accounting and pricing costs (including the daily calculation of net
asset value); insurance; interest; brokerage costs; litigation and other
extraordinary or non-recurring expenses; and other expenses properly payable by
the Fund. Accounting services are provided to the Fund by the Manager, and the
Fund reimburses the Manager for its costs in connection with such services on a
semi-annual basis. As required by the Fund's distribution agreements, the
Distributor will pay the promotional expenses of the Fund in connection with the
offering of its shares. See 'Purchase of Shares--Distribution Plans'.
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 contract is not assignable and may be terminated without penalty on
60 days' written notice at the option of either party thereto or by the vote of
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(Service Mark) System: shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives, and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Each Class A, Class B, Class C and Class D share of the Fund
represents identical interests in the investment portfolio of the Fund and has
the same rights, except that Class B, Class C and Class D shares bear the
expenses of the ongoing account maintenance fees and Class B and Class C shares
bear the expenses of the ongoing distribution fees and the additional
incremental transfer agency costs resulting from the deferred sales charge
arrangements. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which the account maintenance and/or distribution fees
are paid. Each class has different exchange privileges. See 'Shareholder
Services--Exchange Privilege.'
The Merrill Lynch Select Pricing(Service Mark) System is used by more than
50 mutual funds advised by the Manager or an affiliate of the Manager, FAM.
Funds advised by FAM or the Manager 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 offerings 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 the 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.
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<PAGE>
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
The gross sales charges for the sale of Class A shares for the fiscal years
ended July 31, 1992, 1993 and 1994 were $109,800, $81,292 and $80,525, of which
the Distributor received $6,669, $2,936 and $4,364, respectively, and Merrill
Lynch received $103,131, $79,356 and $76,171, respectively. During the fiscal
year ended July 31, 1994, the Distributor received no CDSCs on Class A shares
for which the initial sales charge was waived. The offering of Class A shares
commenced on November 29, 1988. For information as to brokerage commissions
received by Merrill Lynch, see 'Portfolio Transactions and Brokerage.'
The term 'purchase,' as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term 'purchase' also includes purchases by any 'company,' as that
term is defined in the Investment Company Act, but does not include purchases by
any such company which has not been in existence for at least six months or
which has no purpose other than the purchase of shares of the Fund or shares of
other registered investment companies at a discount; provided, however, that it
shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.
REDUCED INITIAL SALES CHARGES
Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value or
cost, whichever is higher, of the purchaser's combined holdings of all classes
of shares of the Fund and of other MLAM-advised mutual funds. For any such right
of accumulation to be made available, the Distributor must be provided at the
time of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time. Shares held in the name of a nominee
or custodian under pension, profit-sharing, or other employee benefit plans may
not be combined with other shares to qualify for the right of accumulation.
Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares; however, its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under the 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
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<PAGE>
the date of the first purchase under the Letter of Intention, may be included as
a credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in the
Letter of Intention (minimum of $25,000), the investor will be notified and must
pay, within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A or Class D shares equal to five percent of the intended amount will be
held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least five percent of the dollar amount of such Letter. If
a purchase during the term of such Letter would otherwise be subject to a
further reduced sales charge based on the right of accumulation, the purchaser
will be entitled on that purchase and subsequent purchases to that further
reduced percentage sales charge, but there will be no retroactive reduction of
the sales charges on any previous purchase. The value of any shares redeemed or
otherwise disposed of by the purchaser prior to termination or completion of the
Letter of Intention will be deducted from the total purchases made under such
Letter. An exchange from a MLAM-advised money market fund, into the Fund that
creates a sales charge will count toward completing a new or existing Letter of
Intention from the Fund.
Merrill Lynch Blueprint(Service Mark) Program. Class D shares of the Fund
are offered to participants in the Merrill Lynch Blueprint(Service Mark) Program
('Blueprint'). In addition, participants in Blueprint who own Class A shares of
the Fund may purchase additional Class A shares of the Fund through Blueprint.
The Blueprint Program is directed to small investors, group Individual
Retirement Accounts ('IRAs') and participants in certain affinity groups such as
credit unions, trade associations and benefit plans. Investors placing orders to
purchase Class A or Class D shares of the Fund through Blueprint will acquire
the Class A or Class D shares at net asset value plus a sales charge calculated
in accordance with the Blueprint sales charge schedule (i.e., up to $300 at
4.25%, $300.01 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.
Class A and Class D shares are offered at net asset value, to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ('IRA
Rollover Program') available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employer Sponsored Retirement and Savings Plans
(as defined below) whose Trustee and/or Plan Sponsor has entered into a Merrill
Lynch Directed IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class D shares of the Fund may be
grouped for execution purposes which, in some circumstances, may involve the
execution of such orders two business days following the day such orders are
placed. The minimum initial purchase price is $100, with a $50 minimum for
subsequent purchases through Blueprint. There are no minimum initial or
subsequent purchase requirements for participants who are part of an automatic
investment plan. Additional information concerning purchases through Blueprint,
including any annual fees and transaction charges, is available from Merrill
Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(Service Mark) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA(Service Mark) Managed Trusts. Class A shares are offered to
TMA(Service Mark) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services at net asset value.
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<PAGE>
Employer Sponsored Retirement Plans and Savings. Class A and Class D shares
are offered at net asset value to employer sponsored retirement or savings
plans, such as tax qualified retirement plans within the meaning of Section
401(a) of the Internal Revenue Code of 1986, as amended (the 'Code'), deferred
compensation plans within the meaning of Section 403(b) and 457 of the Code,
other deferred compensation arrangements, Voluntary Employee Benefits
Association ('VEBA') plans, and non-qualified After Tax Savings and Investment
programs, maintained on the Merrill Lynch Group Employee Services system, herein
referred to as 'Employer Sponsored Retirement or Savings Plans', provided the
plan has accumulated at least $20 million in MLAM-advised mutual funds (in the
case of Class A shares) or $5 million in MLAM-advised mutual funds (in the case
of Class D shares). Class D shares may be offered at net asset value to new
Employer Sponsored Retirement or Savings Plans, provided the plan has $3 million
or more initially invested in MLAM-advised mutual funds. Assets of Employer
Sponsored Retirement or Savings Plans sponsored by the same sponsor or an
affiliated sponsor may be aggregated. Class A shares and Class D shares also are
offered at net asset value to Employer Sponsored Retirement or Savings Plans
that have at least 1,000 employees eligible to participate in the plan (in the
case of Class A shares) or between 500 and 999 employees eligible to participate
in the plan (in the case of Class D shares). Employees eligible to participate
in Employer Sponsored Retirement or Savings Plans of the same sponsoring
employer or its affiliates may be aggregated. Tax qualified retirement plans
within the meaning of Section 401(a) of the Code meeting any of the foregoing
requirements and which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a wide
range of investments including individual corporate equities and other
securities in addition to mutual fund shares) by the Merrill Lynch
Blueprint(Service Mark) Program, are offered Class A shares at a price equal to
net asset value per share plus a reduced sales charge of 0.50%. Any Employer
Sponsored Retirement or Savings Plan which does not meet the above described
qualifications to purchase Class A shares or Class D shares at net asset value
has the option of (i) purchasing Class A shares at the initial sales charge and
possible CDSC schedule disclosed in the Prospectus, if it is otherwise eligible
to purchase Class A shares, (ii) purchasing Class D shares at the initial sales
charge and possible CDSC schedule disclosed in the Prospectus, (iii) if the
Employer Sponsored Retirement or Savings Plan meets the specified requirements,
purchasing Class B shares with a waiver of the CDSC upon redemption, or (iv) if
the Employer Sponsored Retirement or Savings Plan does not qualify to purchase
Class B shares with a waiver of the CDSC upon redemption, purchasing Class C
shares at the CDSC schedule disclosed in the Prospectus. The minimum initial and
subsequent purchase requirements are waived in connection with all the above
referenced Employer Sponsored Retirement or Savings Plans.
Purchase Privileges of Certain Persons. Trustees of the Fund, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term 'subsidiaries', when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and employees, and
any trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of the Fund at net asset value.
Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the financial consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis. Second, the investor must also establish that such
redemption had been made within 60 days prior to the investment in the Fund, and
the proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
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Class D shares of the Fund will be offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds and that such shares have been outstanding for a
period of no less than 6 months. Second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must have been maintained in the interim in cash or a money market fund.
Class D shares of the Fund 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.
Employees and directors wishing to purchase shares of the Fund must satisfy
the Fund's suitability standards.
Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ('Eligible Class A Shares') are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or FAM
who purchased such closed-end fund shares prior to October 21, 1994 and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such shares
on or after October 21, 1994 and wish to reinvest the net proceeds from a sale
of their closed-end fund shares are offered Class A shares if they are eligible
Class A investors, Class D shares of the Fund and other MLAM-advised mutual
funds ('Eligible Class D Shares'), if the following conditions are met. First,
the sale of the closed-end fund shares must be made through Merrill Lynch, and
the net proceeds therefrom must be immediately reinvested in Eligible Class A or
Class D Shares. Second, the closed-end fund shares either must have been
acquired in the initial public offering or be shares representing dividends from
shares of common stock acquired in such offering. Third, the closed-end fund
shares must have been continuously maintained in a Merrill Lynch securities
account. Fourth, there must be a minimum purchase of $250 to be eligible for the
investment option. Class A shares of the Fund are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. ('Senior Floating
Rate Fund') who wish to reinvest the net proceeds from a sale of certain of
their shares of common stock of Senior Floating Rate Fund in shares of the Fund.
In order to exercise this investment option, Senior Floating Rate Fund
shareholders must sell their Senior Floating Rate Fund shares to the Senior
Floating Rate Fund in connection with a tender offer conducted by the Senior
Floating Rate Fund and reinvest the proceeds immediately in the Fund. This
investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in
the Senior Floating Rate Fund prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net asset value of the
Fund at such day.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or
19
<PAGE>
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.
DISTRIBUTION PLANS
Reference is made to 'Purchase of Shares--Distribution Plans' in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a 'Distribution Plan') with respect to the account
maintenance and/or distribution fees paid by the 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 each Distribution Plan will benefit the Fund and its related
class of shareholders. Each Distribution Plan can be terminated at any time,
without penalty, by the vote of a majority of the 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 the 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 each Distribution Plan or such report, the first two years in an easily
accessible place.
20
<PAGE>
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ('NASD') imposes a limitation on certain
asset-based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares, but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the 'voluntary maximum') in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the amount
payable pursuant to the voluntary maximum may exceed the amount payable under
the NASD formula. In such circumstances payment in excess of the amount payable
under the NASD formula will not be made.
The following table sets forth comparative information as of July 31, 1994
with respect to the Class B shares of the Fund indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule and the
Distributor's voluntary maximum for the period November 25, 1987 (commencement
of the public offering of Class B shares) to July 31, 1994. Since Class C shares
of the Fund had not been publicly issued prior to the date of this Statement of
Additional Information, information concerning Class C shares is not yet
provided below.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1994
--------------------------------------------------
(IN THOUSANDS)
ALLOWABLE
ELIGIBLE AGGREGATE INTEREST MAXIMUM
GROSS SALES ON UNPAID AMOUNT
SALES(1) CHARGES BALANCE(2) PAYABLE
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Under NASD Rule as
Adopted................... $ 382,233 $ 23,890 $ 8,003 $ 31,893
Under Distributor's
Voluntary Waiver.......... $ 382,233 $ 23,890 $ 1,911 $ 25,801
<CAPTION>
ANNUAL
DISTRIBUTION
AMOUNT FEE AT
PREVIOUSLY AGGREGATE CURRENT
PAID TO UNPAID NET ASSET
DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- ----------- ------------
<S> <C> <C> <C>
Under NASD Rule as
Adopted................... $ 16,568 $ 15,325 $ 1,259
Under Distributor's
Voluntary Waiver.......... $ 16,568 $ 9,233 $ 1,259
</TABLE>
- ------------------
(1) Purchase price of all eligible Class B shares sold since November 25, 1987
(commencement of the public offering of Class B shares) other than shares
acquired through dividend reinvestment and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made prior to July 6, 1993 under a prior plan at
the 1.0% rate, 0.75% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. See 'Purchase of Shares-- Distribution Plans' in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum.
21
<PAGE>
REDEMPTION OF SHARES
Reference is made to 'Redemption of Shares' in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange is restricted as determined by the
Commission or during which the New York Stock Exchange is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Commission, as a result of which disposal of
portfolio securities or determination of the net asset value of the Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of the Fund.
The value of shares at the time of redemption may be more or less than the
shareholder's costs, depending on the net asset value of such shares at such
time.
DEFERRED SALES CHARGES--CLASS B SHARES
As discussed in the Prospectus under 'Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares,' while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account ('IRA') or
other retirement plan or on redemptions of Class B shares following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a distribution
following retirement under a tax-deferred retirement plan 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 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 July 31, 1992,
1993 and 1994, the Distributor received CDSCs of $686,958, $291,740 and
$122,226, respectively, all of which was paid to Merrill Lynch.
Merrill Lynch Blueprint(Service Mark) Program. Class B shares are offered
to certain participants in the Merrill Lynch Blueprint(Service Mark) Program
('Blueprint'). Blueprint is directed to small investors and participants in
certain affinity groups such as trade associations and credit unions. Class B
shares of the Fund are offered through Blueprint only to members of certain
affinity groups. The CDSC is waived in connection with purchase orders placed
through Blueprint. Services, including the exchange privilege, available to
Class B investors through Blueprint, however, may differ from those available to
other Class B investors. Orders for purchases and redemptions of Class B shares
of the Fund 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(Service Mark)
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
22
<PAGE>
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value has the
option of purchasing Class A or Class D shares at the sales charge schedule
disclosed in the Prospectus, or if the Retirement Plan meets the following
requirements, then it may purchase Class B shares with a waiver of the CDSC upon
redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
shares. 'Eligible 401(k) Plan' is defined as a a retirement plan qualified under
Section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from a
401(a) plan qualified under the Code, provided, however, that each such plan has
the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ('Eligible 401(a) Plan').
Other tax qualified retirement plans within the meaning of Sections 401(a) and
403(b) of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a menu of
investments) by independent administration firms contracted through Merrill
Lynch also may purchase Class B shares with a waiver of the CDSC. The CDSC also
is waived for any Class B shares which are purchased by an Eligible 401(k) Plan
or Eligible 401(a) Plan and are rolled over into a Merrill Lynch or Merrill
Lynch Trust Company custodied IRA and held in such account at the time of
redemption. The Class B CDSC also is waived for any Class B shares which are
purchased by a Merrill Lynch rollover IRA, that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The minimum initial and subsequent
purchase requirements are waived in connection with all the above-referenced
Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for making the Fund's portfolio decisions,
placing the Fund's brokerage business, evaluating the reasonableness of
brokerage commissions and negotiating the amount of any commissions paid,
subject to 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 the 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. Consistent with the Rules of Fair Practice of the NASD, 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.
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
23
<PAGE>
fiscal year ended July 31, 1994, the Fund did not acquire any 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 the purchase and sale of securities. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own accounts, affiliated persons of the Fund, including
Merrill Lynch, will not serve as the Fund's dealer in such transactions.
However, affiliated persons of the Fund may serve as the Fund's dealer in such
transactions and 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. Pursuant to prior Section 11(a) and Rule 11a2-2(T)
thereunder, Merrill Lynch was not permitted to execute transactions for the Fund
on the floor of any national securities exchange, but was allowed to effect such
transactions through transmitting orders for execution, providing for clearance
and settlement and arranging for the performance of such functions. Under prior
Section 11(a) and as permitted by the Rule, the Fund entered into an agreement
with the Manager and Merrill Lynch which permitted Merrill Lynch to retain
compensation for effecting transactions for the Fund on national securities
exchanges, and provided, among other things, that Merrill Lynch must furnish the
Fund at least annually with a statement setting forth the total amount of all
compensation retained by Merrill Lynch under the agreement. Because the recent
amendments to Section 11(a) obviate the need for this type of agreement, these
agreements have been terminated. For the years ended July 31, 1992, 1993 and
1994 Merrill Lynch effected three, four and five of such transactions,
respectively, pursuant to such agreement and received $18,300, $9,564 and
$13,650, respectively, as compensation in connection with such transactions.
For the fiscal year ended July 31, 1992, the Fund paid total brokerage
commissions of $308,190, of which $18,300 or 5.94% was paid to Merrill Lynch for
effecting 2.92% of the aggregate dollar amount of transactions in which the Fund
paid brokerage commissions. For the fiscal year ended July 31, 1993, the Fund
paid total brokerage commissions of $246,230, of which $9,564 or 3.88% was paid
to Merrill Lynch for effecting 5.43% of the aggregate dollar amount of
transactions in which the Fund paid brokerage commissions. For the fiscal year
ended July 31, 1994, the Fund paid total brokerage commissions of $293,748, of
which $13,360 or 4.6% was paid to Merrill Lynch for effecting 5.9% of the
aggregate dollar amount of transactions in which the Fund paid brokerage
commissions.
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.
24
<PAGE>
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 the Fund is determined once daily
Monday through Friday at 4:15 P.M., New York time, following the close of
trading on the New York Stock Exchange. The New York Stock Exchange is not open
on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates quoted by one or more banks or
dealers on the day of valuation. 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. Expenses, including the fees payable to the Manager
and the Distributor and any account maintenance and/or distribution fees, are
accrued daily. The per share net asset value of the Class B, Class C and Class D
shares generally will be lower than the per share net asset value of the Class A
shares reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to the Class D shares; moreover the per
share net asset value of the Class B and Class C shares generally will be lower
than the per share net asset value of Class D shares reflecting the daily
expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to the Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the four classes will
tend to converge immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differential between the classes.
Portfolio securities which are securities 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. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Trustees as the primary
market. Securities traded in the over-the-counter market are valued at the last
available quoted price in the over-the-counter market prior to the time of
valuation. Securities traded on a stock exchange and the over-the-counter market
will be valued according to the broadest and most representative market. Options
which are traded on exchanges are valued at their last sale price as of the
close of such exchanges, or if there are no sales, then the price is the last
available bid price.
Where there is no market quotation on securities or options, fair market
value will be determined in good faith by or under the direction of the Fund's
Trustees. Such valuations and procedures will be reviewed periodically by the
Trustees.
When the Fund sells an option, an amount equal to the premium received by
the Fund is included in the Fund's Statement of Assets and Liabilities as a
deferred credit. The amount of such liability will be subsequently
marked-to-market to reflect the current market value of the option written. If
current market value exceeds the premium received there is an unrealized loss;
conversely, if the premium exceeds current market value there is an unrealized
gain. The current market value of a traded option is the last sale price or, in
the absence of a sale, the last offering price. If an option expires on its
stipulated expiration date or if the Fund enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying
25
<PAGE>
security, and the liability related to such option will be extinguished. If an
option is exercised, the Fund will realize a gain or loss from the sale of the
underlying security and the proceeds of sale are increased by the premium
originally received.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services summarized below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gain distributions.
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.
If the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he be issued certificates for his
shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence.
AUTOMATIC INVESTMENT PLANS
A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price either through the shareholder's securities
dealer or by mail directly from the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the 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. The
Automatic Investment Plan is not available to shareholders participating in
certain retirement plans. For investors who buy shares of the Fund through the
Merrill Lynch Blueprint(Service Mark) Program, no minimum charge to the
investor's bank
26
<PAGE>
account is required. Investors who maintain CMA(Registered) accounts may arrange
to have periodic investments made in the Fund in their CMA(Registered) accounts
or in certain related accounts in amounts of $100 or more ($1 for retirement
plans) through the CMA(Registered) Automated Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund 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 income
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on the payment date.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account in the form of payments by check or through automatic
payment by direct deposit to such shareholder's bank account, on either a
monthly or quarterly basis as provided below. Quarterly withdrawals are
available for shareholders who have acquired Class A or Class D shares of the
Fund having a value, based on cost or the current offering price, of $5,000 or
more, and monthly withdrawals are available for shareholders with Class A or
Class D shares with such a value of $10,000 or more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined at the
close of business on the New York Stock Exchange on the 24th day of each month
or the 24th day of the last month of each quarter, whichever is applicable. If
the New York Stock Exchange is not open for business on such date, the Class A
or Class D shares will be redeemed at the close of business on the following
business day. The check for the withdrawal payment will be mailed, or the direct
deposit for withdrawal payment will be made, on the next business day following
redemption. When a shareholder is making systematic withdrawals, dividends and
distributions on all Class A or Class D shares in the Investment Account are
reinvested automatically in Fund Class A or Class D shares, respectively. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Fund, the Fund's transfer agent or
the Distributor. Withdrawal payments should not be considered as dividends,
yield or income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be reduced correspondingly. Purchases of additional Class A or Class D
shares concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. The Fund will not
knowingly accept purchase orders for Class A or Class D shares of the Fund from
investors who maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Periodic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a
CMA(Registered), CBA(Registered) or Retirement Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual
basis through the Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $25. The proceeds of
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systematic redemptions will be posted to a shareholder's account five business
days after the date the shares are redeemed. Monthly systematic redemptions will
be made at net asset value on the first Monday of each month, bimonthly
systematic redemptions will be made at net asset value on the first Monday of
every other month, and quarterly, semiannual or annual redemptions are made at
net asset value on the first Monday of months selected at the shareholder's
option. If the first Monday of the month is a holiday, the redemption will be
processed at net asset value on the next business day. The Systematic Redemption
Program is not available if Fund shares are being purchased within the account
pursuant to the Automatic Investment Program. For more information on the
Systematic Redemption Program, eligible shareholders should contact their
Merrill Lynch 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 and the minimum subsequent purchase is $1.
Capital gains and income received in each of the plans referred to above
are exempt from Federal taxation until distributed from the plans. Investors
considering participation in any such plan should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of any such plans.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Fund have an exchange privilege
with certain other MLAM-advised mutual funds listed below. Under the Merrill
Lynch Select Pricing(Service Mark) System, Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second MLAM-advised mutual
fund if the shareholder holds any Class A shares of the second fund in his
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in his account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class B, Class C and
Class D shares will be exchangeable with shares of the same class of other
MLAM-advised mutual funds. For purposes of computing the CDSC that may be
payable upon a disposition of the shares acquired in the exchange, the holding
period of the previously owned shares of the Fund is 'tacked' to the holding
period of the newly acquired shares of the other Fund as more fully described
below. Class A, Class B, Class C and Class D shares also will be exchangeable
for shares of certain MLAM-advised money market funds specifically designated
below as available for exchange by holders of Class A, Class B, Class C or Class
D shares. Shares with a net asset value of at least $100 are required to qualify
for the exchange privilege, and any shares utilized in an exchange must have
been held by the shareholder for 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.
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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 Class A or
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, of another
MLAM-advised mutual fund ('new Class B or Class C shares') on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the 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 Merrill Lynch Special Value
Fund, Inc. ('Special Value Fund') after having held the Fund Class B shares for
two and a half years. The 2% sales charge that generally would apply to a
redemption would not apply to the exchange. Three years later the investor may
decide to redeem the Class B shares of Merrill Lynch Special Value Fund and
receive cash. There will be no CDSC due on this redemption since by 'tacking'
the two and a half year holding period of Fund Class B shares to the three year
holding period for the Merrill Lynch Special Value Fund Class B shares, the
investor will be deemed to have held the new Class B shares for more than five
years.
Shareholders also may exchange shares of the Fund into shares of a money
market fund advised by the 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 B shares, towards satisfaction of the conversion
period. However, shares of a money market fund which were acquired as a result
of an exchange for Class B or Class C shares of the Fund may, in turn, be
exchanged back into Class B or Class C shares, respectively of any fund offering
such shares, in which event the holding period for Class B or Class C shares of
the fund will be aggregated with previous holding periods for purposes of
reducing the CDSC. Thus, for example, an investor may exchange Class B shares of
the Fund for shares of Merrill Lynch Institutional Fund ('Institutional Fund')
after having held the Fund Class B shares for two and a half years and three
years later decide to redeem the shares of Institutional Fund for cash. At the
time of this redemption, the 2% CDSC that would have been due had the Class B
shares of the Fund been redeemed
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<PAGE>
for cash rather than exchanged for shares of Institutional Fund will be payable.
If instead of such redemption the shareholder exchanged such shares for Class B
shares of a fund which the shareholder continued to hold for an additional two
and a half years, any subsequent redemption will not incur a CDSC.
Set forth below is a description of the investment objectives of the other
funds into which exchanges can be made:
Funds issuing Class A, Class B, Class C and Class D Shares:
<TABLE>
<S> <C>
MERRILL LYNCH ADJUSTABLE RATE
SECURITIES FUND, INC............. High current income, consistent with a
policy of limiting the degree of
fluctuation in net asset value by
investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and
asset-backed securities.
MERRILL LYNCH AMERICAS INCOME FUND,
INC.............................. As high a level of current income as is
consistent with prudent investment risk
through investment primarily in debt
securities denominated in a currency
of a country located in the Western
Hemisphere (i.e., North and South
America and the surrounding waters).
MERRILL LYNCH ARIZONA LIMITED
MATURITY MUNICIPAL BONDS FUND.... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Arizona income
taxes as is consistent with prudent
investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Arizona Municipal Bonds.
MERRILL LYNCH ARIZONA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Arizona income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH ARKANSAS MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Arkansas income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH ASSET GROWTH FUND,
INC.............................. High total investment return, consistent
with prudent risk, from investment in
United States and foreign equity, debt
and money market securities the
</TABLE>
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<TABLE>
<S> <C>
combination of which will be varied
both with respect to types of
securities and markets in response to
changing market and economic trends.
MERRILL LYNCH ASSET INCOME FUND,
INC.............................. A high level of current income through
investment primarily in United States
fixed income securities.
MERRILL LYNCH BALANCED FUND FOR
INVESTMENT AND RETIREMENT........ As high a level of total investment
return as is consistent with a
relatively low level of risk through
investment in common stock and other
types of securities, including fixed
income securities and convertible
securities.
MERRILL LYNCH BASIC VALUE FUND,
INC.............................. Capital appreciation and, secondarily,
income by investing in securities,
primarily equities, that are
undervalued and therefore represent
basic investment value.
MERRILL LYNCH CALIFORNIA INSURED
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of insured income exempt from
Federal and California income taxes as
is consistent with prudent investment
mangement.
MERRILL LYNCH CALIFORNIA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and California
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
California Municipal Bonds.
MERRILL LYNCH CALIFORNIA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch California
Municipal Series Trust, a series fund,
whose objective is as high a level of
income exempt from Federal and
California income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CAPITAL FUND, INC.... The highest total investment return
consistent with prudent risk through a
fully managed investment
policy utilizing equity, debt and
convertible securities.
</TABLE>
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<TABLE>
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MERRILL LYNCH COLORADO MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Colorado income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CONNECTICUT MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Connecticut income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH CORPORATE BOND FUND,
INC.............................. Current income from three separate
diversified portfolios of fixed income
securities.
MERRILL LYNCH DEVELOPING CAPITAL
MARKETS FUND, INC................ Long-term appreciation through
investment in securities, principally
equities, of issuers in countries
having smaller capital markets.
MERRILL LYNCH DRAGON FUND, INC..... Capital appreciation primarily through
investment in equity and debt securities
of issues domiciled in developing
countries located in Asia and the
Pacific Basin.
MERRILL LYNCH EUROFUND............. Capital appreciation primarily through
investment in equity securities of
corporations domiciled in Europe.
MERRILL LYNCH FEDERAL SECURITIES
TRUST............................ High current return through investments
in U.S. Government and Government agency
securities, including GNMA
mortgage-backed certificates and other
mortgage-backed Government securities.
MERRILL LYNCH FLORIDA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment
management while seeking to offer
shareholders the opportunity to own
securities exempt from Florida
intangible personal property taxes
through investment in a portfolio
primarily of intermediate-term
investment grade Florida Municipal
Bonds.
MERRILL LYNCH FLORIDA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is as
</TABLE>
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high a level of income exempt from
Federal income taxes as is consistent
with prudent investment management while
seeking to offer shareholders the
opportunity to own securities exempt
from Florida intangible personal
property taxes.
MERRILL LYNCH FUND FOR TOMORROW,
INC.............................. Long-term growth through investment in a
portfolio of good quality securities,
primarily common stock, potentially
positioned to benefit from demographic
and cultural changes as they affect
consumer markets.
MERRILL LYNCH FUNDAMENTAL GROWTH
FUND, INC........................ Long-term growth through investment in a
diversified portfolio of equity
securities in placing particular
emphasis on companies that have
exhibited an above-average growth rate
in earnings.
MERRILL LYNCH GLOBAL ALLOCATION
FUND, INC........................ High total return consistent with
prudent risk, through a fully-managed
investment policy utilizing United
States and foreign equity, debt and
money market securities, the
combination of which will be varied
from time to time both with respect to
types of securities and markets in
response to changing market and
economic trends.
MERRILL LYNCH GLOBAL BOND FUND FOR
INVESTMENT AND RETIREMENT........ High total investment return from
investment in government and corporate
bonds denominated in various
currencies and multi-national currency
units.
MERRILL LYNCH GLOBAL CONVERTIBLE
FUND, INC........................ High total return from investment
primarily in an internationally
diversified portfolio of convertible
debt securities, convertible preferred
stock and 'synthetic' convertible
securities consisting of a combination
of debt securities or preferred stock
and warrants or options.
MERRILL LYNCH GLOBAL HOLDINGS, INC.
(residents of Arizona must meet
investor
suitability standards)........... The highest total investment return
consistent with prudent risk through
worldwide investment in an
internationally diversified portfolio
of securities.
MERRILL LYNCH GLOBAL RESOURCES
TRUST............................ Long-term growth and protection of
capital from investment in securities of
foreign and domestic companies that
possess substantial natural resource
assets.
</TABLE>
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<TABLE>
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MERRILL LYNCH GLOBAL SMALLCAP FUND,
INC.............................. Long-term growth of capital by investing
primarily in equity securities of
companies with relatively small market
capitalizations located in various
foreign countries and in the United
States.
MERRILL LYNCH GLOBAL UTILITY FUND,
INC.............................. Capital appreciation and current income
through investment of at least 65% of
its total assets in equity and debt
securities issued by domestic and
foreign companies primarily engaged in
the owner-
ship or operation of facilities used
to generate, transmit or distribute
electricity, telecommuni-
cations, gas or water.
MERRILL LYNCH GROWTH FUND FOR
INVESTMENT AND RETIREMENT........ Growth of capital and, secondarily,
income from investment in a diversified
portfolio of equity securities placing
a principal emphasis on those
securities which management of the
fund believes to be undervalued.
MERRILL LYNCH HEALTHCARE FUND, INC.
(residents
of Wisconsin must meet investor
suitability standards)........... Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in healthcare.
MERRILL LYNCH INTERNATIONAL EQUITY
FUND............................. Capital appreciation and, secondarily,
income by investing in a diversified
portfolio of equity securities of
issuers located in countries other
than the United States.
MERRILL LYNCH LATIN AMERICA FUND,
INC.............................. Capital appreciation by investing
primarily in Latin American equity and
debt securities.
MERRILL LYNCH MARYLAND MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Maryland income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MASSACHUSETTS LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of
income exempt from Federal and
Massachusetts income taxes as is
consistent with prudent
</TABLE>
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<TABLE>
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investment management through investment
in a portfolio primarily of
intermediate-term investment grade
Massachusetts Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and
Massachusetts income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MICHIGAN LIMITED
MATURITY MUNICIPAL BOND FUND,
INC.............................. A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Michigan
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade
Michigan Municipal Bonds.
MERRILL LYNCH MICHIGAN MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Michigan income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH MINNESOTA MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Minnesota personal income taxes as
is consistent with prudent investment
management.
MERRILL LYNCH MUNICIPAL BOND FUND,
INC.............................. Tax exempt income from three separate
diversified portfolios of municipal
bonds.
MERRILL LYNCH MUNICIPAL
INTERMEDIATE TERM FUND........... Currently the only portfolio of Merrill
Lynch Municipal Series Trust, a series
fund, whose objective is to provide as
high a level as possible of income
exempt from Federal income taxes by
investing in investment grade
obligations with a dollar weighted
average maturity of five to twelve
years.
MERRILL LYNCH NEW JERSEY LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of
</TABLE>
35
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<TABLE>
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income
exempt from Federal and New Jersey
income taxes as is consistent with
prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade New
Jersey Municipal Bonds.
MERRILL LYNCH NEW JERSEY MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and New Jersey income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NEW MEXICO MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and New Mexico income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH NEW YORK LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal, New York State
and New York City income taxes as is
consistent with prudent investment
management through investment in a
portfolio primarily of
intermediate-term investment grade New
York Municipal Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL
BOND FUND........................ A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal,
New York State and New York City
income taxes as is consistent with
prudent investment management.
MERRILL LYNCH NORTH CAROLINA
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and North Carolina income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH OHIO MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and Ohio
income taxes as is consistent with
prudent investment management.
</TABLE>
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<TABLE>
<S> <C>
MERRILL LYNCH OREGON MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from both Federal and
Oregon income taxes as is consistent
with prudent investment management.
MERRILL LYNCH PACIFIC FUND, INC.... Capital appreciation by investing in
equity securities of corporations
domiciled in Far Eastern and Western
Pacific countries, including Japan,
Australia, Hong Kong, Singapore and
the Philippines.
MERRILL LYNCH PENNSYLVANIA LIMITED
MATURITY MUNICIPAL BOND FUND..... A portfolio of Merrill Lynch Multi-State
Limited Maturity Municipal Series Trust,
a series fund, whose objective is to
provide as high a level of income
exempt from Federal and Pennsylvania
income taxes as is consistent with
prudent investment management through
investment in a portfolio of
intermediate-term investment grade
Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA
MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide as high
a level of income exempt from Federal
and Pennsylvania income taxes as is
consistent with prudent investment
management.
MERRILL LYNCH PHOENIX FUND, INC.... Long-term growth of capital by investing
in equity and fixed income securities,
including tax-exempt securities, of
issuers in weak financial condition or
experiencing poor operating results
believed to be undervalued relative to
the current or prospective condition
of such issuer.
MERRILL LYNCH SHORT-TERM GLOBAL
INCOME
FUND, INC........................ As high a level of current income as is
consistent with prudent investment
management from a global portfolio of
high-quality debt securities
denominated in various currencies and
multinational currency units and
having remaining maturities not
exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND,
INC.............................. Long-term growth of capital from
investments in securities, primarily
common stocks, of relatively
small companies believed to have
special investment value and emerging
growth companies regardless of size.
</TABLE>
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<TABLE>
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MERRILL LYNCH TECHNOLOGY FUND,
INC.............................. Capital appreciation through worldwide
investment in equity securities of
companies that derive or are expected
to derive a substantial portion of
their sales from products and services
in technology.
MERRILL LYNCH TEXAS MUNICIPAL BOND
FUND............................. A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund,
whose objective is to provide
investors with as high a level of
income exempt from Federal income
taxes as is consistent with prudent
investment management by investing
primarily in a portfolio of long-term,
investment grade obligations issued by
the state of Texas, its political sub-
divisions, agencies and
instrumentalities.
MERRILL LYNCH UTILITY INCOME FUND,
INC.............................. High current income through investment
primarily in equity and debt securities
issued by companies primarily engaged
in the ownership or operation of
facilities used to generate, transmit
or to distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH WORLD INCOME FUND,
INC.............................. High current income by investing in a
global portfolio of fixed income
securities denominated in various
currencies, including multi-national
currencies.
</TABLE>
Class A Share Money Market Funds:
<TABLE>
<S> <C>
MERRILL LYNCH READY ASSETS TRUST... Preservation of capital, liquidity and
the highest possible current income
consistent with the foregoing
objectives from the short-term money
market securities in which the Trust
invests.
MERRILL LYNCH RETIREMENT RESERVES
MONEY FUND
(available only for exchanges
within certain retirement
plans)........................... Currently the only portfolio of Merrill
Lynch Retirement Series Trust, a series
fund, whose objectives are current
income, preservation of capital and
liquidity available from investing in
a diversified portfolio of short-term
money market securities.
MERRILL LYNCH U.S.A. GOVERNMENT
RESERVES......................... Preservation of capital, current income
and liquidity available from investing
in direct obligations of the
U.S. Government and repurchase
agreements relating to such
securities.
MERRILL LYNCH U.S. TREASURY MONEY
FUND............................. Preservation of capital, liquidity and
current income through investment
exclusively in a diversified
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<TABLE>
<S> <C>
portfolio of short-term marketable
securities which are direct obligations
of the U.S. Treasury.
</TABLE>
Class B; Class C and Class D Share Money Market Funds:
<TABLE>
<S> <C>
MERRILL LYNCH GOVERNMENT FUND...... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in securities issued or guaranteed by
the U.S. Government, its agencies and
instrumentalities and in repurchase
agreements secured by such
obligations.
MERRILL LYNCH INSTITUTIONAL FUND... A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide maximum
current income consistent with
liquidity and the maintenance of a
high-quality portfolio of money market
securities.
MERRILL LYNCH INSTITUTIONAL
TAX-EXEMPT FUND.................. A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income exempt from Federal income
taxes, preservation of capital and
liquidity available from investing in
a diversified portfolio of short-term,
high quality municipal bonds.
MERRILL LYNCH TREASURY FUND........ A portfolio of Merrill Lynch Funds for
Institutions Series, a series fund,
whose objective is to provide current
income consistent with liquidity and
security of principal from investment
in direct obligations of the U.S.
Treasury and up to 10% of its total
assets in repurchase agreements
secured by such obligations.
</TABLE>
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an investor
may exercise the exchange privilege. Certain funds may suspend the continuous
offering of their shares to the general public at any time and
may thereafter resume such offering from time to time. The exchange privilege is
available only to U.S. shareholders in states where the exchange legally may be
made.
39
<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 figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B, Class
C and Class D shares in accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period 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 with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average rates of return
reflect compounding of return; aggregate total return data generally will be
higher than average annual total return data since the aggregate rates of return
reflect compounding over a longer period of time.
Set forth below is total return information for the Class A and Class B
shares of the Fund for the periods indicated. Since Class C and Class D shares
have not been issued prior to the date of this Statement of Additional
Information, performance information concerning Class C and Class D shares is
not yet provided.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
--------------------------- ---------------------------
REDEEMABLE EXPRESSED AS REDEEMABLE
VALUE OF A A VALUE OF A
EXPRESSED AS HYPOTHETICAL PERCENTAGE HYPOTHETICAL
A PERCENTAGE $1,000 BASED $1,000
BASED ON A INVESTMENT ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF $1,000 OF THE
PERIOD INVESTMENT THE PERIOD INVESTMENT PERIOD
- ----------------------- ------------ ------------ ------------ ------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended July 31,
1994................. (3.00)% $ 970.00 (2.47)% $ 975.30
Five Years Ended July
31, 1994............. 5.14% 1,284.70 5.19% $ 1,287.70
Inception (November 25,
1987) to July 31,
1994................. 8.74% $ 1,751.00
Inception (November 29,
1988), to July 31,
1994................. 8.25% $ 1,567.70
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
--------------------------- ---------------------------
REDEEMABLE EXPRESSED AS REDEEMABLE
VALUE OF A A VALUE OF A
EXPRESSED AS HYPOTHETICAL PERCENTAGE HYPOTHETICAL
A PERCENTAGE $1,000 BASED $1,000
BASED ON A INVESTMENT ON A INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
$1,000 OF $1,000 OF THE
PERIOD INVESTMENT THE PERIOD INVESTMENT PERIOD
- ----------------------- ------------ ------------ ------------ ------------
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Year Ended July 31,
1994................... 2.38% $ 1,023.80 1.30% $ 1,013.00
1993................... 10.03% $ 1,100.30 8.90% $ 1,089.00
1992................... 11.96% $ 1,119.60 10.85% $ 1,108.50
1991................... 6.25% $ 1,062.50 5.14% $ 1,051.40
1990................... 1.20% $ 1,012.00 0.15% $ 1,001.50
1989................... 23.48% $ 1,234.80
Inception (November 25,
1987) to July 31,
1988................. 10.13% $ 1,101.30
Inception (November 29,
1988) to July 31,
1989................. 22.02% $ 1,220.20
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (November 25,
1987) to July 31,
1994................. 75.10% $ 1,751.00
November 29, 1988, to
July 31, 1994........ 56.77% $ 1,567.70
</TABLE>
In order to reflect the reduced sales charges in the case of Class A or
Class D shares or the waiver of the CDSC in the case of Class B or Class C
shares applicable to certain investors, as described under 'Purchase of Shares'
and 'Redemption of Shares', respectively, the total return data quoted by the
Fund in advertisements directed to such investors may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of 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.
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 quarterly. All net
realized long-or short-term capital gains, if any, will be distributed to the
Fund's shareholders at least annually. From time to time, the Fund may declare a
special distribution at or about the end of the calendar year in order to comply
with 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
41
<PAGE>
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 elect to qualify for the special tax
treatment afforded regulated investment companies ('RICs') under the Internal
Revenue Code of 1986, as amended (the 'Code'). If it so qualifies, the Fund (but
not its shareholders) will not be subject to Federal income tax on the part of
its net ordinary income and net realized capital gains which it distributes to
Class A, Class B, Class C and Class D shareholders (together, the
'shareholders'). The Fund intends to distribute substantially all of such
income.
Dividends paid by the Fund from its ordinary income and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as 'ordinary income dividends') are taxable to shareholders as ordinary income.
Distributions made from the Fund's net realized long-term capital gains
(including long-term gains from certain transactions in futures and options) are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund 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
distributions received by the shareholder with respect to such shares.
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).
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 ordinary income dividends or
capital gains distributions. A portion of the Fund's ordinary income dividends
may be eligible for the dividends received deduction allowed to 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 Securities and Exchange Commission exemptive
order permitting the issuance and sale of multiple classes of stock) that is
based upon the gross income that is 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
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 Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.
Ordinary income dividends paid by the Fund to shareholders who are
nonresident 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 the applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
42
<PAGE>
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 reportable 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 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 for Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent the sales charge
paid to the Fund reduces any sales charge the shareholder would have owed upon
the purchase of the new shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its ordinary
income and capital gains in the manner necessary to avoid imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the
Fund's taxable income and capital gains will be distributed to avoid entirely
the imposition of the tax. In such event, the Fund will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirements.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Fund may purchase or sell options and 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 such
option or futures contract will be treated as sold for its fair market value on
the last day of the taxable year. In general, unless the special election
referred to in the previous sentence is made, gain or loss from Section 1256
contracts will be 60% long-term and 40% short-term capital gain or loss. The
mark-to-market rules outlined
43
<PAGE>
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest rates with respect to
its investments.
Code Section 1092, which applies to certain 'straddles', may affect the
taxation of the Fund's transactions in options and futures contracts. Under
Section 1092, the Fund may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options and futures.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income may be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the Fund
may be restricted in effecting closing transactions within three months after
entering into an options or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from 'foreign currencies' and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and 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 United States
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,
rather than increasing or decreasing the amount of the Fund's net capital gains.
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 the basis of each shareholder's Fund
shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code
sections and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative or administrative
action either prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
44
<PAGE>
MASSACHUSETTS INCOME TAX
Under present Massachusetts law, the Fund (but not its shareholders) is not
subject to any Massachusetts income taxation during any fiscal year in which the
Fund qualifies as a RIC. The Fund might be subject to Massachusetts income taxes
for any taxable year in which it did not so qualify.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, par value
$0.10 per share, of different classes and to divide or combine the shares of
each class into a greater or lesser number of shares without thereby changing
the proportionate beneficial interest in the Fund. At the date of this Statement
of Additional Information, the shares of the Fund are divided into Class A,
Class B, Class C and Class D shares. Under the Declaration of Trust, the
Trustees have the authority to issue separate classes of shares which would
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 distribution and account maintenance 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 distribution and account
maintenance expenses being borne solely by such class. The Fund has received an
order from the Securities and Exchange Commission permitting the issuance and
sale of multiple classes of shares. Upon liquidation of the Fund, shareholders
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
to only one class. Shares have no preemptive rights. The rights of redemption,
conversion and exchange 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 hereafter provided) and on other matters submitted to vote of
shareholders except that shareholders of the class bearing distribution and
account maintenance expenses as provided above shall have exclusive voting
rights with respect to matters relating to such distribution and account
maintenance expenses. There normally will be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Shareholders may, in accordance with the terms of the Declaration
of Trust, cause a meeting of shareholders to be held for the purpose of voting
on the removal of the Trustees. The Declaration of Trust 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 a majority of the Trustees. Under the
Investment Company Act, if ten or more shareholders apply to the Trustees in
writing, the Trustees will be required to assist such shareholders in
communicating with other shareholders to obtain the
necessary signatures to request a shareholders' meeting so long as the
requirements of Section 16(c) are met. 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.
The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. The organizational
45
<PAGE>
expenses of the Fund were paid by the Fund and were amortized over a period not
exceeding five years. The proceeds realized by the Manager upon the redemption
of any of the shares initially purchased by it during such five year period, if
any, were reduced by the proportional amount of the unamortized organizational
expenses which the number of such initial shares being redeemed bears to the
number of shares initially purchased.
COMPUTATION OF OFFERING PRICE PER SHARE
The offering price for Class A and Class B shares of the Fund, based on the
value of the Fund's net assets and number of shares outstanding as of July 31,
1994, is calculated as set forth below. Information is not provided for Class C
or Class D shares since no Class C or Class D shares were publicly offered prior
to the date of this Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B
----------- ------------
<S> <C> <C>
Net Assets.............................. $21,854,071 $167,888,785
----------- ------------
----------- ------------
Number of Shares Outstanding............ 1,710,051 13,146,375
----------- ------------
----------- ------------
Net Asset Value Per Share (net assets
divided by number of shares
outstanding).......................... $ 12.78 $ 12.77
Sales Charge* (for Class A shares: 5.25%
of offering price; 5.54% of net asset
value per share)...................... .71 --
----------- ------------
Offering Price.......................... $ 13.49 $ 12.77
----------- ------------
----------- ------------
</TABLE>
- ------------------
* Rounded to nearest one-hundredth of one percent; assumes maximum sales charge
is applicable.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the annual financial
statements of the Fund.
CUSTODIAN
State Street Bank and Trust Company, One Heritage Drive, P2N, North Quincy,
Massachusetts 02171, acts as the Custodian of the Fund's assets. The Custodian
is responsible for safeguarding and controlling the Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest and
dividends on the Fund's investments.
TRANSFER AGENT
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening,
maintenance and servicing of shareholder accounts. See 'Management of the
Fund--Transfer Agency Services' in the Prospectus.
46
<PAGE>
LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman, 919 Third Avenue, New York, New York
10022, is counsel for the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on July 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.
To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's share on September 30, 1994.
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.
The Declaration of Trust establishing the Fund, dated as of May 14, 1987, 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 Strategic Dividend 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 satisfaction of any obligation or claim of said Fund but
the 'Trust Property' only shall be liable.
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
MERRILL LYNCH STRATEGIC DIVIDEND FUND:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Strategic Dividend Fund as of July
31, 1994, the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period then
ended. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at July 31,
1994 by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Strategic Dividend Fund as of July 31, 1994, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
August 29, 1994
48
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
EUROPE
United Kingdom
Chemicals 62,000 Imperial Chemical Industries PLC (ADR)* $ 2,744,492 $ 3,177,500 1.7%
Consumer Products 350,000 B.A.T. Industries PLC (ADR)* 4,470,025 4,681,250 2.5
Oil--International 65,000 Royal Dutch Petroleum PLC (ADR)* 3,617,240 7,345,000 3.9
Total Investments in Europe 10,831,757 15,203,750 8.1
NORTH AMERICA
Canada
Telecommunications 142,000 BC Telecom, Inc. 2,669,047 2,440,481 1.3
Total Investments in Canada 2,669,047 2,440,481 1.3
United States
Aerospace & Defense 180,000 Northrop Grumman Corp. 6,327,472 7,560,000 4.0
79,000 TRW Inc. 4,310,795 5,510,250 2.9
------------ ------------ ------
10,638,267 13,070,250 6.9
Banking 90,000 The Chase Manhattan Corp. 3,166,154 3,318,750 1.7
70,000 First Chicago Corp. 1,966,210 3,517,500 1.9
100,000 National City Corp. 2,661,218 2,687,500 1.4
------------ ------------ ------
7,793,582 9,523,750 5.0
Chemicals 46,000 The Dow Chemical Co. 2,739,760 3,179,750 1.7
110,000 du Pont (E.I.) de Nemours & Co. 4,384,428 6,531,250 3.4
------------ ------------ ------
7,124,188 9,711,000 5.1
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Drugs 40,000 Bristol-Myers Squibb Co. 1,826,550 2,105,000 1.1
Electrical Equipment 80,000 General Electric Co. 3,864,900 4,030,000 2.1
Financial Services 170,000 American Express Co. 3,631,867 4,505,000 2.4
72,000 Beneficial Corp. 2,763,271 2,862,000 1.5
------------ ------------ ------
6,395,138 7,367,000 3.9
Hardware Products 61,000 The Stanley Works Co. 2,557,835 2,493,375 1.3
Information Processing 20,000 Xerox Corp. 1,963,262 2,045,000 1.1
Insurance 150,000 American General Corp. 3,096,836 4,293,750 2.2
60,000 CIGNA Corp. 3,420,450 4,110,000 2.2
60,000 Lincoln National Corp. 2,565,720 2,257,500 1.3
30,000 Marsh & McLennan Companies, Inc. 2,626,800 2,557,500 1.3
160,000 Ohio Casualty Corp. 5,117,500 4,920,000 2.6
------------ ------------ ------
16,827,306 18,138,750 9.6
Metals 50,000 Carpenter Technology Corp. 3,167,183 3,018,750 1.6
100,000 Cyprus Amax Minerals Co. 2,627,429 3,125,000 1.6
------------ ------------ ------
5,794,612 6,143,750 3.2
Oil--International 80,000 Mobil Corp. 3,581,850 6,710,000 3.5
110,000 Texaco Inc. 5,107,249 6,985,000 3.7
------------ ------------ ------
8,689,099 13,695,000 7.2
Oil Services 135,000 Halliburton Co. 4,039,632 4,590,000 2.4
Paper & Forest Products 163,100 Federal Paper Board Co., Inc. 3,555,174 4,077,500 2.1
100,000 Union Camp Corp. 4,787,720 4,725,000 2.5
------------ ------------ ------
8,342,894 8,802,500 4.6
Photographic 100,000 Eastman Kodak Co. 3,975,843 4,837,500 2.5
Retail 110,000 Sears, Roebuck & Co. 3,025,842 5,197,500 2.7
Telecommunications 110,000 Bell Atlantic Corp. 4,071,196 6,228,750 3.3
170,000 Southwestern Bell Corp. 4,488,850 7,140,000 3.8
------------ ------------ ------
8,560,046 13,368,750 7.1
Utilities--Electric 126,000 Consolidated Edison Co. of N.Y., Inc. 3,559,500 3,622,500 1.9
86,000 Public Service Co. of Colorado 2,768,078 2,322,000 1.2
120,000 Public Service Enterprise Group, Inc. 4,209,600 3,330,000 1.8
92,000 Texas Utilities Corp. 3,335,000 3,024,500 1.6
------------ ------------ ------
13,872,178 12,299,000 6.5
Utilities--Gas & 160,000 The Brooklyn Union Gas Co. 4,287,226 4,020,000 2.1
Gas Pipeline 200,000 Enron Corp. 2,126,430 6,475,000 3.4
155,000 NICOR Inc. 4,397,154 3,894,375 2.1
236,000 Sonat, Inc. 4,263,114 7,817,500 4.1
------------ ------------ ------
15,073,924 22,206,875 11.7
Total Investments in the United States 130,365,098 159,625,000 84.0
Total Investments in North America 133,034,145 162,065,481 85.3
PACIFIC BASIN
Hong Kong
Airlines 1,525,000 Cathay Pacific Airways Ltd. 2,733,414 2,467,733 1.3
Total Investments in the Pacific Basin 2,733,414 2,467,733 1.3
Total Common Stocks 146,599,316 179,736,964 94.7
</TABLE>
50
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1994
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Value Percent of
Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C>
Repurchase $5,823,000 UBS Finance Corp., purchased on
Agreement** 7/29/1994 to yield 4.22% to 8/01/1994 $ 5,823,000 $ 5,823,000 3.1%
Total Short-Term Securities 5,823,000 5,823,000 3.1
Total Investments $152,422,316 185,559,964 97.8
============
Other Assets Less Liabilities 4,182,892 2.2
------------ ------
Net Assets $189,742,856 100.0%
============ ======
</TABLE>
*American Depositary Receipt (ADR).
**Repurchase Agreements are fully collateralized by US Government Obligations.
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of July 31, 1994
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$152,422,316) (Note 1a) $185,559,964
Cash 28,428
Receivables:
Securities sold $ 4,994,357
Dividends 560,555
Beneficial interest sold 189,978 5,744,890
------------
Prepaid registration fees and other assets (Note 1e) 58,038
------------
Total assets 191,391,320
------------
Liabilities: Payables:
Beneficial interest redeemed 1,323,760
Distributor (Note 2) 134,065
Investment adviser (Note 2) 90,828 1,548,653
------------
Accrued expenses and other liabilities 99,811
------------
Total liabilities 1,648,464
------------
Net Assets: Net assets $189,742,856
============
Net Assets Class A Shares of beneficial interest, $0.10 par value, unlimited number of
Consist of: shares authorized $ 171,005
Class B Shares of beneficial interest, $0.10 par value, unlimited number of
shares authorized 1,314,638
Paid-in capital in excess of par 143,816,200
Undistributed investment income--net 192,681
</TABLE>
51
<PAGE>
<TABLE>
<S> <C> <C> <C>
Undistributed realized capital gains on investments and foreign currency
transactions--net 11,110,308
Unrealized appreciation on investments and foreign currency transactions--net 33,138,024
------------
Net assets $189,742,856
============
Net Asset Class A--Based on net assets of $21,854,071 and 1,710,051 shares of beneficial
Value: interest outstanding $ 12.78
============
Class B--Based on net assets of $167,888,785 and 13,146,375 shares of beneficial
interest outstanding $ 12.77
============
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended July 31, 1994
<S> <C> <C> <C>
Investment Dividends (net of $153,312 foreign withholding tax) $ 9,416,012
Income Interest and discount earned 404,334
(Notes 1c & 1d): Other income 959
------------
Total income 9,821,305
------------
Expenses: Distribution fees--Class B (Note 2) 2,013,716
Investment advisory fees (Note 2) 1,381,980
Transfer agent fees--Class B (Note 2) 268,527
Printing and shareholder reports 127,935
Accounting services (Note 2) 51,945
Registration fees (Note 1e) 43,622
Professional fees 41,427
Transfer agent fees--Class A (Note 2) 31,884
Custodian fees 27,501
Trustees' fees and expenses 27,474
Amortization of organization expenses (Note 1e) 1,522
Other 6,653
------------
Total expenses 4,024,186
------------
Investment income--net 5,797,119
------------
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net $ 13,167,444
(Loss) on Foreign currency transactions (4,340) 13,163,104
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (16,549,230)
(Notes 1b, 1d & 3): Foreign currency transactions 2,794 (16,546,436)
------------ ------------
Net realized and unrealized loss on investments and foreign currency
transactions (3,383,332)
------------
Net Increase in Net Assets Resulting from Operations $ 2,413,787
============
</TABLE>
See Notes to Financial Statements.
52
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1994
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended July 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <C> <C> <C>
Operations: Investment income--net $ 5,797,119 $ 6,443,619
Realized gain on investments and foreign currency transactions--net 13,163,104 15,349,726
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net (16,546,436) 183,755
------------ ------------
Net increase in net assets resulting from operations 2,413,787 21,977,100
------------ ------------
Dividends & Investment income--net:
Distributions to Class A (987,005) (1,084,305)
Shareholders Class B (4,814,245) (5,336,560)
(Note 1f): Realized gain on investments--net:
Class A (1,506,196) --
Class B (10,287,745) --
------------ ------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (17,595,191) (6,420,865)
------------ ------------
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions (56,392,747) (24,799,466)
Transactions ------------ ------------
(Note 4):
Net Assets: Net decrease in net assets (71,574,151) (9,243,231)
Beginning of year 261,317,007 270,560,238
------------ ------------
End of year* $189,742,856 $261,317,007
============ ============
<FN>
*Undistributed investment income--net $ 192,681 $ 196,812
============ ============
</FN>
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class A
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.60 $ 12.79 $ 11.90 $ 11.80 $ 12.38
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .41 .44 .44 .55 .76
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (1) (.12) .81 .93 .14 (.61)
--------- --------- --------- --------- ---------
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total from investment operations .29 1.25 1.37 .69 .15
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.46) (.44) (.48) (.59) (.73)
Realized gain on investments--net (.65) -- -- -- --
--------- --------- --------- --------- ---------
Total dividends and distributions (1.11) (.44) (.48) (.59) (.73)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 12.78 $ 13.60 $ 12.79 $ 11.90 $ 11.80
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 2.38% 10.03% 11.96% 6.25% 1.20%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses .85% .81% .88% .88% .86%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 3.42% 3.38% 3.75% 4.83% 6.17%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 21,854 $ 34,228 $ 31,512 $ 33,916 $ 37,499
Data: ========= ========= ========= ========= =========
Portfolio turnover 22.75% 25.23% 29.17% 10.50% 16.99%
========= ========= ========= ========= =========
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended July 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 13.59 $ 12.78 $ 11.88 $ 11.78 $ 12.37
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .33 .31 .34 .45 .60
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net (1) (.18) .81 .91 .12 (.58)
--------- --------- --------- --------- ---------
Total from investment operations .15 1.12 1.25 .57 .02
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income--net (.32) (.31) (.35) (.47) (.61)
Realized gain on investments--net (.65) -- -- -- --
--------- --------- --------- --------- ---------
Total dividends and distributions (.97) (.31) (.35) (.47) (.61)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 12.77 $ 13.59 $ 12.78 $ 11.88 $ 11.78
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 1.30% 8.90% 10.85% 5.14% 0.15%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses, excluding distribution fees .88% .84% .91% .90% .89%
Net Assets: ========= ========= ========= ========= =========
Expenses 1.88% 1.84% 1.91% 1.90% 1.89%
========= ========= ========= ========= =========
Investment income--net 2.39% 2.37% 2.74% 3.81% 5.14%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 167,889 $227,089 $239,048 $284,869 $337,072
Data: ========= ========= ========= ========= =========
Portfolio turnover 22.75% 25.23% 29.17% 10.50% 16.99%
========= ========= ========= ========= =========
</TABLE>
* Total investment returns exclude the effects of sales loads.
(1) Foreign currency transaction amounts have been reclassified to conform to
1994 presentation.
See Notes to Financial Statements.
54
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1994
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Strategic Dividend Fund (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund offers both Class A and Class B Shares. Class A Shares are
sold with a front-end sales charge. Class B Shares may be subject to a
contingent deferred sales charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that Class B Shares bear certain expenses related to the account maintenance and
distribution of such shares and have exclusive voting rights with respect to
matters relating to such distribution expenditures. The following is a summary
of significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued or, lacking any sales, at the last available
bid price. Securities traded in the over-the-counter market are valued at the
last available quoted bid price in the over-the-counter market prior to the time
of valuation. Portfolio securities which are traded both in the over-the-counter
market and on a stock exchange are valued based upon the prices or quotes
obtained from the broadest and most representative market. Short-term securities
are valued at amortized cost which approximates market. Options which are traded
on exchanges are valued at their last sale price as of the close of such
exchanges or, lacking any sales, at the last available bid price. Securities for
which market quotations are not readily available are valued at their fair value
as determined in good faith by or under the direction of the Fund's 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) such transactions expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
The Fund is authorized to enter into forward foreign exchange contracts as a
hedge against either specific transactions or portfolio positions. Such
contracts are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Company enters into such contracts.
Premium or discount is amortized over the life of the contracts.
(c) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend date, except that if the
ex-dividend date has passed, certain dividends from foreign securities are
recorded as soon as the Fund is informed of the ex-dividend date. Interest
income (including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(e) Deferred organization expenses and prepaid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Costs related to the organization of the second class of
shares are charged to expense over a period not exceeding five years. Prepaid
registration fees are charged to expense as the related shares are issued.
(f) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(g) Non-income producing investments--Written and purchased options are
non-income producing investments.
(h) Reclassifications--Certain 1993 amounts have been reclassified to conform to
the 1994 presentation.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. ("MLAM"). Effective January 1, 1994, the investment
advisory business of MLAM was reorganized from a corporation to a limited
partnership. Both prior to and after the reorganization, ultimate control of
MLAM was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned subsidiary
of ML & Co. The limited partners are ML & Co. and Merrill Lynch Investment
Management, Inc. ("MLIM"), which is also an indirect wholly-owned subsidiary of
ML & Co. The Fund has also entered into Distribution Agreements and a
Distribution
55
<PAGE>
Plan with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of MLIM. MLAM is responsible for the management of the
Fund's portfolio and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 0.60%, on an annual basis, of the
average daily value of the Fund's net assets. The Investment Advisory Agreement
obligates MLAM to reimburse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, brokerage fees and commissions,
extraordinary items) exceed 2.5% of the Fund's first $30 million of average
daily net assets, 2.0% of the next $70 million of average daily net assets, and
1.5% of the average daily net assets in excess thereof. No fee payment will be
made to MLAM during any fiscal year which will cause such expenses to exceed the
expense limitation at the time of such payment.
The Fund has adopted a Plan of Distribution (the "Plan") in accordance with Rule
12b-1 under the Investment Company Act of 1940 pursuant to which MLFD receives
from the Fund at the end of each month an ongoing account maintenance fee and a
distribution fee, which are accrued daily and paid monthly at the annual rates
of 0.25% and 0.75%, respectively, of the average daily net assets of the Class B
Shares of the Fund. These fees are to compensate the Distributor for services
provided and the expenses borne by the Distributor under the Distribution
Agreement. As authorized by the Plan, the Distributor has entered into an
agreement with Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"), which
provides for the compensation of MLPF&S for providing distribution-related
services to the Fund. For the year ended July 31, 1994, MLFD earned $2,013,716
under the Plan, all of which was paid to MLPF&S pursuant to the agreement.
For the year ended July 31, 1994, MLFD earned underwriting discounts of $4,364,
and MLPF&S earned dealer concessions of $76,161 on sales of the Fund's Class A
Shares.
MLPF&S also received contingent deferred sales charges for the sale of Class B
Shares of $122,226 and $13,650 in commissions on the execution of portfolio
security transactions for the Fund during the year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
acts as 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, MLIM, MLPF&S, FDS, MLFD, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended July 31, 1994 were $49,266,246 and $109,536,566, respectively.
Net realized and unrealized gains (losses) as of July 31, 1994 were as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $13,167,444 $33,137,648
Foreign currency transactions (4,340) 376
----------- -----------
Total $13,163,104 $33,138,024
=========== ===========
As of July 31, 1994, net unrealized appreciation for Federal income tax purposes
aggregated $33,137,648, of which $36,888,711 related to appreciated securities
and $3,751,063 related to depreciated securities. The aggregate cost of
investments at July 31, 1994 for Federal income tax purposes was $152,422,316.
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest transactions was
$56,392,747 and $24,799,466 for the years ended July 31, 1994 and July 31, 1993,
respectively.
Transactions in capital shares for Class A and Class B Shares were as follows:
Class A Shares for the Year Dollar
Ended July 31, 1994 Shares Amount
Shares sold 565,272 $ 7,579,456
Shares issued to shareholders in
reinvestment of dividends and distributions 126,113 1,592,528
----------- ------------
Total issued 691,385 9,171,984
Shares redeemed (1,497,859) (19,449,269)
----------- ------------
Net decrease (806,474) $(10,277,285)
=========== ============
Class A Shares for the Year Dollar
Ended July 31, 1993 Shares Amount
Shares sold 644,558 $ 8,429,680
Shares issued to shareholders in
reinvestment of dividends 52,863 679,791
----------- -----------
Total issued 697,421 9,109,471
Shares redeemed (644,026) (8,392,440)
----------- -----------
Net increase 53,395 $ 717,031
=========== ===========
56
<PAGE>
Merrill Lynch Strategic Dividend Fund, July 31, 1994
NOTES TO FINANCIAL STATEMENTS (concluded)
Class B Shares for the Year Dollar
Ended July 31, 1994 Shares Amount
Shares sold 1,342,236 $ 17,730,479
Shares issued to shareholders in
reinvestment of dividends and distributions 963,577 12,154,097
----------- ------------
Total issued 2,305,813 29,884,576
Shares redeemed (5,872,428) (76,000,038)
----------- ------------
Net decrease (3,566,615) $(46,115,462)
=========== ============
Class B Shares for the Year Dollar
Ended July 31, 1993 Shares Amount
Shares sold 1,929,689 25,209,671
Shares issued to shareholders in
reinvestment of dividends 332,400 4,271,745
----------- ------------
Total issued 2,262,089 29,481,416
Shares redeemed (4,255,519) (54,997,913)
----------- ------------
Net decrease (1,993,430) $(25,516,497)
=========== ============
57
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Investment Objective and Policies.............. 2
Management of the Fund......................... 12
Purchase of Shares............................. 15
Initial Sales Charge Alternatives--Class A
and Class D Shares........................ 16
Reduced Initial Sales Charges................ 16
Distribution Plans............................. 20
Limitations on the Payment of Deferred Sales
Charges...................................... 21
Redemption of Shares........................... 22
Deferred Sales Charges--Class B Shares....... 22
Portfolio Transactions and Brokerage........... 23
Determination of Net Asset Value............... 25
Shareholder Services........................... 26
Performance Data............................... 40
Dividends, Distributions and Taxes............. 41
General Information............................ 45
Description of Shares........................ 45
Computation of Offering Price per Share...... 46
Independent Auditors......................... 46
Custodian.................................... 46
Transfer Agent............................... 46
Legal Counsel................................ 47
Reports to Shareholders...................... 47
Additional Information....................... 47
Independent Auditors' Report................... 48
Financial Statements........................... 49
</TABLE>
Code #10560-1094
Statement of
Additional Information
[ART]
- ---------------------------------------------------
MERRILL LYNCH
STRATEGIC DIVIDEND FUND
October 21, 1994
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents fair
and accurate narrative descriptions of graphic and image material omitted from
this EDGAR Submission File due to ASCII-incompatibility and cross-references
this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
Contained in Part A:
Financial Highlights (selected per share data and ratios) for each
of the periods in the six years ended July 31, 1994, and the
period November 25, 1987 (commencement of operations) to July 31,
1988.
Contained in Part B:
Schedule of Investments, as of July 31, 1994.
Statement of Assets and Liabilities, as of July 31, 1994.
Statement of Operations for the year ended July 31, 1994.
Statements of Changes in Net Assets for the years ended July 31,
1994 and 1993.
Financial Highlights for each of the years in the five years ended
July 31, 1994.
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
<S> <C>
1(a) -- Declaration of Trust of the Registrant. (a)
(b) -- Amendment to Declaration of Trust of Registrant dated July 14,
1987. (b)
(c) -- Instrument establishing Class A shares and Class B shares of
Registrant. (c)
2 -- By-Laws of Registrant. (a)
3 -- None.
4(a) -- Specimen certificate for Class A shares of beneficial interest of
Registrant. (c)
(b) -- Specimen certificate for Class B shares of beneficial interest of
Registrant. (c)
(c) -- Instruments Defining Rights of Shareholders. (h)
5 -- Management Agreement between Registrant and Merrill Lynch Asset
Management, Inc. (b)
6(a) -- Form of Class A Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.
(b) -- Class B Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (a)
(c) -- Form of Class C Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor,
Inc.
(d) -- Form of Class D Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.
7 -- None.
8 -- Custody Agreement between Registrant and State Street Bank and
Trust Company. (b)
9 -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc. (formerly Merrill Lynch Financial Data Service,
Inc.). (b)
10 -- Opinion of Shereff, Friedman, Hoffman & Goodman, counsel to
Registrant.
11(a) -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
(b) -- Consent of Morningstar, Inc. (g)
12 -- None.
13 -- Certificate of Merrill Lynch Asset Management, Inc. (b)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
<S> <C>
14(a) -- Prototype Individual Retirement Account Plan, Simplified Employee
Pension Plan, and Corporate Individual Retirement Account Plan
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated.
(f)
(b) -- Prototype Merrill Lynch Tax-Deferred Basic Retirement Plan
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated.
(e)
15(a) -- Amended and Restated Class B Distribution Plan and Class B
Distribution Plan Sub-Agreement of Registrant. (h)
15(b) -- Form of Class C Distribution Plan and Class C Distribution Plan
Sub-Agreement.
15(c) -- Form of Class D Distribution Plan and Class D Distribution Plan
Sub-Agreement.
16(a) -- Schedule for computation for each performance quotation relating to
Class A shares provided in the Registration Statement in response
to Item 22. (d)
(b) -- Schedule for computation of each performance quotation relating to
Class B shares provided in the Registration Statement in response
to Item 22. (c)
17(a) -- Other Exhibits
Powers of Attorney for Officers and Trustees
Arthur Zeikel (h)
Gerald M. Richard (h)
Ronald W. Forbes (h)
Cynthia A. Montgomery
Charles C. Reilly (h)
Kevin A. Ryan (h)
Richard R. West (h)
17(b) -- Financial Data Schedule for Class A shares.
17(c) -- Financial Data Schedule for Class B shares.
</TABLE>
- ------------------
(a) Filed on May 22, 1987 as an exhibit to Registrant's Registration Statement
under the Securities Act of 1933 on Form N-1A.
(b) Filed on August 4, 1987 as an exhibit to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement under the Securities Act of 1933 on Form
N-1A.
(c) Filed on October 28, 1988 as an exhibit to Post-Effective Amendment No. 2 to
Registrant's Registration Statement under the Securities Act of 1933 on Form
N-1A.
(d) Filed on November 28, 1989 as an exhibit to Registrant's Registration
Statement under the Securities Act of 1933 on Form N-1A.
(e) Incorporated by reference to Exhibit 14 to Post-Effective Amendment No. 3 to
the Registration Statement under the Securities Act of 1933 on Form N-1
(File No. 2-60836) of Merrill Lynch Special Value Fund, Inc., filed on July
11, 1979.
(f) Incorporated by reference to Exhibit 14 to Pre-Effective Amendment No. 1 to
the Registration Statement under the Securities Act of 1933 on Form N-1
(File No. 2-74584) of Merrill Lynch Retirement Series Trust, filed January
26, 1982.
(g) Filed on November 27, 1992 as an exhibit to Post-Effective Amendment No. 6
to Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A.
(h) Filed on November 23, 1993 as an exhibit to Post-Effective Amendment No. 7
to Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant is not controlled by or under common control with any person.
C-2
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
SEPTEMBER 30,
TITLE OF CLASS 1994
- -------------------------------------------------- ----------------
<S> <C>
Class A shares of beneficial interest, par value
$0.10 per share................................. 86
Class B shares of beneficial interest, par value
$0.10 per share................................. 681
Class C shares of beneficial interest, par value
$0.10 per share................................. 0
Class D shares of beneficial interest, par value
$0.10 per share................................. 0
</TABLE>
ITEM 27. INDEMNIFICATION.
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
'The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a shareholder,
creditor or otherwise) against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and penalties, and as
counsel fees) reasonably incurred by him in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief as
to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no Person may satisfy any right of indemnity or
reimbursement granted herein or in Section 5.1 or to which he may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The 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 moneys 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 or 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.
In Section 9 of the Distribution Agreements relating to each class of
shares being offered hereby, the Registrant agrees to indemnify the distributor
and each person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 (the 'Act' ), against certain types of civil liabilities
arising in connection with the Registration Statement or Prospectus and
Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or
C-3
<PAGE>
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Investment Management, L.P. (the 'Manager' or 'MLAM' ) also
acts as investment adviser for the following investment companies: Convertible
Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill
Lynch Asset Income Fund, Inc., Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch Corporate Bond Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fund for Tomorrow, Inc.,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Allocation Fund, Inc., 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 Growth Fund for Investment and
Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate Fund,
Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund, Inc.,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill Lynch Variable
Series Funds, Inc. Fund Asset Management, L.P. ('FAM' ), an affiliate of the
Manager, acts as the investment adviser for the following investment companies:
Apex Municipal Fund, Inc., 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, Income Opportunities Fund 1999, Inc., Income
Opportunities 2000 Fund, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill
Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch 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., The Municipal Fund Accumulation
Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest 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 Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Emerging Tigers Fund, Inc., Senior High Income Portfolio, Inc., Senior
High Income Portfolio II, Inc., Senior Strategic Income Fund, 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, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Institutional Intermediate
Fund is One Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, FAM, Princeton Services, Inc. ('Princeton Services'),
Merrill Lynch Funds Distributor, Inc. and Princeton Administrators, L.P., is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ('Merrill Lynch' ) and Merrill Lynch
& Co., Inc. ('ML&Co.' ) is World Financial Center, North Tower, 250
C-4
<PAGE>
Vesey Street, New York, New York 10281. The address of Financial Data Services
('FDS') is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since December 1,
1991 for his own account or in the capacity of director, officer, partner or
trustee. In addition, Mr. Zeikel is President, Mr. Glenn is Executive Vice
President and Mr. Richard is Treasurer of all or substantially all of the
investment companies described in the preceding paragraph. Mr. Zeikel is a
director of substantially all of such companies, and Mr. Glenn is a director of
certain of such companies. Messrs. Durnin, Giordano, Harvey, Hewitt, Monagle and
Ms. Griffin are directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------- ------------------- ----------------------------------
<S> <C> <C>
ML & Co................ Limited Partner Financial Services Holding Company
Merrill Lynch Limited Partner Investment Advisory Services
Investment
Management, Inc......
Princeton Services, General Partner General Partner of FAM
Inc.
('Princeton
Services')...........
Arthur Zeikel.......... President and President and Director of FAM;
Director President and Director of
Princeton Services; Director of
Merrill Lynch Funds Distributor,
Inc. ('MLFD'); Executive Vice
President of ML & Co. and
Merrill Lynch
Terry K. Glenn......... Executive Vice Executive Vice President of FAM;
President and Executive Vice President and
Director Director of Princeton Services;
President and Director of MLFD;
President of Princeton
Administrations, Inc.
Bernard J. Durnin...... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
Vincent R. Giordano.... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
Elizabeth Griffin...... Senior Vice Senior Vice President of FAM
President
Norman R. Harvey....... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
N. John Hewitt......... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
Philip L. Kirstein..... Senior Vice Senior Vice President, General
President, General Counsel and Secretary of FAM;
Counsel, Senior Vice President, General
Secretary and Counsel, Director and Secretary
Director of Princeton Services; Director
of MLFD
Ronald M. Kloss........ Senior Vice Senior Vice President of FAM;
President Controller of the Manager and FAM
Stephen M. M. Miller... Senior Vice Executive Vice President of
President Princeton Administrators, L.P.
Joseph T. Monagle...... Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------- ------------------- ----------------------------------
<S> <C> <C>
Gerald M. Richard...... Senior Vice Senior Vice President and
President and Treasurer of FAM; Vice President
Treasurer and Treasurer of MLFD; Senior
Vice President of Princeton
Services
Richard L. Rufener..... Senior Vice Senior Vice President of FAM; Vice
President President of MLFD; Senior Vice
President of Princeton Services
Ronald L. Welburn...... Senior Vice Senior Vice President of FAM since
President 1988; Senior Vice President of
Princeton Services
Anthony Wiseman........ Senior Vice Senior Vice President of FAM;
President Senior Vice President of Princeton
Services
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) MLFD acts as the principal underwriter for the Registrant. MLFD acts as
the principal underwriter for each of the investment companies referred to in
the first paragraph of Item 28 except Apex Municipal Fund, Inc., CBA Money Fund,
CMA Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, Convertible Holdings, Inc., The
Corporate Fund Accumulation Program, Inc., Corporate High Yield Fund, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities 2000 Fund, Inc.,
MuniAssets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniVest New York
Insured, Inc., MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, 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 Insured Fund II, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New
York Insured Fund II, Inc., MuniYield New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc.,
Taurus MuniCalifornia Holdings, Inc., Taurus MuniNew York Holdings, Inc. and
Worldwide DollarVest Fund, Inc.
(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Crook, Graczyk, Fatseas, Schena and Wasel is One Financial Center, 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 Executive Vice President
Arthur Zeikel............. Director President and Director
Philip L. Kirstein........ Director None
William E. Aldrich........ Senior Vice President None
Robert W. Crook........... Senior Vice President None
Kevin P. Boman............ Vice President None
Michael J. Brady.......... Vice President None
Sharon Creveling.......... Vice President and None
Assistant Treasurer
Mark A. DeSario........... Vice President None
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH MLFD WITH REGISTRANT
- -------------------------- ------------------------- ------------------------
<S> <C> <C>
James T. Fatseas.......... Vice President None
Stanley Graczyk........... Vice President None
Debra W. Landsman-Yaros... Vice President None
Michelle T. Lau........... Vice President None
Gerald M. Richard......... Vice President and Treasurer
Treasurer
Richard L. Rufener........ Vice President None
Salvatore Venezia......... Vice President None
William Wasel............. Vice President None
Lisa Gobora............... Assistant Vice President None
Susan Kibler.............. Assistant Vice President None
Mark A. Maguire........... Assistant Vice President None
Richard Romm.............. Assistant Vice President None
Patricia A. Schena........ Assistant 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 and its Custodian
and Transfer Agent, FDS, 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the caption 'Management of the
Fund--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-7
<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 THE
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1993
AND HAS DULY CAUSED THIS POST-EFFECTIVE 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 11TH DAY OF OCTOBER,
1994.
MERRILL LYNCH STRATEGIC DIVIDEND FUND
(REGISTRANT)
By _________/s/ ARTHUR ZEIKEL_________
(ARTHUR ZEIKEL, PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE(S)
- ------------------------------------- --------------------- ------------------
<C> <S> <C>
/s/ ARTHUR ZEIKEL President and Trustee October 11, 1994
- ------------------------------------- (Principal
(ARTHUR ZEIKEL) Executive Officer)
/s/ GERALD M. RICHARD Treasurer (Principal October 11, 1994
- ------------------------------------- Financial and
(GERALD M. RICHARD) Accounting Officer)
* Trustee
- -------------------------------------
(RONALD W. FORBES)
* Trustee
- -------------------------------------
(CYNTHIA A. MONTGOMERY)
* Trustee
- -------------------------------------
(CHARLES C. REILLY)
* Trustee
- -------------------------------------
(KEVIN A. RYAN)
* Trustee
- -------------------------------------
(RICHARD R. WEST)
*By /s/ ARTHUR ZEIKEL October 11, 1994
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT)
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------- ------
<C> <S> <C>
6(a) -- Form of Class A Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc.
6(c) -- Form of Class C Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement)
6(d) -- Form of Class D Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (including Form of
Selected Dealers Agreement)
10 -- Opinion of Shereff, Friedman, Hoffman & Goodman, Counsel to
Registrant
11 -- Consent of Deloitte & Touche LLP, independent auditors for
Registrant
15(b) -- Form of Class C Distribution Plan and Class C Distribution
Plan Sub-Agreement
15(c) -- Form of Class D Distribution Plan and Class C Distribution
Plan Sub-Agreement
17(a) -- Power of Attorney for Cynthia A. Montgomery
17(b) -- Financial Data Schedule for Class A Shares
17(c) -- Financial Data Schedule for Class B Shares
</TABLE>
CLASS A SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October 1994 between
MERRILL LYNCH STRATEGIC DIVIDEND FUND, a Massachusetts business
trust (the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a
Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), as an
open-end investment company, and it is affirmatively in the
interest of the Fund to offer its shares for sale continuously;
and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Class A shares of beneficial interest in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby
appoints the Distributor as the principal underwriter and distri-
butor of the Fund to sell Class A shares of beneficial interest
in the Fund (sometimes herein referred to as "Class A shares") to
1
<PAGE>
eligible investors (as defined below) and hereby agrees during
the term of this Agreement to sell Class A shares of the Fund to
the Distributor upon the terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Fund to act as prin-
cipal underwriter and distributor, except that:
(a) The Fund may, upon written notice to the Distributor,
from time to time designate other principal underwriters and dis-
tributors of Class A shares with respect to areas other than the
United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class A shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
(b) The exclusive right granted to the Distributor to pur-
chase Class A shares from the Fund shall not apply to Class A
shares issued in connection with the merger or consolidation of
any other investment company or personal holding company with the
Fund or the acquisition by purchase or otherwise of all (or sub-
stantially all) the assets or the outstanding Class A shares of
any such company by the Fund.
(c) Such exclusive right also shall not apply to Class A
shares issued by the Fund pursuant to reinvestment of dividends
or capital gains distributions.
2
<PAGE>
(d) Such exclusive right also shall not apply to Class A
shares issued by the Fund pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class A shares as shall be agreed between the Fund and the
Distributor from time to time.
Section 3. Purchase of Class A shares from the Fund.
(a) The Distributor shall have the right to buy from the
Fund the Class A shares needed, but not more than the Class A
shares needed (except for clerical errors in transmission) to
fill unconditional orders for Class A shares of the Fund placed
with the Distributor by eligible investors or securities dealers.
Investors eligible to purchase Class A shares shall be those
persons so identified in the currently effective prospectus and
statement of additional information of the Fund (the "prospectus"
and "statement of additional information", respectively) under
the Securities Act of 1933, as amended (the "Securities Act"),
relating to such Class A shares ("eligible investors"). The
price which the Distributor shall pay for the Class A shares so
purchased from the Fund shall be the net asset value, determined
as set forth in Section 3(d) hereof, used in determining the
public offering price on which such orders were based.
(b) The Class A shares are to be resold by the Distributor
to eligible investors at the public offering price, as set forth
in Section 3(c) hereof, or to securities dealers having
agreements with the Distributor upon the terms and conditions set
forth in Section 7 hereof.
3
<PAGE>
(c) The public offering price(s) of the Class A shares,
i.e., the price per share at which the Distributor or selected
dealers may sell Class A shares to eligible investors, shall be
the public offering price as set forth in the prospectus and
statement of additional information relating to such Class A
shares, but not to exceed the net asset value at which the
Distributor is to purchase the Class A shares, plus a sales
charge not to exceed 5.25% of the public offering price (5.54% of
the net amount invested), subject to reductions for volume
purchases. Class A shares may be sold to certain Trustees,
officers and employees of the Fund, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and to certain
other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the
prospectus and statement of additional information. If the
public offering price does not equal an even cent, the public
offering price may be adjusted to the nearest cent. All payments
to the Fund hereunder shall be made in the manner set forth in
Section 3(f).
(d) The net asset value of Class A shares shall be deter-
mined by the Fund or any agent of the Fund in accordance with the
method set forth in the prospectus and statement of additional
information of the Fund and guidelines established by the
Trustees.
4
<PAGE>
(e) The Fund shall have the right to suspend the sale of
its Class A shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Fund
shall also have the right to suspend the sale of its Class A
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Fund, makes it
impracticable or inadvisable to sell the Class A shares.
(f) The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Class A shares received by the Distributor. Any order
may be rejected by the Fund; provided, however, that the Fund
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class A shares from
eligible investors. The Fund (or its agent) will confirm orders
upon their receipt, will make appropriate book entries and, upon
receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts or certificates for such Class A shares
pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds. The
Distributor agrees to cause such payment and such instructions to
be delivered promptly to the Fund (or its agent).
5
<PAGE>
Section 4. Repurchase or Redemption of Class A shares by
the Fund.
(a) Any of the outstanding Class A shares may be tendered
for redemption at any time, and the Fund agrees to repurchase or
redeem the Class A shares so tendered in accordance with its
obligations as set forth in Article VIII of its Declaration of
Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement
of additional information. The price to be paid to redeem or
repurchase the Class A shares shall be equal to the net asset
value calculated in accordance with the provisions of Section
3(d) hereof, less any contingent deferred sales charge ("CDSC"),
redemption fee or other charge(s), if any, set forth in the
prospectus and statement of additional information of the Fund.
All payments by the Fund hereunder shall be made in the manner
set forth below. The redemption or repurchase by the Fund of any
of the Class A shares purchased by or through the Distributor
will not affect the sales charge secured by the Distributor or
any selected dealer in the course of the original sale, except
that if any Class A shares are tendered for redemption or repur-
chase within seven business days after the date of the confirma-
tion of the original purchase, the right to the sales charge
shall be forfeited by the Distributor and the selected dealer
which sold such Class A shares.
The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
6
<PAGE>
the Distributor in New York Clearing House funds on or before the
seventh business day subsequent to its having received the notice
of redemption in proper form. The proceeds of any redemption of
shares shall be paid by the Fund as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall
be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class A shares or payment may be
suspended at times when the New York Stock Exchange is closed,
when trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Dis-
tributor may reasonably request for use in connection with the
distribution of Class A shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor
7
<PAGE>
such number of copies of the prospectus and statement of addi-
tional information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to
any necessary approval of the Class A shareholders, all necessary
action to fix the number of authorized Class A shares and such
steps as may be necessary to register the same under the Securi-
ties Act, to the end that there will be available for sale such
number of Class A shares as the Distributor may reasonably be
expected to sell.
(c) The Fund shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
A shares for sale under the securities laws of such states as the
Distributor and the Fund may approve. Any such qualification may
be withheld, terminated or withdrawn by the Fund at any time in
its discretion. As provided in Section 8(c) hereof, the expense
of qualification and maintenance of qualification shall be borne
by the Fund. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be
required by the Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class A shares of the Fund but shall not be
obligated to sell any specific number of Class A shares. The
8
<PAGE>
services of the Distributor to the Fund hereunder are not to be
deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(b) In selling the Class A shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any
selected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Fund to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Fund, for the confirmation of
sales to eligible investors and selected dealers, the collection
of amounts payable by eligible investors and selected dealers on
such sales, and the cancellation of unsettled transactions, as
may be necessary to comply with the requirements of the National
Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice
9
<PAGE>
("selected dealers") for the sale of Class A shares and fix
therein the portion of the sales charge which may be allocated to
the selected dealers; provided that the Fund shall approve the
forms of agreements with dealers and the dealer compensation set
forth therein. Class A shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s)
set forth in the prospectus and statement of additional
information. The form of agreement with selected dealers to be
used during the continuous offering of the Class A shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class A shares only to such selected dealers as are mem-
bers in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required regis-
tration statements and/or prospectuses and statements of
additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
materials to Class A shareholders (including but not limited to
the expense of setting in type any such registration statements,
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
10
<PAGE>
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class A
shares to selected dealers or eligible investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class A shares for sale to
eligible investors and any expenses of advertising incurred by
the Distributor in connection with such offering.
(c) The Fund shall bear the cost and expenses of qualifi-
cation of the Class A shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
fying the Fund as a broker or dealer in such states of the United
States or other jurisdictions as shall be selected by the Fund
and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing
qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5(c) hereof.
11
<PAGE>
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class A shares, which may be
based upon the Securities Act, or on any other statute or at com-
mon law, on the ground that the registration statement or related
prospectus and statement of additional information, as from time
to time amended and supplemented, or an annual or interim report
to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements
therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the
indemnity of the Fund in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or
any such controlling persons thereof against any liability to the
Fund or its security holders to which the Distributor or any such
controlling persons would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the per-
formance of their duties or by reason of the reckless disregard
12
<PAGE>
of their obligations and duties under this Agreement; or (ii) is
the Fund to be liable under its indemnity agreement contained in
this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the
Distributor or such controlling persons, as the case may be,
shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Fund will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
the Fund elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Fund elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses of any
additional counsel retained by them, but in case the Fund does
not elect to assume the defense of any such suit, it will reim-
13
<PAGE>
burse the Distributor or such controlling person or persons, de-
fendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund shall
promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or
Trustees in connection with the issuance or sale of any of the
Class A shares.
(b) The Distributor shall indemnify and hold harmless the
Fund and each of its Trustees and officers and each person, if
any, who controls the Fund against any loss, liability, claim,
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on
behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to Class A shareholders. In case any
action shall be brought against the Fund or any person so
indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties
given to the Fund, and the Fund and each person so indemnified
shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Advisor Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
14
<PAGE>
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1995 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding voting securities of
the Fund and (ii) by the vote of 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 the Trustees or by vote of a majority
of the outstanding voting securities of the Fund, or by the Dis-
tributor, on sixty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its
assignment.
The terms "vote of a majority of the outstanding voting
securities", "assignment", "affiliated person" and "interested
15
<PAGE>
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Trustees or by the vote of a majority
of outstanding voting securities of the Fund and (ii) by the vote
of a majority of those Trustees of the Fund 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.
Section 13. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. This Agreement supersedes the prior
Distribution Agreement entered into by the parties hereto with
respect to the Class A shares of the Fund.
Section 15. Personal Liability. The Declaration of Trust
establishing the Fund, dated May 14, 1987, 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 Strategic
Dividend Fund" refers to the Trustees under the Declaration
16
<PAGE>
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 or otherwise in connection with the affairs
of the Fund, but the "Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH STRATEGIC DIVIDEND FUND
By __________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH STRATEGIC DIVIDEND FUND
CLASS A SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Strategic Dividend Fund, a
Massachusetts business trust (the "Fund"), pursuant to which it
acts as the distributor for the sale of Class A shares of
beneficial interest, par value $0.10 per share (herein referred
to as "Class A shares"), of the Fund and as such has the right to
distribute Class A shares of the Fund for resale. The Fund is an
open-end investment company registered under the Investment
Company Act of 1940, as amended, and its Class A shares are
registered under the Securities Act of 1933, as amended. You
have received a copy of the Class A shares Distribution Agreement
(the "Distribution Agreement") between ourself and the Fund and
reference is made herein to certain provisions of such
Distribution Agreement. The terms "Prospectus" and "Statement of
Additional Information" used herein refer to the prospectus and
statement of additional information, respectively, on file with
the Securities and Exchange Commission which is part of the most
recent effective registration statement pursuant to the
Securities Act of 1933, as amended. We offer to sell to you, as
a member of the Selected Dealers Group, Class A shares of the
Fund for resale to investors identified in the Prospectus and
Statement of Additional Information as eligible to purchase Class
A shares ("eligible investors") upon the following terms and
conditions:
1. In all sales of these Class A shares to eligible
investors, you shall act as dealer for your own account and in no
transaction shall you have any authority to act as agent for the
Fund, for us or for any other member of the Selected Dealers
Group, except in connection with the Merrill Lynch Mutual Fund
Adviser program and such other special programs as we from time
to time agree, in which case you shall have authority to offer
and sell shares, as agent for the Fund, to participants in such
program.
1
<PAGE>
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 5 hereof and instructions
which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor
or the Fund in the sole discretion of either. The minimum
initial and subsequent purchase requirements are as set forth in
the current Prospectus and Statement of Additional Information of
the Fund.
3. The sales charges for sales to eligible investors,
computed as percentages of the public offering price and the
amount invested, and the related discount to Selected Dealers are
as follows:
Discount to
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
- ------------------ ------------------ -------------- --------------
Less than $25,000.... 5.25% 5.54% 5.00%
$25,000 but less
than $50,000........ 4.75 4.99 4.50
$50,000 but less
than $100,000....... 4.00 4.17 3.75
$100,000 but less
than $250,000....... 3.00 3.09 2.75
$250,000 but less
than $1,000,000.. 2.00 2.04 1.80
$1,000,000 and over**.. 0.00 0.00 0.00
___________________
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees
as set forth in the current Prospectus and Statement of Additional
Information of the Fund. Such purchases may be subject to a contingent
deferred sales charge as set forth in the current Prospectus and
Statement of Additional Information.
2
<PAGE>
The term "purchase" refers to a single purchase by an indi-
vidual, 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 Class A
shares for his or their own account and to single purchases by a
trustee or other fiduciary purchasing Class A 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 of 1940, as amended, but does not include purchases by any such
company which has not been in existence for at least six months or
which has no purpose other than the purchase of Class A shares of the
Fund or Class A 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.
The reduced sales charges are applicable through a right of
accumulation under which certain eligible investors are permitted to
purchase Class A shares of the Fund 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 Class A, Class B, Class C and Class D shares of the Fund
and of any other investment company with an initial sales charge for
which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided
at the time of purchase, by the purchaser or you, with sufficient
information to permit confirmation of qualification, and acceptance
of the purchase order is subject to such confirmation.
The reduced sales charges are applicable to purchases aggre-
gating $25,000 or more of Class A shares or of Class D shares of any
other investment company with an initial sales charge for which the
Distributor acts as the distributor made through you within a
thirteen-month period starting with the first purchase pursuant to a
Letter of Intention in the form provided in the Prospectus. A
purchase not originally made pursuant to a Letter of Intention may be
included under a subsequent letter executed within 90 days of such
purchase if the Distributor is informed in writing of this intent
within such 90-day period. If the intended amount of shares is not
purchased within the thirteen-month period, an appropriate price
adjustment will be made pursuant to the terms of the Letter of
Intention.
You agree to advise us promptly at our request as to amounts of
any sales made by you to eligible investors qualifying for reduced
3
<PAGE>
sales charges. Further information as to the reduced sales charges
pursuant to the right of accumulation or a Letter of Intention is set
forth in the Prospectus and Statement of Additional Information.
4. You shall not place orders for any of the Class A shares
unless you have already received purchase orders for such Class A
shares at the applicable public offering prices and subject to the
terms hereof and of the Distribution Agreement. You agree that you
will not offer or sell any of the Class A shares except under
circumstances that will result in compliance with the applicable
Federal and state securities laws and that in connection with sales
and offers to sell Class A shares you will furnish to each person to
whom any such sale or offer is made a copy of the Prospectus and, if
requested, the Statement of Additional Information (as then amended
or supplemented) and will not furnish to any person any information
relating to the Class A shares of the Fund which is inconsistent in
any respect with the information contained in the Prospectus and
Statement of Additional Information (as then amended or
supplemented) or cause any advertisement to be published in any
newspaper or posted in any public place without our consent and the
consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Fund for Class A shares of the Fund to
be resold by us to you subject to the applicable terms and conditions
governing the placement of orders by us set forth in Section 3 of the
Distribution Agreement and subject to the compensation provisions of
Section 3 hereof and (ii) to tender Class A shares directly to the
Fund or its agent for redemption subject to the applicable terms and
conditions set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such withholding:
e.g., by a change in the "net asset value" from that used in
determining the offering price to your customers.
7. If any Class A shares sold to you under the terms of this
Agreement are repurchased by the Fund or by us for the account of the
Fund or are tendered for redemption within seven business days after
the date of the confirmation of the original purchase by you, it is
agreed that you shall forfeit your right to, and refund to us, any
discount received by you on such Class A shares.
4
<PAGE>
8. No person is authorized to make any representations con-
cerning Class A shares of the Fund except those contained in the
current Prospectus and Statement of Additional Information of the
Fund and in such printed information subsequently issued by us or the
Fund as information supplemental to such Prospectus and Statement of
Additional Information. In purchasing Class A shares through us you
shall rely solely on the representations contained in the Prospectus
and Statement of Additional Information and supplemental information
above mentioned. Any printed information which we furnish you other
than the Fund's Prospectus, Statement of Additional Information,
periodic reports and proxy solicitation material is our sole
responsibility and not the responsibility of the Fund, and you agree
that the Fund shall have no liability or responsibility to you in
these respects unless expressly assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to the
time of offering or sale and you agree thereafter to deliver to such
purchasers copies of the annual and interim reports and proxy
solicitation materials of the Fund. You further agree to endeavor to
obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim
reports and proxy solicitation materials of the Fund will be supplied
to you in reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to
suspend sales or withdraw the offering of Class A shares entirely or
to certain persons or entities in a class or classes specified by us.
Each party hereto has the right to cancel this agreement upon notice
to the other party.
11. We shall have full authority to take such action as we may
deem advisable in respect of all matters pertaining to the continuous
offering. We shall be under no liability to you except for lack of
good faith and for obligations expressly assumed by us herein.
Nothing contained in this paragraph is intended to operate as, and
the provisions of this paragraph shall not in any way whatsoever
constitute, a waiver by you of compliance with any provision of the
Securities Act of 1933, as amended, or of the rules and regulations
of the Securities and Exchange Commission issued thereunder.
12. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
5
<PAGE>
13. Upon application to us, we will inform you as to the states
in which we believe the Class A shares have been qualified for sale
under, or are exempt from the requirements of, the respective
securities laws of such states, but we assume no responsibility or
obligation as to your right to sell Class A shares in any
jurisdiction. We will file with the Department of State in New York
a Further State Notice with respect to the Class A shares, if
necessary.
14. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
15. Your first order placed pursuant to this Agreement for the
purchase of Class A shares of the Fund will represent your acceptance
of this Agreement.
16. This Agreement supersedes any prior Selected Dealers
Agreement entered into by the parties hereto with respect to the
Class A shares of the Fund.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-------------------------------------
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
------------------------------------------
By:
------------------------------------------------
Address: 800 Scudders Mill Road
--------------------------------------------
Plainsboro, New Jersey 08536
--------------------------------------------
Date: October , 1994
----------------------------------------------
6
<PAGE>
CLASS C SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ______ day of October 1994, between
MERRILL LYNCH STRATEGIC DIVIDEND FUND, a Massachusetts business
trust (the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a
Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), as an
open-end investment company, and it is affirmatively in the in-
terest of the Fund to offer its shares for sale continuously; and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either direct-
ly to purchasers or through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Fund's Class C shares in order to promote the growth of
the Fund and facilitate the distribution of its Class C shares.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby
appoints the Distributor as the principal underwriter and
distributor of the Fund to sell Class C shares of beneficial
interest in the Fund (sometimes herein referred to as "Class C
1
<PAGE>
shares") to the public and hereby agrees during the term of this
Agreement to sell shares of the Fund to the Distributor upon the
terms and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Fund to act as prin-
cipal underwriter and distributor of the Class C shares, except
that:
(a) The Fund may, upon written notice to the Distributor,
from time to time designate other principal underwriters and
distributors of Class C shares with respect to areas other than
the United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class C shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
(b) The exclusive right granted to the Distributor to
purchase Class C shares from the Fund shall not apply to Class C
shares of the Fund issued in connection with the merger or conso-
lidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise
of all (or substantially all) the assets or the outstanding Class
C shares of any such company by the Fund.
2
<PAGE>
(c) Such exclusive right also shall not apply to Class C
shares issued by the Fund pursuant to reinvestment of dividends
or capital gains distributions.
(d) Such exclusive right also shall not apply to Class C
shares issued by the Fund pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class C shares as shall be agreed between the Fund and the
Distributor from time to time.
Section 3. Purchase of Class C Shares from the Fund.
(a) It is contemplated that the Fund will commence an
offering of its Class C shares, and thereafter the Distributor
shall have the right to buy from the Fund the Class C shares
needed, but not more than the Class C shares needed (except for
clerical errors in transmission) to fill unconditional orders for
Class C shares of the Fund placed with the Distributor by
eligible investors or securities dealers. Investors eligible to
purchase Class C shares shall be those persons so identified in
the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act
of 1933, as amended (the "Securities Act"), relating to such
Class C shares. The price which the Distributor shall pay for the
Class C shares so purchased from the Fund shall be the net asset
value, determined as set forth in Section 3(c) hereof.
3
<PAGE>
(b) The Class C shares are to be resold by the Distributor
to investors at net asset value, as set forth in Section 3(c)
hereof, or to securities dealers having agreements with the Dis-
tributor upon the terms and conditions set forth in Section 7
hereof.
(c) The net asset value of Class C shares of the Fund shall
be determined by the Fund or any agent of the Fund in accordance
with the method set forth in the prospectus and statement of
additional information and guidelines established by the Board of
Trustees.
(d) The Fund shall have the right to suspend the sale of
its Class C shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Fund
shall also have the right to suspend the sale of its Class C
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Fund, makes it imprac-
ticable or inadvisable to sell the Class C shares.
(e) The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Class C shares received by the Distributor. Any order
may be rejected by the Fund; provided, however, that the Fund
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class C shares. The Fund
4
<PAGE>
(or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Fund (or its
agent) of payment therefor, will deliver deposit receipts or
certificates for such Class C shares pursuant to the instructions
of the Distributor. Payment shall be made to the Fund in New
York Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the
Fund (or its agent).
Section 4. Repurchase or Redemption of Class C Shares by
the Fund.
(a) Any of the outstanding Class C shares may be tendered
for redemption at any time, and the Fund agrees to repurchase or
redeem the Class C shares so tendered in accordance with its
obligations as set forth in Article VIII of its Declaration of
Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement
of additional information of the Fund. The price to be paid to
redeem or repurchase the Class C shares shall be equal to the net
asset value calculated in accordance with the provisions of
Section 3(c) hereof, less any contingent deferred sales charge
("CDSC"), redemption fee or other charge(s), if any, set forth in
the prospectus and statement of additional information of the
Fund. All payments by the Fund hereunder shall be made in the
manner set forth below.
5
<PAGE>
The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
the Distributor on or before the seventh business day subsequent
to its having received the notice of redemption in proper form.
The proceeds of any redemption of shares shall be paid by the
Fund as follows: (i) any applicable CDSC shall be paid to the
Distributor, and (ii) the balance shall be paid to or for the
account of the shareholder, in each case in accordance with the
applicable provisions of the prospectus and statement of
additional information.
(b) Redemption of Class C shares or payment may be sus-
pended at times when the New York Stock Exchange is closed, when
trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the
Distributor may reasonably request for use in connection with the
distribution of Class C shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
6
<PAGE>
financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor
such number of copies of its prospectus and statement of addi-
tional information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to
any necessary approval of the shareholders, all necessary action
to fix the number of authorized shares and such steps as may be
necessary to register the same under the Securities Act to the
end that there will be available for sale such number of Class C
shares as the Distributor reasonably may be expected to sell.
(c) The Fund shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
C shares for sale under the securities laws of such states as the
Distributor and the Fund may approve. Any such qualification may
be withheld, terminated or withdrawn by the Fund at any time in
its discretion. As provided in Section 8(c) hereof, the expense
of qualification and maintenance of qualification shall be borne
by the Fund. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be
required by the Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
7
<PAGE>
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class C shares of the Fund but shall not be
obligated to sell any specific number of shares. The services of
the Distributor to the Fund hereunder are not to be deemed exclu-
sive and nothing herein contained shall prevent the Distributor
from entering into like arrangements with other investment com-
panies so long as the performance of its obligations hereunder is
not impaired thereby.
(b) In selling the Class C shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any se-
lected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Fund to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Fund, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
and the cancellation of unsettled transactions, as may be neces-
sary to comply with the requirements of the National Association
8
<PAGE>
of Securities Dealers, Inc. (the "NASD"), as such requirements
may from time to time exist.
Section 7. Selected Dealer Agreements.
(a) The Distributor shall have the right to enter into
selected dealer agreements with securities dealers of its choice
("selected dealers") for the sale of Class C shares; provided,
that the Fund shall approve the forms of agreements with dealers.
Class C shares sold to selected dealers shall be for resale by
such dealers only at net asset value determined as set forth in
Section 3(c) hereof. The form of agreement with selected dealers
to be used during the continuous offering of the shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class C shares only to such selected dealers that are
members in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required
registration statements and/or prospectuses and statements of
additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
materials to Class C shareholders (including but not limited to
the expense of setting in type any such registration statements,
9
<PAGE>
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class C
shares to selected dealers or investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class C shares for sale to
the public and any expenses of advertising incurred by the Dis-
tributor in connection with such offering. It is understood and
agreed that so long as the Fund's Class C Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor here-
under may be paid from amounts recovered by it from the Fund
under such Plan.
(c) The Fund shall bear the cost and expenses of qualifi-
cation of the Class C shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
10
<PAGE>
fying the Fund as a broker or dealer in such states of the United
States or other jurisdictions as shall be selected by the Fund
and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing
qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class C shares, which may be
based upon the Securities Act, or on any other statute or at
common law, on the ground that the registration statement or
related prospectus and statement of additional information, as
from time to time amended and supplemented, or an annual or
interim report to Class C shareholders of the Fund, includes an
untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make
the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, in-
formation furnished to the Fund in connection therewith by or on
behalf of the Distributor; provided, however, that in no case (i)
11
<PAGE>
is the indemnity of the Fund in favor of the Distributor and any
such controlling persons to be deemed to protect such Distributor
or any such controlling persons thereof against any liability to
the Fund or its security holders to which the Distributor or any
such controlling persons would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the
performance of their duties or by reason of the reckless
disregard of their obligations and duties under this Agreement;
or (ii) is the Fund to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made
against the Distributor or any such controlling persons, unless
the Distributor or such controlling persons, as the case may be,
shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Fund will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
the Fund elects to assume the defense, such defense shall be
12
<PAGE>
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Fund elects to assume
the defense of any such suit and retain such counsel, the
Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses, as
incurred, of any additional counsel retained by them, but in case
the Fund does not elect to assume the defense of any such suit,
it will reimburse the Distributor or such controlling person or
persons, defendant or defendants in the suit, for the reasonable
fees and expenses, as incurred, of any counsel retained by them.
The Fund shall promptly notify the Distributor of the commence-
ment of any litigation or proceedings against it or any of its
officers or Trustees in connection with the issuance or sale of
any of the Class C shares.
(b) The Distributor shall indemnify and hold harmless the
Fund and each of its Trustees and officers and each person, if
any, who controls the Fund against any loss, liability, claim,
damage or expense, as incurred, described in the foregoing indem-
nity contained in subsection (a) of this Section, but only with
respect to statements or omissions made in reliance upon, and in
conformity with, information furnished to the Fund in writing by
or on behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
13
<PAGE>
annual or interim reports to shareholders. In case any action
shall be brought against the Fund or any person so indemnified,
in respect of which indemnity may be sought against the Distri-
butor, the Distributor shall have the rights and duties given to
the Fund, and the Fund and each person so indemnified shall have
the rights and duties given to the Distributor by the provisions
of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Advisor Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first
above written and shall remain in force until October __, 1995
and thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding voting securities of
the Fund and (ii) by the vote of a majority of those Trustees who
are not parties to this Agreement or interested persons of any
14
<PAGE>
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 the Trustees or by vote of a majority
of the outstanding voting securities of the Fund, or by the
Distributor, on sixty days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
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.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Trustees or by the vote of a majority
of outstanding voting securities of the Fund and (ii) by the vote
of a majority of those Trustees of the Fund 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.
Section 13. Governing Law. The provisions of this Agree-
ment shall be construed and interpreted in accordance with the
laws of the State of New York as at the time in effect and the
applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
15
<PAGE>
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. Personal Liability. The Declaration of
Trust establishing the Fund, dated May 14, 1987, 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 Strategic
Dividend 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 or otherwise in connection with the affairs
of the Fund, but the "Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH STRATEGIC DIVIDEND FUND
By
---------------------------------
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
---------------------------------
Title:
16
<PAGE>
EXHIBIT A
MERRILL LYNCH STRATEGIC DIVIDEND FUND
CLASS C SHARES OF BENEFICIAL INTEREST
SELECTED DEALER AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Strategic Dividend Fund, a
Massachusetts business trust (the "Fund"), pursuant to which it
acts as the distributor for the sale of Class C shares of
beneficial interest, par value $0.10 per share (herein referred
to as the "Class C shares"), of the Fund and as such has the
right to distribute Class C shares of the Fund for resale. The
Fund is an open-end investment company registered under the
Investment Company Act of 1940, as amended, and its Class C
shares being offered to the public are registered under the
Securities Act of 1933, as amended. You have received a copy of
the Class C Shares Distribution Agreement (the "Distribution
Agreement") between ourself and the Fund and reference is made
herein to certain provisions of such Distribution Agreement. The
terms "Prospectus" and "Statement of Additional Information" as
used herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and
Exchange Commission which is part of the most recent effective
registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class C shares of the Fund upon the following
terms and conditions:
1. In all sales of these Class C shares to the public, you shall
act as dealer for your own account and in no transaction shall
you have any authority to act as agent for the Fund, for us or
for any other member of the Selected Dealers Group, except in
connection with the Merrill Lynch Mutual Fund Adviser program and
such other special programs as we from time to time agree, in
which case you shall have authority to offer and sell shares, as
agent for the Fund, to participants in such program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 4 hereof and instructions
which we or the Fund shall forward from time to time to you. All
1
<PAGE>
orders are subject to acceptance or rejection by the Distributor
or the Fund in the sole discretion of either. The minimum ini-
tial and subsequent purchase requirements are as set forth in the
current Prospectus and Statement of Additional Information of the
Fund.
3. You shall not place orders for any of the Class C shares
unless you have already received purchase orders for such Class C
shares at the applicable public offering prices and subject to
the terms hereof and of the Distribution Agreement. You agree
that you will not offer or sell any of the Class C shares except
under circumstances that will result in compliance with the
applicable Federal and state securities laws and that in
connection with sales and offers to sell Class C shares you will
furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of Addi-
tional Information (as then amended or supplemented) and will not
furnish to any person any information relating to the Class C
shares of the Fund which is inconsistent in any respect with the
information contained in the Prospectus and Statement of Addi-
tional Information (as then amended or supplemented) or cause any
advertisement to be published in any newspaper or posted in any
public place without our consent and the consent of the Fund.
4. As a selected dealer, you are hereby authorized (i) to
place orders directly with the Fund for Class C shares of the
Fund to be resold by us to you subject to the applicable terms
and conditions governing the placement of orders by us set forth
in Section 3 of the Distribution Agreement and (ii) to tender
Class C shares directly to the Fund or its agent for redemption
subject to the applicable terms and conditions set forth in Sec-
tion 4 of the Distribution Agreement.
5. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such with-
holding: e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
6. No person is authorized to make any representations
concerning Class C shares of the Fund except those contained in
the current Prospectus and Statement of Additional Information of
the Fund and in such printed information subsequently issued by
us or the Fund as information supplemental to such Prospectus and
Statement of Additional Information. In purchasing Class C
shares through us you shall rely solely on the representations
contained in the Prospectus and Statement of Additional Informa-
tion and supplemental information above mentioned. Any printed
information which we furnish you other than the Fund's Prospec-
tus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not
the responsibility of the Fund, and you agree that the Fund shall
2
<PAGE>
have no liability or responsibility to you in these respects
unless expressly assumed in connection therewith.
7. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to
the time of offering or sale and you agree thereafter to deliver
to such purchasers copies of the annual and interim reports and
proxy solicitation materials of the Fund. You further agree to
endeavor to obtain proxies from such purchasers. Additional
copies of the Prospectus and Statement of Additional Information,
annual or interim reports and proxy solicitation materials of the
Fund will be supplied to you in reasonable quantities upon re-
quest.
8. We reserve the right in our discretion, without notice,
to suspend sales or withdraw the offering of Class C shares
entirely or to certain persons or entities in a class or classes
specified by us. Each party hereto has the right to cancel this
Agreement upon notice to the other party.
9. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering. We shall be under no liability to you
except for lack of good faith and for obligations expressly
assumed by us herein. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph
shall not in any way whatsoever constitute, a waiver by you of
compliance with any provision of the Securities Act of 1933, as
amended, or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
10. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any
sales in the United States, we both hereby agree to abide by the
Rules of Fair Practice of such Association.
11. Upon application to us, we will inform you as to the
states in which we believe the Class C shares have been qualified
for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your right to sell Class C
shares in any jurisdiction. We will file with the Department of
State in New York a Further State Notice with respect to the
Class C shares, if necessary.
12. All communications to us should be sent to the address
below. Any notice to you shall be duly given if mailed or tele-
graphed to you at the address specified by you below.
3
<PAGE>
13. Your first order placed pursuant to this Agreement for
the purchase of Class C shares of the Fund will represent your
acceptance of this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
---------------------------------
(Authorized Signature)
Please return one signed copy
of this Agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
---------------------------------------------
By:
---------------------------------------------------
Address: 800 Scudders Mill Road
-----------------------------------------------
Plainsboro, New Jersey 08536
--------------------------------------------------------
Date: October , 1994
-------------------------------------------------
4
<PAGE>
CLASS D SHARES
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____ day of October 1994 between
MERRILL LYNCH STRATEGIC DIVIDEND FUND, a Massachusetts business
trust (the "Fund"), and MERRILL LYNCH FUNDS DISTRIBUTOR, INC., a
Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), as an
open-end investment company, and it is affirmatively in the
interest of the Fund to offer its shares for sale continuously;
and
WHEREAS, the Distributor is a securities firm engaged in the
business of selling shares of investment companies either
directly to purchasers or through other securities dealers; and
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering
of the Class D shares of beneficial interest in the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor. The Fund hereby
appoints the Distributor as the principal underwriter and distri-
butor of the Fund to sell Class D shares of beneficial interest
in the Fund (sometimes herein referred to as "Class D shares") to
1
<PAGE>
the public and hereby agrees during the term of this Agreement to
sell Class D shares of the Fund to the Distributor upon the terms
and conditions herein set forth.
Section 2. Exclusive Nature of Duties. The Distributor
shall be the exclusive representative of the Fund to act as prin-
cipal underwriter and distributor, except that:
(a) The Fund may, upon written notice to the Distributor,
from time to time designate other principal underwriters and dis-
tributors of Class D shares with respect to areas other than the
United States as to which the Distributor may have expressly
waived in writing its right to act as such. If such designation
is deemed exclusive, the right of the Distributor under this
Agreement to sell Class D shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full
effect until terminated in accordance with the other provisions
hereof.
(b) The exclusive right granted to the Distributor to pur-
chase Class D shares from the Fund shall not apply to Class D
shares issued in connection with the merger or consolidation of
any other investment company or personal holding company with the
Fund or the acquisition by purchase or otherwise of all (or sub-
stantially all) the assets or the outstanding Class D shares of
any such company by the Fund.
(c) Such exclusive right also shall not apply to Class D
shares issued by the Fund pursuant to reinvestment of dividends
or capital gains distributions.
2
<PAGE>
(d) Such exclusive right also shall not apply to Class D
shares issued by the Fund pursuant to any conversion, exchange or
reinstatement privilege afforded redeeming shareholders or to any
other Class D shares as shall be agreed between the Fund and the
Distributor from time to time.
Section 3. Purchase of Class D Shares from the Fund.
(a) It is contemplated that the Fund will commence an
offering of its Class D shares, and thereafter the Distributor
shall have the right to buy from the Fund the Class D shares
needed, but not more than the Class D shares needed (except for
clerical errors in transmission) to fill unconditional orders for
Class D shares of the Fund placed with the Distributor by
eligible investors or securities dealers. Investors eligible to
purchase Class D shares shall be those persons so identified in
the currently effective prospectus and statement of additional
information of the Fund (the "prospectus" and "statement of
additional information", respectively) under the Securities Act
of 1933, as amended (the "Securities Act"), relating to such
Class D shares. The price which the Distributor shall pay for the
Class D shares so purchased from the Fund shall be the net asset
value, determined as set forth in Section 3(d) hereof, used in
determining the public offering price on which such orders were
based.
(b) The Class D shares are to be resold by the Distributor
to investors at the public offering price, as set forth in Sec-
tion 3(c) hereof, or to securities dealers having agreements
3
<PAGE>
with the Distributor upon the terms and conditions set forth in
Section 7 hereof.
(c) The public offering price(s) of the Class D shares,
i.e., the price per share at which the Distributor or selected
dealers may sell Class D shares to the public, shall be the
public offering price as set forth in the prospectus and
statement of additional information relating to such Class D
shares, but not to exceed the net asset value at which the
Distributor is to purchase the Class D shares, plus a sales
charge not to exceed 5.25% of the public offering price (5.54% of
the net amount invested), subject to reductions for volume
purchases. Class D shares may be sold to certain Trustees,
officers and employees of the Fund, directors and employees of
Merrill Lynch & Co., Inc. and its subsidiaries, and to certain
other persons described in the prospectus and statement of
additional information, without a sales charge or at a reduced
sales charge, upon terms and conditions set forth in the
prospectus and statement of additional information. If the
public offering price does not equal an even cent, the public
offering price may be adjusted to the nearest cent. All payments
to the Fund hereunder shall be made in the manner set forth in
Section 3(f).
(d) The net asset value of Class D shares shall be deter-
mined by the Fund or any agent of the Fund in accordance with the
method set forth in the prospectus and statement of additional
4
<PAGE>
information of the Fund and guidelines established by the Trustees.
(e) The Fund shall have the right to suspend the sale of
its Class D shares at times when redemption is suspended pursuant
to the conditions set forth in Section 4(b) hereof. The Fund
shall also have the right to suspend the sale of its Class D
shares if trading on the New York Stock Exchange shall have been
suspended, if a banking moratorium shall have been declared by
Federal or New York authorities, or if there shall have been some
other event, which, in the judgment of the Fund, makes it
impracticable or inadvisable to sell the Class D shares.
(f) The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Class D shares received by the Distributor. Any order
may be rejected by the Fund; provided, however, that the Fund
will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Class D shares. The Fund
(or its agent) will confirm orders upon their receipt, will make
appropriate book entries and, upon receipt by the Fund (or its
agent) of payment therefor, will deliver deposit receipts or
certificates for such Class D shares pursuant to the instructions
of the Distributor. Payment shall be made to the Fund in New
York Clearing House funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the
Fund (or its agent).
5
<PAGE>
Section 4. Repurchase or Redemption of Class D Shares by
the Fund.
(a) Any of the outstanding Class D shares may be tendered
for redemption at any time, and the Fund agrees to repurchase or
redeem the Class D shares so tendered in accordance with its
obligations as set forth in Article VIII of its Declaration of
Trust, as amended from time to time, and in accordance with the
applicable provisions set forth in the prospectus and statement
of additional information. The price to be paid to redeem or
repurchase the Class D shares shall be equal to the net asset
value calculated in accordance with the provisions of Section
3(d) hereof, less any contingent deferred sales charge ("CDSC"),
redemption fee or other charge(s), if any, set forth in the
prospectus and statement of additional information of the Fund.
All payments by the Fund hereunder shall be made in the manner
set forth below. The redemption or repurchase by the Fund of any
of the Class D shares purchased by or through the Distributor
will not affect the sales charge secured by the Distributor or
any selected dealer in the course of the original sale, except
that if any Class D shares are tendered for redemption or repur-
chase within seven business days after the date of the confirma-
tion of the original purchase, the right to the sales charge
shall be forfeited by the Distributor and the selected dealer
which sold such Class D shares.
The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of
6
<PAGE>
the Distributor in New York Clearing House funds on or before the
seventh business day subsequent to its having received the notice
of redemption in proper form. The proceeds of any redemption of
shares shall be paid by the Fund as follows: (i) any applicable
CDSC shall be paid to the Distributor, and (ii) the balance shall
be paid to or for the account of the shareholder, in each case in
accordance with the applicable provisions of the prospectus and
statement of additional information.
(b) Redemption of Class D shares or payment may be
suspended at times when the New York Stock Exchange is closed,
when trading on said Exchange is suspended, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for
the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange
Commission, by order, so permits.
Section 5. Duties of the Fund.
(a) The Fund shall furnish to the Distributor copies of all
information, financial statements and other papers which the Dis-
tributor may reasonably request for use in connection with the
distribution of Class D shares of the Fund, and this shall in-
clude, upon request by the Distributor, one certified copy of all
financial statements prepared for the Fund by independent public
accountants. The Fund shall make available to the Distributor
7
<PAGE>
such number of copies of the prospectus and statement of addi-
tional information as the Distributor shall reasonably request.
(b) The Fund shall take, from time to time, but subject to
any necessary approval of the Class D shareholders, all necessary
action to fix the number of authorized Class D shares and such
steps as may be necessary to register the same under the Securi-
ties Act, to the end that there will be available for sale such
number of Class D shares as the Distributor may reasonably be
expected to sell.
(c) The Fund shall use its best efforts to qualify and
maintain the qualification of an appropriate number of its Class
D shares for sale under the securities laws of such states as the
Distributor and the Fund may approve. Any such qualification may
be withheld, terminated or withdrawn by the Fund at any time in
its discretion. As provided in Section 8(c) hereof, the expense
of qualification and maintenance of qualification shall be borne
by the Fund. The Distributor shall furnish such information and
other material relating to its affairs and activities as may be
required by the Fund in connection with such qualification.
(d) The Fund will furnish, in reasonable quantities upon
request by the Distributor, copies of annual and interim reports
of the Fund.
Section 6. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort
to effect sales of Class D shares of the Fund but shall not be
obligated to sell any specific number of Class D shares. The
8
<PAGE>
services of the Distributor to the Fund hereunder are not to be
deemed exclusive and nothing herein contained shall prevent the
Distributor from entering into like arrangements with other in-
vestment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(b) In selling the Class D shares of the Fund, the Distri-
butor shall use its best efforts in all respects duly to conform
with the requirements of all Federal and state laws relating to
the sale of such securities. Neither the Distributor nor any
selected dealer, as defined in Section 7 hereof, nor any other
person is authorized by the Fund to give any information or to
make any representations, other than those contained in the
registration statement or related prospectus and statement of
additional information and any sales literature specifically
approved by the Fund.
(c) The Distributor shall adopt and follow procedures, as
approved by the officers of the Fund, for the confirmation of
sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales,
and the cancellation of unsettled transactions, as may be
necessary to comply with the requirements of the National
Association of Securities Dealers, Inc. (the "NASD"), as such
requirements may from time to time exist.
Section 7. Selected Dealers Agreements.
(a) The Distributor shall have the right to enter into
selected dealers agreements with securities dealers of its choice
9
<PAGE>
("selected dealers") for the sale of Class D shares and fix
therein the portion of the sales charge which may be allocated to
the selected dealers; provided that the Fund shall approve the
forms of agreements with dealers and the dealer compensation set
forth therein. Class D shares sold to selected dealers shall be
for resale by such dealers only at the public offering price(s)
set forth in the prospectus and statement of additional
information. The form of agreement with selected dealers to be
used during the continuous offering of the Class D shares is
attached hereto as Exhibit A.
(b) Within the United States, the Distributor shall offer
and sell Class D shares only to such selected dealers as are mem-
bers in good standing of the NASD.
Section 8. Payment of Expenses.
(a) The Fund shall bear all costs and expenses of the Fund,
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required regis-
tration statements and/or prospectuses and statements of
additional information under the Investment Company Act, the
Securities Act, and all amendments and supplements thereto, and
preparing and mailing annual and interim reports and proxy
materials to Class D shareholders (including but not limited to
the expense of setting in type any such registration statements,
prospectuses, statements of additional information, annual or
interim reports or proxy materials).
10
<PAGE>
(b) The Distributor shall be responsible for any payments
made to selected dealers as reimbursement for their expenses
associated with payments of sales commissions to financial con-
sultants. In addition, after the prospectuses, statements of
additional information and annual and interim reports have been
prepared and set in type, the Distributor shall bear the costs
and expenses of printing and distributing any copies thereof
which are to be used in connection with the offering of Class D
shares to selected dealers or investors pursuant to this
Agreement. The Distributor shall bear the costs and expenses of
preparing, printing and distributing any other literature used by
the Distributor or furnished by it for use by selected dealers in
connection with the offering of the Class D shares for sale to
the public and any expenses of advertising incurred by the
Distributor in connection with such offering. It is understood
and agreed that so long as the Fund's Class D Shares Distribution
Plan pursuant to Rule 12b-1 under the Investment Company Act
remains in effect, any expenses incurred by the Distributor
hereunder in connection with account maintenance activities may
be paid from amounts recovered by it from the Fund under such
plan.
(c) The Fund shall bear the cost and expenses of qualifi-
cation of the Class D shares for sale pursuant to this Agreement
and, if necessary or advisable in connection therewith, of quali-
fying the Fund as a broker or dealer in such states of the United
States or other jurisdictions as shall be selected by the Fund
11
<PAGE>
and the Distributor pursuant to Section 5(c) hereof and the cost
and expenses payable to each such state for continuing
qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5(c) hereof.
Section 9. Indemnification.
(a) The Fund shall indemnify and hold harmless the Distri-
butor and each person, if any, who controls the Distributor
against any loss, liability, claim, damage or expense (including
the reasonable cost of investigating or defending any alleged
loss, liability, claim, damage or expense and reasonable counsel
fees incurred in connection therewith), as incurred, arising by
reason of any person acquiring any Class D shares, which may be
based upon the Securities Act, or on any other statute or at com-
mon law, on the ground that the registration statement or related
prospectus and statement of additional information, as from time
to time amended and supplemented, or an annual or interim report
to shareholders of the Fund, includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements
therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, information
furnished to the Fund in connection therewith by or on behalf of
the Distributor; provided, however, that in no case (i) is the
indemnity of the Fund in favor of the Distributor and any such
controlling persons to be deemed to protect such Distributor or
any such controlling persons thereof against any liability to the
12
<PAGE>
Fund or its security holders to which the Distributor or any such
controlling persons would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the per-
formance of their duties or by reason of the reckless disregard
of their obligations and duties under this Agreement; or (ii) is
the Fund to be liable under its indemnity agreement contained in
this paragraph with respect to any claim made against the
Distributor or any such controlling persons, unless the
Distributor or such controlling persons, as the case may be,
shall have notified the Fund in writing within a reasonable time
after the summons or other first legal process giving information
of the nature of the claim shall have been served upon the
Distributor or such controlling persons (or after the Distributor
or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Fund
of any such claim shall not relieve it from any liability which
it may have to the person against whom such action is brought
otherwise than on account of its indemnity agreement contained in
this paragraph. The Fund will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but if
the Fund elects to assume the defense, such defense shall be
conducted by counsel chosen by it and satisfactory to the
Distributor or such controlling person or persons, defendant or
defendants in the suit. In the event the Fund elects to assume
the defense of any such suit and retain such counsel, the
13
<PAGE>
Distributor or such controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses of any
additional counsel retained by them, but in case the Fund does
not elect to assume the defense of any such suit, it will reim-
burse the Distributor or such controlling person or persons, de-
fendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund shall
promptly notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or
Trustees in connection with the issuance or sale of any of the
Class D shares.
(b) The Distributor shall indemnify and hold harmless the
Fund and each of its Trustees and officers and each person, if
any, who controls the Fund against any loss, liability, claim,
damage or expense described in the foregoing indemnity contained
in subsection (a) of this Section, but only with respect to
statements or omissions made in reliance upon, and in conformity
with, information furnished to the Fund in writing by or on
behalf of the Distributor for use in connection with the
registration statement or related prospectus and statement of
additional information, as from time to time amended, or the
annual or interim reports to Class D shareholders. In case any
action shall be brought against the Fund or any person so
indemnified, in respect of which indemnity may be sought against
the Distributor, the Distributor shall have the rights and duties
given to the Fund, and the Fund and each person so indemnified
14
<PAGE>
shall have the rights and duties given to the Distributor by the
provisions of subsection (a) of this Section 9.
Section 10. Merrill Lynch Mutual Fund Advisor Program. In
connection with the Merrill Lynch Mutual Fund Adviser Program,
the Distributor and its affiliate, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, are authorized to offer and sell shares of
the Fund, as agent for the Fund, to participants in such program.
The terms of this Agreement shall apply to such sales, including
terms as to the offering price of shares, the proceeds to be paid
to the Fund, the duties of the Distributor, the payment of
expenses and indemnification obligations of the Fund and the
Distributor.
Section 11. Duration and Termination of this Agreement.
This Agreement shall become effective as of the date first above
written and shall remain in force until October __, 1995 and
thereafter, but only for so long as such continuance is
specifically approved at least annually by (i) the Trustees or by
the vote of a majority of the outstanding voting securities of
the Fund and (ii) by the vote of 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 the Trustees or by vote of a majority
of the outstanding voting securities of the Fund, or by the Dis-
tributor, on sixty days' written notice to the other party. This
15
<PAGE>
Agreement shall automatically terminate in the event of its
assignment.
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.
Section 12. Amendments of this Agreement. This Agreement
may be amended by the parties only if such amendment is specifi-
cally approved by (i) the Trustees or by the vote of a majority
of outstanding voting securities of the Fund and (ii) by the vote
of a majority of those Trustees of the Fund 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.
Section 13. Governing Law. The provisions of this
Agreement shall be construed and interpreted in accordance with
the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any
of the provisions herein, conflict with the applicable provisions
of the Investment Company Act, the latter shall control.
Section 14. Personal Liability. The Declaration of Trust
establishing the Fund, dated May 14, 1987, 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 Strategic
16
<PAGE>
Dividend 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 or otherwise in connection with the affairs
of the Fund, but the "Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
MERRILL LYNCH STRATEGIC DIVIDEND FUND
By __________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By __________________________________
Title:
17
<PAGE>
EXHIBIT A
MERRILL LYNCH STRATEGIC DIVIDEND FUND
CLASS D SHARES OF BENEFICIAL INTEREST
SELECTED DEALERS AGREEMENT
Gentlemen:
Merrill Lynch Funds Distributor, Inc. (the "Distributor")
has an agreement with Merrill Lynch Strategic Dividend Fund, a
Massachusetts business trust (the "Fund"), pursuant to which it
acts as the distributor for the sale of Class D shares of
beneficial interest, par value $0.10 per share (herein referred
to as "Class D shares"), of the Fund and as such has the right to
distribute Class D shares of the Fund for resale. The Fund is an
open-end investment company registered under the Investment
Company Act of 1940, as amended, and its Class D shares being
offered to the public are registered under the Securities Act of
1933, as amended. You have received a copy of the Class D Shares
Distribution Agreement (the "Distribution Agreement") between
ourself and the Fund and reference is made herein to certain
provisions of such Distribution Agreement. The terms
"Prospectus" and "Statement of Additional Information" used
herein refer to the prospectus and statement of additional
information, respectively, on file with the Securities and
Exchange Commission which is part of the most recent effective
registration statement pursuant to the Securities Act of 1933, as
amended. We offer to sell to you, as a member of the Selected
Dealers Group, Class D shares of the Fund upon the following
terms and conditions:
1. In all sales of these Class D shares to the public, you
shall act as dealer for your own account and in no transaction
shall you have any authority to act as agent for the Fund, for us
or for any other member of the Selected Dealers Group, except in
connection with the Merrill Lynch Mutual Fund Adviser program and
such other special programs as we from time to time agree, in
which case you shall have authority to offer and sell shares, as
agent for the Fund, to participants in such program.
2. Orders received from you will be accepted through us
only at the public offering price applicable to each order, as
set forth in the current Prospectus and Statement of Additional
Information of the Fund. The procedure relating to the handling
of orders shall be subject to Section 5 hereof and instructions
1
<PAGE>
which we or the Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by the Distributor
or the Fund in the sole discretion of either. The minimum
initial and subsequent purchase requirements are as set forth in
the current Prospectus and Statement of Additional Information of
the Fund.
3. The sales charges for sales to the public, computed as
percentages of the public offering price and the amount invested,
and the related discount to Selected Dealers are as follows:
Selected
Sales Charge Dealers as
Sales Charge as Percentage* Percentage
as Percentage of the Net of the
of the Amount Offering
Amount of Purchase Offering Price Invested Price
- ------------------ ------------------ -------------- --------------
Less than $25,000.... 5.25% 5.54% 5.00%
$25,000 but less
than $50,000........ 4.75 4.99 4.50
$50,000 but less
than $100,000....... 4.00 4.17 3.75
$100,000 but less
than $250,000....... 3.00 3.09 2.75
$250,000 but less
than $1,000,000.. 2.00 2.04 1.80
$1,000,000 and over**.. 0.00 0.00 0.00
___________________
* Rounded to the nearest one-hundredth percent.
** Initial sales charges will be waived for certain classes of offerees
as set forth in the current Prospectus and Statement of Additional
Information of the Fund. Such purchases may be subject to a contingent
deferred sales charge as set forth in the current Prospectus and
Statement of Additional Information.
2
<PAGE>
The term "purchase" 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 Class D shares for his or their own
account and to single purchases by a trustee or other fiduciary
purchasing Class D 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 of 1940, as amended, but does not
include purchases by any such company which has not been in existence
for at least six months or which has no purpose other than the purchase
of Class D shares of the Fund or Class D 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.
The reduced sales charges are applicable through a right of
accumulation under which eligible investors are permitted to purchase
Class D shares of the Fund 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 Class A,
Class B, Class C and Class D shares of the Fund and of any other
investment company with an initial sales charge for which the
Distributor acts as the distributor. For any such right of accumulation
to be made available, the Distributor must be provided at the time of
purchase, by the purchaser or you, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is
subject to such confirmation.
The reduced sales charges are applicable to purchases aggregating
$25,000 or more of Class A shares or of Class D shares of any other
investment company with an initial sales charge for which the
Distributor acts as the distributor made through you within a
thirteen-month period starting with the first purchase pursuant to a
Letter of Intention in the form provided in the Prospectus. A purchase
not originally made pursuant to a Letter of Intention may be included
under a subsequent letter executed within 90 days of such purchase if
the Distributor is informed in writing of this intent within such 90-day
period. If the intended amount of shares is not purchased within the
thirteen-month period, an appropriate price adjustment will be made
pursuant to the terms of the Letter of Intention.
You agree to advise us promptly at our request as to amounts of any
sales made by you to the public qualifying for reduced sales charges.
Further information as to the reduced sales charges pursuant to the
3
<PAGE>
right of accumulation or a Letter of Intention is set forth in the
Prospectus and Statement of Additional Information.
4. You shall not place orders for any of the Class D shares
unless you have already received purchase orders for such Class D shares
at the applicable public offering prices and subject to the terms hereof
and of the Distribution Agreement. You agree that you will not offer or
sell any of the Class D shares except under circumstances that will
result in compliance with the applicable Federal and state securities
laws and that in connection with sales and offers to sell Class D shares
you will furnish to each person to whom any such sale or offer is made a
copy of the Prospectus and, if requested, the Statement of Additional
Information (as then amended or supplemented) and will not furnish to
any person any information relating to the Class D shares of the Fund
which is inconsistent in any respect with the information contained in
the Prospectus and Statement of Additional Information (as then amended
or supplemented) or cause any advertisement to be published in any
newspaper or posted in any public place without our consent and the
consent of the Fund.
5. As a selected dealer, you are hereby authorized (i) to place
orders directly with the Fund for Class D shares of the Fund to be
resold by us to you subject to the applicable terms and conditions
governing the placement of orders by us set forth in Section 3 of the
Distribution Agreement and subject to the compensation provisions of
Section 3 hereof and (ii) to tender Class D shares directly to the Fund
or its agent for redemption subject to the applicable terms and
conditions set forth in Section 4 of the Distribution Agreement.
6. You shall not withhold placing orders received from your
customers so as to profit yourself as a result of such withholding:
e.g., by a change in the "net asset value" from that used in determining
the offering price to your customers.
7. If any Class D shares sold to you under the terms of this
Agreement are repurchased by the Fund or by us for the account of the
Fund or are tendered for redemption within seven business days after the
date of the confirmation of the original purchase by you, it is agreed
that you shall forfeit your right to, and refund to us, any discount
received by you on such Class D shares.
4
<PAGE>
8. No person is authorized to make any representations concerning
Class D shares of the Fund except those contained in the current
Prospectus and Statement of Additional Information of the Fund and in
such printed information subsequently issued by us or the Fund as
information supplemental to such Prospectus and Statement of Additional
Information. In purchasing Class D shares through us you shall rely
solely on the representations contained in the Prospectus and Statement
of Additional Information and supplemental information above mentioned.
Any printed information which we furnish you other than the Fund's
Prospectus, Statement of Additional Information, periodic reports and
proxy solicitation material is our sole responsibility and not the
responsibility of the Fund, and you agree that the Fund shall have no
liability or responsibility to you in these respects unless expressly
assumed in connection therewith.
9. You agree to deliver to each of the purchasers making
purchases from you a copy of the then current Prospectus and, if
requested, the Statement of Additional Information at or prior to the
time of offering or sale and you agree thereafter to deliver to such
purchasers copies of the annual and interim reports and proxy
solicitation materials of the Fund. You further agree to endeavor to
obtain proxies from such purchasers. Additional copies of the
Prospectus and Statement of Additional Information, annual or interim
reports and proxy solicitation materials of the Fund will be supplied to
you in reasonable quantities upon request.
10. We reserve the right in our discretion, without notice, to
suspend sales or withdraw the offering of Class D shares entirely or to
certain persons or entities in a class or classes specified by us. Each
party hereto has the right to cancel this agreement upon notice to the
other party.
11. We shall have full authority to take such action as we may
deem advisable in respect of all matters pertaining to the continuous
offering. We shall be under no liability to you except for lack of good
faith and for obligations expressly assumed by us herein. Nothing
contained in this paragraph is intended to operate as, and the
provisions of this paragraph shall not in any way whatsoever constitute,
a waiver by you of compliance with any provision of the Securities Act
of 1933, as amended, or of the rules and regulations of the Securities
and Exchange Commission issued thereunder.
12. You represent that you are a member of the National
Association of Securities Dealers, Inc. and, with respect to any sales
in the United States, we both hereby agree to abide by the Rules of Fair
Practice of such Association.
5
<PAGE>
13. Upon application to us, we will inform you as to the states in
which we believe the Class D shares have been qualified for sale under,
or are exempt from the requirements of, the respective securities laws
of such states, but we assume no responsibility or obligation as to your
right to sell Class D shares in any jurisdiction. We will file with the
Department of State in New York a Further State Notice with respect to
the Class D shares, if necessary.
14. All communications to us should be sent to the address below.
Any notice to you shall be duly given if mailed or telegraphed to you at
the address specified by you below.
15. Your first order placed pursuant to this Agreement for the
purchase of Class D shares of the Fund will represent your acceptance of
this Agreement.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By
-----------------------------------
(Authorized Signature)
Please return one signed copy
of this agreement to:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
Box 9011
Princeton, New Jersey 08543-9011
Accepted:
Firm Name: Merrill Lynch, Pierce, Fenner & Smith Inc.
--------------------------------------------
By:
--------------------------------------------------
Address: 800 Scudders Mill Road
----------------------------------------------
Plainsboro, New Jersey 08536
-------------------------------------------------------
Date: October , 1994
-------------------------------------------------
6
<PAGE>
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN
919 Third Avenue
New York, New York 10022
(212) 758-9500
October 7, 1994
Merrill Lynch Strategic Dividend Fund
P.O. Box 9011
Princeton, New Jersey 08540-9011
Dear Sirs:
Merrill Lynch Strategic Dividend Fund, a Massachusetts
business trust (the "Fund"), is filing with the Securities and
Exchange Commission Post-Effective Amendment No. 8 to its
Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act") and the Investment Company Act of 1940,
as amended (the "1940") on Form N-1A (1933 Act File No. 33-14517,
1940 Act File No. 811-5178) relating to the registration under
the 1933 Act of 7,394,946 additional shares of beneficial
interest, par value $.10 per share (the "Additional Shares"),
which are to be offered and sold by the Fund in the manner and on
the terms set forth in the prospectus of the Fund current at the
time of sale. 7,370,287 of the Additional Shares are previously
outstanding shares of beneficial interest of the Fund, par value
$.10 per share, which were redeemed by the Fund during its fiscal
year ended July 31, 1994. According to Post-Effective Amendment
No. 8 to the Fund's Registration Statement, none of the
Additional Shares have previously been used by the Fund for
reduction pursuant to paragraph (a) of Rule 24e-2 under the 1940
Act on previous filings of post-effective amendments to the
Fund's Registration Statement during the current fiscal year, or
for reduction, pursuant to paragraph (c) of Rule 24f-2 under the
1940 Act during the Fund's current fiscal year, of the
registration fee payable by the Fund for the registration of
shares for sale under the 1933 Act.
We have, as counsel, participated in various corporate
and other proceedings relating to the Fund and to the proposed
issuance of the Additional Shares. We have examined copies,
either certified or otherwise proved to our satisfaction to be
genuine, of its Declaration of Trust and By-Laws, as currently in
effect, and other documents relating to its organization and
operation. We have received a certificate from the Office of the
Secretary of State of the Commonwealth of Massachusetts, dated
September 30, 1994, confirming that the Fund is currently in good
standing in that Commonwealth. We have also reviewed the above-
mentioned Registration Statement, as amended, and the documents
filed as exhibits thereto. We are generally familiar with the
corporate affairs of the Fund.
1
<PAGE>
Merrill Lynch Stragetic Dividend Fund
October 7, 1994
Page 2
Based upon the foregoing, it is our opinion that:
1. The Fund has been duly organized and is validly
existing under the laws of the Commonwealth of Massachusetts.
2. The Fund is authorized to issue an unlimited
number of shares of beneficial interest.
3. Subject to the effectiveness of the above-
mentioned Post-Effective Amendment No. 8 to the Fund's
Registration Statement and compliance with applicable state
securities laws, upon the issuance of the Additional Shares for a
consideration not less than the par value thereof, and not less
than the net asset value thereof as required by the 1940 Act and
in accordance with the terms of the Registration Statement, such
shares will be legally issued and outstanding and fully paid and
non-assessable. However, we note that as set forth in the
Registration Statement, the Fund's Shareholders might, under
certain circumstances, be liable for transactions effected by the
Fund.
We hereby consent to the filing of this opinion with
the Securities and Exchange Commission as part of the above-
mentioned Post-Effective Amendment No. 8 to the Registration
Statement and with any state securities commission where such
filing is required. In giving this consent we do not admit that
we come within the category of persons whose consent is required
under Section 7 of the 1933 Act.
We are members of the Bar of the State of New York and
do not hold ourselves out as being conversant with the laws of
any jurisdiction other than those of the United States of America
and the State of New York. We note that we are not licensed to
practice law in the Commonwealth of Massachusetts, and to the
extent that any opinion herein involves the law of Massachusetts,
such opinion should be understood to be based solely upon our
review of the documents referred to above, the published statutes
of the Commonwealth of Massachusetts and, where applicable,
published cases, rules or regulations of regulatory bodies of
that Commonwealth.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman
Shereff, Friedman, Hoffman & Goodman
SFHG:JHG:MKN:MSG:rew
2
<PAGE>
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
Merrill Lynch Strategic Dividend Fund:
We consent to the use in Post-Effective Amendment No. 8 to Registration
Statement No. 33-14517 of our report dated August 29, 1994 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption 'Financial Highlights'
appearing in the Prospectus, which also is a part of such Registration
Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 10, 1994
CLASS C DISTRIBUTION PLAN
OF
MERRILL LYNCH STRATEGIC DIVIDEND FUND
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October 1994,
by and between Merrill Lynch Strategic Dividend Fund, a
Massachusetts business trust (the "Fund"), and Merrill Lynch
Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H:
WHEREAS, the Fund is engaged in business as an open-end
investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business
of selling shares of investment companies either directly to
purchasers or through other securities dealers; and
WHEREAS, the Fund proposes to enter into a Class C Shares
Distribution Agreement with MLFD, pursuant to which MLFD will act
as the exclusive distributor and representative of the Fund in
the offer and sale of Class C shares of beneficial interest, par
value $0.10 per share (the "Class C shares"), of the Fund to the
public; and
WHEREAS, the Fund desires to adopt this Class C Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act, pursuant to which the Fund will pay an account
maintenance fee and a distribution fee to MLFD with respect to
the Fund's Class C shares; and
WHEREAS, the Trustees of the Fund have determined that there
is a reasonable likelihood that adoption of the Plan will benefit
the Fund and its shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1
under the Investment Company Act on the following terms and
conditions:
1
<PAGE>
1. The Fund shall pay MLFD an account maintenance fee under
the Plan at the end of each month at the annual rate of 0.25% of
average daily net assets of the Fund relating to Class C shares
to compensate MLFD and securities firms with which MLFD enters
into related agreements pursuant to Paragraph 3 hereof ("Sub-
Agreements") for providing account maintenance activities with
respect to Class C shareholders of the Fund. Expenditures under
the Plan may consist of payments to financial consultants for
maintaining accounts in connection with Class C shares of the
Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making
services available to shareholders including assistance in
connection with inquiries related to shareholder accounts.
2. The Fund shall pay MLFD a distribution fee under the
Plan at the end of each month at the annual rate of .75% of
average daily net assets of the Fund relating to Class C shares
to compensate MLFD and securities firms with which MLFD enters
into related Sub-Agreements for providing sales and promotional
activities and services. Such activities and services will
relate to the sale, promotion and marketing of the Class C shares
of the Fund. Such expenditures may consist of sales commissions
to financial consultants for selling Class C shares of the Fund,
compensation, sales incentives and payments to sales and
marketing personnel, and the payment of expenses incurred in its
sales and promotional activities, including advertising
expenditures related to the Fund and the costs of preparing and
distributing promotional materials. The distribution fee may
also be used to pay the financing costs of carrying the
unreimbursed expenditures described in this Paragraph 2. Payment
of the distribution fee described in this Paragraph 2 shall be
subject to any limitations set forth in any applicable regulation
of the National Association of Securities Dealers, Inc.
3. The Fund hereby authorizes MLFD to enter into
Sub-Agreements with certain securities firms ("Securities
Firms"), including Merrill Lynch, Pierce, Fenner & Smith
Incorporated, to provide compensation to such Securities Firms
for activities and services of the type referred to in Paragraphs
1 and 2 hereof. MLFD may reallocate all or a portion of its
account maintenance fee or distribution fee to such Securities
Firms as compensation for the above-mentioned activities and
services. Such Sub-Agreement shall provide that the Securities
Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting require-
ments set forth in Paragraph 4 hereof.
4. MLFD shall provide the Fund for review by the Board of
Trustees, and the Trustees shall review, at leastquarterly, a
written report complying with the requirements of Rule 12b-1
2
<PAGE>
regarding the disbursement of the account maintenance fee and the
distribution fee during such period.
5. This Plan shall not take effect until it has been
approved by a vote of at least a majority, as defined in the
Investment Company Act, of the outstanding Class C voting securi-
ties of the Fund.
6. This Plan shall not take effect until it has been
approved, together with any related agreements, by votes of a
majority of both (a) the Trustees of the Fund and (b) those
Trustees of the Fund who are not "interested persons" of the
Fund, as defined in the Investment Company Act, and have no
direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Rule 12b-1 Trustees"),
cast in person at a meeting or meetings called for the purpose of
voting on the Plan and such related agreements.
7. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the
manner provided for approval of the Plan in Paragraph 6.
8. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Trustees, or by vote of a majority of
the outstanding Class C voting securities of the Fund.
9. The Plan may not be amended to increase materially the
rate of payments provided for herein unless such amendment is
approved by at least a majority, as defined in the Investment
Company Act, of the outstanding Class C voting securities of the
Fund, and by the Trustees of the Fund in the manner provided for
in Paragraph 6 hereof, and no material amendment to the Plan
shall be made unless approved in the manner provided for approval
and annual renewal in Paragraph 6 hereof.
10. While the Plan is in effect, the selection and nomina-
tion of Trustees who are not interested persons, as defined in
the Investment Company Act, of the Fund shall be committed to the
discretion of the Trustees who are not interested persons.
11. The Fund shall preserve copies of the Plan and any
related agreements and all reports made pursuant to Paragraph 4
hereof, for a period of not less than six years from the date of
the Plan, or the agreements or such report, as the case may be,
the first two years in an easily accessible place.
12. The Declaration of Trust establishing the Fund, dated
May 14, 1987, 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
3
<PAGE>
name "Merrill Lynch Strategic Dividend 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 or
otherwise in connection with the affairs of the Fund, but the
"Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Distribution Plan as of the date first above written.
MERRILL LYNCH STRATEGIC DIVIDEND FUND
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
4
<PAGE>
CLASS C SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October 1994, by and
between Merrill Lynch Funds Distributor, Inc., a Delaware corpo-
ration ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation ("Securities Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill
Lynch Strategic Dividend Fund, a Massachusetts business trust
(the "Fund"), pursuant to which it acts as the exclusive
distributor for the sale of Class C shares of beneficial
interest, par value $0.10 per share (the "Class C shares"), of
the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class C
Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Act"),
pursuant to which MLFD receives an account maintenance fee from
the Fund at the annual rate of 0.25% of average daily net assets
of the Fund relating to Class C shares for account maintenance
activities related to Class C shares of the Fund and a
distribution fee from the Fund at the annual rate of .75% of
average daily net assets of the Fund relating to Class C shares
for providing sales and promotional activities and services
related to the distribution of Class C shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain
account maintenance activities and sales and promotional
activities and services for the Fund's Class C shareholders and
the Securities Firm is willing to perform such activities and
services;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities and services with respect to the Class C shares of the
Fund and incur expenditures in connection with such activities
and services of the types referred to in Paragraph 1 of the Plan.
2. The Securities Firm shall provide sales and promotional
activities and services with respect to the sale of the Class C
shares of the Fund, and incur distribution expenditures, of the
types referred to in Paragraph 2 of the Plan.
1
<PAGE>
3. As compensation for its activities and services
performed under this Agreement, MLFD shall pay the Securities
Firm an account maintenance fee and a distribution fee at the end
of each calendar month in an amount agreed upon by the parties
hereto.
4. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
12b-1 regarding the disbursement of the account maintenance fee
and the distribution fee during such period referred to in
Paragraph 4 of the Plan.
5. This Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Trustees of the
Fund and (b) those Trustees of the Fund who are not "interested
persons" of the Fund, as defined in the Act, and have no direct
or indirect financial interest in the operation of the Plan, this
Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
6. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 6.
7. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
Title:
2
<PAGE>
CLASS D DISTRIBUTION PLAN
OF
MERRILL LYNCH STRATEGIC DIVIDEND FUND
PURSUANT TO RULE 12b-1
DISTRIBUTION PLAN made as of the day of October 1994,
by and between Merrill Lynch Strategic Dividend Fund, a
Massachusetts business trust (the "Fund"), and Merrill Lynch
Funds Distributor, Inc., a Delaware corporation ("MLFD").
W I T N E S S E T H :
WHEREAS, the Fund is engaged in business as an open-end
investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"); and
WHEREAS, MLFD is a securities firm engaged in the business
of selling shares of investment companies either directly to
purchasers or through other securities dealers; and
WHEREAS, the Fund proposes to enter into a Class D Shares
Distribution Agreement with MLFD, pursuant to which MLFD will act
as the exclusive distributor and representative of the Fund in
the offer and sale of Class D shares of beneficial interest, par
value $0.10 per share (the "Class D shares"), of the Fund to the
public; and
WHEREAS, the Fund desires to adopt this Class D Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act, pursuant to which the Fund will pay an account main-
tenance fee to MLFD with respect to the Fund's Class D shares;
and
WHEREAS, the Trustees of the Fund have determined that there
is a reasonable likelihood that adoption of the Plan will benefit
the Fund and its shareholders.
NOW, THEREFORE, the Fund hereby adopts, and MLFD hereby
agrees to the terms of, the Plan in accordance with Rule 12b-1
under the Investment Company Act on the following terms and
conditions:
1. The Fund shall pay MLFD an account maintenance fee under
the Plan at the end of each month at the annual rate of 0.25% of
average daily net assets of the Fund relating to Class D shares
to compensate MLFD and securities firms with which MLFD enters
into related agreements ("Sub-Agreements") pursuant to Paragraph
1
<PAGE>
2 hereof for providing account maintenance activities with
respect to Class D shareholders of the Fund. Expenditures under
the Plan may consist of payments to financial consultants for
maintaining accounts in connection with Class D shares of the
Fund and payment of expenses incurred in connection with such
account maintenance activities including the costs of making
services available to shareholders including assistance in
connection with inquiries related to shareholder accounts.
2. The Fund hereby authorizes MLFD to enter into
Sub-Agreements with certain securities firms ("Securities
Firms"), including Merrill Lynch, Pierce, Fenner & Smith
Incorporated, to provide compensation to such Securities Firms
for activities of the type referred to in Paragraph 1. MLFD may
reallocate all or a portion of its account maintenance fee to
such Securities Firms as compensation for the above-mentioned
activities. Such Sub-Agreement shall provide that the Securities
Firms shall provide MLFD with such information as is reasonably
necessary to permit MLFD to comply with the reporting
requirements set forth in Paragraph 3 hereof.
3. MLFD shall provide the Fund for review by the Board of
Trustees, and the Trustees shall review, at least quarterly, a
written report complying with the requirements of Rule 12b-1
regarding the disbursement of the account maintenance fee during
such period.
4. This Plan shall not take effect until it has been
approved by a vote of at least a majority, as defined in the
Investment Company Act, of the outstanding Class D voting securi-
ties of the Fund.
5. This Plan shall not take effect until it has been
approved, together with any related agreements, by votes of a
majority of both (a) the Trustees of the Fund and (b) those
Trustees of the Fund who are not "interested persons" of the
Fund, as defined in the Investment Company Act, and have no
direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Rule 12b-1 Trustees"),
cast in person at a meeting or meetings called for the purpose of
voting on the Plan and such related agreements.
6. The Plan shall continue in effect for so long as such
continuance is specifically approved at least annually in the
manner provided for approval of the Plan in Paragraph 5.
7. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Trustees, or by vote of a majority of
the outstanding Class D voting securities of the Fund.
2
<PAGE>
8. The Plan may not be amended to increase materially the
rate of payments provided for in Paragraph 1 hereof unless such
amendment is approved by at least a majority, as defined in the
Investment Company Act, of the outstanding Class D voting
securities of the Fund, and by the Trustees of the Fund in the
manner provided for in Paragraph 5 hereof, and no material
amendment to the Plan shall be made unless approved in the
manner provided for approval and annual renewal in Paragraph 5
hereof.
9. While the Plan is in effect, the selection and nomina-
tion of Trustees who are not interested persons, as defined in
the Investment Company Act, of the Fund shall be committed to the
discretion of the Trustees who are not interested persons.
10. The Fund shall preserve copies of the Plan and any
related agreements and all reports made pursuant to Paragraph 3
hereof, for a period of not less than six years from the date of
the Plan, or the agreements or such report, as the case may be,
the first two years in an easily accessible place.
11. The Declaration of Trust establishing the Fund, dated
May 14, 1987, 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 Strategic Dividend 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 or
otherwise in connection with the affairs of the Fund, but the
"Trust Property" only shall be liable.
IN WITNESS WHEREOF, the parties hereto have executed this
Distribution Plan as of the date first above written.
MERRILL LYNCH STATEGIC DIVIDEND FUND
By_____________________________________
Title:
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
Title:
3
<PAGE>
CLASS D SHARES DISTRIBUTION PLAN SUB-AGREEMENT
AGREEMENT made as of the day of October 1994, by and
between Merrill Lynch Funds Distributor, Inc. a Delaware corpo-
ration ("MLFD"), and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a Delaware corporation ("Securities Firm").
W I T N E S S E T H :
WHEREAS, MLFD has entered into an agreement with Merrill
Lynch Strategic Dividend Fund, a Massachusetts business trust
(the "Fund"), pursuant to which it acts as the exclusive
distributor for the sale of Class D shares of beneficial
interest, par value $0.10 per share (the "Class D shares"), of
the Fund; and
WHEREAS, MLFD and the Fund have entered into a Class D
Shares Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "Act"),
pursuant to which MLFD receives an account maintenance fee from
the Fund at the annual rate of 0.25% of average daily net assets
of the Fund relating to Class D shares for providing account
maintenance activities and services with respect to Class D
shares; and
WHEREAS, MLFD desires the Securities Firm to perform certain
account maintenance activities and services, including assistance
in connection with inquiries related to shareholder accounts, for
the Fund's Class D shareholders and the Securities Firm is
willing to perform such services;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the parties hereby agree as follows:
1. The Securities Firm shall provide account maintenance
activities and services with respect to the Class D shares of the
Fund and incur expenditures in connection with such activities
and services, of the types referred to in Paragraph 1 of the
Plan.
2. As compensation for its services performed under this
Agreement, MLFD shall pay the Securities Firm a fee at the end of
each calendar month in an amount agreed upon by the parties
hereto.
3. The Securities Firm shall provide MLFD, at least
quarterly, such information as reasonably requested by MLFD to
enable MLFD to comply with the reporting requirements of Rule
1
<PAGE>
12b-1 regarding the disbursement of the fee during such period
referred to in Paragraph 3 of the Plan.
4. This Agreement shall not take effect until it has been
approved by votes of a majority of both (a) the Trustees of the
Fund and (b) those Trustees of the Fund who are not "interested
persons" of the Fund, as defined in the Act, and have no direct
or indirect financial interest in the operation of the Plan, this
Agreement or any agreements related to the Plan or this Agreement
(the "Rule 12b-1 Trustees"), cast in person at a meeting or
meetings called for the purpose of voting on this Agreement.
5. This Agreement shall continue in effect for as long as
such continuance is specifically approved at least annually in
the manner provided for approval of the Plan in Paragraph 5.
6. This Agreement shall automatically terminate in the
event of its assignment or in the event of the termination of the
Plan or any amendment to the Plan that requires such termination.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.
By_____________________________________
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________
2
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose
name appears below hereby nominates, constitutes and appoints
Arthur Zeikel and Gerald M. Richard (with full power to each of
them to act alone) her true and lawful attorney-in-fact and agent,
for her and on her behalf and in her place and stead in any and all
capacities, to make, execute and sign all amendments and
supplements to the Registration Statement on Form N-1A under the
Securities Act of 1933 and the Investment Company Act of 1940 of
MERRILL LYNCH STRATEGIC DIVIDEND FUND (the "Fund"), and to file the
same with the Securities and Exchange Commission, and any other
regulatory authority having jurisdiction over the offer and sale of
shares of common stock, par value $0.10 per share, of the Fund, and
any and all exhibits and other documents requisite in connection
therewith, granting unto said attorneys and each of them, full
power and authority to perform each and every act and thing
requisite and necessary to be done in and about the premises as
fully to all intents and purposes as the undersigned Director
herself might or could do.
IN WITNESS WHEREOF, the undersigned Director has hereunto
set her hand this 22nd day of September, 1994.
/s/ Cynthia A. Montgomery
-------------------------
Trustee
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> MERRILL LYNCH STRATEGIC DIVIDEND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-START> AUG-01-1993
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<REALIZED-GAINS-CURRENT> 13163104
<APPREC-INCREASE-CURRENT> (16546436)
<NET-CHANGE-FROM-OPS> 2413787
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 987005
<DISTRIBUTIONS-OF-GAINS> 1506196
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<NUMBER-OF-SHARES-SOLD> 565272
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<NAME> MERRILL LYNCH STRATEGIC DIVIDEND FUND
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