MERRILL LYNCH STRATEGIC DIVIDEND FUND, 485BPOS, 1998-10-29

MERRILL LYNCH STRATEGIC DIVIDEND FUND
485BPOS, 1998-10-29

Previous: MUTUAL FUND GROUP, 485BPOS, 1998-10-29

Next: ELLIGENT CONSULTING GROUP INC, 10KSB, 1998-10-29

<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1998
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. 12 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]

Amendment No. 14 [X]
(Check appropriate box or boxes)

----------------

MERRILL LYNCH STRATEGIC DIVIDEND FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800

ARTHUR ZEIKEL
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the Registration Statement.

----------------

COPIES TO:

COUNSEL FOR THE FUND: MICHAEL J. HENNEWINKEL, ESQ.
JOEL H. GOLDBERG, ESQ. MERRILL LYNCH ASSET
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP MANAGEMENT, L.P.
919 THIRD AVENUE, NEW YORK, NEW YORK 10022 P.O. BOX 9011
PRINCETON, NJ 08543-9011

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX):
[X]immediately upon filing pursuant to paragraph (b)
[_]on (date) pursuant to paragraph (b)
[_]60 days after filing pursuant to paragraph (a)(i)
[_]on (date) pursuant to paragraph (a)(i)
[_]75 days after filing pursuant to paragraph (a)(ii)
[_]on (date) pursuant to paragraph (a)(ii) of rule 485.

IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_]this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PROSPECTUS

October 29, 1998

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 that yield more than
the Standard & Poor's 500 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 that have above average
dividend yields will provide attractive long-term total return and greater
price stability than stocks that 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. For more information on
the Fund's investment objective and policies, please see "Investment Objective
and Policies" on page 11.

----------------

Pursuant to the Merrill Lynch Select PricingSM 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 PricingSM 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 PricingSM System" on page 3.

Shares may be purchased directly from Merrill Lynch Funds Distributor (the
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), P.O.
Box 9081, Princeton, New Jersey 08543-9081, (609) 282-2800, or from securities
dealers that have entered into dealer agreements with the Distributor,
including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"). The minimum initial purchase is $1,000, and the minimum subsequent
purchase is $50, except that for retirement plans the minimum initial purchase
is $100, and the minimum subsequent purchase is $1, and for participants in
certain fee-based programs the minimum initial purchase is $250 and the
minimum subsequent purchase is $50. Merrill Lynch may charge its customers a
processing fee (presently $5.35) for confirming purchases and repurchases.
Purchases and redemptions made directly through Financial Data Services Inc.
(the "Transfer Agent") are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares."

----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

----------------

This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated October 29, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Commission maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information
regarding the Fund. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.

----------------
MERRILL LYNCH ASSET MANAGEMENT -- MANAGER

MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR
<PAGE>

FEE TABLE

A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:

<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------------------- ------------ -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES:
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)....... 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on
Dividend
Reinvestments......... None None None None
Deferred Sales Charge
(as a percentage of None(d) 4.0% during the first 1.0% for one None(d)
original purchase year, decreasing 1.0% year(f)
price or redemption annually thereafter to
proceeds, whichever is 0.0% after the fourth
lower)................ year(e)
Exchange Fee........... None None None None
ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS):
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:
Shareholder Servicing
Fees(i)............... 0.12% 0.14% 0.15% 0.12%
Other.................. 0.16% 0.16% 0.15% 0.15%
---- ---- ---- ----
Total Other Expenses.. 0.28% 0.30% 0.30% 0.27%
---- ---- ---- ----
Total Fund Operating
Expenses.............. 0.88% 1.90% 1.90% 1.12%
==== ==== ==== ====
</TABLE>
- --------

(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain participants in
certain fee-based programs. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares"--page 20.

(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 and "Shareholder
Services--Fee-Based Programs"--page 32.

(c) Reduced for purchases of $25,000 and over and waived for purchases of
Class A shares in connection with certain fee-based programs. Class A or
Class D purchases of $1,000,000 or more may not be subject to an initial
sales charge. See "Purchase of Shares--Initial Sales Charge Alternatives--
Class A and Class D Shares"--page 20.

(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a
CDSC of 1.0% of amounts redeemed within the first year after purchase.
Such CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 32.

(e) Such CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 32.

(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 32.

(g) See "Management of the Fund--Management and Advisory Arrangements"--page
15.

(h) See "Purchase of Shares--Distribution Plans"--page 25.

(i) See "Management of the Fund--Transfer Agency Services"--page 16.

2
<PAGE>

EXAMPLE:

<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment including the maximum
$52.50 initial sales charge (Class A and
Class D shares only) and assuming (1) the
Total Fund Operating Expenses for each class
set forth on page 2, (2) a 5% annual return
throughout the periods and (3) redemption at
the end of the period:
Class A..................................... $61 $79 $ 99 $155
Class B..................................... $59 $80 $103 $203*
Class C..................................... $29 $60 $103 $222
Class D..................................... $63 $86 $111 $182
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 $79 $ 99 $155
Class B..................................... $19 $60 $103 $203*
Class C..................................... $19 $60 $103 $222
Class D..................................... $63 $86 $111 $182
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.

The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who own their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charge permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD"), Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Fund's transfer agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."

MERRILL LYNCH SELECT PRICINGSM SYSTEM

The Fund offers four classes of shares under the Merrill Lynch Select
PricingSM 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 PricingSM System is used
by more than 50 registered investment companies advised by Merrill Lynch Asset
Management, L.P., doing business as Merrill

3
<PAGE>

Lynch Asset Management ("MLAM" or the "Manager") or an affiliate of MLAM, Fund
Asset Management, L.P. ("FAM"). Funds advised by MLAM or FAM that use the
Merrill Lynch Select Pricing SM System are referred to herein as "MLAM-advised
mutual funds."

Each Class A, Class B, Class C 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 CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on the Class D shares, 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 CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.

The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing SM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing SM System that the investor
believes is 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
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial sales No No No
charge(/2/)(/3/)
- ---------------------------------------------------------------------------------------------
B CDSC for a period of four 0.25% 0.75% B shares convert to
years, at a rate of 4.0% D shares automatically
during the first year, after approximately
decreasing 1.0% annually to eight years(/5/)
0.0%(/4/)
- ---------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- ---------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(/3/)
</TABLE>

(Notes continued on next page.)

4
<PAGE>

- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
of the offering price. CDSCs are imposed if the redemption occurs within
the applicable CDSC time period. The charge will be assessed on an amount
equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."

(3) Reduced for purchases of $25,000 or more, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
sales charge for 401(k) purchases over $1,000,000 will apply. See "Class
A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.

(5) The conversion period for dividend reinvestment shares and the conversion
and holding periods for certain retirement plans are modified as described
under "Purchase of Shares--Deferred Sales Charged Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares." Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have a ten-year conversion period. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares
acquired in the exchange will apply, and the holding period for the shares
exchanged will be tacked onto the holding period for the shares acquired.

(6) The CDSC may be waived in connection with certain fee-based programs.

Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors who currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A
shares of the Fund in that account. Other eligible investors include
certain retirement plans and participants in certain fee-based
programs. In addition, Class A shares will be offered at net asset
value to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries
(the term "subsidiaries" when used herein with respect to ML & Co.
includes MLAM, FAM and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) and their directors and
employees, and to members of the Boards of other investment companies
advised by MLAM or its affiliates. The maximum initial sales charge
of 5.25% is reduced for purchases of $25,000 and over, and waived for
purchases by certain retirement plans and participants in connection
with certain fee-based programs. Purchases of $1,000,000 or more may
not be subject to an initial sales charge but if the initial sales
charge is waived such purchases may be subject to a CDSC of 1.0% if
the shares are redeemed within one year after purchase. Such CDSC may
be waived in connection with certain fee-based programs. Sales
charges are also reduced under a right of accumulation that takes
into account the investor's holdings of all classes of all MLAM-
advised mutual funds. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares."

Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class B shares and a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in
connection with certain fee-based programs. Approximately eight years
after issuance, Class B shares will convert automatically to Class D
shares of the Fund, which are subject to an account maintenance fee
of 0.25% but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert to
Class D shares automatically after approximately ten years. If Class
B shares of the Fund are exchanged for Class B shares of another
MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, as will the Class
D account maintenance fee of the acquired fund

5
<PAGE>

upon the conversion, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
Automatic conversion of Class B shares to Class D shares will occur at
least once a month on the basis of the relative net asset values of
the shares of the two classes on the conversion date, without the
imposition of any sales load, fee or other charge. Conversion of Class
B shares to Class D shares will not be deemed a purchase or sale of
the shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares and the conversion and holding periods for certain
retirement plans are modified as described under "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares."

Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25%
and an ongoing distribution fee of 0.75% of the Fund's average net
assets attributable to Class C shares. Class C shares are also
subject to a 1.0% CDSC if they are redeemed within one year of
purchase. Such CDSC may be waived in connection with certain fee-
based programs. Although Class C shares are subject to a CDSC for
only one year (as compared to four years for Class B), Class C shares
have no conversion feature and, accordingly, an investor who
purchases Class C shares will be subject to account maintenance fees
and higher distribution fees that will be imposed on Class C shares
for an indefinite period subject to annual approval by the Fund's
Board of Trustees and regulatory limitations.

Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC
when they are redeemed. The maximum initial sales charge of 5.25% is
reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
more may not be subject to an initial sales charge but if the initial
sales charge is waived such purchases may be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Such
CDSC may be waived in connection with certain fee-based programs. The
schedule of initial sales charges and reductions for Class D shares
is the same as the schedule for Class A shares, except that there is
no waiver for purchases in connection with certain fee-based
programs. Class D shares also will be issued upon conversion of Class
B shares as described above under "Class B." See "Purchase of
Shares--Initial Sales Charge Alternatives--Class A and Class D
Shares."

The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing SM System that the investor believes is most beneficial 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

6
<PAGE>

maintain their investment for an extended period of time also may elect to
purchase Class A or Class D shares, because over time the accumulated ongoing
account maintenance and distribution fees on Class B or Class C shares may
exceed the initial sales charge and, in the case of Class D shares, the
account maintenance fee. Although some investors who previously purchased
Class A shares may no longer be eligible to purchase Class A shares of other
MLAM-advised mutual funds, those previously purchased Class A shares, together
with Class B, Class C and Class D share holdings, will count toward a right of
accumulation which may qualify the investor for reduced initial sales charges
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class
C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.

Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors who do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.

Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may 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 fiscal year ended July
31, 1998, and the independent auditors' report thereon appear in the annual
report of the Fund for the fiscal year ended July 31, 1998 which is
incorporated by reference in the Statement of Additional Information. The
following per share data and ratios have been derived from information
provided in the Fund's audited financial statements. 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
----------------------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED JULY 31, NOV. 29, 1988+
------------------------------------------------------------------------------------ TO JULY 31,
1998++ 1997++ 1996++ 1995 1994 1993 1992 1991 1990 1989
-------- ------- ------- -------- -------- -------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 15.21 $ 12.43 $ 12.24 $ 12.78 $ 13.60 $ 12.79 $ 11.90 $ 11.80 $ 12.38 $ 10.71
-------- ------- ------- -------- -------- -------- ------- ------- -------- -------
Investment income--
net................... .39 .38 .38 .39 .41 .44 .44 .55 .76 .39
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions--net..... 1.37 4.17 1.55 1.10 (.12) .81 .93 .14 (.61) 1.88
-------- ------- ------- -------- -------- -------- ------- ------- -------- -------
Total from investment
operations............. 1.76 4.55 1.93 1.49 .29 1.25 1.37 .69 .15 2.27
-------- ------- ------- -------- -------- -------- ------- ------- -------- -------
Less dividends and
distributions:
Investment income--
net................... (.39) (.39) (.36) (.42) (.46) (.44) (.48) (.59) (.73) (.46 )
Realized gain on
investments--net...... (1.22) (1.38) (1.38) (1.61) (.65) -- -- -- -- (.14 )
-------- ------- ------- -------- -------- -------- ------- ------- -------- -------
Total dividends and
distributions.......... (1.61) (1.77) (1.74) (2.03) (1.11) (.44) (.48) (.59) (.73) (.60 )
-------- ------- ------- -------- -------- -------- ------- ------- -------- -------
Net asset value, end of
period................. $ 15.36 $ 15.21 $ 12.43 $ 12.24 $ 12.78 $ 13.60 $ 12.79 $ 11.90 $ 11.80 $ 12.38
======== ======= ======= ======== ======== ======== ======= ======= ======== =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 12.03% 40.42% 16.98% 14.04% 2.38% 10.03% 11.96% 6.25% 1.20% 22.02%#
======== ======= ======= ======== ======== ======== ======= ======= ======== =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ .88% .90% 1.04% 1.05% .85% .81% .88% .88% .86% 1.04%*
======== ======= ======= ======== ======== ======== ======= ======= ======== =======
Investment income--net.. 2.51% 2.87% 3.04% 3.39% 3.42% 3.38% 3.75% 4.83% 6.17% 4.89%*
======== ======= ======= ======== ======== ======== ======= ======= ======== =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $ 24,233 $28,940 $18,106 $ 18,687 $ 21,854 $ 34,228 $31,512 $33,916 $ 37,499 $24,002
======== ======= ======= ======== ======== ======== ======= ======= ======== =======
Portfolio turnover...... 32.66% 14.29% 26.42% 52.69% 22.75% 25.23% 29.17% 10.50% 16.99% 33.66%
======== ======= ======= ======== ======== ======== ======= ======= ======== =======
</TABLE>
- --------
* Annualized.

** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.

++ Based on average shares outstanding.
# Aggregate total investment return.

8
<PAGE>

FINANCIAL HIGHLIGHTS (CONTINUED)

<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JULY 31,
-----------------------------------------------------------------------------------------------
1998++ 1997++ 1996++ 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year...... $ 15.22 $ 12.44 $ 12.23 $ 12.77 $ 13.59 $ 12.78 $ 11.88 $ 11.78 $ 12.37 $ 10.76
------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Investment income--net.. .23 .25 .26 .29 .33 .31 .34 .45 .60 .51
Realized and unrealized
gain (loss) on
investments and foreign
currency transactions--
net.................... 1.38 4.16 1.55 1.07 (.18) .81 .91 .12 (.58) 1.89
------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. 1.61 4.41 1.81 1.36 .15 1.12 1.25 .57 .02 2.40
------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Less dividends and
distributions:.........
Investment income--net.. (.23) (.25) (.22) (.29) (.32) (.31) (.35) (.47) (.61) (.52)
Realized gain on
investments--net....... (1.22) (1.38) (1.38) (1.61) (.65) -- -- -- -- (.27)
------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (1.45) (1.63) (1.60) (1.90) (.97) (.31) (.35) (.47) (.61) (.79)
------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year................... $ 15.38 $ 15.22 $ 12.44 $ 12.23 $ 12.77 $ 13.59 $ 12.78 $ 11.88 $ 11.78 $ 12.37
======= ======= ======= ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:*
Based on net asset value
per share.............. 10.94% 38.90% 15.89% 12.82% 1.30% 8.90% 10.85% 5.14% .15% 23.48%
======= ======= ======= ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.90% 1.94% 2.08% 2.09% 1.88% 1.84% 1.91% 1.90% 1.89% 1.98%
======= ======= ======= ======== ======== ======== ======== ======== ======== ========
Investment income--net.. 1.50% 1.89% 2.06% 2.36% 2.39% 2.37% 2.74% 3.81% 5.14% 5.05%
======= ======= ======= ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)......... $73,067 $93,509 $96,461 $130,921 $167,889 $227,089 $239,048 $284,869 $337,072 $289,599
======= ======= ======= ======== ======== ======== ======== ======== ======== ========
Portfolio turnover...... 32.66% 14.29% 26.42% 52.69% 22.75% 25.23% 29.17% 10.50% 16.99% 33.66%
======= ======= ======= ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------

* Total investment returns exclude the effects of sales loads.

++ Based on average shares outstanding.

9
<PAGE>

FINANCIAL HIGHLIGHTS (CONCLUDED)

<TABLE>
<CAPTION>
CLASS C CLASS D
----------------------------------------- ---------------------------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED JULY 31, OCTOBER 21, 1994+ ENDED JULY 31, OCTOBER 21, 1994+
---------------------- TO JULY 31, -------------------------- TO JULY 31,
1998++ 1997++ 1996++ 1995 1998++ 1997++ 1996++ 1995
------ ------ ------ ----------------- -------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $15.11 $12.37 $12.20 $11.84 $ 15.20 $ 12.43 $ 12.24 $ 11.85
------ ------ ------ ------ -------- ------- ------- -------
Investment income--
net................... .23 .24 .24 .21 .35 .35 .34 .26
Realized and unrealized
gain on investments
and foreign currency
transactions--net..... 1.37 4.13 1.55 1.21 1.38 4.16 1.57 1.23
------ ------ ------ ------ -------- ------- ------- -------
Total from investment
operations............. 1.60 4.37 1.79 1.42 1.73 4.51 1.91 1.49
------ ------ ------ ------ -------- ------- ------- -------
Less dividends and
distributions:
Investment income--
net................... (.24) (.25) (.24) (.25) (.35) (.36) (.34) (.29)
Realized gain on
investments--net...... (1.22) (1.38) (1.38) (.81) (1.22) (1.38) (1.38) (.81)
------ ------ ------ ------ -------- ------- ------- -------
Total dividends and
distributions.......... (1.46) (1.63) (1.62) (1.06) (1.57) (1.74) (1.72) (1.10)
------ ------ ------ ------ -------- ------- ------- -------
Net asset value, end of
period................. $15.25 $15.11 $12.37 $12.20 $ 15.36 $ 15.20 $ 12.43 $ 12.24
====== ====== ====== ====== ======== ======= ======= =======
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. 10.96% 38.84% 15.78% 13.30%# 11.84% 39.99% 16.73% 13.98%#
====== ====== ====== ====== ======== ======= ======= =======
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.90% 1.95% 2.08% 2.19%* 1.12% 1.15% 1.28% 1.38%*
====== ====== ====== ====== ======== ======= ======= =======
Investment income--net.. 1.47% 1.83% 1.91% 1.94%* 2.25% 2.62% 2.62% 2.93%*
====== ====== ====== ====== ======== ======= ======= =======
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $4,379 $3,025 $1,953 $ 811 $100,642 $74,577 $44,691 $13,988
====== ====== ====== ====== ======== ======= ======= =======
Portfolio turnover...... 32.66% 14.29% 26.42% 52.69% 32.66% 14.29% 26.42% 52.69%
====== ====== ====== ====== ======== ======= ======= =======
</TABLE>
- --------
+ Commencement of operations.

++ Based on average shares outstanding.
* Annualized.

** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.

10
<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 that yield more than the Standard & Poor's 500 Index. Total return is
the aggregate of income and capital value changes. MLAM's strategy is based on
the belief that stocks that have above average yields will provide attractive
long-term total return and greater price stability than stocks that 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 that 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 that 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
that 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,

11
<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 that 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 that evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe that 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.

EUROPEAN ECONOMIC AND MONETARY UNION ("EMU")--LONG FORM

Certain European countries have agreed to enter into EMU in an effort to,
among other things, reduce barriers between countries, increase competition
among companies, reduce government subsidies in certain industries, and reduce
or eliminate currency fluctuations among these countries. Among other things,
EMU establishes a single common European currency (the "euro") that will be
introduced on January 1, 1999 and is

12
<PAGE>

expected to replace the existing national currencies of all EMU participants
by July 1, 2002. Upon introduction of the euro, certain securities (beginning
with government and corporate bonds) will be redenominated in the euro, and,
thereafter, will be listed, trade and make dividend and other payments only in
euros. Although EMU is generally expected to have a beneficial effect, it
could negatively affect the Fund in a number of situations, including as
follows:

. If the euro, or EMU as a whole, does not take effect as planned, the
Fund's investments could be adversely affected. For example, sharp
currency fluctuations, exchange rate volatility, and other disruptions of
the markets could occur.

. Withdrawal from EMU by a participating country could also have a negative
effect on the Fund's investments, for example if securities redenominated
in euros are transferred back into that country's national currency.

. Computer, accounting, and trading systems must be capable of recognizing
the euro as a distinct currency. Like other investment companies and
business organizations, the Fund could be adversely affected if the
systems used by the Investment Adviser, the Fund's other service
providers, or entities with which the Fund or its service providers do
business do not properly address this issue prior to euro conversion over
the first weekend of 1999 (January 1 through January 3). These issues may
negatively affect the operations of the companies the Fund invests in as
well.

Because of its principal emphasis on dividend paying common stocks, the Fund
should be considered as a vehicle for diversification and not as a balanced
investment program. The suitability for any particular investor of a purchase
of shares of the Fund will depend upon, among other things, such investor's
investment objectives and such investor's ability to accept the risks of
investing in such securities including the risk of a loss of principal.

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 15% 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.

Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the United States
Government which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. During the
period of a 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.

13
<PAGE>

Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid securities. Pursuant to this restriction the Fund may not invest in
securities that cannot be readily resold because of legal or contractual
restrictions or that cannot otherwise be marketed, redeemed, put to the issuer
or a third party, or that do not mature within seven days, or that the Board
of Trustees has not determined to be liquid, if, regarding all such
securities, more than 15% of its net assets, taken at market value, would be
invested in such securities.

The Fund may purchase, without regard to the above limitation, securities
that are not registered under the Securities Act of 1933, as amended (the
"Securities Act") but that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act, provided that the Fund's
Board of Trustees, or the Manager pursuant to guidelines adopted by the Board,
continuously determines, based on the trading markets for the specific Rule
144A security, that it is liquid. The Board of Trustees retains oversight and
is ultimately responsible for the determinations. The Board of Trustees
carefully monitors the Fund's investments in these securities, focusing on
such factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.

Portfolio Strategies Involving Indexed and Inverse Securities, Options,
Futures and Foreign Exchange Transactions. The Fund may use certain derivative
instruments, including indexed and inverse securities, options and futures to
purchase and sell foreign exchange. Transactions involving such instruments
expose the Fund to certain risks. The Fund's use of these instruments and the
associated risks are described in detail in Appendix A attached to this
Prospectus.

INVESTMENT RESTRICTIONS

The Fund has adopted a number of restrictions and policies relating to the
investment of its assets and its activities that 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:

. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.

. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities).

Non-fundamental policies of the Fund (which may be changed by vote of the
Board of Trustees) include policies that (i) notwithstanding a more lenient
fundamental investment restriction concerning borrowing, prohibit the Fund
from borrowing amounts in excess of 20% of its total assets, taken at market
value (including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes, such as redemption of Fund
shares, and further prohibit purchases of securities while borrowings are
outstanding except in limited circumstances; and (ii) limit investment in
securities which cannot be readily resold because of legal or contractual
restrictions, or that 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
net assets would be invested in such securities. Securities purchased in
accordance with Rule 144A under the Securities Act and determined to be liquid
by the Board of Trustees are not subject to the 15% limitation set forth in
clause (ii).

14
<PAGE>

In addition, although not a fundamental policy, the Fund will include over
the counter ("OTC") options and the securities underlying such options (to the
extent provided under "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. However, as
discussed further above, the Fund may treat the securities it uses as cover
for written OTC options as liquid and, therefore, will be excluded from this
limitation, provided it follows a specified procedure. The Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position regarding OTC options, as discussed in
Appendix A.

MANAGEMENT OF THE FUND

TRUSTEES

The Trustees of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act. The
Trustees are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors of investment
companies by the Investment Company Act.

The Trustees are:

Arthur Zeikel*--Chairman of the Manager and its affiliate, FAM; Chairman and
Director of Princeton Services, Inc. ("Princeton Services"); and Executive
Vice President of ML & Co.

Ronald W. Forbes--Professor of Finance, School of Business, State University
of New York at Albany.

Cynthia A. Montgomery--Professor of Competition and Strategy, Harvard
Business School.

Charles C. Reilly--Self-employed financial consultant; 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, Boston University; Founder and
current Director of The Boston University Center for the Advancement of Ethics
and Character.

Richard R. West--Dean Emeritus, New York University Leonard N. Stern School
of Business Administration.

MANAGEMENT AND ADVISORY ARRANGEMENTS

MLAM acts as the manager for the Fund and provides the Fund with management
and investment advisory services. The Manager is owned and controlled by ML &
Co., a financial services holding company and the parent of Merrill Lynch. 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 Asset Management Group of ML & Co. (which includes the
Manager), acts as the investment adviser to more than 100 other registered
investment companies and offers portfolio management services to individuals
and institutions. As of September 1998, the Asset Management Group had a total
of approximately $473 billion in investment company and other portfolio assets
under management. This amount includes assets managed for certain affiliates
of the Manager.
- --------

*Interested person, as defined by the Investment Company Act, of the Fund.

15
<PAGE>

The Fund has entered into a management agreement with the Manager (the
"Management Agreement"). 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
currently First Vice President of the Manager and has been employed by the
Manager as a Vice President 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, 1998,
the Manager received a fee of $1,230,228 (based on average daily net assets of
approximately $205.0 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, 1998, the amount of such reimbursement was $36,688.
For the fiscal year ended July 31, 1998, the ratio of total expenses to
average net assets, was .0.88%, 1.90%, 1.90% and 1.12% for Class A, Class B,
Class C and Class D shares, respectively.

The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co.
and an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K.
a fee for providing investment advisory services to the Manager with respect
to the Fund in an amount to be determined from time to time by the Manager and
MLAM U.K., but in no event in excess of the amount that the Manager actually
receives for providing services to the Fund pursuant to the Management
Agreement.

TRANSFER AGENCY SERVICES

The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $11.00 per Class
A or Class D account and up to $14.00 per Class B or Class C account and is
entitled to reimbursement for certain transaction charges and out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts that close during the calendar year. Application of the fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fee will be due. For purposes of the Transfer
Agency Agreement, the

16
<PAGE>

term "account" includes a shareholder account maintained directly by the
Transfer Agent and any other account representing the beneficial interest of a
person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. For the fiscal
year ended July 31, 1998, $259,068 was paid to the Transfer Agent pursuant to
the Transfer Agency Agreement.

CODE OF ETHICS

The Board of Trustees of the Fund has adopted a Code of Ethics under Rule
17j-1 of the Investment Company Act which incorporates the Code of Ethics of
the Manager (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Manager and, as described
below, impose additional, more onerous, restrictions on fund investment
personnel.

The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).

PURCHASE OF SHARES

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 that (i) for retirement plans the minimum initial purchase is $100, and
the minimum subsequent purchase is $1 and (ii) for shareholders who are
participants in a Mutual Funds Advisor ("MFA") Program administered by Merrill
Lynch, the minimum initial purchase is $250.

The Fund offers 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 PricingSM
System, as described below. The applicable offering price for purchase orders
is based upon the net asset value of the Fund next determined after receipt of
the purchase orders by the Distributor. As to purchase orders received by
securities dealers prior to the close of business on the New York Stock
Exchange ("NYSE") (generally 4:00 p.m., New York time), which includes orders
received after the close of business on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the NYSE on that day, provided the Distributor
in turn receives orders from the securities dealer prior to 30 minutes after
the close of business on the NYSE on that day. If the purchase orders are not
received prior to 30 minutes after the close of business on the NYSE on that
day, such orders shall be deemed received on the next business day. The Fund or

17
<PAGE>

the Distributor may suspend the offering of the Fund's shares of any class at
any time in response to conditions in the securities markets or otherwise and
may thereafter resume such offering from time to time. Any order may be
rejected by the Distributor or the Fund. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by a
price change. Merrill Lynch may charge its customers a processing fee
(presently $5.35) to confirm a sale of shares to such customers. Purchases made
directly through the Transfer Agent are not subject to the processing fee.

The Merrill Lynch Select PricingSM System 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 and
Class C 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 PricingSM System is set forth
under "Merrill Lynch Select PricingSM 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 CDSCs, distribution and account maintenance fees that are imposed on Class
B and Class C shares, as well as the account maintenance fees that are imposed
on Class D shares, will be imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors choosing
another sales charge option. Dividends paid by the Fund for each class of
shares will be calculated in the same manner at the same time and will differ
only to the extent that account maintenance and distribution fees and any
incremental transfer agency costs relating to a particular class are borne
exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). See
"Distribution Plans" below. Each class has different exchange privileges. See
"Shareholder Services--Exchange Privilege."

Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.

18
<PAGE>

The following table sets forth a summary of the distribution arrangements for
each class of shares under the Merrill Lynch Select Pricing SM System.

<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
A Maximum 5.25% initial No No No
sales
charge(/2/)(/3/)
- -------------------------------------------------------------------------------
B CDSC for a period of 0.25% 0.75% B shares convert to
4 years, at a rate of D shares automatically
4.0% during the first after approximately
year, decreasing 1.0% eight years(/5/)
annually to 0.0%(/4/)
- -------------------------------------------------------------------------------
C 1.0% CDSC for one 0.25% 0.75% No
year(/6/)
- -------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(/3/)
</TABLE>

(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
Charge Alternatives--Class A and Class D Shares--Eligible Class A
Investors."

(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans and participants in connection with
certain fee-based programs. Class A and Class D share purchases of
$1,000,000 or more may not be subject to an initial sales charge but
instead may be subject to a 1.0% CDSC if redeemed within one year. Such
CDSC may be waived in connection with certain fee-based programs. A 0.75%
Sales Charge for 401(k) purchases over $1,000,000 will apply.

(4) The CDSC may be modified in connection with certain fee-based programs.

(5) The conversion period for dividend reinvestment shares and the conversion
and holding period for certain retirement plans are modified as described
under "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
C Shares--Conversion of Class B Shares to Class D Shares." Also, Class B
shares of certain other MLAM-advised mutual funds into which exchanges may
be made have a ten-year conversion period. If Class B shares of the Fund
are exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked
onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.

19
<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>
DISCOUNT TO
SALES LOAD SALES LOAD AS SELECTED DEALERS
AS PERCENTAGE OF PERCENTAGE* OF THE AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED THE OFFERING PRICE
- ------------------ ---------------- ------------------- ------------------
<S> <C> <C> <C>
Less than $25,000....... 5.25% 5.54% 5.00%
$25,000 but less than
$50,000................ 4.75 4.99 4.50
$50,000 but less than
$100,000............... 4.00 4.17 3.75
$100,000 but less than
$250,000............... 3.00 3.09 2.75
$250,000 but less than
$1,000,000............. 2.00 2.04 1.80
$1,000,000 and over**... 0.00 0.00 0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.

** The initial sales charge may be waived on certain Class A and Class D
purchases of $1,000,000 or more and on Class A purchases by certain
retirement plans and participants in connection with certain fee-based
programs. If the sales charge is waived in connection with a purchase of
$1,000,000 or more, such purchases may be subject to a 1.0% CDSC if the
shares are redeemed within one year after purchase. The charge will be
assessed on an account equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. A sales charge of 0.75% will be
charged on purchases of $1,000,000 or more of Class A or Class D shares by
certain employer sponsored retirement or savings plans.

The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended (the "Securities Act"). The proceeds from the account maintenance
fees are used to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing continuing account maintenance activities.

For the fiscal year ended July 31, 1998, the Fund sold 514,315 Class A shares
for aggregate net proceeds of $7,854,695. The gross sales charges for the sale
of Class A shares of the Fund for that year were $3,914, of which $260 and
$3,654 were received by the Distributor and Merrill Lynch, respectively. For
the fiscal year ended July 31, 1998, the Distributor received no CDSCs with
respect to redemption within one year after purchase of Class A shares
purchased subject to a front end sales charge waiver.

For the fiscal year ended July 31, 1998, the Fund sold 294,437 Class D shares
for aggregate net proceeds of $4,567,752. The gross sales charges for the sale
of Class D shares of the Fund for that year were $35,468, of which $2,330 and
$33,138 were received by the Distributor and Merrill Lynch, respectively. For
the same period, the Distributor received no CDSCs with respect to redemption
within one year after purchase of Class D shares purchased subject to a front
end sales charge waiver.

20
<PAGE>

Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors that currently own Class A shares of the Fund in a
shareholder account, including participants in the Merrill Lynch BlueprintSM
Program, are entitled to purchase additional Class A shares of the Fund in that
account. Certain employer sponsored retirement or savings plans, including
eligible 401(k) plans, may purchase Class A shares at net asset value provided
such plans meet the required minimum number of eligible employees or required
amount of assets advised by MLAM or any of its affiliates. Class A shares are
available at net asset value to corporate warranty insurance reserve fund
programs and U.S. branches of foreign banking institutions provided that the
program or branch has $3 million or more initially invested in MLAM-advised
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee, and purchases made in connection with certain fee-based programs. In
addition, Class A shares are offered at net asset value to ML & Co. and its
subsidiaries and their directors and employees and to members of the Boards of
investment companies advised by MLAM or its affiliates, including the Fund.
Certain persons who acquired shares of certain closed-end funds advised by MLAM
or its affiliates in their initial offerings who wish to reinvest the net
proceeds from a sale of their closed-end fund shares of common stock in shares
of the Fund also may purchase Class A and Class D shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met (for
closed-end funds that commenced operations prior to October 21, 1994). In
addition, Class A shares of the Fund and certain other MLAM-advised mutual
funds are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. ("Senior Floating Rate Fund"). Shareholders already
owning Class A shares who wish to reinvest the net proceeds from a tender of
the Merrill Lynch High Income Municipal Bond Fund, Inc. ("High Income Fund") or
the Merrill Lynch Municipal Strategy Fund, Inc. ("Municipal Strategy Fund") may
purchase Class A shares at net asset value rather than Class D shares provided
that (i) the shares to be purchased are held in the same account as the Class A
shares that the shareholder already owns, and (ii) all other requirements
pertaining to the reinvestment privilege are met.

Shareholders already owning Class A shares who wish to reinvest the net
proceeds from a tender of the High Income Fund or the Municipal Strategy Fund
may purchase Class A shares at net asset value rather than Class D shares
provided that (i) the shares to be purchased are held in the same account as
the Class A shares that the shareholder already owns, and (ii) all other
requirements pertaining to the reinvestment privilege are met.

Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges
also may be reduced under a Right of Accumulation and a Letter of Intent. Class
A shares are offered at net asset value to certain eligible Class A investors
as set forth above under "Eligible Class A Investors." See "Shareholder
Services--Fee-Based Programs."

Provided applicable threshold requirements are met, either Class A or Class D
shares are offered at net asset value to Employee AccessSM Accounts available
through authorized employers. Subject to certain conditions, Class A and Class
D shares are offered at net asset value to shareholders of Municipal Strategy
Fund and High Income Municipal Bond Fund and Class A shares are offered at net
asset value to shareholders of Senior Floating Rate Fund, who wish to reinvest
in shares of the Fund the net proceeds from a sale of certain of their shares
of common stock, pursuant to tender offers conducted by those funds.

21
<PAGE>

Class D shares of the Fund are offered at net asset value to shareholders of
Municipal Strategy Fund and High Income Fund who wish to purchase shares of the
Fund with the net proceeds from a sale of certain of their shares of common
stock pursuant to a tender offer by Municipal Strategy Fund or High Income
Fund. This investment option is available only with respect to the proceeds of
Municipal Strategy Fund shares as to which no CDSC (as defined in the Municipal
Strategy Fund prospectus) is applicable, or with respect to the proceeds of
High Income Fund shares as to which no Early Withdrawal Charge (as defined in
the High Income Fund prospectus) is applicable. Such Class D shares are offered
subject to the conditions applicable to the offering of Class A shares of the
Fund to shareholders of Senior Floating Rate Fund who wish to purchase shares
of the Fund with the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer by Senior Floating Rate Fund, as
described in the Statement of Additional Information under "Purchase of
Shares--Reduced Initial Sales Charges--Closed-End Fund Investment Option."

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 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
BlueprintSM Program.

Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.

DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES

Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.

The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
which declines each year while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately eight years after Class B shares
are issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted to Class
D shares of the Fund and thereafter will be subject to lower continuing fees.
See "Conversion of Class B Shares to Class D Shares" below. Both Class B and
Class C shares are subject to an account maintenance fee at an annual rate of
0.25% of average daily net assets and a distribution fee at an annual rate of
0.75% of average daily net assets as discussed below under "Distribution
Plans." The proceeds from the account maintenance fees are used to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.

22
<PAGE>

Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.

Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of Class B and Class C shares,
such as the payment of compensation to financial consultants for selling Class
B and Class C shares, from the dealers' own funds. The combination of the CDSC
and the ongoing distribution fee facilitates the ability of the Fund to sell
the Class B and Class C shares without a sales charge being deducted at the
time of purchase. Approximately eight years after issuance, Class B shares will
convert automatically to Class D shares of the Fund, which are subject to an
account maintenance fee but no distribution fee; Class B shares of certain
other MLAM-advised mutual funds into which exchanges may be made convert to
Class D shares automatically after approximately ten years. If Class B shares
of the Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired in the
exchange will apply and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.

Imposition of the CDSC and the distribution fee on Class B and Class C shares
is limited by the NASD asset-based sales charge rule. See "Limitations on the
Payment of Deferred Sales Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services--
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.

Contingent Deferred Sales Charges--Class B Shares. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the 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, 1998, the Distributor received CDSCs of
$70,120 with respect to Class B shares, all of which was paid to Merrill Lynch.
Additional CDSCs payable to the Distributor may have been waived or converted
to a contingent obligation in connection with a shareholder's participation in
certain fee-based programs.

23
<PAGE>

In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible rate being
charged. Therefore, it will be assumed that the redemption is first of shares
held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.

To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000), and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the 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 (the "Code")) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by
certain eligible 401(a) and eligible 401(k) plans and in connection with
certain group plans placing orders through the Merrill Lynch BlueprintSM
Program. The CDSC also is waived for any Class B shares that are purchased by
eligible 401(k) or eligible 401(a) plans that are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
the time of redemption and for any Class B shares that were acquired and held
at the time of the redemption in an Employee AccessSM Account available through
employers providing eligible 401(k) plans. The Class B CDSC also is waived for
any Class B shares that are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. The Class B
CDSC also is waived for any Class B shares that are purchased within qualifying
Employee AccessSM Accounts. Additional information concerning the waiver of the
Class B CDSC is set forth in the Statement of Additional Information. The terms
of the CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs."

Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year 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. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs." For the fiscal year ended July 31, 1998, the Distributor
received CDSCs of $1,695, with respect to the Class C shares, all of which was
paid to Merrill Lynch.

In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar

24
<PAGE>

amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.

Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
to Class D shares of the Fund. Class D shares are subject to an ongoing account
maintenance fee at an annual rate of 0.25% of average daily net assets but are
not subject to the distribution fee that is borne by Class B shares. Automatic
conversion of Class B shares to Class D shares will occur at least once each
month (on the "Conversion Date") on the basis of the relative net asset values
of the shares of the two classes on the Conversion Date, without the imposition
of any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal income
tax purposes.

In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.

Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.

In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa, the
Conversion Period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be "tacked"
onto the holding period for the shares acquired.

The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value per
share.

The Conversion Period also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-Based
Programs."

DISTRIBUTION PLANS

The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each, a
"Distribution Plan") with respect to the account maintenance

25
<PAGE>

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.

For the fiscal year ended July 31, 1998, the Fund paid the Distributor
$809,407 pursuant to the Class B Distribution Plan (based on average net assets
subject to such Class B Distribution Plan of approximately $80.9 million), all
of which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class B shares.
For the fiscal year ended July 31, 1998, the Fund paid the Distributor $37,876
pursuant to the Class C Distribution Plan (based on average net assets subject
to such Class C Distribution Plan of approximately $3.8 million), all of which
was paid to Merrill Lynch for providing account maintenance and distribution-
related activities and services in connection with Class C shares. For the
fiscal year ended July 31, 1998, the Fund paid the Distributor $229,949
pursuant to the Class D Distribution Plan (based on average net assets subject
to such Class D Distribution Plan of approximately $92.0 million) all of which
was paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares.

The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution 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

26
<PAGE>

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. With respect to Class B shares, as of
December 31, 1997, 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 $6,355,000 (7.9% of
Class B net assets at that date). For Class C shares as of December 31, 1997,
the fully allocated accrual expenses incurred by the Distributor and Merrill
Lynch since the Class C shares commenced operations exceeded fully allocated
accrual revenues for such period by approximately $3,000 (.09% of Class C
assets at that date). As of July 31, 1998, direct cash revenues for the period
since the Fund commenced operations exceeded direct cash expenses by
$17,736,211 (24.28% of Class B net assets at that date). With respect to Class
C shares, as of July 31, 1998, direct cash revenues for the period since the
Fund commenced operations exceeded direct cash expenses by $60,469 (1.38% of
Class C 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 " Purchase of Shares--Deferred Sales Charge Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares."

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

The maximum sales charge rule in the NASD Conduct Rules imposes a limitation
on certain asset-based sales charges such as the 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.

27
<PAGE>

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 that may be applicable, there will be no charge
for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The 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., 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., 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.

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
NYSE (generally 4:00 p.m., New York time) on the day received and such request
is received by the Fund from such dealer not later than 30 minutes after the
close of business on the NYSE on the same day.

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 that do not have selected dealer agreements with the

28
<PAGE>

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 $5.35) to confirm a repurchase of shares. Repurchases
made directly through the Fund's Transfer Agent are not subject to the
processing fee. The Fund reserves the right to reject any order for repurchase,
which right of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure. 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
privilege to reinstate their accounts by purchasing Class A or Class D shares
of the Fund, as the case may be, at net asset value without a sales charge up
to the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be reinstated
to the Transfer Agent within 30 days after the date the request for a
redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date the
request for redemption was accepted by the Transfer Agent or the Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.

SHAREHOLDER SERVICES

The Fund offers a number of shareholder services and investment plans
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 gains distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions.

Shareholders may make additions to their Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders also may maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an account in the transferring shareholder's
name 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, the shareholder either must redeem the Class A or Class D shares (paying
any applicable CDSC) so that the cash proceeds can be transferred

29
<PAGE>

to the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder at the Transfer Agent. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he or she be issued certificates for such shares and then
must turn the certificates over to the new firm for re-registration as
described in the preceding sentence.

Shareholders considering transferring a tax-deferred retirement account such
as an individual retirement account from Merrill Lynch to another brokerage
firm or financial institution should be aware that if the firm to which the
retirement account is to be transferred will not take delivery of shares of the
Fund, the shareholder must either redeem the shares (paying any applicable
CDSC) so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain a retirement account at
Merrill Lynch for those shares.

Share certificates are issued only for full shares and only upon the specific
request of the shareholder. Issuance of certificates representing all or only
part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.

EXCHANGE PRIVILEGE

U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission.

Under the Merrill Lynch Select PricingSM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
his account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund, and the shareholder does not hold Class A shares of the
second fund in his account at the time of the exchange and is not otherwise
eligible to acquire Class A shares of the second fund, the shareholder will
receive Class D shares of the second fund as a result of the exchange. Class D
shares also may be exchanged for Class A shares of a second MLAM-advised mutual
fund at any time as long as, at the time of the exchange, the shareholder holds
Class A shares of the second fund in the account in which the exchange is made
or is otherwise eligible to purchase Class A shares of the second fund.

Exchanges of Class A and Class D shares are made on the basis of the relative
net asset values per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.

Class B, Class C and Class D shares are exchangeable for shares of the same
class of other MLAM-advised mutual funds.

30
<PAGE>

Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares of
the Fund is "tacked" to the holding period for the newly acquired shares of the
other fund.

Class A and Class D shares also will be exchangeable for Class A shares of,
and Class B and Class C shares also will be exchangeable for Class B shares of,
Summit Cash Reserves Fund, a series of Financial Institutions Series Trust,
which is a Merrill Lynch-sponsored money market fund specifically designated as
available for exchange by holders of Class A, Class B, Class C and Class D
shares. Class A shares of Summit Cash Reserves Fund have an exchange privilege
back into Class A or Class D shares of MLAM-advised funds; Class B shares of
Summit Cash Reserves Fund have an exchange privilege back into Class B or Class
C shares of MLAM-advised funds. The period of time that Class B shares of
Summit Cash Reserves Fund are held will count toward satisfaction of the
holding period requirement for purposes of reducing any CDSC and, with respect
to Class B shares, toward satisfaction of any Conversion Period. Class B shares
of Summit Cash Reserves Fund will be subject to a distribution fee at an annual
rate of 0.75% of average daily net assets of such Class B shares.

The exchange privilege described above does not apply with respect to certain
Merrill Lynch fee-based programs, for which alternative exchange arrangements
may exist. Please see your Merrill Lynch Financial Consultant for further
information.

Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.

Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.

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 to Merrill Lynch if the
shareholder's account is maintained with Merrill Lynch or by written
notification or telephone (1-800-MER-FUND) to the Transfer Agent if the
shareholder's account is maintained with the Transfer Agent, elect to have
subsequent dividends or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on the payment
date (provided that, in the event that a payment on an account maintained at
the Transfer Agent would amount to $10 or less, a shareholder will not receive
such payment in cash and such payment will be automatically reinvested in
additional shares). 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

31
<PAGE>

or capital gains distributions. The Fund is not responsible for any failure of
delivery to the shareholder's address of record and no interest will accrue on
amounts represented by uncashed distribution or redemption checks.

SYSTEMATIC WITHDRAWAL PLANS

A shareholder may elect to receive systematic withdrawal payments from his or
her Investment Account through automatic payment by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis. A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semi-annual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program, subject to certain conditions. With respect to redemptions
of Class B and Class C shares pursuant to a systematic withdrawal plan, the
maximum number of Class B and Class C shares that can be redeemed from an
account annually shall not exceed 10% of the value of shares of such class in
that account at the time the election to join the systematic withdrawal plan
was made. Any CDSC that otherwise might be due on such redemption of Class B or
Class C shares will be waived. Shares redeemed pursuant to a systematic
withdrawal plan will be redeemed in the same order as Class B and Class C
shares are otherwise redeemed. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Contingent Deferred Sales Charges--
Class B Shares" and "--Contingent Deferred Sales Charges--Class C Shares."
Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, a
shareholder must make a new election to join the systematic withdrawal plan
with respect to the Class D shares. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares--Conversion of Class B Shares
to Class D Shares."

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(R) or CBA(R) accounts may
arrange to have periodic investments made in the Fund in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.

FEE-BASED PROGRAMS

Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares, which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of such
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including

32
<PAGE>

charges and limitations on transferability applicable to shares that may be
held in such Program) is available in such Program's client agreement and from
the Transfer Agent at (800) MER-FUND or (800) 637-3863.

RETIREMENT PLANS

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 NASD
Conduct Rules, 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.

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.

33
<PAGE>

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 Index, the Value Line Composite Index, the Dow Jones Industrial
Average, other market indexes, 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. When comparing its performance to a market
index, the Fund may refer to various statistical measures derived from the
historic performances of the Fund and the index, such as standard deviation and
beta. In addition, from time to time, the Fund may include the Fund's
Morningstar risk-adjusted performance ratings in advertisements or

34
<PAGE>

supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of the Fund's relative
performance for any future period.

TAXES

The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Fund (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains which it distributes to Class A, Class B, Class C and Class D
shareholders (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 capital gains from the sale or
disposition of assets held for more than 12 months (including such 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. 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). Recent legislation
creates additional categories of capital gains taxable at different rates.
Additional legislation eliminates the 28% capital gains tax category for sales
of capital assets occurring after December 31, 1997. Generally not later than
60 days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amounts of any ordinary
income dividends or capital gain dividends, as well as the amount of capital
gain dividends in the different categories of capital gain referred to above.

Dividends and distributions are taxable to shareholders even though they are
reinvested in additional shares of the Fund. A portion of the Fund's ordinary
income dividends may be eligible for the dividends-received deduction allowed
to corporations under the Code if certain requirements are met. 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,

35
<PAGE>

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, 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 6 months or less will be a capital loss to the extent of any 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 and gain on the sale or exchange
of shares in the Fund may also be subject to state and local taxes.

36
<PAGE>

Shareholders are urged to consult their tax advisors 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 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 certain percentages of its ordinary income and
capital gains be distributed during the calendar year. The per share dividends
and distributions on each class of shares will be reduced as a result of any
account maintenance, distribution and transfer agency fees applicable to that
class. See "Additional Information--Determination of Net Asset Value."
Dividends and distributions may be reinvested automatically in shares of the
Fund, at net asset value without sales charge. Shareholders may elect in
writing to receive any such dividends or distributions, or both, in cash
(provided that, in the event that a payment on an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder will not receive
such payment in cash and such payment will automatically be reinvested in
additional shares). Dividends and distributions are taxable to shareholders as
described above whether they are reinvested in shares of the Fund or received
in cash.

All net realized capital gains, if any, are declared and distributed to the
Fund's shareholders annually after the close of the Fund's fiscal year. Capital
gains distributions will be automatically reinvested in shares unless the
shareholder elects to receive such distributions in cash.

See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information as to how to elect either dividend
reinvestment or cash payments.

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of all classes of the Fund is determined by
the Manager once daily as of 15 minutes after the close of business on the NYSE
(generally 4:00 p.m., New York time) on each day during which the NYSE is open
for trading. The net asset value per share is computed by dividing the market
value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
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

37
<PAGE>

Class B and Class C shares. It is expected, however, that the per share net
asset value of the classes will tend to converge (although not necessarily
meet) immediately after the payment of dividends or distributions, which will
differ by approximately the amount of the expense accrual differentials among
the classes. The Fund employs Merrill Lynch Securities Pricing Service
("MLSPS"), an affiliate of the Manager, to provide certain securities prices
for the Fund. For the fiscal year ended July 31, 1998, the Fund did not pay
any fees to MLSPS.

Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors as the
primary market. Long positions in securities traded in the OTC market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC market are valued
at the last available ask price in the OTC market prior to the time of
valuation. Portfolio securities that are traded both in the OTC market and on
a stock exchange are valued according to the broadest and most representative
market. 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. Other investments, including futures contracts and related options,
are stated at market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the 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, based upon
the last sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last asked price. Options purchased by
the Fund are valued at their last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC markets, the last bid
price. Other investments, including futures contracts and related options, are
stated at market value. 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. 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 relating to the account maintenance associated with such shares, and
Class B and Class C shares bear certain expenses relating to the distribution
of such shares. Each class has exclusive voting rights with respect to matters
relating to account maintenance and

38
<PAGE>

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.
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.

----------------

YEAR 2000 ISSUES

Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the '"Year 2000 Problem"). Like other investment companies
and financial and business organizations, the Fund could be adversely affected
if the computer systems used by the Manager or other Fund service providers do
not properly address this problem prior to January 1, 2000. The Manager has
established a dedicated group to analyze these issues and to implement any
systems modifications necessary to prepare for the Year 2000. Currently, the
Manager does not anticipate that the transition to the Year 2000 will have any
material impact on its ability to continue to service

39
<PAGE>

the Fund at current levels. In addition, the Manager has sought assurances from
the Fund's other service providers that they are taking all necessary steps to
ensure that their computer systems will accurately reflect the Year 2000, and
the Manager will continue to monitor the situation. At this time, however, no
assurance can be given that the Fund's other service providers have anticipated
every step necessary to avoid any adverse effect on the Fund attributable to
the Year 2000 Problem. The Year 2000 Problem could also have a negative impact
on the companies in which the Fund invests, and this could hurt the Fund's
investment returns.

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.

40
<PAGE>

APPENDIX A

INDEXED AND INVERSE SECURITIES, OPTIONS, FUTURES AND FOREIGN EXCHANGE
TRANSACTIONS

The Fund is authorized to use certain derivative instruments, including
indexed and inverse securities, options and futures, and to purchase and sell
foreign exchange, as described below. Such instruments, which may be regarded
as derivatives, are referred to collectively herein as "Strategic
Instruments."

Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Instruments"), the Manager believes that, because the Fund will (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 engage in hedging
activities only 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 Strategic
Instruments.

INDEXED AND INVERSE SECURITIES

The Fund may invest in securities the potential return of which is based on
the change in particular measurements of value or rate (an "index"). As an
illustration, the Fund may invest in a debt security that pays interest and
returns principal based on the change in the value of a securities index or a
basket of securities, or based on the relative changes of two indices. In
addition, the Fund may invest in securities the potential return of which is
based inversely on the change in an index. For example, the Fund may invest in
securities that pay a higher rate of interest when a particular index
decreases and pay a lower rate of interest (or do not fully return principal)
when the value of the index increases. If the Fund invests in such securities,
it may be subject to reduced or eliminated interest payments or loss of
principal in the event of an adverse movement in the relevant index or
indices.

Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal
payable increases or decreases at a rate that is a multiple of the changes in
the relevant index. As a consequence, the market value of such securities may
be substantially more volatile than the market values of other debt
securities. The Fund believes that indexed and inverse securities may provide
portfolio management flexibility that permits the Fund to seek enhanced
returns, hedge other portfolio positions or vary the degree of portfolio
leverage with greater efficiency than would otherwise be possible under
certain market conditions.

OPTIONS ON SECURITIES AND SECURITIES INDICES

Purchasing Options. The Fund is authorized to purchase put options on equity
securities held in its portfolio or securities indices the performance of
which is substantially replicated by securities held in its portfolio for
hedging purposes. When the Fund purchases a put option, in consideration for
an upfront payment (the "option premium") the Fund acquires a right to sell to
another party specified securities owned by the Fund

A-1
<PAGE>

at a specified price (the "exercise price") on or before a specified date (the
"expiration date"), in the case of an option on securities, or to receive from
another party a payment based on the amount a specified securities index
declines below a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a put option limits the
Fund's risk of loss in the event of a decline in the market value of the
portfolio holdings underlying the put option prior to the option's expiration
date. If the market value of the portfolio holdings associated with the put
option increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio holdings
than would have been realized without the purchase of the put. The Fund 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.

The Fund is also authorized to purchase call options on securities indices
the performance of which substantially replicates the performance of the types
of securities it intends to purchase. When the Fund purchases a call option on
a securities index, in consideration for the option premium the Fund acquires
the right to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date. The purchase of a call option may protect the Fund from
attempting to identify specific securities in which to invest in a market the
Fund believes to be attractive (an "anticipatory hedge").

The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.

Writing Call Options. The Fund is authorized to write (i.e., sell) call
options on equity securities held in its portfolio or securities indices the
performance of which is substantially correlated to securities held in its
portfolio. When the Fund writes a call option, in return for an option premium
the Fund gives another party the right to buy specified securities owned by
the Fund at the exercise price on or before the expiration date, in the case
of an option on securities, or agrees to pay to another party an amount based
on any gain in a specified securities index beyond a specified level on or
before the expiration date, in the case of an option on a securities index.
The Fund may write call options on securities to earn income, through the
receipt of option premiums; the Fund may write call options on securities
indices for hedging purposes. In the event the party to which the Fund has
written an option fails to exercise its rights under the option because the
value of the underlying securities is less than the exercise price, the Fund
will partially offset any decline in the value of the underlying securities
through the receipt of the option premium. By writing a call option, however,
the Fund limits its ability to sell the underlying securities, and gives up
the opportunity to profit from any increase in the value of the underlying
securities beyond the exercise price, while the option remains outstanding.

The Fund is also authorized to sell call options in connection with closing
out call options it has previously purchased.

Other than with respect to closing transactions, the Fund will only write
call options that are "covered." A call option will be considered covered if
the Fund has segregated assets with respect to such option in the manner
described in "Risk Factors in Options, Futures and Currency Instruments"
below. A call option will also be considered covered if the Fund owns the
securities it would be required to deliver upon exercise of the option (or, in
the case of option on a securities index, securities which substantially
replicate the performance of such index) or owns a call option, warrant or
convertible instrument that is immediately exercisable for, or convertible
into, such security.

A-2
<PAGE>

Types of Options. The Fund may engage in transactions in the options on
securities or securities indices described above on exchanges and in the over-
the-counter ("OTC") markets. In general, exchange-traded options have
standardized exercise prices and expiration dates and require the parties to
post margin against their obligations, and the performance of the parties'
obligations in connection with such options is guaranteed by the exchange or a
related clearing corporation. OTC options have more flexible terms negotiated
between the buyer and seller, but generally do not require the parties to post
margin and are subject to greater risk of counterparty default. See
"Additional Risk Factors of OTC Transactions" below.

FUTURES

The Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of a commodity
at a specified future date at a specified price. No price is paid upon
entering into a futures contract. Rather, upon purchasing or selling a futures
contract the Fund is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value. Each day
thereafter until the futures position is closed, the Fund will pay additional
margin representing any loss experienced as a result of the futures position
the prior day or be entitled to a payment representing any profit experienced
as a result of the futures position the prior day.

The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the future's contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.

The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in value or the Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.

The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying
commodity is a currency or securities or interest rate index) purchased or
sold for hedging purposes (including anticipatory hedges). The Fund will
further limit transactions in futures and options on futures to the extent
necessary to prevent the Fund from being deemed a "commodity pool operator"
under regulations of the Commodity Futures Trading Commission.

FOREIGN EXCHANGE TRANSACTIONS

The Fund may engage in spot and forward foreign exchange transactions,
purchase and sell options on currencies and purchase and sell currency futures
and related options thereon (collectively, "Currency Instruments") for
purposes of hedging against possible variations in foreign exchange rates.
Such transactions may be effected with respect to hedges on non-U.S. dollar
denominated securities owned by the Fund, sold by the Fund but not yet
delivered, or committed or anticipated to be purchased by the Fund.

A-3
<PAGE>

Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
The Fund will enter into foreign exchange transactions only for purposes of
hedging either a specific transaction or a portfolio position. The Fund may
enter into a foreign exchange transaction for purposes of hedging a specific
transaction by, for example, purchasing a currency needed to settle a security
transaction or selling a currency in which the Fund has received or
anticipates receiving a dividend or distribution. The Fund may enter into a
foreign exchange transaction for purposes of hedging a portfolio position by
selling forward a currency in which a portfolio position of the Fund is
denominated or by purchasing a currency in which the Fund anticipates
acquiring a portfolio position in the near future.

The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.

The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through the use of currency options. Currency options
are similar to options on securities, but in consideration for an option
premium the writer of a currency option is obligated to sell (in the case of a
call option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions" below.

The Fund will not speculate in Currency Instruments. Accordingly, the Fund
will not hedge a currency in excess of the aggregate market value of the
securities which it owns (including receivables for unsettled securities
sales), or has committed to or anticipates purchasing, which are denominated
in such currency. The Fund may not incur potential net liabilities of more
than 20% of its total assets from foreign currency options, futures or related
options. The Fund will not necessarily attempt to hedge all of its foreign
portfolio positions.

Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated
currency movements will not be accurately predicted and that the Fund's
hedging strategies will be ineffective. To the extent that the Fund hedges
against anticipated currency movements that do not occur, the Fund may realize
losses, and decrease its total return, as the result of its hedging
transactions. Furthermore, the Fund will engage in hedging activities only
from time to time and may not be engaging in hedging activities when movements
in currency exchange rates occur. It may not be possible for the Fund to hedge
against currency exchange rate movements, even if correctly anticipated, in
the event that (i) the currency exchange rate is so generally anticipated that
the Fund is not able to enter into a hedging transaction at an effective
price, or (ii) the currency exchange rate movement relates to a market with
respect to which Currency Instruments are not available (such as certain
developing markets) and it is not possible to engage in effective foreign
currency hedging.

A-4
<PAGE>

RISK FACTORS IN OPTIONS, FUTURES, AND CURRENCY INSTRUMENTS

Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments
and the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments the
Fund will experience a gain or loss that will not be completely offset by
movements in the value of the hedged instruments.

The Fund intends to enter into transactions involving Strategic Instruments
only if there appears to be a liquid secondary market for such instruments or,
in the case of illiquid instruments traded in OTC transactions, such
instruments satisfy the criteria set forth below under "Additional Risk
Factors of OTC Transactions." However, there can be no assurance that, at any
specific time, either a liquid secondary market will exist for a Strategic
Instrument or the Fund will otherwise be able to sell such instrument at an
acceptable price. It may therefore not be possible to close a position in a
Strategic Instrument without incurring substantial losses, if at all.

Certain transactions in Strategic Instruments (e.g., forward foreign
exchange transactions, futures transactions, sales of put options) may expose
the Fund to potential losses that exceed the amount originally invested by the
Fund in such instruments. When the Fund engages in such a transaction, the
Fund will deposit in a segregated account at its custodian liquid securities
with a value at least equal to the Fund's exposure, on a mark-to-market basis,
to the transaction (as calculated pursuant to requirements of the Commission).
Such segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Fund's
exposure to loss.

ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS

Certain Strategic Instruments traded in OTC markets, including indexed
securities and OTC options, may be substantially less liquid than other
instruments in which the Fund may invest. The absence of liquidity may make it
difficult or impossible for the Fund to sell such instruments promptly at an
acceptable price. The absence of liquidity may also make it more difficult for
the Fund to ascertain a market value for such instruments. The Fund will
therefore acquire illiquid OTC instruments (i) if the agreement pursuant to
which the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or (ii) for which the Manager
anticipates the Fund can receive on each business day at least two independent
bids or offers, unless a quotation from only one dealer is available, in which
case that dealer's quotation may be used.

The staff of the Commission has taken the position that purchased OTC
options and the assets underlying written OTC options are illiquid securities.
The Fund has therefore adopted an investment policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transactions, the sum of the market value of OTC
options currently outstanding which are held by the Fund, the market value of
the securities underlying OTC call options currently outstanding which have
been sold by the Fund and margin deposits on the Fund's outstanding OTC
options exceeds 15% of the total assets of the Fund, taken at market value,
together with all other assets of the Fund which are deemed to be illiquid or
are otherwise not readily marketable. However, if an OTC option is sold by the
Fund to a dealer in U.S. Government securities recognized as a "primary
dealer" by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option at a
predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as 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 exercise price).

A-5
<PAGE>

Because Strategic Instruments traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments
or has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in
transactions in Strategic Instruments traded in OTC markets only with
financial institutions which have substantial capital or which have provided
the Fund with a third-party guaranty or other credit enhancement.

ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS

The Fund may not use any Strategic Instrument to gain exposure to an asset
or class of assets that it would be prohibited by its investment restrictions
from purchasing directly.

A-6
<PAGE>

MERRILL LYNCH STRATEGIC DIVIDEND FUND--AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------

NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT/SM/ PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT/SM/ PROGRAM
APPLICATION BY CALLING 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 Dividends Long-Term Capital
Gains

Select One: Select One:
[_] Reinvest [_] Reinvest
[_] Cash [_] 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.

A-7
<PAGE>

MERRILL LYNCH STRATEGIC DIVIDEND FUND--AUTHORIZATION FORM (PART 1)--(CONTINUED)

- -------------------------------------------------------------------------------

3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER

[ ]
Social Security Number or Taxpayer Identification Number

Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "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 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 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
We hereby authorize Merrill Lynch
Funds Distributor to act as our
- - - agent in connection with
transactions under this
- - - authorization form and agree to
notify the Distributor of any
This form when completed should be purchases or sales made under a
mailed to: Letter of Intention, Automatic
Investment Plan or Systematic
Merrill Lynch Strategic Dividend Withdrawal Plan. We guarantee the
Fund shareholder's signature.

......................................
c/o Financial Data Services, Inc. Dealer Name and Address
P.O. Box 45289

Jacksonville, Florida 32232-5289 By ..................................
Authorized Signature of Dealer

----- -------
----- ------- ...............
F/C Last Name
Branch-Code
F/C No.
----- ---------
----- ---------

Dealer's Customer Account No.

A-8
<PAGE>

MERRILL LYNCH STRATEGIC DIVIDEND FUND--AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------

NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL PLAN OR
THE AUTOMATIC INVESTMENT PLAN ONLY.
- -------------------------------------------------------------------------------

1. ACCOUNT REGISTRATION

Name of Owner........................
[ ]
Name of Co-Owner (if any)............ Social Security No. or
Taxpayer Identification
Number

Address..............................

.....................................
Account Number.....................
(if existing account)
- -------------------------------------------------------------------------------

2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)

MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
Merrill Lynch 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 [_] 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 in .............,
or as soon as possible thereafter. (month)

SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: $......... of
(check one) [_] Class A, [_] Class B*, [_] Class C* 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 SHALL ACCOMPANY THIS APPLICATION.

* ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS
HELD IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC WITHDRAWAL
PLAN IS MADE.

A-9
<PAGE>

MERRILL LYNCH STRATEGIC DIVIDEND FUND--AUTHORIZATION FORM (PART 2)--(CONTINUED)
- --------------------------------------------------------------------------------

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 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. AUTHORIZATION TO
HONOR ACH DEBITS DRAWN BY
You are hereby authorized to draw an FINANCIAL DATA SERVICES, INC.
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 To................................Bank
$................................. (Investor's Bank)

Account Number ................... Bank Address..........................
Please date and invest ACH debits on
the 20th of each month beginning City........State.....Zip.............
........... or as soon thereafter
(month) as possible.
As a convenience to me, I hereby
request and authorize you to pay and
charge to my account ACH debits drawn
I agree that you are drawing these on my account by and payable to
ACH debits voluntarily at my request Financial Data Services, Inc. I agree
and that you shall not be liable for that your rights in respect to each
any loss arising from any delay in such debit shall be the same as if it
preparing or failure to prepare any were a check drawn on you and signed
such check or debit. If I change personally by me. This authority is
banks or desire to terminate or to remain in effect until revoked by
suspend this program, I agree to me in writing. Until you receive such
notify you promptly in writing. I notice, you shall be fully protected
hereby authorize you to take any in honoring any such debit. I further
action to correct erroneous ACH agree that if any such debit be
debits of my bank account or dishonored, whether with or without
purchases of fund shares including cause and whether intentionally or
liquidating shares of the Fund and inadvertently, you shall be under no
credit my bank account. I further liability.
agree that if a check or debit is
not honored upon presentation,
Financial Data Services, Inc. is .......... .........................
authorized to discontinue Date Signature of Depositor
immediately the Automatic Investment
Plan and to liquidate sufficient .......... .........................
shares held in my account to offset Bank Signature of Depositor
the purchase made with the returned Account (If joint account, both
check or dishonored debit. Number must sign)

.......... ......................
Date Signature of Depositor

.....................
Signature of
Depositor
(If joint
account, both
must sign)

NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.

A-10
<PAGE>

MANAGER

Merrill Lynch Asset Management, L.P.

Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011

DISTRIBUTOR

Merrill Lynch Funds Distributor

Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN

State Street Bank and Trust Company
One Heritage Drive P2N
North Quincy, Massachusetts 02171

TRANSFER AGENT

Financial Data Services, Inc.

Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289

INDEPENDENT AUDITORS

Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400

COUNSEL

Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
<PAGE>

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION 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 PricingSM System.................................... 3
Financial Highlights..................................................... 8
Investment Objective and Policies........................................ 11
Other Investment Policies and Practices................................. 13
Investment Restrictions................................................. 14
Management of the Fund................................................... 15
Trustees................................................................ 15
Management and Advisory Arrangements.................................... 15
Transfer Agency Services................................................ 16
Code of Ethics.......................................................... 17
Purchase of Shares....................................................... 17
Initial Sales Charge Alternatives--Class A and Class D Shares........... 20
Deferred Sales Charge Alternatives--Class B and Class C Shares.......... 22
Distribution Plans...................................................... 25
Limitations on the Payment of Deferred Sales Charges.................... 27
Redemption of Shares..................................................... 28
Redemption.............................................................. 28
Repurchase.............................................................. 28
Reinstatement Privilege--Class A and Class D Shares..................... 29
Shareholder Services..................................................... 29
Investment Account...................................................... 29
Exchange Privilege...................................................... 30
Automatic Reinvestment of Dividends and Capital Gains Distributions..... 31
Systematic Withdrawal Plans............................................. 32
Automatic Investment Plans.............................................. 32
Fee-Based Programs...................................................... 32
Retirement Plans........................................................ 33
Portfolio Transactions................................................... 33
Performance Data......................................................... 33
Taxes.................................................................... 35
Additional Information................................................... 37
Dividends and Distributions............................................. 37
Determination of Net Asset Value........................................ 37
Organization of the Fund................................................ 38
Shareholder Reports..................................................... 39
Shareholder Inquiries................................................... 39
Year 2000 Issues........................................................ 39
Appendix A--Indexed and Inverse Securities, Options, Futures and Foreign
Exchange Transactions................................................... A-1
Authorization Form....................................................... A-7
</TABLE>

Code #10559-1098

[LOGO] MERRILL LYNCH

Merrill Lynch
Strategic Dividend Fund

[Art]

PROSPECTUS

October 29, 1998

Distributor:
Merrill Lynch
Funds Distributor

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 that yield more than
the Standard & Poor's 500 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 that have above average yields
will provide attractive long-term total return and greater price stability
than stocks that 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 PricingSM 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 PricingSM 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
29, 1998 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into
the Prospectus. Capitalized terms used but not defined herein have the same
meanings as in the Prospectus.

----------------

MERRILL LYNCH ASSET MANAGEMENT -- MANAGER

MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR

----------------

The date of this Statement of Additional Information is October 29, 1998
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

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. 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, 1997 and 1998 were 14.29% and 32.66%, respectively.

PORTFOLIO STRATEGIES INVOLVING OPTIONS AND FUTURES

Reference is made to the discussion in the Appendix to the Prospectus for
information with respect to various portfolio strategies involving options and
futures. The following is further information relating to portfolio strategies
the Fund may utilize involving options and futures.

Writing Options. The Fund is authorized to write (i.e., sell) covered call
options on the equity securities held in its portfolio or on securities
indices, the performance of which is substantially correlated to the
securities held in its portfolio. These transactions are described more fully
in the Appendix to the Prospectus. The following is additional information
about covered call options.

The writer of a covered call option has no control over when he may be
required to sell his securities since he may be assigned an exercise notice at
any time prior to the termination of his obligation as a writer. If an option
expires unexercised, the writer realizes a gain in the amount of the premium.
Such a gain, of course, may be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised,
the writer realizes a gain or loss from the sale of the underlying security.

As discussed in the Appendix to the Prospectus, the Fund also may write put
options on securities or securities indices. The Fund writes only covered put
options which means that so long as the Fund is obligated as the writer of the
option, it will, through its custodian, have deposited and maintained cash,
cash equivalents, U.S. government securities or other liquid securities
denominated in U.S. dollars or non-U.S. currencies with a securities
depository with a value equal to or greater than the exercise price of the
underlying securities.

Options referred to herein and in the Fund's Prospectus may be options
issued by The Options Clearing Corporation (the "Clearing Corporation") that
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 that
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

2
<PAGE>

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.

Purchasing Put Options. The Fund may purchase put options on equity
securities held in its portfolio or securities indices, the performance of
which is substantially replicated by the securities held in its portfolio. For
more information, see Appendix A to the Prospectus.

Types of Options. As discussed more fully in the Prospectus, the Fund may
engage in options on securities or securities indices described above on
exchanges and in the over-the-counter ("OTC") markets. For additional
discussion of the types of options in which the Fund may invest, as well as
the additional risk factors and limitations on OTC transactions, see Appendix
A to the Prospectus.

Futures. As described in the Prospectus, the Fund will limit transactions in
futures and options on futures to financial futures contracts (i.e. contracts
for which the underlying commodity is a currency or securities or interest
rate index) purchased or sold for hedging purposes (including anticipatory
hedges). See Appendix A to the Prospectus. Set forth below is further
information concerning futures transactions.

A futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-based futures contract, to make and
accept a cash settlement for a set price on a future date. A majority of
transactions in futures contracts, however, do not result in the actual
delivery of the underlying instrument or cash settlement, but are settled
through liquidation, i.e., by entering into an offsetting transaction. Futures
contracts have been designed by boards of trade which have been designated
"contracts markets" by the Commodity Futures Trading Commission ("CFTC").

The purchase or sale of a futures contract differs from the purchase or sale
of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant
contract market, which varies, but is generally less than 10% of the contract
amount, must be deposited with the broker. This amount is known as "initial
margin" and represents a "good faith" deposit assuring the performance of both
the purchaser and seller under the futures contract. Subsequent payments to
and from the broker, called "variation margin", are required to be made on a
daily basis as the price of the futures 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.

3
<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 liquid securities will be deposited in a segregated account
with the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.

Foreign Exchange Transactions. Generally, the foreign exchange transactions
of the Fund will be conducted on a spot, i.e., cash, basis at the spot rate
for purchasing or selling currency prevailing in the foreign exchange market.
This rate under normal market conditions differs from the prevailing exchange
rate in an amount generally less than 0.15% of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to
deal in forward foreign exchange among currencies of the different countries
in which it will invest as a hedge against possible variations in the foreign
exchange rate among these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Fund's dealings in forward
foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward foreign currency with respect to specific receivables or
payables of the Fund accruing in connection with the purchase and sale of its
portfolio securities, 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 forward contract with a term of more than one
year.

The Fund is also authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar-denominated securities owned by the Fund, sold by
the Fund but not yet delivered, or committed or anticipated to be purchased by
the Fund. As an illustration, the Fund may use such techniques to hedge the
stated value in United States dollars of an investment in a 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

4
<PAGE>

in the relative value of the pound to the dollar. The Manager believes that
"straddles" of the type that may be utilized by the Fund constitute hedging
transactions and are consistent with the policies described above.

Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for the Fund to hedge against a devaluation
that is so generally anticipated that the Fund is not able to contract to sell
the currency at a price above the devaluation level it anticipates. The cost
to the Fund of engaging in foreign currency transactions varies with such
factors as the currencies involved, the length of the contract period and the
market conditions then prevailing. Since transactions in foreign currency
exchange usually are conducted on a principal basis, no fees or commissions
are involved.

Risk Factors in Options 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 that 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 that will not be completely offset by
movements in the price of the underlying security that 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)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts that any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these
limits, and it may impose other sanctions or restrictions. The Manager does
not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.

OTHER INVESTMENT POLICIES AND PRACTICES

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

5
<PAGE>

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 (5)
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 that 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.

Illiquid Securities. While the Fund will not purchase illiquid securities in
an amount exceeding 15% 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 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.

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. 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.

6
<PAGE>

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.

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 in
selling portfolio securities.

9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Fund may do so in accordance with applicable law and
the Fund's Prospectus and Statement of Additional Information, as they may
be amended from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.

The Fund has also adopted certain non-fundamental investment restrictions,
which may be changed by the Trustees without approval by the shareholders.
Under the non-fundamental investment restrictions, the Fund may not:

a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the
Investment Company Act, at any time the Fund's shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.

b. Make short sales of securities or maintain a short position, except to
the extent permitted by applicable law. The Fund currently does not intend
to engage in short sales, except short sales "against the box."

c. Invest in securities that cannot be readily resold because of legal or
contractual restrictions or that 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 net assets would be invested in such securities. This
restriction shall not apply to securities that mature within seven days or
securities that the Board of Trustees of the Fund has otherwise determined
to be liquid pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act (a "Rule 144A security") and
determined to be liquid by the Fund's Board of Trustees are not subject to
the limitations set forth in this investment restriction.

d. Notwithstanding fundamental restriction (7) above, borrow amounts in
excess of 20% of its total assets, taken at market value (including the
amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares.
In addition, the Fund will not purchase securities while borrowings are
outstanding except to honor prior commitments and exercise subscription
rights.

7
<PAGE>

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 not registered under the Securities Act or are not municipal
securities as defined in the Securities Exchange Act of 1934, as amended in
which such firms or any of its affiliates participate as an underwriter or
dealer.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

Information about the Trustees executive officers and portfolio manager of
the Fund, their ages and their principal occupations for at least the last
five years are set forth below. Unless otherwise noted, the address of the
portfolio manager and of each executive officer and Trustee is P.O. Box 9011,
Princeton, New Jersey 08543-9011.

Arthur Zeikel (66)--President and Trustee(1)(2)--Chairman of the Manager
(which term, as used herein, includes its corporate predecessors) since 1997;
Chairman of Fund Asset Management, L.P. ("FAM") (which term as used herein,
includes its corporate predecessors) since 1997; President of the Manager and
FAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997 and Director thereof since 1993; President of Princeton
Services from 1993 to 1997; Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990.

Ronald W. Forbes (58)--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 (46)--Trustee(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate
School of Business Administration, The University of Michigan from 1979 to
1985; Director, UNUM Corporation since 1990 and Director of Newell Co. since
1995.

Charles C. Reilly (67)--Trustee(2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and Chief
Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania, from 1989 to
1990; Partner, Small Cities Cable Television since 1986 to 1997.

Kevin A. Ryan (66)--Trustee(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; formerly taught on the faculties of The
University of Chicago, Stanford University and Ohio State University.

Richard R. West (60)--Trustee(2)--Box 604, Genoa, Nevada 89411. Professor of
Finance since 1984, and Dean from 1984 to 1993, and currently Dean Emeritus of
New York University, Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc. (financial printers), Vornado Realty Trust, Inc.
(real estate holding corporation), and Alexander's Inc. (real estate company).

Terry K. Glenn (58)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Princeton Funds
Distributor Inc. since 1986 and Director thereof since 1991.

8
<PAGE>

Norman R. Harvey (65)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.

Donald C. Burke (38)--Vice President(1)(2)--First Vice President of the
Manager since 1997 and Director of Taxation thereof since 1990; Vice President
of the Manager from 1990 to 1997.

Walter D. Rogers (56)--Senior Vice President and Portfolio Manager(1)--First
Vice President of the Manager since 1997; Vice President of the Manager since
1987.

Gerald M. Richard (49)--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 Princeton Funds Distributor,
Inc. since 1981 and Treasurer thereof since 1984.

Thomas D. Jones, III (33)--Secretary(1)--Attorney with the Manager since
1992; Lawyer in private practice from 1990 to 1992.
- --------
(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.

As of October 1, 1998, the officers and Trustees of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of
common stock of ML & Co., and owned an aggregate of less than 1% of the
outstanding shares of the Fund.

COMPENSATION OF TRUSTEES

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 (each
a "non-affiliated Trustee") a fee of $2,000 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 (the "Committee"), which consists of all the non-
affiliated Trustees with a fee of $900 per year; the Chairman of the Committee
receives an additional annual fee of $1,000 per year. For the fiscal year
ended July 31, 1998, fees and expenses paid to non-affiliated Trustees that
were allocated to the Fund aggregated $24,312.

The following table sets forth the compensation earned by non-affiliated
Trustees from the Fund for the fiscal year ended July 31, 1998 and the
aggregate compensation paid to non-affiliated Trustees from all registered
investment companies advised by MLAM and its affiliate, FAM ("MLAM/FAM Advised
Funds") for the calendar year ended December 31, 1997.

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM FUND AND
AGGREGATE PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
NAME OF TRUSTEE FROM FUND PART OF FUND EXPENSES TRUSTEES(1)
- --------------- ------------ --------------------- ----------------
<S> <C> <C> <C>
Ronald W. Forbes............ $4,500 None $153,500
Cynthia A. Montgomery....... $4,500 None $153,500
Charles C. Reilly........... $5,500 None $313,000
Kevin A. Ryan............... $4,500 None $153,500
Richard R. West............. $4,500 None $299,000
</TABLE>
- --------

(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Forbes (35 registered investment companies consisting of 48 portfolios);
Ms. Montgomery (35 registered investment companies consisting of 48
portfolios); Mr. Reilly (54 registered investment companies consisting of
67 portfolios); Mr. Ryan (35 registered investment companies consisting of
48 portfolios); and Mr. West (56 registered investment companies
consisting of 81 portfolios).

9
<PAGE>

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, 1996, 1997 and 1998, the total management fees paid by the Fund to the
Manager aggregated $1,007,894, $1,056,060 and $1,230,228, respectively.

The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees
of all Trustees of the Fund who are affiliated persons of the Manager or any
of its subsidiaries. The Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, taxes; expenses for
legal and auditing services; costs of printing proxies, stock certificates,
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; 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."

The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies. Similarly, the following entities
may be considered "controlling persons" of MLAM U.K.: Merrill Lynch Europe PLC
(MLAM U.K.'s parent), a subsidiary of Merrill Lynch International Holdings
Inc., a subsidiary of Merrill Lynch International, Inc., a subsidiary of ML &
Co.

The Manager has entered into a sub-advisory agreement (the "Sub-Advisory
Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML & Co.
and an affiliate of the Manager, pursuant to which the Manager pays MLAM U.K.
a fee for providing investment advisory services to the Manager with respect
to the Fund in an amount to be determined from time to time by the Manager and
MLAM U.K. but in no event in excess of the amount that the Manager actually
receives for providing services to the Fund pursuant to the Management
Agreement.

Duration and Termination. Unless earlier terminated as described below, the
Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees or by a majority of the outstanding shares of the
Fund and (b) by a majority of the Trustees who are not parties to such
contract or interested persons

10
<PAGE>

(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
PricingSM 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
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege."

The Merrill Lynch Select PricingSM System is used by more than 50 registered
investment companies advised by the Manager or an affiliate of the Manager,
FAM. Funds advised by FAM or the Manager that use the Merrill Lynch Select
PricingSM System are referred to herein as "MLAM-advised mutual funds."

The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous 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.

INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES

The gross sales charges for the sale of Class A shares for the fiscal year
ended July 31, 1998 was $3,914, of which the Distributor received $260 and
Merrill Lynch received $3,654. The gross sales charges for the sale of Class A
shares for the fiscal year ended July 31, 1997 was $6,629, of which the
Distributor received $384 and Merrill Lynch received $6,245. The gross sales
charges for the sale of Class A shares for the fiscal year ended July 31, 1996
was $6,336, of which the Distributor received $390 and Merrill Lynch received
$5,946. During the fiscal years ended July 31, 1996, 1997 and 1998, the
Distributor received no Contingent Deferred Sales Charges ("CDSCs") with
respect to redemptions within one year after purchase of Class A shares
purchased subject to a front-end sales charge waiver.

The gross sales charges for the sale of Class D shares for the fiscal year
ended July 31, 1998 was $35,468, of which the Distributor received $2,330 and
Merrill Lynch received $33,138. The gross sales charges for the sale of Class
D shares for the fiscal year ended July 31, 1997 was $20,997, of which the
Distributor received $1,314 and Merrill Lynch received $19,683. The gross
sales charges for the sale of Class D shares for the fiscal year ended July
31, 1996 was $16,845, of which the Distributor received $1,311 and Merrill
Lynch received $15,534. For the fiscal years ended July 31, 1996, 1997 and
1998, the Distributor received no CDSCs with

11
<PAGE>

respect to redemption within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver.

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 that 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 that has not been in existence for at least six
months or that 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 Intent. 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 Intent in the form provided in the
Prospectus. The Letter of Intent is available only to investors whose accounts
are maintained at Financial Data Services, Inc., the Fund's transfer agent
(the "Transfer Agent"). The Letter of Intent is not available to employee
benefit plans for which Merrill Lynch provides plan participant record-keeping
services. The Letter of Intent is not a binding obligation to purchase any
amount of Class A or Class D shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intent may be
included under the subsequent Letter of Intent executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. The value of Class A and Class D shares of the Fund and of
other MLAM-advised mutual funds presently held, at cost or maximum offering
price (whichever is higher), on the date of the first purchase under the
Letter of Intent, may be included as a credit toward the completion of such
Letter, but the reduced sales charge applicable to the amount covered by such
Letter will be applied only to new purchases. If the total amount of shares
does not equal the amount stated in the Letter of Intent (minimum of $25,000),
the investor will be notified and must pay, within 20 days of the expiration
of such Letter, the difference between the sales charge on the Class A or
Class D shares purchased at the reduced rate and the sales charge applicable
to the shares actually purchased through the Letter. Class A or Class D shares
equal to 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 Intent 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

12
<PAGE>

of Intent will be deducted from the total purchases made under such Letter. An
exchange from a money market fund advised by MLAM or its affiliates into the
Fund that creates a sales charge will count toward completing a new or
existing Letter of Intent from the Fund.

Merrill Lynch BlueprintSM Program. Class D shares of the Fund are offered to
participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group 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, with a waiver of
the front-end sales charge, 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 an 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 BlueprintSM
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.

Employee AccessSM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee AccessSM Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is
$50.

Purchase Privileges of Certain Persons. Trustees of the Fund, members of the
Boards of other investment companies advised by MLAM or its affiliates, 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 are 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
he or she 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

13
<PAGE>

establish that such redemption had been made within 60 days prior to the
investment in the Fund, and the proceeds from the redemption had been
maintained in the interim in cash or a money market fund.

Class D shares of the Fund are offered at net asset value, without sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: First, the investor must advise Merrill Lynch that he or she will
purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds 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 MLAM or its
affiliates 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.

Shareholders of certain continuously offered closed-end funds advised by
MLAM or its affiliates may reinvest at net asset value the net proceeds from a
sale of certain shares of common stock of such funds in shares of the Fund.
Upon exercise of this investment option, shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. will receive Class A shares of the Fund and
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund,
except that shareholders already owning Class A shares of the Fund will be
eligible to purchase additional Class A shares pursuant to this option, if
such additional Class A shares will be held in the same account as the
existing Class A shares and the other requirements pertaining to the
reinvestment privilege are met. In order to exercise this investment option, a
shareholder of one of the above-referenced continuously offered closed-end
funds (an "eligible fund") must sell his or her shares of common stock of the
eligible fund (the "eligible shares") back to the fund in connection with a
tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus)
is applicable. Purchase orders from eligible fund shareholders wishing to
exercise this investment option will be

14
<PAGE>

accepted only on the day that the related tender offer terminates and will be
effected at the net asset value of the designated class of the Fund on such
day.

Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund that might result from an acquisition of assets having net unrealized
appreciation 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 that (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, that 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 load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.

Fee-Based Programs. Certain Merrill Lynch fee-based programs, including
pricing alternatives for securities transactions (each referred to in this
paragraph as a "Program"), may permit the purchase of Class A shares at net
asset value. Under specified circumstances, participants in certain Programs
may deposit other classes of shares, which will be exchanged for Class A
shares. Initial or deferred sales charges otherwise due in connection with
such exchanges may be waived or modified. Termination of participation in a
Program may result in the redemption of such shares or the automatic exchange
thereof to another class at net asset value. In addition, upon termination of
participation in a Program, shares that have been held for less than specified
periods within such Program may be subject to a fee based upon the current
value of such shares. These Programs also generally prohibit such shares from
being transferred to another account at Merrill Lynch, to another broker-
dealer or to the Transfer Agent. Except in limited circumstances (which may
also involve an exchange as described above), such shares must be redeemed and
another class of shares purchased (which may involve the imposition of initial
or deferred sales charges and distribution and account maintenance fees) in
order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in the Program's client agreement and from the Transfer Agent at
(800) MER-FUND or (800) 637-3863.

EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS

Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the CDSC upon redemption, based
on similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any MLAM-
advised mutual fund. Minimum purchase requirements may be waived or varied for
such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.

DISTRIBUTION PLANS

Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1

15
<PAGE>

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.

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

The maximum sales charge rule in the National Association of Securities
Dealers, Inc. ("NASD") Conduct Rules imposes a limitation on certain asset-
based sales charges such as the distribution fee and the CDSC borne by the
Class B and Class C shares, but not the account maintenance fee. The maximum
sales charge rule is applied separately to each class. As applicable to the
Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately,
at the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed
to waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance fee. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.

16
<PAGE>

The following table sets forth comparative information as of July 31, 1998
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales
charge rule, and with respect to Class B shares only the Distributor's
voluntary maximum. The information shown is for the period November 25, 1987
(commencement of operations) to July 31, 1998, with respect to Class B shares
and for the period October 21, 1994 (commencement of operations) to July 31,
1998, with respect to Class C shares.

<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1998
(IN THOUSANDS)
CLASS B
---------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $412,079 $25,755 $ 14,377 $40,132 $20,245 $19,887 $548
Under Distributor's
Voluntary Waiver....... $412,079 $25,755 $ 2,060 $27,815 $20,245 $ 7,570 $548
<CAPTION>
CLASS C
---------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $ 4,335 $ 271 $ 39 $ 310 $ 67 $ 243 $ 32
</TABLE>
- --------
(1) Purchase price of all eligible Class B shares sold since November 25, 1987
(commencement of operations) and all eligible Class C shares sold since
October 21, 1994 (commencement of operations) other than shares acquired
through dividend reinvestment and the exchange privilege.

(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0% as permitted under the NASD
maximum sales charge rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. This
figure may include CDSCs that were deferred when a shareholder redeemed
shares prior to the expiration of the applicable CDSC period and invested
the proceeds, without the imposition of a sales charge, in Class A shares
in conjunction with the shareholder's participation in the Merrill Lynch
Mutual Funds Advisor ("MFA") program. The CDSC is booked as a contingent
obligation that may be payable if the shareholder terminates participation
in the MFA program. Of the distribution fee payments made prior to July 6,
1993 under a prior plan applicable to Class B shares at the 1.0% rate,
0.75% of average daily net assets has been treated as a distribution fee
and 0.25% of average daily net assets has been deemed to have been a
service fee and not subject to the NASD maximum sales charge rule.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum or the NASD
maximum.

REDEMPTION OF SHARES

Reference is made to "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 ("NYSE") is restricted as
determined by the Commission or during which the NYSE is closed (other than
customary weekend and holiday closings), for any period during which an
emergency exists, as defined by the Commission, 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 market value of the securities held by
the Fund at any such time.

17
<PAGE>

DEFERRED SALES CHARGES--CLASS B AND CLASS C SHARES

As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares
redeemed within four years of purchase or are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
certain instances, including in connection with certain post-retirement
withdrawals from an Individual Retirement Account ("IRA") or other retirement
plan or on redemptions of Class B shares in certain circumstances following
the death or disability of a Class B shareholder. Redemptions for which the
waiver applies in the case of such withdrawals are: (a) any partial or
complete redemption in connection with a distribution following retirement
under a tax-deferred retirement plan or attaining age 59 1/2 in the case of an
IRA or other retirement plan, or part of a series of equal periodic payments
(not less frequently than annually) made for life (or life expectancy), or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or
disability (as defined in the 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, 1996, 1997
and 1998, the Distributor received CDSCs of $75,449, $74,947 and $70,120,
respectively, with respect to redemption of Class B shares, all of which were
paid to Merrill Lynch. Additional CDSCs payable to the Distributor during the
fiscal year ended July 31, 1998 may have been waived or converted to a
contingent obligation in connection with a shareholder's participation in
certain fee-based programs. For the fiscal years ended July 31, 1996, 1997 and
1998, the Distributor received CDSCs of $2,429, $1,310 and $1,695,
respectively, with respect to redemption of Class C shares, all of which were
paid to Merrill Lynch.

Merrill Lynch BlueprintSM Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors and
participants in certain affinity groups such as trade associations and credit
unions. Class B shares of the Fund are offered through Blueprint only to
members of certain affinity groups. The CDSC is waived in connection with
purchase orders placed through Blueprint. Services, including the exchange
privilege, available to Class B investors through Blueprint, however, may
differ from those available to other Class B investors. Orders for purchases
and redemptions of Class B shares of the Fund 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 BlueprintSM Program, P.O. Box 30441,
New Brunswick, New Jersey 08989-0441.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Manager is responsible for making the Fund's portfolio decisions,
placing the Fund's brokerage business, evaluating the reasonableness of
brokerage commissions and negotiating the amount of any commissions paid,
subject to 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 that offers the Fund the best price and execution or other
services that 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 NASD Conduct Rules, 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.

18
<PAGE>

The Fund does not use any particular broker or dealer, and brokers who
provide supplemental investment research to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily
consist of assessments and analyses of the business or prospects of a company,
industry or economic sector. Information so received will be in addition to
and not in lieu of the services required to be performed by the Manager under
the Management Agreement. If in the judgment of the Manager the Fund will be
benefited by supplemental research services, the Manager is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions which another broker may have charged for effecting the same
transaction. The expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information, and the Manager may
use such information in servicing its other accounts. For the fiscal year
ended July 31, 1998, the Fund did not acquire any securities of brokers or
dealers that executed its portfolio transactions during that year.

The Fund invests in certain securities traded in the OTC 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 OTC 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.

For the fiscal year ended July 31, 1996, the Fund paid total brokerage
commissions of $146,599, of which $13,020 or 8.9% was paid to Merrill Lynch
for effecting 8.0% of the aggregate dollar amount of transactions in which the
Fund paid brokerage commissions. For the fiscal year ended July 31, 1997, the
Fund paid total brokerage commissions of $82,194, of which $8,080 or 9.8% was
paid to Merrill Lynch for effecting 9.9% of the aggregate dollar amount of
transactions in which the Fund paid brokerage commissions. For the fiscal year
ended July 31, 1998, the Fund paid total brokerage commissions of $205,336, of
which $7,029 or 3.42% was paid to Merrill Lynch for effecting 2.93% of the
aggregate dollar amount of transactions in which the Fund paid brokerage
commissions.

The Trustees of the Fund have considered the possibility of seeking to
recapture for the benefit of the Fund brokerage commissions, dealer spreads
and other expenses of possible portfolio transactions, such as underwriting
commissions, by conducting such portfolio transactions through affiliated
entities, including Merrill Lynch. For example, brokerage commissions received
by Merrill Lynch could be offset against the management fee paid by the Fund
to the Manager. After considering all factors deemed relevant, the Trustees
made a determination not to seek such recapture. The Trustees will reconsider
this matter from time to time.

DETERMINATION OF NET ASSET VALUE

Reference is made to "Additional Information--Determination of Net Asset
Value" in the Prospectus concerning the determination of net asset value.

The net asset value of the shares of the Fund is determined once daily
Monday through Friday as of 15 minutes after the close of business on the NYSE
(generally 4:00 p.m., New York time) on each day the NYSE is open. The NYSE is
not open on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Any assets or liabilities initially expressed in terms of non-
U.S. dollar currencies are translated into U.S. dollars at the prevailing
market

19
<PAGE>

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 (although not
necessarily meet) immediately after the payment of dividends or distributions,
which will differ by approximately the amount of the expense accrual
differential among the classes.

Portfolio securities that are securities traded on stock exchanges are
valued at the last sale price (regular way) on the exchange on which such
securities are traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid price for
long positions and at the last available ask price for short positions. Long
positions in securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Short
positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation.
Securities traded on a stock exchange and the OTC market will be valued
according to the broadest and most representative market. 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. When the Fund writes an option, the amount of the premium
received is recorded on the books of the Fund as an asset and an equivalent
liability. The amount of the liability is subsequently valued to reflect the
current market value of the option written, based upon the last sale price in
the case of exchange-traded options or, in the case of options traded in the
OTC market, the last asked price. Options purchased by the Fund are valued at
their last sale price in the case of exchange-traded options or, in the case
of options traded in the OTC market, the last bid price. Other investments,
including futures contracts and related options, are stated at market value.

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.

SHAREHOLDER SERVICES

The Fund offers a number of shareholder services summarized below that 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 gains distributions. The statements will also
show any other activity in the account since the preceding statement.
Shareholders will receive separate transaction confirmations for each purchase
or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gains
distributions.

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

20
<PAGE>

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 (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. 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
Blueprint, no minimum charge to the investors' bank account is required.
Investors who maintain CMA(R) accounts may arrange to have periodic
investments made in the Fund in their CMA(R) accounts or in certain related
accounts in amounts of $100 or more ($1 for retirement plans) through the
CMA(R) Automated Investment Program.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund 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. The Fund
is not responsible for any failure of delivery to the shareholder's address of
record and no interest will accrue on amounts represented by uncashed
distribution or redemption checks.

Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if the shareholder's account
is maintained with the Transfer Agent, that they no longer wish to have their
dividends and/or capital gains distributions reinvested in shares of the Fund
or vice versa and, commencing ten days after the receipt by the Transfer Agent
of such notice, those instructions will be effected (provided that, in the
event that a payment on an account maintained at the Transfer Agent would
amount to $10.00 or less, a shareholder will not receive such payment in cash
and such payment will automatically be reinvested in additional shares). The
Fund is not responsible for any failure of delivery to the shareholder's
address of record and no interest will accrue on amounts represented by
uncashed distribution or redemption checks. The Fund is not responsible for
any failure of delivery to the shareholder's address of record and no interest
will accrue on amounts represented by uncashed distribution or redemption
checks.

SYSTEMATIC WITHDRAWAL PLANS

A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit to

21
<PAGE>

such shareholder's bank account, on either a monthly or quarterly basis as
provided below. Quarterly withdrawals are available for shareholders who have
acquired shares of the Fund having a value, based on cost or the current
offering price, of $5,000 or more, and monthly withdrawals are available for
shareholders with shares having a value of $10,000 or more.

At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and the class of shares to be redeemed. Redemptions will be made at net
asset value determined as described herein on the 24th day of each month or
the 24th day of the last month of each quarter, whichever is applicable. If
the NYSE is not open for business on such date, the shares will be redeemed at
the close of business on the following business day. The check for the
withdrawal payment will be mailed, or the direct deposit for withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all shares in the Investment Account are reinvested automatically in shares of
the Fund. A shareholder's systematic withdrawal plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund, the Fund's
Transfer Agent or the Distributor.

Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase
orders for shares of the Fund from investors who maintain a systematic
withdrawal plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.

Alternatively, a shareholder whose shares are held within a CMA(R), CBA(R)
or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$50. The proceeds of systematic redemptions will be posted to a shareholder's
account three business days after the date the shares are redeemed. All
redemptions are made at net asset value. A shareholder may elect to have his
or her shares redeemed on the first, second, third or fourth Monday of each
month, in the case of monthly redemptions, or of every other month, in the
case of bimonthly redemptions. For quarterly, semiannual or annual
redemptions, the shareholder may select the month in which the shares are to
be redeemed and may designate whether the redemption is to be made on the
first, second, third or fourth Monday of the month. If the Monday selected is
not a business day, the redemption will be processed at net asset value on the
next business day. The CMA(R) or CBA(R) Systematic Redemption Program is not
available if Fund shares are being purchased within the account pursuant to
the Automatic Investment Program. For more information on the CMA(R) or CBA(R)
Systematic Redemption Program, eligible shareholders should contact their
Merrill Lynch Financial Consultant.

With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B and Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "--Contingent Deferred
Sales Charges--Class C Shares" in the Prospectus. Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last
Class B shares in an account to Class D shares, a shareholder must make a new
election to join the systematic withdrawal plan with respect to the Class D
shares. See "Purchase of Shares--Deferred Sales Charge Alternatives--Class B
and Class C Shares--Conversion of Class B Shares to Class D Shares" in the
Prospectus; if an investor wishes to change the amount being withdrawn in a
systematic withdrawal plan the investor should contact his or her Financial
Consultant.

22
<PAGE>

RETIREMENT PLANS

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.
However, there is no minimum for purchases through Blueprint's automatic
investment plans.

Capital gains and income received in each of the plans referred to above are
exempt from Federal taxation until distributed from the plans. Investors
considering 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 PricingSM System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second MLAM-
advised mutual fund but does not hold Class A shares of the second fund in his
or her account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class
D shares of the second fund as a result of the exchange. Class D shares also
may be exchanged for Class A shares of a second MLAM-advised mutual fund at
any time as long as, at the time of the exchange, the shareholder holds Class
A shares of the second fund in the account in which the exchange is made or is
otherwise eligible to purchase Class A shares of the second fund. Class B,
Class C and Class D shares will be exchangeable for 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 and Class D shares also will be exchangeable for
Class A shares, and Class B and Class C shares also will be exchangeable for
Class B shares, of Summit Cash Reserves Fund, a series of Financial
Institutions Series Trust, which is a Merrill Lynch-sponsored money market
fund specifically designated as available for exchange by holders of Class A,
Class B, Class C and Class D shares as more fully described below. Shares with
an aggregate net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for 15 days.

Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have
taken place, the "sales charge previously paid" shall include the aggregate of
the sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, dividend reinvestment Class A and Class D shares shall be deemed to
have been sold with a sales charge equal to the sales charge previously paid
on the Class A or Class D shares on which the dividend was paid. Based on this
formula, Class A and Class D shares of the Fund generally may be exchanged
into 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.

23
<PAGE>

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% CDSC that
generally would apply to a redemption would not apply to the exchange. Three
years later the investor may decide to redeem the Class B shares of 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 their shares into shares of Summit Cash
Reserves Fund, which is a Merrill Lynch-sponsored money market fund
specifically designated as available for exchange by holders of Class A, Class
B, Class C and Class D shares. Class A and Class D shares will be exchangeable
for Class A shares of, and Class B and Class C shares will be exchangeable for
Class B shares of, Summit Cash Reserves Fund. Class A shares of Summit Cash
Reserves Fund have an exchange privilege back into Class A or Class D shares
of MLAM-advised funds; Class B shares of Summit Cash Reserves Fund have an
exchange privilege back into Class B or Class C shares of MLAM-advised funds.
The period of time that Class B shares of Summit Cash Reserves Fund are held
will count toward satisfaction of the holding period requirement for purposes
of reducing any CDSC and, with respect to Class B shares, toward satisfaction
of any conversion period. Class B shares of Summit Cash Reserves Fund will be
subject to a distribution fee at an annual rate of 0.75% of average daily net
assets of such Class B shares.

The exchange privilege described above does not apply with respect to
certain Merrill Lynch fee-based programs, for which alternative exchange
arrangements may exist. Please see your Merrill Lynch Financial Consultant for
further information.

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.

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.

24
<PAGE>

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 Class A, Class B, Class C
and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A PERCENTAGE HYPOTHETICAL AS A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year Ended July 31,
1998................... 6.15% $1,061.50 6.94% $1,069.40
Five Years Ended July
31, 1998............... 15.28% $2,035.70 15.34% $2,041.00
Ten Years Ending July
31, 1998............... -- -- 12.35% $3,203.70
Inception (November 29,
1988) to
July 31, 1998.......... 13.11% $3,289.90
<CAPTION>
ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year Ended July 31,
1998.................... 12.03% $1,120.30 10.94% $1,109.40
1997.................... 40.42% $1,404.20 38.90% $1,389.00
1996.................... 16.98% $1,169.80 15.89% $1,158.90
1995.................... 14.04% $1,140.40 12.82% $1,128.20
1994.................... 2.38% $1,023.80 1.30% $1,013.00
1993.................... 10.03% $1,100.30 8.90% $1,089.00
</TABLE>

(continued on next page)

25
<PAGE>

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A PERCENTAGE HYPOTHETICAL AS A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year ended July 31,
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 ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (November 29,
1988) to
July 31, 1998.......... 228.99% $3,289.90
Inception (November 25,
1987) to
July 31, 1998.......... 252.82% $3,528.20
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE REDEEMABLE
EXPRESSED VALUE OF A EXPRESSED VALUE OF A
AS A PERCENTAGE HYPOTHETICAL AS A PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
One Year ended July 31,
1998................... 9.96% $1,099.60 5.97% $1,059.70
Inception (October 21,
1994) to
July 31, 1998.......... 20.48% $2,020.70 19.73% $1,973.60
<CAPTION>
ANNUAL TOTAL RETURN
(excluding maximum applicable sales charges)
<S> <C> <C> <C> <C>
Year ended July 31,
1998................... 10.96% $1,109.60 11.84% $1,118.40
Year ended July 31,
1997................... 38.84% $1,388.40 39.99% $1,399.90
Year ended July 31,
1996................... 15.78% $1,157.80 16.73% $1,167.30
Inception (October 21,
1994) to
July 31, 1995.......... 13.30% $1,133.00 13.98% $1,139.80
<CAPTION>
AGGREGATE TOTAL RETURN
(including maximum applicable sales charges)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to
July 31, 1998.......... 102.07% $2,020.70 97.36% $1,973.60
</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.

26
<PAGE>

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 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 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"). As long as it so qualifies, the
Fund (but not its shareholders) will not be subject to Federal income tax on
the part of its net ordinary income and net realized capital gains that it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.

Dividends paid by the Fund from its ordinary income and distributions of the
Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary
income. Any net capital gains (i.e., the excess of net capital gains from the
sale of assets held for more than 12 months over net short-term capital
losses, and including such gains from certain transactions in futures and
options) distributed to shareholders will be taxable as long-term capital
gains to the shareholders, whether or not reinvested and regardless of the
length of time a shareholder has owned his or her shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any 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). Recent legislation creates additional
categories of capital gains taxable at different rates. Additional legislation
eliminates the 28% capital gains tax category for sales, applicable to
individuals, occurring after December 31, 1997. Generally not later than 60
days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amounts of any ordinary
income dividends or capital gain dividends, as well as the amount of capital
gain dividends in the different categories of capital gain referred to above.

Dividends and distributions are taxable to shareholders even though they are
reinvested in additional shares of the Fund. A portion of the Fund's ordinary
income dividends may be eligible for the dividends received deduction allowed
to corporations under the Code if certain requirements are met. For this
purpose, the Fund will allocate dividends eligible for the dividends received
deduction between the Class A, Class B, Class C and Class D shareholders
according to a method (which it believes is consistent with the Commission
exemptive order permitting the issuance and sale of multiple classes of stock)
that is based 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

27
<PAGE>

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.

Pursuant to the Fund's investment objective, 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.

The Fund may invest in high yield securities as described in the Prospectus.
Furthermore, the Fund may also invest in instruments the return on which
includes nontraditional features such as indexed principal or interest
payments ("nontraditional instruments"). These instruments may be subject to
special tax rules under which the Fund may be required to accrue and
distribute income before amounts due under the obligations are paid. In
addition, it is possible that all or a portion of the interest payments on
such high yield securities and/or nontraditional instruments could be
recharacterized as taxable ordinary income.

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.

Generally any loss realized on a sale or exchange of shares of the Fund will
be disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.

The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. 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

28
<PAGE>

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.

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.

Code Section 1259 will require the recognition of gain (but not loss) if the
Fund makes a "constructive sale" of an appreciated financial position (e.g.,
stock). The Fund generally will be considered to make a constructive sale of
an appreciated financial position if it sells the same or substantially
identical property short, enters into a futures or forward contract to deliver
the same or substantially identical property, or enters into certain other
similar transactions.

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.

Dividends and capital gains distributions and gain on the sale or exchange
of shares in the Fund may also be subject to state and local taxes.

Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.

29
<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. 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 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.

30
<PAGE>

COMPUTATION OF OFFERING PRICE PER SHARE

The offering price for Class A, Class B, Class C and Class D shares of the
Fund, based on the value of the Fund's net assets and number of shares
outstanding as of July 31, 1998, is calculated as set forth below.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Net Assets.................. $24,232,991 $73,067,070 $4,379,013 $100,641,656
=========== =========== ========== ============
Number of Shares
Outstanding................ 1,577,415 4,752,005 287,188 6,553,697
=========== =========== ========== ============
Net Asset Value Per Share
(net assets divided by
number of shares
outstanding)............... $ 15.36 $ 15.38 $ 15.25 $ 15.36
Sales Charge* (for Class A
and Class D shares: 5.25%
of offering price,
5.54% of net asset value
per share)................. 0.85 ** ** 0.85
----------- ----------- ---------- ------------
Offering Price.............. $ 16.21 $ 15.38 $ 15.25 $ 16.21
=========== =========== ========== ============
</TABLE>
- --------
* Rounded to nearest one-hundredth of one percent; assumes maximum sales
charge is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption. See "Purchase of Shares--Deferred
Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus
and "Redemption of Shares--Deferred Sales Charges--Class B and Class C
Shares" herein.

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.

LEGAL COUNSEL

Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022, is counsel for the Fund.

REPORTS TO SHAREHOLDERS

The fiscal year of the Fund ends on 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.

31
<PAGE>

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 October 1, 1998.

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.

FINANCIAL STATEMENTS

The Fund's audited financial statements are incorporated by reference in
this Statement of Additional Information to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling 1-800-456-4587 Ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.

32
<PAGE>

[This page is intentionally left blank]

<PAGE>

[This page is intentionally left blank]

<PAGE>

[This page is intentionally left blank]

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Portfolios Strategies Involving Options and Futures...................... 2
Other Investment Policies and Practices.................................. 5
Investment Restrictions.................................................. 6
Management of the Fund.................................................... 8
Trustees and Officers.................................................... 8
Compensation of Trustees................................................. 9
Management and Advisory Arrangement...................................... 10
Purchase of Shares........................................................ 11
Initial Sales Charge Alternatives--Class A and Class D Shares............ 11
Reduced Initial Sales Charges............................................ 12
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements............................................................ 15
Distribution Plans....................................................... 15
Limitations on the Payment of Deferred Sales Charges..................... 16
Redemption of Shares...................................................... 17
Deferred Sales Charges--Class B and Class C Shares....................... 18
Portfolio Transactions and Brokerage...................................... 18
Determination of Net Asset Value.......................................... 19
Shareholder Services...................................................... 20
Investment Account....................................................... 20
Automatic Investment Plans............................................... 21
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 21
Systematic Withdrawal Plans.............................................. 21
Retirement Plans......................................................... 23
Exchange Privilege....................................................... 23
Performance Data.......................................................... 24
Dividends, Distributions and Taxes........................................ 27
Dividends and Distributions.............................................. 27
Taxes.................................................................... 27
Tax Treatment of Options and Futures Investments......................... 29
Special Rules for Certain Foreign Currency Transactions.................. 29
Massachusetts Income Tax................................................. 30
General Information....................................................... 30
Description of Shares.................................................... 30
Computation of Offering Price Per Share.................................. 31
Independent Auditors..................................................... 31
Custodian................................................................ 31
Transfer Agent........................................................... 31
Legal Counsel............................................................ 31
Reports to Shareholders.................................................. 31
Additional Information................................................... 32
Financial Statements...................................................... 32
</TABLE>

Code #10560-1098

[LOGO] MERRILL LYNCH

Merrill Lynch
Strategic Dividend Fund

[Art]

STATEMENT OF
ADDITIONAL
INFORMATION

October 29, 1998

Distributor:
Merrill Lynch
Funds Distributor
<PAGE>

PART C. OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(A) FINANCIAL STATEMENTS:

Contained in Part A:

Financial Highlights for each of the years in the ten-year period ended
July 31, 1998.

Contained in Part B:

Schedule of Investments, as of July 31, 1998*.

Statement of Assets and Liabilities, as of July 31, 1998*.

Statement of Operations for the year ended July 31, 1998*.

Statements of Changes in Net Assets for each of the years in the two-year
period ended July 31, 1998.

Financial Highlights for each of the years in the five-year period ended
July 31, 1998*.
- --------

*Incorporated by reference in this Statement of Additional Information to the
Fund's 1998 annual report to shareholders.

(B) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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)
(d) --Certificate of Amendment to Declaration of Trust and Establishment
and Designation of Class C and D shares, dated October 19, 1994.(h)
2(a) --By-Laws of Registrant.(i)
(b) --Amended By-laws of Registrant.(j)
3 --None.
4(a) --Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.
5(a) --Management Agreement between Registrant and Merrill Lynch Asset
Management, Inc.(b)
(b) --Sub-Advisory Agreement between Merrill Lynch Asset Management, L.P.
and Merrill Lynch Asset Management U.K. Limited.(l)
6(a) --Class A Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(f)
(b) --Class B Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(a)
(c) --Class C Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(f)
(d) --Class D Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc.(f)
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 Merrill Lynch
Financial Data Services, Inc. (now known as Financial Data Services,
Inc.)(b)
10 --Opinion of counsel for Registrant.(k)
11 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, Inc.(b)
14 --Not Applicable.
15(a) --Amended and Restated Class B Distribution Plan and Class B
Distribution Plan Sub-Agreement of Registrant.(e)
(b) --Class C Distribution Plan and Class C Distribution Plan Sub-
Agreement.(f)
(c) --Class D Distribution Plan and Class D Distribution Plan Sub-
Agreement.(f)
</TABLE>

C-1
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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)
(c) --Schedules for computation of each performance quotation for Class C
and Class D shares provided in Registration Statement in response to
Item 22.(h)
17(a) --Other Exhibits
Powers of Attorney for Officers and Trustees
Arthur Zeikel(e)
Gerald M. Richard(e)
Ronald W. Forbes(e)
Cynthia A. Montgomery(g)
Charles C. Reilly(e)
Kevin A. Ryan(e)
Richard R. West(e)
(b) --Financial Data Schedule for Class A shares.
(c) --Financial Data Schedule for Class B shares.
(d) --Financial Data Schedule for Class C shares.
(e) --Financial Data Schedule for Class D shares.
</TABLE>
- --------

(a) Refiled electronically as, and incorporated by reference to, the
identically numbered exhibit to Post-Effective Amendment No. 9 to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A. Initially filed on May 22, 1987 as an exhibit to Registrant's
Registration Statement under the Securities Act of 1933 on Form N-1A (File
No. 33-14517).

(b) Refiled electronically as, and incorporated by reference to, the
identically numbered exhibit to Post-Effective Amendment No. 9 to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A. Initially filed on August 4, 1987 as an exhibit to Pre-
Effective Amendment No. 2.

(c) Refiled electronically as, and incorporated by reference to, the
identically numbered exhibit to Post-Effective Amendment No. 9. to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A. Initially filed on October 28, 1988 as an exhibit to Post-
Effective Amendment No. 2.

(d) Refiled electronically as, and incorporated by reference to, the
identically numbered exhibit to Post-Effective Amendment No. 9 to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A. Initially filed on November 28, 1989 as an exhibit to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A.

(e) Refiled electronically as, and incorporated by reference to, the
identically numbered exhibit to Post-Effective Amendment No. 11 to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A. Originally filed as the identically numbered exhibit to Post-
Effective Amendment No. 7 to Registrant's Registration Statement under the
Securities Act of 1933 on Form N-1A.

(f) Refiled electronically as, and incorporated by reference to, the
identically numbered exhibit to Post-Effective Amendment No. 9 to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A. Initially filed as identically numbered exhibit to Post-
Effective Amendment No. 8.

(g) Refiled electronically as, and incorporated by reference to, the
identically numbered exhibit to Post-Effective Amendment No. 11 to
Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A. Originally filed as the identically numbered exhibit to Post-
Effective Amendment 8 to Registrant's Registration Statement under the
Securities Act of 1933 on Form N-1A.

(h) Incorporated by reference to the identically numbered exhibit to Post-
Effective Amendment 9 to Registrant's Registration Statement under the
Securities Act of 1933 on Form N-1A.

(i) Refiled electronically as, and incorporated by reference to, Exhibit 2 to
Post-Effective Amendment No. 9 to Registrant's Registration Statement
under the Securities Act of 1933 on Form N-1A. Initially filed on May 22,
1987 as an exhibit to Registrant's Registration Statement.

(j) Incorporated by reference to the identically numbered exhibit to Post-
Effective Amendment No. 10 to Registrant's Registration Statement under
the Securities Act of 1933 on Form N-1A.

(k) Incorporated by reference to the identically numbered exhibit to Pre-
Effective Amendment No. 2 to Registrant's Registration Statement under the
Securities Act of 1933 on Form N-1A.

(l) Incorporated by reference to the identically numbered exhibit to Post-
Effective Amendment No. 11 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
HOLDERS AT
TITLE OF CLASS AUGUST 31, 1998
-------------- ---------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per
share........................................................ 2,497
Class B shares of beneficial interest, par value $0.10 per
share........................................................ 5,534
Class C shares of beneficial interest, par value $0.10 per
share........................................................ 522
Class D shares of beneficial interest, par value $0.10 per
share........................................................ 8,188
</TABLE>

Note: The number of holders shown in the table includes holders of record
plus beneficial owners whose shares are held of record by Merrill Lynch,
Pierce, Fenner & Smith Incorporated (Merrill Lynch).

ITEM 27. INDEMNIFICATION.

Section 5.3 of the Registrant's Declaration of Trust provides as follows:

"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties; provided, however, that as to any matter disposed
of by a compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion 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.

The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against
such officers and trustees, to the extent such officers and trustees are

C-3
<PAGE>

not found to have committed conduct constituting willful misfeasance, bad
faith, gross negligence or reckless disregard in the performance of their
duties.

Article IV of the Management Agreement between Registrant and Merrill Lynch
Asset Management, Inc. (now called Merrill Lynch Asset Management L.P.)
("MLAM") (Exhibit 5(a) to Registrant's Registration Statement on Form N-1A)
limits the liability of MLAM to liabilities arising from willful misfeasance,
bad faith or gross negligence in the performance of their respective duties or
from reckless disregard of their respective duties and obligations.

In Section 9 of the Distribution Agreements relating to 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, as amended (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 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 Asset Management, L.P. (the "Manager" or "MLAM" ) acts as the
investment adviser for the following open-end registered investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Fund for Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc.,
Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Convertible Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill
Lynch Global Holdings, Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund,
Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch Intermediate Government Bond Fund, Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle East/Africa
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley,
a division of MLAM); and the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill
Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill
Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio,
two investment portfolios of EQ Advisors Trust.

Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following registered open-end investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-
State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,

C-4
<PAGE>

The Corporate Fund Accumulation Program, Inc., Financial Institutions Series
Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Corporate High Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end registered investment
companies: Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc.,
Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt
Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund
III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund,
Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II,
Inc., MuniHoldings Insured Fund, Inc., MuniHoldings California Insured Fund,
Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings California
Fund III, Inc., MuniHoldings Florida Insured Fund, MuniHoldings Florida
Insured Fund II, MuniHoldings Florida Insured Fund III, MuniHoldings New
Jersey Insured Fund, Inc., MuniHoldings New Jersey Fund II, Inc., MuniHoldings
New York Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings
New York Insured Fund II, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc.,
MuniVest Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund,
Inc., MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield
California Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc.,
MuniYield Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield
Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New
Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., and Worldwide DollarVest Fund, Inc.

The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-
2665. The address of the Manager, FAM, Princeton Services, Inc. ("Princeton
Services") and Princeton Administrators, L.P. ("Princeton Administrators") is
also P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
Princetons Funds Distributor, Inc. ("Princeton Fund Distributor", and of
Merrill Lynch Funds Distributor ("MLFD") is P.O. Box 9081, Princeton, New
Jersey 08543-9081. The address of Merrill Lynch, Pierce Fenner & Smith
Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is
World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281. The address of the Fund's transfer agent 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 June 1,
1996 for his, her or its 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. Giordano, Harvey, Kirstein
and Monagle 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;
Limited Partner of FAM.
Princeton Services...... General Partner General Partner of FAM.
Arthur Zeikel........... Chairman Chairman of FAM; President of MLAM and
FAM from 1977 to 1997; Chairman and
Director of Princeton Services;
President of Princeton Services from
1993 to 1997; Executive Vice President
of ML & Co.
</TABLE>

C-5
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- ---- ------------- ----------------------------------
<S> <C> <C>
Jeffrey M. Peek......... Executive Vice President of FAM; President and Director
President of Princeton Services; Executive Vice
president of ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM;
President Executive Vice President and Director
of Princeton Services; President and
Director of Princeton Funds
Distributor, Inc.; Director of FDS;
President of Princeton Administrators,
L.P.
Mark DeSario............ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Linda L. Federici....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Vincent R. Giordano..... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Elizabeth A. Griffin.... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Norman R. Harvey........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Michael J. Hennewinkel.. Senior Vice Senior Vice President, Secretary and
President, Secretary General Counsel of FAM; Senior Vice
and General Counsel President of Princeton Services.
Philip L. Kirstein...... Senior Vice President Senior Vice President of FAM; Senior
Vice President, Director and Secretary
of Princeton Services.
Ronald M. Kloss......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Debra Landsman-Yaros.... Senior Vice President Senior Vice President of FAM; Vice
President of Princeton Funds
Distributor, Inc.; Senior Vice
President of Princeton Services.
Stephen M. M. Miller.... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services.
Joseph T. Monagle, Senior Vice President Senior Vice President of FAM; Senior
Jr. ................... Vice President of Princeton Services.
Michael L. Quinn........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services;
Managing Director and First Vice
President of Merrill Lynch from 1989 to
1995.
Brian A. Murdock........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
and Director of Princeton Funds
Distributor, Inc.
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of Princeton
Funds Distributor, Inc.
Gregory D. Upah......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
Ronald L. Welburn....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services.
</TABLE>

C-6
<PAGE>

Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as a sub-
adviser for the following registered investment companies: The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies
Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Consults International Portfolio, Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch
Developing Capital Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund,
Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Real Estate Fund Inc., Merrill
Lynch Series Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value
Fund, Inc. Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc., Merrill Lynch World Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., Senior Floating Rate Fund, Inc. and Worldwide
DollarVest Fund, Inc. The address of each of these registered investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The address of
MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.

Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since June 1,
1996, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel and Richard are officers of
one or more of the registered investment companies listed in the first two
paragraphs of this Item 28:

<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME MLAM U.K. PROFESSION, VOCATION OR EMPLOYMENT
- ---- ------------- ----------------------------------
<S> <C> <C>
Arthur Zeikel........... Director and Chairman Chairman of the Manager and FAM;
President of the Manager and FAM from
1977 to 1997; Chairman and Director of
Princeton Services; President and
Director of Princeton Services from
1993 to 1997; Executive Vice President
of ML & Co.
Nicholas C.D. Hall...... Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group.
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
the Manager and FAM; Senior Vice
President and Treasurer of Princeton
Services; Vice President and Treasurer
of Princeton Funds Distributor, Inc.
Carol Ann Langham....... Company Secretary None.
Debra Anne Searle....... Assistant Company
Secretary None.
</TABLE>

C-7
<PAGE>

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) MLFD a division of Princeton Funds Distributor, Inc., acts as the
principal underwriter for the Registrant and for each of the open-end
registered investment companies referred to in the first two paragraphs of
Item 28 except CBA Money Fund, CMA Government Securities Fund, CMA Money Fund,
CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
Fund, The Corporate Fund Accumulation Program, Inc., and The Municipal Fund
Accumulation Program, Inc. MLFD also acts as principal underwriter for the
following closed-end registered funds: Merrill Lynch High Income Municipal
Bond Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill
Lynch Municipal Strategy Fund, Inc. A separate division of Princeton Funds
Distributor, Inc. acts as the principal underwriter of a number of other
investment companies.

(b) Set forth below is information concerning each director and officer of
Princeton Funds Distributor, Inc. The principal business address of each such
person is P.O. Box 9011, Princeton, New Jersey 08543-9011, except that the
address of Messrs. Breen, Crook, Fatseas and Wasel is One Financial Center,
23rd Floor, Boston, Massachusetts 02111-2665.

<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH REGISTRANT
- ---- ------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn.......... President and Director Executive Vice President
Thomas J. Verage........ Director None
Brian A. Murdock........ Director None
Robert W. Crook......... Senior Vice President None
Michael J. Brady........ Vice President None
William M. Breen........ Vice President None
Michael G. Clark........ Vice President None
James T. Fatseas........ Vice President None
Debra W. Landsman-
Yaros.................. Vice President None
Michelle T. Lau......... Vice President None
Gerald M. Richard....... Vice President and Treasurer Treasurer
Salvatore Venezia....... Vice President None
William Wasel........... Vice President None
Robert Harris........... Secretary None
</TABLE>

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, Financial Data Services, Inc., 4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484.

ITEM 31. MANAGEMENT SERVICES.

Other than as set forth under the caption "Management of the 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-8
<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
1933 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
29TH DAY OF OCTOBER, 1998.

Merrill Lynch Strategic Dividend
Fund
(Registrant)

/s/ Arthur Zeikel
By __________________________________
(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.

SIGNATURE TITLE DATE(S)

/s/ Arthur Zeikel President and
- ------------------------------------- Trustee (Principal October 29,
(ARTHUR ZEIKEL) Executive Officer) 1998

* Treasurer (Principal
- ------------------------------------- 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)

* This Amendment has been signed by each of the persons so indicated by the
undersigned as Attorney-in-Fact.

/s/ Arthur Zeikel
*By _________________________________ October 29,
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT) 1998

C-9
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
--Consent of Deloitte & Touche LLP, independent auditors for
11 Registrant
17(b) --Financial Data Schedule for Class A Shares
17(c) --Financial Data Schedule for Class B Shares
17(d) --Financial Data Schedule for Class C Shares
17(e) --Financial Data Schedule for Class D Shares
</TABLE>
<PAGE>

APPENDIX FOR GRAPHIC AND IMAGE MATERIAL

Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.

DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH STRATEGIC DIVIDEND FUND CLASS A

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 153386939
<INVESTMENTS-AT-VALUE> 205015567
<RECEIVABLES> 730326
<ASSETS-OTHER> 46921
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 205792814
<PAYABLE-FOR-SECURITIES> 2790021
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 682063
<TOTAL-LIABILITIES> 3472084
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 121108885
<SHARES-COMMON-STOCK> 1577415
<SHARES-COMMON-PRIOR> 1903208
<ACCUMULATED-NII-CURRENT> 406383
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 29178734
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 51626728
<NET-ASSETS> 24232991
<DIVIDEND-INCOME> 6110296
<INTEREST-INCOME> 838906
<OTHER-INCOME> 0
<EXPENSES-NET> (2892199)
<NET-INVESTMENT-INCOME> 4057003
<REALIZED-GAINS-CURRENT> 33543282
<APPREC-INCREASE-CURRENT> (15046769)
<NET-CHANGE-FROM-OPS> 22553516
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (687382)
<DISTRIBUTIONS-OF-GAINS> (2370162)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 514315
<NUMBER-OF-SHARES-REDEEMED> (1001374)
<SHARES-REINVESTED> 161266
<NET-CHANGE-IN-ASSETS> 2269757
<ACCUMULATED-NII-PRIOR> 379522
<ACCUMULATED-GAINS-PRIOR> 11596133
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1230228
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2892199
<AVERAGE-NET-ASSETS> 28330009
<PER-SHARE-NAV-BEGIN> 15.21
<PER-SHARE-NII> .39
<PER-SHARE-GAIN-APPREC> 1.37
<PER-SHARE-DIVIDEND> (.39)
<PER-SHARE-DISTRIBUTIONS> (1.22)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.36
<EXPENSE-RATIO> .88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH STRATEGIC DIVIDEND FUND CLASS B

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 153386939
<INVESTMENTS-AT-VALUE> 205015567
<RECEIVABLES> 730326
<ASSETS-OTHER> 46921
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 205792814
<PAYABLE-FOR-SECURITIES> 2790021
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 682063
<TOTAL-LIABILITIES> 3472084
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 121108885
<SHARES-COMMON-STOCK> 4752005
<SHARES-COMMON-PRIOR> 6145233
<ACCUMULATED-NII-CURRENT> 416383
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 29178734
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 51626728
<NET-ASSETS> 73067070
<DIVIDEND-INCOME> 6110296
<INTEREST-INCOME> 838906
<OTHER-INCOME> 0
<EXPENSES-NET> (2892199)
<NET-INVESTMENT-INCOME> 4057003
<REALIZED-GAINS-CURRENT> 33543282
<APPREC-INCREASE-CURRENT> (15046769)
<NET-CHANGE-FROM-OPS> 22553516
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1178158)
<DISTRIBUTIONS-OF-GAINS> (6786151)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1170952
<NUMBER-OF-SHARES-REDEEMED> (2961618)
<SHARES-REINVESTED> 397438
<NET-CHANGE-IN-ASSETS> 2269757
<ACCUMULATED-NII-PRIOR> 379522
<ACCUMULATED-GAINS-PRIOR> 11596133
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1230228
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2892199
<AVERAGE-NET-ASSETS> 80940651
<PER-SHARE-NAV-BEGIN> 15.22
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> 1.37
<PER-SHARE-DIVIDEND> (.23)
<PER-SHARE-DISTRIBUTIONS> (1.22)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.38
<EXPENSE-RATIO> 1.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> MERRILL LYNCH STRATEGIC DIVIDEND FUND CLASS C

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 153386939
<INVESTMENTS-AT-VALUE> 205015567
<RECEIVABLES> 730326
<ASSETS-OTHER> 46921
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 205792814
<PAYABLE-FOR-SECURITIES> 2790021
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 682063
<TOTAL-LIABILITIES> 3472084
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 121108885
<SHARES-COMMON-STOCK> 287188
<SHARES-COMMON-PRIOR> 200133
<ACCUMULATED-NII-CURRENT> 406383
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 29178734
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 51626728
<NET-ASSETS> 4379013
<DIVIDEND-INCOME> 6110296
<INTEREST-INCOME> 838906
<OTHER-INCOME> 0
<EXPENSES-NET> (2892199)
<NET-INVESTMENT-INCOME> 4057003
<REALIZED-GAINS-CURRENT> 33543282
<APPREC-INCREASE-CURRENT> (15046769)
<NET-CHANGE-FROM-OPS> 22553516
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (58545)
<DISTRIBUTIONS-OF-GAINS> (257657)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 269716
<NUMBER-OF-SHARES-REDEEMED> (198582)
<SHARES-REINVESTED> 15921
<NET-CHANGE-IN-ASSETS> 2269757
<ACCUMULATED-NII-PRIOR> 379522
<ACCUMULATED-GAINS-PRIOR> 11596133
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1230228
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2892199
<AVERAGE-NET-ASSETS> 3787617
<PER-SHARE-NAV-BEGIN> 15.11
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> 1.37
<PER-SHARE-DIVIDEND> (.24)
<PER-SHARE-DISTRIBUTIONS> (1.22)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.25
<EXPENSE-RATIO> 1.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH STRATEGIC DIVIDEND FUND CLASS D

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 153386939
<INVESTMENTS-AT-VALUE> 205015567
<RECEIVABLES> 730326
<ASSETS-OTHER> 46921
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 205792814
<PAYABLE-FOR-SECURITIES> 2790021
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 682063
<TOTAL-LIABILITIES> 3472084
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 121108885
<SHARES-COMMON-STOCK> 6553697
<SHARES-COMMON-PRIOR> 4905708
<ACCUMULATED-NII-CURRENT> 406383
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 29178734
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 51626728
<NET-ASSETS> 100641656
<DIVIDEND-INCOME> 6110296
<INTEREST-INCOME> 838906
<OTHER-INCOME> 0
<EXPENSES-NET> (2892199)
<NET-INVESTMENT-INCOME> 4057003
<REALIZED-GAINS-CURRENT> 33543282
<APPREC-INCREASE-CURRENT> (15046769)
<NET-CHANGE-FROM-OPS> 22553516
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2102336)
<DISTRIBUTIONS-OF-GAINS> (6550432)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2057387
<NUMBER-OF-SHARES-REDEEMED> (845433)
<SHARES-REINVESTED> 436035
<NET-CHANGE-IN-ASSETS> 2269757
<ACCUMULATED-NII-PRIOR> 379522
<ACCUMULATED-GAINS-PRIOR> 11596133
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1230228
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2892199
<AVERAGE-NET-ASSETS> 91976951
<PER-SHARE-NAV-BEGIN> 15.20
<PER-SHARE-NII> .35
<PER-SHARE-GAIN-APPREC> 1.38
<PER-SHARE-DIVIDEND> (.35)
<PER-SHARE-DISTRIBUTIONS> (1.22)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.36
<EXPENSE-RATIO> 1.12
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

EXHIBIT 99.11

INDEPENDENT AUDITORS' CONSENT

Merrill Lynch Strategic Dividend Fund:

We consent to the incorporation by reference in this Post-Effective Amendment
No. 12 to Registration Statement No. 33-14517 of our report dated September 8,
1998 appearing in the annual report to shareholders of the Merrill Lynch
Strategic Dividend Fund for the year ended July 31, 1998, and to the reference
to us under the caption "Financial Highlights" in the Prospectus, which is a
part of such Registration Statement.

/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Princeton, New Jersey
October 28, 1998