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Previous: W-J INTERNATIONAL LTD /DE/, 10KSB40, EX-27, 2000-12-28 |
Next: MERRILL LYNCH STRATEGIC DIVIDEND FUND, 485APOS, EX-99.1(E), 2000-12-28 |
| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 | [X] |
| Pre-Effective Amendment No. | [ ] |
| Post-Effective Amendment No. 17 | [X] |
| and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |
[X] |
| Amendment No. 19 | [X] |
| (Check appropriate box or boxes) |
| Counsel for the Fund:
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP The Chrysler Building 405 Lexington Avenue New York, New York 10174 Attention: Joel H. Goldberg, Esq. |
Michael J. Hennewinkel, Esq. MERRILL LYNCH INVESTMENT MANAGERS, L.P. P.O. Box 9011 Princeton, New Jersey 08543-9011 |
Approximate date of the Proposed Public Offering: As soon as practicable after the effective date of the Registration Statement.
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) 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.
MERRILL LYNCH LOGO Investment Managers
December 28, 2000
This Prospectus contains information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference.
The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
| PAGE | |
| [KEY FACTS GRAPHIC] KEY FACTS | |
| Merrill Lynch Equity Income Fund at a Glance | 3 |
| Risk/Return Bar Chart | 5 |
| Fees and Expenses | 6 |
| [DETAILS GRAPHIC] DETAILS ABOUT THE FUND | |
| How the Fund Invests | 8 |
| Investment Risks | 9 |
| [ACCOUNT GRAPHIC] YOUR ACCOUNT | |
| Merrill Lynch Select PricingSM System | 15 |
| How to Buy, Sell, Transfer and Exchange Shares | 20 |
| Participation in Fee-Based Programs | 25 |
| [MANAGEMENT GRAPHIC] MANAGEMENT OF THE FUND | |
| Merrill Lynch Investment Managers | 28 |
| Financial Highlights | 29 |
| [INFORMATION GRAPHIC] FOR MORE INFORMATION | |
| Shareholder Reports | Back Cover |
| Statement of Additional Information | Back Cover |
|
| |
MERRILL LYNCH EQUITY INCOME FUND
In an effort to help you better understand the many concepts involved in making an investment decision, we have defined the highlighted terms in this prospectus in the sidebar.
Common Stock — securities representing shares of ownership of a corporation.
Yield — percentage rate of return paid on stock in dividends. For example, a stock that sells for $100 and has an annual dividend of $2 per share has a yield of 2%.
Convertible Security — a fixed income security, such as a bond or preferred stock, that is exchangeable for shares of common stock of the issuer or of another company.
Preferred Stock — class of stock that often pays dividends at a specified rate and has preference over common stock in dividend payments and liquidation of assets.
Debt Security — an obligation to pay specified amounts at specified times such as bonds.
The investment objective of the Fund is to seek long-term total return and current income.
The Fund seeks to achieve its objective by investing primarily in a portfolio of equity securities. In other words, it tries to choose investments that will increase in value over the long term as well as provide current income. The Fund's investments emphasize long-term total return more than current income.
Total return consists of increases in value from both capital appreciation and income. Under normal market conditions, the Fund will invest at least 65% of its total assets in a diversified portfolio of equity securities of issuers that have good prospects for capital appreciation. Within this diversified portfolio of equity securities, it is expected that a majority of the securities will be dividend-paying common stocks. Fund management believes that stocks that have yields often provide attractive long-term total return and greater price stability during periods of downward movements in market prices than stocks that do not pay dividends. The Fund emphasizes investments in large companies. The Fund's portfolio, in the aggregate, will be structured in a manner designed to produce potential long-term capital appreciation as well as net portfolio yield in excess of the average yield of mutual funds invested primarily in U.S. equities. In addition to common stocks, the Fund may also invest in convertible securities, non-convertible preferred stocks and debt securities. The Fund may invest in debt securities of any maturity that are rated investment grade. The Fund may invest up to 25% of its total assets in securities of foreign issuers.
We cannot guarantee that the Fund will achieve its objective.
As with any mutual fund, the value of the Fund's investments — and therefore the value of Fund shares — may fluctuate. These changes may occur because a particular stock market is rising or falling. At other times, there are specific factors that may affect the value of a particular investment. The Fund is also subject to the risk that the investments that Fund management selects will underperform the markets or other funds with similar investment objectives and investment strategies. If the value of the Fund's investments goes down, you may lose money.
| MERRILL LYNCH EQUITY INCOME FUND | 3 |
In addition, the Fund's investments in debt securities are subject to interest rate and credit risk. Interest rate risk is the risk that when interest rates go up, the value of debt instruments generally goes down. In general, the market price of debt securities with longer maturities will go up or down more in response to changes in interest rates than shorter term securities. Credit risk is the risk that the issuer will be unable to pay the interest or principal when due. The degree of credit risk depends on both the financial condition of the issuer and the terms of the obligation.
Investment Grade — debt securities that are rated in the four highest quality ratings as determined by either Moody's Investors Services, Inc. (currently Aaa, Aa, A and Baa for bonds) or Standard & Poor's Ratings Group (currently AAA, AA, A and BBB for bonds), or if unrated, considered by fund management to be of comparable quality.
The Fund may invest in foreign securities. Because foreign markets may differ significantly from U.S. markets in terms of both economic conditions and government regulation, investments in foreign securities involve special risks. In addition, investments in securities denominated in foreign currencies involve the risk that these currencies may decline in value relative to the U.S. dollar, which decreases the value of the investments in U.S. dollar terms.
The Fund may be an appropriate investment for you if you:
| 4 | MERRILL LYNCH EQUITY INCOME FUND |
The bar chart and table shown below provide an indication of the risks of investing in the Fund. The bar chart shows changes in the Fund 's performance for Class B shares for each of the past ten calendar years. Sales charges are not reflected in the bar chart. If these amounts were reflected, returns would be less than those shown. The table compares the average annual returns for each class of the Fund's shares for the periods shown with those of the S&P 500 Index and the S&P 500 Yield Index. How the Fund performed in the past is not necessarily an indication of how the Fund will perform in the future.
| 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 |
|---|---|---|---|---|---|---|---|---|---|
| -7.68% | 14.78% | 7.89% | 7.54% | -0.82% | 30.73% | 17.71% | 27.32% | 13.41% | 1.86% |
During the ten year period shown in the bar chart, the highest return for a quarter was 11.40% (quarter ended June 30, 1997) and the lowest return for a quarter was - 9.48% (quarter ended September 30, 1990). The fund's year-to-date return as of September 30, 2000 was 5.97%.
| Average Annual Total Returns (as of the
calendar year ended December 31, 1999) |
Past
One Year |
Past
Five Years |
Past Ten Years/
Since Inception |
|---|---|---|---|
| Merrill Lynch Strategic Dividend Fund* — Class A | -2.54% | 17.68% | 11.22% |
| S&P 500 Index** | 21.04% | 28.54% | 18.20% |
| S&P 500 Yield Index*** | -7.83% | 12.96% | N/A |
| Merrill Lynch Strategic Dividend Fund* — Class B | -1.98% | 17.75% | 10.69%† |
| S&P 500 Index** | 21.04% | 28.54% | 18.20% |
| S&P 500 Yield Index*** | -7.83% | 12.96% | N/A |
| Merrill Lynch Strategic Dividend Fund* — Class C | 0.88% | 17.72% | 16.54%†† |
| S&P 500 Index** | 21.04% | 28.54% | 27.19%††† |
| S&P 500 Yield Index*** | -7.83% | 12.96% | 11.89%# |
| Merrill Lynch Strategic Dividend Fund* — Class D | -2.78% | 17.39% | 16.26%†† |
| S&P 500 Index** | 21.04% | 28.54% | 27.19%††† |
| S&P 500 Yield Index*** | -7.83% | 12.96% | 11.89%# |
* Includes sales charge.
** The S&P 500® is the Standard & Poor's Composite Index of 500 Stocks, a widely recognized, unmanaged index of common stock prices. Past performance is not predictive of future performance.
*** This unmanaged Index consists of the first two quintiles of the highest-yielding stocks of the S&P 500. Past performance is not predictive of future performance.
† This performance does not reflect the effect of conversion of Class B shares to Class D shares after approximately eight years.
†† Inception date is October 21, 1994.
††† Since October 21, 1994.
# Since October 31, 1994.
| MERRILL LYNCH EQUITY INCOME FUND | 5 |
UNDERSTANDING EXPENSES
Fund investors pay various fees and expenses, either directly or indirectly. Listed below are some of the main types of expenses, which the Fund may charge:
Expenses paid directly by the shareholder:
Shareholder Fees — these include sales charges, which you may pay when you buy or sell shares of the Fund.
Expenses paid indirectly by the shareholder:
Annual Fund Operating Expenses — expenses that cover the costs of operating the Fund.
Management Fee — a fee paid to the Manager for managing the Fund.
Distribution Fees — fees used to support the Fund's marketing and distribution efforts, such as compensating Financial Consultants and other financial intermediaries, advertising and promotion.
Service (Account Maintenance) Fees — fees used to compensate securities dealers and other financial intermediaries for account maintenance activities.
The Fund offers four different classes of shares. Although your money will be invested the same way no matter which class of shares you buy, there are differences among the fees and expenses associated with each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your Merrill Lynch Financial Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy and hold the different classes of shares of the Fund. Future expenses may be greater or less than those indicated below.
| Shareholder Fees (fees paid
directly from
your investment)(a): |
Class A | Class B(b) | Class C | Class D | |
|---|---|---|---|---|---|
| Maximum Sales Charge (Load) imposed on purchases (as a percentage of offering price) | 5.25%(c) | None | None | 5.25%(c) | |
| Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption proceeds, whichever is lower) | None(d) | 4.0%(c) | 1.0%(c) | None(d) | |
| Maximum Sales Charge (Load) imposed on
Dividend Reinvestments |
None | None | None | None | |
| Redemption Fee | None | None | None | None | |
| Exchange Fee | None | None | None | None | |
| Annual Fund Operating
Expenses (expenses
that are deducted from Fund assets): |
|||||
| Management Fee | 0.60% | 0.60% | 0.60% | 0.60% | |
| Distribution and/or Service (12b-1) Fees(e) | None | 1.00% | 1.00% | 0.25% | |
| Other Expenses (including transfer agency fees)(f) | 0.35% | 0.37% | 0.38% | 0.35% | |
| Total Annual Fund Operating Expenses | 0.95% | 1.97% | 1.98% | 1.20% | |
| 6 | MERRILL LYNCH EQUITY INCOME FUND |
These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.
These examples assume that you invest $10,000 in the Fund for the time periods indicated, that your investment has a 5% return each year, that you pay the sales charges, if any, that apply to the particular class and that the Fund's operating expenses remain the same. This assumption is not meant to indicate you will receive a 5% annual rate of return. Your annual return may be more or less than the 5% used in this example. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 Years | |
|---|---|---|---|---|
| Class A | $617 | $812 | $1,023 | $1,630 |
| Class B | $600 | $818 | $1,062 | $2,102* |
| Class C | $301 | $621 | $1,068 | $2,306 |
| Class D | $641 | $886 | $1,150 | $1,903 |
| 1 Year | 3 Years | 5 Years | 10 Years | |
|---|---|---|---|---|
| Class A | $617 | $812 | $1,023 | $1,630 |
| Class B | $200 | $618 | $1,062 | $2,102* |
| Class C | $201 | $621 | $1,068 | $2,306 |
| Class D | $641 | $886 | $1,150 | $1,903 |
* Assumes conversion to Class D shares approximately eight years after purchase. See note (b) to the Fees and Expenses table above.
| MERRILL LYNCH EQUITY INCOME FUND | 7 |
ABOUT THE PORTFOLIO MANAGER
Walter D. Rogers has been the portfolio manager and Senior Vice President of the Fund since 1997. He has been a Vice President of Merrill Lynch Investment Managers since 1987.
ABOUT THE MANAGER
The Fund is managed by Merrill Lynch Investment Managers.
Futures — exchange-traded contracts involving the obligation of the seller to deliver, and the buyer to receive, certain assets (or a money payment based on the change in the level of an index) at a specified time.
Options — exchange-traded or private contracts involving the right of a holder to deliver ("put") or receive ("call") certain assets (or a money payment based on the change in the level of an index) from another party at a specified price within a specified time period.
Indexed Securities — debt obligations that return a variable amount of principal or interest based on the value of an index at a specified time.
The investment objective of the Fund is to seek long-term total return and current income. The Fund tries to achieve its goal by investing primarily in a diversified portfolio of equity securities.
Total return consists of increases in value from both capital appreciation and income. Under normal market conditions, the Fund will invest at least 65% of its total assets in a diversified portfolio of equity securities of issuers that have good prospects for capital appreciation. Within this diversified portfolio of equity securities, it is expected that a majority of the securities will be dividend-paying common stocks. Fund management believes that stocks that have yields often provide attractive long-term total return and greater price stability during periods of downward movements in market prices than stocks that do not pay dividends. The Fund emphasizes investments in large companies. The Fund's portfolio, in the aggregate, will be structured in a manner designed to seek long-term capital appreciation as well as net portfolio yield in excess of the average yield of mutual funds invested primarily in U.S. equities.
The Fund may also invest in securities convertible into common stocks, non-convertible preferred stocks and debt securities. The Fund may invest in investment grade debt securities of any maturity.
In addition to the Fund's principal investment strategies described above, the Fund may also make the following investments: The Fund invests mainly in U.S. companies, but may invest up to 25% of its total assets in securities of foreign issuers. The Fund may invest in securities from any country. The Fund may invest in securities denominated in currencies other than the U.S. dollar. The Fund may engage in currency transactions to seek to hedge against the risk of loss from changes in currency exchange rates, but Fund management cannot guarantee that it will be able to enter into such transactions or that such transactions will be effective. The Fund is not required to hedge currency risk, and Fund management may choose not to do so. The Fund may use derivatives, such as futures, options and indexed securities. Derivatives are financial instruments whose value is derived from another security, a commodity (such as gold or oil) or an index such as the S&P 500. The Fund may use derivatives for hedging purposes, including anticipatory hedges, and to seek increased return. The Fund may also invest in illiquid securities, enter into repurchase agreements and engage in securities lending.
The Fund will normally invest a portion of its assets in short term debt securities, money market securities, including repurchase agreements, or cash. The Fund invests in such securities or cash when Fund management is unable to find
| 8 | MERRILL LYNCH EQUITY INCOME FUND |
enough attractive long-term investments to reduce exposure to stocks when Fund management believes it is advisable to do so or to meet redemptions. Except during temporary defensive periods, such investments will not exceed 20% of the Fund's total assets. As a temporary measure for defensive purposes, the Fund may invest more heavily in these securities or cash, without limitation. During such periods, the Fund's investments in dividend-paying common stocks will be limited and the Fund may, therefore, not be able to achieve its investment objective.
The Fund has no stated minimum holding period for investments and will buy or sell securities whenever fund management sees an appropriate opportunity. For example, the Fund may sell shares of a company when the company's prospects for capital appreciation deteriorate or when its dividend rates become unattractive or when the Fund identifies another company with more attractive prospects.
This Prospectus describes the Fund's principal investment strategies and related risks. The Fund may use many different investment strategies and it has certain investment restrictions, all of which are explained in the Fund's Statement of Additional Information.
This section contains a summary discussion of the general risks of investing in the Fund. As with any mutual fund, there can be no guarantee that the Fund will meet its goals or that the Fund's performance will be positive over any period of time.
Market and Selection Risk — Market risk is the risk that the stock market in one or more countries in which the Fund invests will go down in value, including the possibility that one or more markets will go down sharply and unpredictably. Selection risk is the risk that the securities that Fund management selects will underperform other funds with similar investment objectives and investment strategies.
Interest Rate Risk — Interest rate risk is the risk that prices of debt securities generally increase when interest rates decline and decrease when interest rates
| MERRILL LYNCH EQUITY INCOME FUND | 9 |
increase. Prices of longer term securities generally change more in response to interest rate changes than prices of shorter term securities.
Credit Risk — Credit risk is the risk that the issuer of a debt security will be unable to pay the interest or principal when due. The degree of credit risk depends on both the financial condition of the issuer and the terms of the obligation.
Foreign Market Risk — Since the Fund may invest in foreign securities, it offers the potential for more diversification than an investment only in the United States. This is because stocks traded on foreign markets have often (though not always) performed differently than stocks in the United States. However, such investments involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, the Fund is subject to the risk that because there are generally fewer investors on foreign exchanges and a smaller number of shares traded each day, it may make it difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities go up and down more than prices of securities traded in the United States.
Foreign Economy Risk — The economies of certain foreign markets often do not compare favorably with the economy of the United States with respect to such issues as growth of gross domestic product, reinvestment of capital, resources and balance of payments. Certain such economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or retaliatory measures. Investments in foreign markets may be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of these actions could severely affect security prices, impair the Fund's ability to purchase or sell foreign securities or transfer the Fund's assets or income back into the United States, or otherwise adversely affect the Fund's operations. Other foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments in foreign courts and political and social
| 10 | MERRILL LYNCH EQUITY INCOME FUND |
instability. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States or other foreign countries,
Currency Risk — Securities in which the Fund invests may be denominated or quoted in currencies other than the U.S. dollar. Changes in foreign currency exchange rates affect the value of the Fund's portfolio. Generally, when the U.S. dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. dollars. This risk, generally known as "currency risk," means that a strong U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns.
Certain Risks of Holding Fund Assets Outside the United States — The Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight over their operations. Also, the laws of certain countries may put limits on the Fund's ability to recover its assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for the Fund to buy, sell and hold securities in certain foreign markets than in the U.S. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund than investment companies invested only in the U.S.
Settlement Risk — Settlement and clearance procedures in certain foreign markets differ significantly from those in the U.S. Foreign settlement procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically generated by the settlement of U.S. investments. Communications between the U.S. and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates. Settlements in certain foreign countries at times have not kept pace with the number of securities transactions; these problems may make it difficult for the Fund to carry out transactions. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the Fund could be liable to that party for any losses incurred.
| MERRILL LYNCH EQUITY INCOME FUND | 11 |
European Economic and Monetary Union ("EMU") — A number of European countries have entered into EMU in an effort to reduce trade barriers between themselves and eliminate fluctuations in their currencies. EMU established a single European currency (the euro), which was introduced on January 1, 1999 and is expected to replace the existing national currencies of all initial EMU participants by July 1, 2002. Certain securities (beginning with government and corporate bonds) were redenominated in the euro and trade and make dividend and other payments only in euros. Like other investment companies and business organizations, including the companies in which the Fund invests, the Fund could be adversely affected if the transition to euro, or EMU as a whole, does not proceed as planned or if a participating country withdraws from EMU.
Borrowing and Leverage — The Fund may borrow for temporary emergency purposes including to meet redemptions. Borrowing may exaggerate changes in the net asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing will cost the Fund interest expense and other fees. The cost of borrowing may reduce the Fund's return. Certain securities that the Fund buys may create leverage including, for example, options.
Risks associated with certain types of securities in which the Fund may invest include:
Derivatives — The Fund may use derivative instruments, including futures, options and indexed securities. Derivatives allow the Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments.
Derivatives are volatile and involve significant risks, including:
Leverage risk — the risk associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested.
Credit risk — the risk that the counterparty (the party on the other side of the transaction) on a derivative transaction will be unable to honor its financial obligation to the Fund.
| 12 | MERRILL LYNCH EQUITY INCOME FUND |
Currency risk — the risk that changes in the exchange rate between currencies will adversely affect the value (in U.S. dollar terms) of an investment.
Liquidity risk — the risk that certain securities may be difficult or impossible to sell at the time that the Fund would like or at the price that the Fund believes the security is currently worth.
The Fund may use derivatives for hedging purposes, including anticipatory hedges, and to seek increased returns. Hedging is a strategy in which the Fund uses a derivative to offset the risk that other Fund holdings may decrease in value. While hedging can reduce losses, it can also reduce or eliminate gains if the market moves in a different manner than anticipated by the Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. There can be no assurance that the Fund's hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Fund is not required to use hedging and may choose not to do so.
Convertibles — Convertibles are generally debt securities or preferred stocks that may be converted into common stock. Convertibles typically pay current income as either interest (debt security convertibles) or dividends (preferred stocks). A convertible's value usually reflects both the stream of current income payments and the value of the underlying common stock. The market value of a convertible performs like that of a regular debt security; that is, if market interest rates rise, the value of a convertible security usually falls. Since it is convertible into common stock, the convertible also has the same types of market and issuer risk as the underlying common stock.
Illiquid securities — The Fund may invest up to 15% of its assets in securities that it cannot easily resell within seven days at current value or that have contractual or legal restrictions on resale. If the Fund buys illiquid securities, it may be unable to quickly resell them or may be able to sell them only at a price below current value.
Securities lending — The Fund may lend securities to financial institutions that provide collateral. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, the Fund may lose money and there may be a delay in recovering the loaned securities. The
| MERRILL LYNCH EQUITY INCOME FUND | 13 |
Fund could also lose money if it does not recover the securities and the value of the collateral falls. These events could trigger adverse tax consequences to the Fund.
If you would like further information about the Fund, including
how it invests, please see the Statement of Additional Information.
| 14 | MERRILL LYNCH EQUITY INCOME FUND |
The Fund offers four share classes, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. Each share class represents an ownership interest in the same investment portfolio. When you choose your class of shares you should consider the size of your investment and how long you plan to hold your shares. Your Merrill Lynch Financial Consultant can help you determine which share class is best suited to your personal financial goals.
For example, if you select Class A or D shares, you generally pay a sales charge at the time of purchase. If you buy Class D shares, you also pay an ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge reduction or waiver.
Certain financial intermediaries may charge additional fees in connection with transactions in Fund shares.
The Manager, the Distributor or their affiliates may make payments out of their own resources to selected securities dealers and other financial intermediaries for providing services intended to result in the sale of Fund shares or for shareholder servicing activities.
If you select Class B or C shares, you will invest the full amount of your purchase price, but you will be subject to a distribution fee of 0.75% and account maintenance fee of 0.25%. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges an initial sales charge. In addition, you may be subject to a deferred sales charge when you sell Class B or C shares.
The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of Merrill Lynch.
| MERRILL LYNCH EQUITY INCOME FUND | 15 |
The table below summarizes key features of the Merrill Lynch Select PricingSM System.
| Class A | Class B | Class C | Class D | |
|---|---|---|---|---|
| Availability | Limited to
certain investors including: º Current Class A shareholders º Certain Retirement Plans º Participants in certain Merrill Lynch-sponsored programs º Certain affiliates of Merrill Lynch, selected securities dealers and other financial intermediaries. |
Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries. | Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries. | Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries. |
| Initial Sales
Charge? |
Yes. Payable at time of purchase. Lower sales charges available for larger investments. | No. Entire purchase price is invested in shares of the Fund. | No. Entire purchase price is invested in shares of the Fund. | Yes. Payable at time of purchase. Lower sales charges available for larger investments. |
| Deferred Sales Charge? | No. (May be charged for purchases over $1 million that are redeemed within one year.) | Yes. Payable if you redeem within four years of purchase. | Yes. Payable if you redeem within one year of purchase. | No. (May be charged for purchases over $1 million that are redeemed within one year.) |
| Account
Maintenance and Distribution Fees? |
No. | 0.25%
Account Maintenance Fee 0.75% Distribution Fee. |
0.25% Account
Maintenance Fee 0.75% Distribution Fee. |
0.25% Account
Maintenance Fee No Distribution Fee. |
| Conversion to
Class D shares? |
No. | Yes, automatically after approximately eight years. | No. | No. |
| 16 | MERRILL LYNCH EQUITY INCOME FUND |
Right of Accumulation — permits you to pay the sales charge that would apply to the cost or value (whichever is higher) of all shares you own in the Merrill Lynch mutual funds that offer SelectSM Pricing options.
Letter of Intent — permits you to pay the sales charge that would be applicable if you add up all shares of Merrill Lynch Select PricingSM System funds that you agree to buy within a 13-month period. Certain restrictions apply.
If you select Class A or Class D shares, you will pay a sales charge at the time of purchase.
| Your Investment | As a % of
Offering Price |
As a % of
Your Investment* |
Dealer
Compensation as a % of Offering Price |
|---|---|---|---|
| Less than $25,000 | 5.25% | 5.54% | 5.00% |
| $25,000 but less than $50,000 | 4.75% | 4.99% | 4.50% |
| $50,000 but less than $100,000 | 4.00% | 4.17% | 3.75% |
| $100,000 but less than $250,000 | 3.00% | 3.09% | 2.75% |
| $250,000 but less than $1,000,000 | 2.00% | 2.04% | 1.80% |
| $1,000,000 and over** | 0.00% | 0.00% | 0.00% |
* Rounded to the nearest one-hundredth percent.
** If you invest $1,000,000 or more in Class A or Class D shares, you may not pay an initial sales charge. In that case, the Manager compensates the selling dealer or other financial intermediary from its own funds. If you redeem your shares within one year after purchase, you may be charged a deferred sales charge. This charge is 1.00% of the lesser of the original cost of the shares being redeemed or your redemption proceeds. 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.
No initial sales charge applies to Class A or Class D shares that you buy through reinvestment of dividends.
A reduced or waived sales charge on a purchase of Class A or Class D shares may apply for:
| MERRILL LYNCH EQUITY INCOME FUND | 17 |
Only certain investors are eligible to buy Class A shares. Your Financial Consultant can help you determine whether you are eligible to buy Class A shares or to participate in any of these programs.
If you decide to buy shares under the initial sales charge alternative and you are eligible to buy both Class A and Class D shares, you should buy Class A since Class D shares are subject to a 0.25% account maintenance fee, while Class A shares are not.
If you redeem Class A or Class D shares and within 30 days buy new shares of the same class, you will not pay a sales charge on the new purchase amount. The amount eligible for this "Reinstatement Privilege" may not exceed the amount of your redemption proceeds. To exercise the privilege, contact your Merrill Lynch Financial Consultant, other financial intermediary or the Fund's Transfer Agent at 1-800-MER-FUND.
If you select Class B or Class C shares, you do not pay an initial sales charge at the time of purchase. However, if you redeem your Class B shares within four years after purchase or your Class C shares within one year after purchase, you may be required to pay a deferred sales charge. You will also pay distribution fees of 0.75% and account maintenance fees of 0.25% each year under distribution plans that the Fund has adopted under Rule 12b-1. Because these fees are paid out of the Fund's assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying an initial sales charge. The Distributor uses the money that it receives from the deferred sales charges and the distribution fees to cover the costs of marketing, advertising and compensating the Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary who assists you in purchasing Fund shares.
If you redeem Class B shares within four years after purchase, you may be charged a deferred sales charge. The amount of the charge gradually decreases as you hold your shares over time, according to the following schedule:
| 18 | MERRILL LYNCH EQUITY INCOME FUND |
| Years Since Purchase | Sales Charge* |
|---|---|
| 0 - 1 | 4.00% |
| 1 - 2 | 3.00% |
| 2 - 3 | 2.00% |
| 3 - 4 | 1.00% |
| 4 and thereafter | 0.00% |
* The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired through reinvestment of dividends are not subject to a deferred sales charge. Not all Merrill Lynch funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund, the higher charge will apply.
The deferred sales charge relating to Class B shares may be reduced or waived in certain circumstances, such as:
Your Class B shares convert automatically into Class D shares approximately eight years after purchase. Any Class B shares received through reinvestment of dividends paid on converting shares will also convert at that time. Class D shares are subject to lower annual expenses than Class B shares. The conversion of Class B to Class D shares is not a taxable event for Federal income tax purposes.
| MERRILL LYNCH EQUITY INCOME FUND | 19 |
Different conversion schedules apply to Class B shares of different Merrill Lynch mutual funds. For example, Class B shares of a fixed-income fund typically convert approximately ten years after purchase compared to approximately eight years for equity funds. If you acquire your Class B shares in an exchange from another fund with a shorter conversion schedule, the Fund's eight year conversion schedule will apply. If you exchange your Class B shares in the Fund for Class B shares of a fund with a longer conversion schedule, the other fund's conversion schedule will apply. The length of time that you hold both the original and exchanged Class B shares in both funds will count toward the conversion schedule. The conversion schedule may be modified in certain other cases as well.
If you redeem Class C shares within one year after purchase, you may be charged a deferred sales charge of 1.00%. The charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. You will not be charged a deferred sales charge when you redeem shares that you acquire through reinvestment of Fund dividends. The deferred sales charge relative to Class C shares may be reduced or waived in connection with involuntary termination of an account in which Fund shares are held and withdrawals through the Merrill Lynch Systematic Withdrawal Plan.
Class C shares do not offer a conversion privilege.
The chart on the following pages summarizes how to buy, sell, transfer and exchange shares through Merrill Lynch, a selected securities dealer, broker, investment adviser, service provider or other financial intermediary. You may also buy shares through the Transfer Agent. To learn more about buying, selling, transferring or exchanging shares through the Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund involves many considerations, your Merrill Lynch Financial Consultant may help you with this decision.
Because of the high costs of maintaining smaller shareholder accounts, the Fund may redeem the shares in your account (without charging any deferred sales
| 20 | MERRILL LYNCH EQUITY INCOME FUND |
charge) if the net asset value of your account falls below $500 due to redemptions you have made. You will be notified that the value of your account is less than $500 before the Fund makes an involuntary redemption. You will then have 60 days to make an additional investment to bring the value of your account to at least $500 before the Fund takes any action. This involuntary redemption does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act accounts.
| MERRILL LYNCH EQUITY INCOME FUND | 21 |
| If You Want To | Your Choices | Information Important for You to Know | |
|---|---|---|---|
| Buy Shares | First, select the share class appropriate for you | Refer to the Merrill Lynch Select Pricing table on page 16. Be sure to read this prospectus carefully. | |
| Next, determine the amount of your investment | The minimum initial investment for the
Fund is $1,000 for all accounts except: º $250 for certain Merrill Lynch fee-based programs º $100 for retirement plans (The minimums for initial investments may be waived under certain circumstances.) | ||
| Have your Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary submit your purchase order | The
price of your shares is based on the next calculation of net asset
value after your order is placed. Any purchase orders placed prior to
the close of business on the New York Stock Exchange (generally 4:00
p.m. Eastern time) will be priced at the net asset value determined
that day. Certain financial intermediaries, however, may require
submission of orders prior to that time. Purchase orders placed after that time will be priced at the net asset value determined on the next business day. The Fund may reject any order to buy shares and may suspend the sale of shares at any time. Selected security dealers or other financial intermediaries, including Merrill Lynch, may charge a processing fee to confirm a purchase. Merrill Lynch currently charges a fee of $5.35. | ||
| Or contact the Transfer Agent | To purchase shares directly, call the Transfer Agent at 1-800-MER-FUND and request a purchase application. Mail the completed purchase application to the Transfer Agent at the address on the inside back cover of this Prospectus. | ||
| Add to Your Investment | Purchase additional shares | The minimum investment for additional
purchases is generally $50 for all accounts except that retirement
plans have a minimum additional purchase of $1 and certain programs,
such as automatic investment plans, may have higher minimums. (The minimums for additional purchases may be waived under certain circumstances.) | |
| Acquire additional shares through the automatic dividend reinvestment plan | All dividends are automatically reinvested without a sales charge. | ||
| Participate in the automatic investment plan | You may invest a specific amount on a periodic basis through certain Merrill Lynch investment or central asset accounts. | ||
| Transfer Shares to Another Securities Dealer or Other Financial Intermediary | Transfer to a participating securities dealer or other financial intermediary | You may transfer your Fund shares only to another securities dealer that has entered into an agreement with Merrill Lynch. Certain shareholder services may not be available for the transferred shares. You may purchase additional shares only of funds previously owned before the transfer. All future trading of these assets must be coordinated by the receiving firm. | |
| 22 | MERRILL LYNCH EQUITY INCOME FUND |
| If You Want To | Your Choices | Information Important for You to Know | |
|---|---|---|---|
| Transfer to a
non-participating securities dealer |
You must either: º Transfer your shares to an account with the Transfer Agent; or º Sell your shares, paying any applicable deferred sales charge. | ||
| Sell Your Shares | Have your Merrill Lynch Financial Consultant selected securities dealer or other financial intermediary submit your sales order | The price of your shares is based on the next calculation
of net asset value after your order is placed. For your redemption
request to be priced at the net asset value on the day of your request,
you must submit your request to your dealer or other financial
intermediary prior to that day's close of business on the New York
Stock Exchange (generally 4:00 p.m. Eastern time). Certain financial
intermediaries, however, may require submission of orders prior to that
time. Any redemption request placed after that time will be priced at
the net asset value at the close of business on the next business
day. Securities dealers or other financial intermediaries, including Merrill Lynch, may charge a fee to process a redemption of shares. Merrill Lynch currently charges a fee of $5.35. No processing fee is charged if you redeem shares directly through the Transfer Agent. The Fund may reject an order to sell shares under certain circumstances. | |
| Sell through the Transfer Agent | You may sell shares held at the Transfer Agent by
writing to the Transfer Agent at the address on the inside back cover
of this Prospectus. All shareholders on the account must sign the
letter. A signature guarantee will generally be required but may be
waived in certain limited circumstances. You can obtain a signature
guarantee from a bank, securities dealer, securities broker, credit
union, savings and loan association, national securities exchange and
registered securities association. A notary public seal will not be
acceptable. If you hold stock certificates, return the certificates
with the letter. The Transfer Agent will normally mail redemption
proceeds within seven days following receipt of a properly completed
request. If you make a redemption request before the Fund has collected
payment for the purchase of shares, the Fund or the Transfer Agent may
delay mailing your proceeds. This delay will usually not exceed ten
days. You may also sell shares held at the Transfer Agent by telephone request if the amount being sold is less than $50,000 and if certain other conditions are met. Contact the Transfer Agent at 1-800-MER-FUND for details. | ||
| 23 | MERRILL LYNCH EQUITY INCOME FUND |
| If You Want To | Your Choices | Information Important for You to Know | |
|---|---|---|---|
| Sell Shares Systematically | Participate in the Fund's Systematic Withdrawal Plan | You can choose to receive systematic payments from your Fund account either by check or through direct deposit to your bank account on a monthly or quarterly basis. If you hold your Fund shares in a Merrill Lynch CMA ®, CBA ® or Retirement Account you can arrange for systematic redemptions of a fixed dollar amount on a monthly, bi-monthly, quarterly, semi-annual or annual basis, subject to certain conditions. Under either method you must have dividends automatically reinvested. For Class B and C shares your total annual withdrawals cannot be more than 10% per year of the value of your shares at the time your plan is established. The deferred sales charge is waived for systematic redemptions. Ask your Merrill Lynch Financial Consultant or other financial intermediary for details. | |
| Exchange Your Shares | Select the fund into which you want to exchange. Be sure to read that fund's prospectus | You can exchange your shares of the
Fund for shares of many other Merrill Lynch mutual funds. You must have
held the shares used in the exchange for at least 15 calendar days
before you can exchange to another fund. Each class of Fund shares is generally exchangeable for shares of the same class of another fund. If you own Class A shares and wish to exchange into a fund in which you have no Class A shares (and are not eligible to purchase Class A shares), you will exchange into Class D shares. Some of the Merrill Lynch mutual funds impose a different initial or deferred sales charge schedule. If you exchange Class A or D shares for shares of a fund with a higher initial sales charge than you originally paid, you will be charged the difference at the time of exchange. If you exchange Class B shares for shares of a fund with a different deferred sales charge schedule, the higher schedule will apply. The time you hold Class B or C shares in both funds will count when determining your holding period for calculating a deferred sales charge at redemption. If you exchange Class A or D shares for money market fund shares, you will receive Class A shares of Summit Cash Reserves Fund. Class B or C shares of the Fund will be exchanged for Class B shares of Summit. To exercise the exchange privilege, contact your Merrill Lynch Financial Consultant or other financial intermediary or call the Transfer Agent at 1-800-MER-FUND. Although there is currently no limit on the number of exchanges that you can make, the exchange privilege may be modified or terminated at any time in the future. | |
| 24 | MERRILL LYNCH EQUITY INCOME FUND |
Net Asset Value — the market value of the Fund's total assets after deducting liabilities, divided by the number of shares outstanding.
When you buy shares, you pay the net asset value, plus any applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The Fund calculates its net asset value (generally by using market quotations) each day the New York Stock Exchange is open as of the close of business on the Exchange, based on prices at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time. The net asset value used in determining your share price is the next one calculated after your purchase or redemption order is placed. Net asset value is generally calculated by valuing each security at its closing price for the day. Foreign securities owned by the Fund may trade on weekends or other days when the Fund does not price its shares. As a result, the Fund's net asset value may change on days when you will not be able to purchase or redeem the Fund's shares. If an event occurs after the close of a foreign exchange that is likely to significantly affect the Fund's net asset value, "fair value" pricing may be used. This means that the Fund may value its foreign holdings at prices other than their last closing prices, and the Fund's net asset value will reflect this.
The Fund may accept orders from certain authorized financial intermediaries or their designees. The Fund will be deemed to receive an order when accepted by the intermediary or designee and the order will receive the net asset value computed by the Fund after such acceptance. If the payment for a purchase order is not made by a designated later time, the order will be canceled and the financial intermediary could be held liable for any losses.
Generally, Class A shares will have the highest net asset value because that class has the lowest expenses, and Class D shares will have a higher net asset value than Class B or Class C shares. Also, dividends paid on Class A and Class D shares will generally be higher than dividends paid on Class B and Class C shares because Class A and Class D shares have lower expenses.
If you participate in certain fee-based programs offered by Merrill Lynch or other financial intermediaries, you may be able to buy Class A shares at net asset value, including by exchanges from other share classes. Sales charges on the shares being exchanged may be reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based program into another account. Instead, you will have to redeem your shares held through the
| MERRILL LYNCH EQUITY INCOME FUND | 25 |
program and purchase shares of another class, which may be subject to distribution and account maintenance fees. This may be a taxable event and you will pay any applicable sales charges.
If you leave one of these programs, your shares may be redeemed or automatically exchanged into another class of Fund shares or into a money market fund. The class you receive may be the class you originally owned when you entered the program, or in certain cases, a different class. If the exchange is into Class B shares, the period before conversion to Class D shares may be modified. Any redemption or exchange will be at net asset value. However, if you participate in the program for less than a specified period, you may be charged a fee in accordance with the terms of the program.
Details about these features and the relevant charges are included in the client agreement for each fee-based program and are available from your Merrill Lynch Financial Consultant, selected securities dealer or other financial intermediary.
Dividends — ordinary income and capital gains paid to shareholders. Dividends may be reinvested in additional Fund shares as they are paid.
The Fund will distribute any net investment income quarterly and any net realized long- or short-term capital gains at least annually. The Fund may also pay a special distribution at the end of the calendar year to comply with Federal tax requirements. If you would like to receive dividends in cash, contact your Merrill Lynch Financial Consultant, selected securities dealer, other financial intermediary or the Transfer Agent. Capital gains may be taxable to you at different rates, depending, in part, on how long the Fund has held the assets sold.You will pay tax on dividends from the Fund whether you receive them in cash or additional shares.
If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold your shares and any gain on the transaction may be subject to tax. Long-term capital gains of individuals are generally taxed at different rates than ordinary income.
If you are neither a lawful permanent resident nor a citizen of the United States or if you are a foreign entity, the Fund's ordinary income dividends (which include distributions of net short term capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.
| 26 | MERRILL LYNCH EQUITY INCOME FUND |
"BUYING A DIVIDEND"
Unless your investment is in a tax-deferred account, you may want to avoid buying shares shortly before the Fund pays a dividend. The reason? If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay the full price for the shares and then receive a portion of the price back in the form of a taxable dividend. Before investing you may want to consult your tax adviser.
By law, the Fund must withhold 31% of your dividends and redemption proceeds if you have not provided a taxpayer identification number or social security number or if the number you have provided is incorrect.
This section summarizes some of the consequences under current Federal tax law of an investment in the Fund. It is not a substitute for personal income tax advice. Consult your personal tax adviser about the potential tax consequences of an investment in the Fund under all applicable tax laws.
| MERRILL LYNCH EQUITY INCOME FUND | 27 |
Merrill Lynch Investment Managers, the Fund's Manager, manages the Fund's investments and its business operations under the overall supervision of the Fund's Board of Trustees. The Manager has the responsibility for making all investment decisions for the Fund. The Manager has a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an affiliate, under which the Manager may pay a fee for services it receives. For the fiscal year ended July 31, 2000 the Manager received a fee equal to 0.60% of the Fund's average daily net assets.
The Manager was organized as an investment adviser in 1977 and offers investment advisory services to more than 50 registered investment companies. The Manager and its affiliates manage portfolios with over $560 billion in assets as of October, 2000. This amount includes assets managed for Merrill Lynch affiliates.
| 28 | MERRILL LYNCH EQUITY INCOME FUND |
The Financial Highlights table is intended to help you understand the Fund's financial performance for the periods shown. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate an investor would have earned on an investment in the Fund (assuming reinvestment of all dividends). This information has been audited by Deloitte & Touche LLP, whose report, along with the Fund's financial statements, is included in the Fund's annual report to shareholders, which is available upon request and without charge.
| Class A† |
Class B†
| |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) in Net Asset Value: | For the Year Ended July 31,
|
For the Year Ended July 31,
| ||||||||
| 2000 | 1999 | 1998 | 1997 | 1996 | 2000 | 1999 | 1998 | 1997 | 1996 | |
| Per Share Operating Performance: | ||||||||||
| Net asset value, beginning of year | $14.27 | $15.36 | $15.21 | $12.43 | $12.24 | $14.29 | $15.38 | $15.22 | $12.44 | $12.23 |
| Investment income — net | .31 | .35 | .39 | .38 | .38 | .18 | .21 | .23 | .25 | .26 |
| Realized
and unrealized gain (loss)
on investments and foreign currency transactions — net |
(.94) | 1.42 | 1.37 | 4.17 | 1.55 | (.94) | 1.41 | 1.38 | 4.16 | 1.55 |
| Total from investment operations | (.63) | 1.77 | 1.76 | 4.55 | 1.93 | (.76) | 1.62 | 1.61 | 4.41 | 1.81 |
| Less dividends and distributions: | ||||||||||
| Investment income — net | (.32) | (.36) | (.39) | (.39) | (.36) | (.18) | (.21) | (.23) | (.25) | (.22) |
| Realized gain on investments — net | (.62) | (2.50) | (1.22) | (1.38) | (1.38) | (.62) | (2.50) | (1.22) | (1.38) | (1.38) |
| Total dividends and distributions | (.94) | (2.86) | (1.61) | (1.77) | (1.74) | (.80) | (2.71) | (1.45) | (1.63) | (1.60) |
| Net asset value, end of year | $12.70 | $14.27 | $15.36 | $15.21 | $12.43 | $12.73 | $14.29 | $15.38 | $15.22 | $12.44 |
| Total Investment Return:* | ||||||||||
| Based on net asset value per share | (4.44%) | 14.15% | 12.03% | 40.42% | 16.98% | (5.39%) | 12.96% | 10.94% | 38.90% | 15.89% |
| Ratios to Average Net Assets: | ||||||||||
| Expenses | .95% | .87% | .88% | .90% | 1.04% | 1.97% | 1.89% | 1.90% | 1.94% | 2.08% |
| Investment income — net | 2.35% | 2.50% | 2.51% | 2.87% | 3.04% | 1.35% | 1.48% | 1.50% | 1.89% | 2.06% |
| Supplemental Data: | ||||||||||
| Net assets, end of year
(in thousands) |
$19,114 | $25,477 | $24,233 | $28,940 | $18,106 | $43,289 | $75,330 | $73,067 | $93,509 | $96,461 |
| Portfolio turnover | 32.33% | 20.11% | 32.66% | 14.29% | 26.42% | 32.33% | 20.11% | 32.66% | 14.29% | 26.42% |
* Total investment returns exclude the effects of sales charges.
† Based on average shares outstanding.
| MERRILL LYNCH EQUITY INCOME FUND | 29 |
| Class C† |
Class D†
| |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) in
Net Asset Value: |
For the Year Ended July 31,
|
For the Year Ended July 31,
| ||||||||
| 2000 | 1999 | 1998 | 1997 | 1996 | 2000 | 1999 | 1998 | 1997 | 1996 | |
| Per Share Operating Performance: | ||||||||||
| Net asset value, beginning of year | $14.14 | $15.25 | $15.11 | $12.37 | $12.20 | $14.27 | $15.36 | $15.20 | $12.43 | $12.24 |
| Investment income — net | .17 | .20 | .23 | .24 | .24 | .28 | .32 | .35 | .35 | .34 |
| Realized and unrealized gain (loss) on
investments and foreign currency transactions — net |
(.93) | 1.40 | 1.37 | 4.13 | 1.55 | (.95) | 1.41 | 1.38 | 4.16 | 1.57 |
| Total from investment operations | (.76) | 1.60 | 1.60 | 4.37 | 1.79 | (.67) | 1.73 | 1.73 | 4.51 | 1.91 |
| Less dividends and distributions: | ||||||||||
| Investment income — net | (.18) | (.21) | (.24) | (.25) | (.24) | (.28) | (.32) | (.35) | (.36) | (.34) |
| Realized gain on investments — net | (.62) | (2.50) | (1.22) | (1.38) | (1.38) | (.62) | (2.50) | (1.22) | (1.38) | (1.38) |
| Total dividends and distributions | (.80) | (2.71) | (1.46) | (1.63) | (1.62) | (.90) | (2.82) | (1.57) | (1.74) | (1.72) |
| Net asset value, end of year | $12.58 | $14.14 | $15.25 | $15.11 | $12.37 | $12.70 | $14.27 | $15.36 | $15.20 | $12.43 |
| Total Investment Return:* | ||||||||||
| Based on net asset value per share | (5.39%) | 12.96% | 10.96% | 38.84% | 15.78% | (4.68%) | 13.88% | 11.84% | 39.99% | 16.73% |
| Ratios To Average Net Assets: | ||||||||||
| Expenses | 1.98% | 1.90% | 1.90% | 1.95% | 2.08% | 1.20% | 1.12% | 1.12% | 1.15% | 1.28% |
| Investment income — net | 1.33% | 1.45% | 1.47% | 1.83% | 1.91% | 2.10% | 2.26% | 2.25% | 2.62% | 2.62% |
| Supplemental Data: | ||||||||||
| Net assets, end of
year
(in thousands) |
$4,294 | $5,347 | $4,379 | $3,025 | $1,953 | $97,517 | $127,743 | $100,642 | $74,577 | $44,691 |
| Portfolio turnover | 32.33% | 20.11% | 32.66% | 14.29% | 26.42% | 32.33% | 20.11% | 32.66% | 14.29% | 26.42% |
* Total investment returns exclude the effects of sales charges.
† Based on average shares outstanding.
| 30 | MERRILL LYNCH EQUITY INCOME FUND |
-------------------------------
POTENTIAL
___________ INVESTORS _____________
| Open an account (two options). |
| ------------------------------- |
| |
\|/ \|/
1 2
-------------------------- ---------------------------------------
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT Financial Data Services, Inc.
OR SECURITIES DEALER
ADMINISTRATIVE OFFICES
Advises shareholders 4800 Deer Lake Drive East
on their Fund investments. Jacksonville, Florida 32246-6484
--------------------------
/|\ MAILING ADDRESS
| P.O. Box 45289
| Jacksonville, Florida 32232-5289
|
| Performs recordkeeping
| and reporting services.
| ---------------------------------------
| /|\
| |
| ----------------------------------------------- |
| DISTRIBUTOR |
| FAM Distributors, Inc. |
| P.O. Box 9081 |
________\ Princeton, New Jersey 08543-9081 /_________
/ \
Arranges for the sale of Fund shares.
-----------------------------------------------
|
\|/
---------------------------------- --------------------- --------------------------------
COUNSEL THE FUND CUSTODIAN
Swidler Berlin ___\ /___ State Street Bank and
Shereff Friedman, LLP / The Board of Trustees \ Trust Company
The Chrysler Building oversees the Fund. One Heritage Drive P2N
405 Lexington Avenue --------------------- North Quincy, Massachusetts 02171
New York, New york 10174
_ _ Holds the Fund's assets
Provides legal advice to the Fund. /| |\ for safekeeping
----------------------------------/ \--------------------------------
/ \
----------------------------------- -----------------------------------------
INDEPENDENT AUDITORS MANAGER
Deloitte & Touche LLP Merrill Lynch Investment Managers, L.P.
Princeton Forrestal Village
116-300 Village Boulevard ADMINISTRATIVE OFFICES
Princeton, New Jersey 08540-6400 800 Scudders Mill Road
Plainsboro, New Jersey 08536
Audits the financial
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
----------------------------------- P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day activities.
-----------------------------------------
| MERRILL LYNCH EQUITY INCOME FUND |
Additional information about the Fund's investments is available in the Fund's annual and semi-annual reports to shareholders. In the Fund's annual report you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. You may obtain these reports at no cost by calling 1-800-MER-FUND.
The Fund will send you one copy of each shareholder report and certain other mailings, regardless of the number of Fund accounts you have. To receive separate shareholder reports for each account, call your Merrill Lynch Financial Consultant or write to the Transfer Agent at its mailing address. Include your name, address, tax identification number and Merrill Lynch brokerage or mutual fund account number. If you have any questions, please call your Merrill Lynch Financial Consultant or other financial intermediary or the Transfer Agent at 1-800-MER-FUND.
The Fund's Statement of Additional Information contains further information about the Fund and is incorporated by reference (legally considered to be part of this prospectus). You may request a free copy by writing the Fund at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289 or by calling 1-800-MER-FUND.
Contact your Merrill Lynch Financial Consultant or the Fund, at the telephone number or address indicated on the inside back cover of this Prospectus, if you have any questions.
Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information on the operation of the public reference room. This information is also available on the SEC's Internet site at http://www.sec.gov and copies may be obtained upon payment of a duplicating fee, by electronic request at the following E-mail address: [email protected], or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.
You should rely only on the information contained in this Prospectus. No one is authorized to provide you with information that is different from the information contained in this Prospectus.
Investment Company Act file #811-5178
Code #10559-1200
©Merrill Lynch Investment Managers, L.P.
MERRILL LYNCH LOGO
December 28, 2000
STATEMENT OF ADDITIONAL INFORMATION
P.O. Box 9011, Princeton, New Jersey 08543-9011 • Phone No. (609) 282-2800
The investment objective of Merrill Lynch Equity Income Fund (the "Fund") is to seek long-term total return and current income. The Fund seeks to achieve its objective by investing primarily in a diversified portfolio of equity securities. Total return consists of increases in value from both capital appreciation and income. Under normal market conditions, the Fund invests at least 65% of its total assets in a diversified portfolio of equity securities. Within this diversified portfolio of equity securities, it is expected that a majority of the securities will be dividend-paying common stocks. The Fund's portfolio, in the aggregate, will be structured in a manner designed to produce potential long-term capital appreciation as well as a net portfolio yield in excess of the average of mutual funds invested primarily in U.S. equities. There can be no assurance that the investment objective of the Fund will be realized. For more information on the Fund's investment objectives and policies, see "Investment Objective and Policies."
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 "Purchase of Shares."
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 December 28, 2000 (the "Prospectus"), which has been filed with the Securities and Exchange Commission (the "Commission") and can be obtained, without charge, by calling 1-800-MER-FUND or by writing the Fund at the above address. The Prospectus is incorporated by reference into this Statement of Additional Information, and this Statement of Additional Information is incorporated by reference into the Prospectus. The Fund's audited financial statements are incorporated in this Statement of Additional Information by reference to its 2000 annual report to shareholders. You may request a copy of the annual report at no charge by calling 1-800-637-3863 between 8:00 a.m. and 8:00 p.m. Eastern time on any business day.
The date of this Statement of Additional Information is
December 28,
2000.
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blank) TABLE OF CONTENTS The investment objective of the Fund is to seek long-term total
return and current income. The Fund seeks to
achieve its objective by investing primarily in a portfolio of equity
securities. Total return consists of
increases in value from both capital appreciation and income. Under
normal market
conditions,
the Fund invests at least 65% of its total
assets in a diversified portfolio of equity securities of issuers that
have good prospects for capital
appreciation. Within this diversified portfolio of equity securities,
it is expected that a majority of the
securities will be dividend-paying common stock. Merrill Lynch
Investment Managers, L.P. ("MLIM" or the "Manager")
believes that stocks that have yields often
provide attractive long-term total return
and greater price stability during periods of downward movements in
market prices than stocks that do not pay
dividends. The Fund emphasizes investments in large companies. The
Fund's portfolio, in the aggregate, will be
structured in a manner designed to produce potential long-term
capital appreciation as well as a net
portfolio yield in excess of the average of mutual funds invested
primarily in U.S. equities. 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.
Reference is made to "How the Fund Invests" and
"Investment Risks" in the Prospectus.
The Fund is classified as a diversified fund under the Investment
Company Act of 1940, as amended (the
"Investment Company Act").
In addition to 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 may
invest in debt securities
of any maturity
that are rated
in 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 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.
Other Investment Policies, Practices and
Risk Factors
Convertible Securities
Convertible securities entitle the holder to receive interest
payments paid on corporate debt securities or the dividend preference
on a preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise the
conversion privilege.
The characteristics of convertible securities make them
appropriate investments for an investment company seeking long-term
total return from income and capital growth. These characteristics
include the potential for capital appreciation as the value of the
underlying common stock increases, the relatively high yield received
from dividend or interest payments as compared to common stock
dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed-income 2 nature. As a result of the conversion feature,
however, the interest rate or dividend preference on a convertible
security is generally less than would be the case if the securities
were issued in nonconvertible form.
In analyzing convertible securities, the Manager will consider
both the yield on the convertible security relative to its credit
quality and the potential capital appreciation that is offered by the
underlying common stock, among other things.
Convertible securities are issued and traded in a number of
securities markets. Even in cases where a substantial portion of the
convertible securities held by the Fund is denominated in U.S. dollars,
the underlying equity securities may be quoted in the currency of the
country where the issuer is domiciled. With respect to convertible
securities denominated in a currency different from that of the
underlying equity securities, the conversion price may be based on a
fixed exchange rate established at the time the security is issued. As
a result, fluctuations in the exchange rate between the currency in
which the debt security is denominated and the currency in which the
share price is quoted will affect the value of the convertible
security. As described below, the Fund is authorized to enter into
foreign currency hedging transactions in which it may seek to reduce
the effect of such fluctuations.
Apart from currency considerations, the value of convertible
securities is influenced by both the yield of nonconvertible securities
of comparable issuers and by the value of the underlying common stock.
The value of a convertible security viewed without regard to its
conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." To the extent
interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion
value," which is the market value of the underlying common stock
that would be obtained if the convertible security were converted.
Conversion value fluctuates directly with the price of the underlying
common stock. If, because of a low price of the common stock the
conversion value is substantially below the investment value of the
convertible security, the price of the convertible security is governed
principally by its investment value.
To the extent the conversion value of a convertible security
increases to a point that approximates or exceeds its investment value,
the price of the convertible security will be influenced principally by
its conversion value. A convertible security will sell at a premium
over the conversion value to the extent investors place value on the
right to acquire the underlying common stock while holding a
fixed-income security. The yield and conversion premium of convertible
securities issued in Japan and the Euromarket are frequently determined
at levels that cause the conversion value to affect their market value
more than the securities' investment value.
Holders of convertible securities generally have a claim on the
assets of the issuer prior to the common stockholders but may be
subordinated to other debt securities of the same issuer. A convertible
security may be subject to redemption at the option of the issuer at a
price established in the charter provision, indenture or other
governing instrument pursuant to which the convertible security was
issued. If a convertible security held by the Fund is called for
redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party.
Certain convertible debt securities may provide a put option to the
holder which entitles the holder to cause the security to be redeemed
by the issuer at a premium over the stated principal amount of the debt
security under certain circumstances.
Foreign Investment Risks
Foreign Market Risk. Since the Fund may invest
in foreign securities, it offers the potential for more diversification
than an investment only in the United States. This is because
securities traded on foreign markets have often (though not always)
performed differently than securities in the United States. However,
such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In
particular, the Fund is subject to the risk that because there are
generally fewer investors on foreign exchanges and a smaller number of
shares traded each day, it may make it difficult for the Fund to buy
and sell securities on those exchanges. In addition, prices of foreign
securities may fluctuate more than prices of securities traded in the
United States.
3 Foreign Economy Risk. The economies of certain
foreign markets often do not compare favorably with that of the United
States with respect to such issues as growth of gross national product,
reinvestment of capital, resources, and balance of payments position.
Certain such economies may rely heavily on particular industries or
foreign capital and are more vulnerable to diplomatic developments, the
imposition of economic sanctions against a particular country or
countries, changes in international trading patterns, trade barriers,
and other protectionist or retaliatory measures. Investments in foreign
markets may also be adversely affected by governmental actions such as
the imposition of capital controls, nationalization of companies or
industries, expropriation of assets, or the imposition of punitive
taxes. In addition, the governments of certain countries may prohibit
or impose substantial restrictions on foreign investing in their
capital markets or in certain industries. Any of these actions could
severely affect security prices, impair the Fund's ability to purchase
or sell foreign securities or transfer the Fund's assets or income
back into the United States, or otherwise adversely affect the Fund's
operations. Other foreign market risks include foreign exchange
controls, difficulties in pricing securities, defaults on foreign
government securities, difficulties in enforcing favorable legal
judgments in foreign courts, and political and social instability.
Legal remedies available to investors in certain foreign countries may
be less extensive than those available to investors in the United
States or other foreign countries.
Currency Risk. Securities in
which the Fund invests may be denominated or quoted in currencies other
than the U.S. dollar. Changes in foreign currency exchange rates will
affect the value of the Fund's portfolio. Generally, when the U.S.
dollar rises in value against a foreign currency, a security
denominated in that currency loses value because the currency is worth
fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value
against a foreign currency, a security denominated in that currency
gains value because the currency is worth more U.S. dollars. This risk,
generally known as "currency risk," means that a stronger U.S.
dollar will reduce returns for U.S. investors investing overseas while
a weak U.S. dollar will increase those returns.
European Economic and Monetary Union. For a
number of years, certain European countries have been seeking economic
unification that would, 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 European countries. The Treaty on European
Union (the "Maastricht Treaty") sets out a framework for the
European Economic and Monetary Union ("EMU") among the countries
that comprise the European Union ("EU"). EMU established a single
common European currency (the "euro") that was introduced on
January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. EMU took
effect for the initial EMU participants on January 1, 1999.
Certain securities issued in participating EU countries (beginning with
government and corporate bonds) have been redenominated in the euro,
and are listed, traded and make dividend and other payments only in
euros.
No assurance can be given that EMU will take full effect, that all
of the changes planned for the EU can be successfully implemented, or
that these changes will result in the economic and monetary unity and
stability intended. There is a possibility that EMU will not be
completed, or will be completed but then partially or completely
unwound. Because any participating country may opt out of EMU within
the first three years, it is possible that a significant participant
could choose to abandon EMU, which would diminish its credibility and
influence. Any of these occurrences could have adverse effects on the
markets of both participating and non-participating countries,
including sharp appreciation or depreciation of the participants'
national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of
confidence in the European markets, an undermining of European economic
stability, the collapse or slowdown of the drive toward European
economic unity, and/or reversion of the attempts to lower government
debt and inflation rates that were introduced in anticipation of EMU.
Also, withdrawal from EMU by an initial participant could cause
disruption of the financial markets as securities that have been
redenominated in euros are transferred back into that country's
national currency, particularly if the withdrawing country is a major
economic power. Such developments could have an adverse impact on the
Fund's investments in Europe generally or in specific countries
participating in EMU. Gains or losses resulting from the euro
conversion may be taxable to Fund shareholders under foreign or, in
certain limited circumstances, U.S. tax laws.
4 Governmental Supervision and Regulation/Accounting
Standards. Many foreign governments supervise and regulate stock
exchanges, brokers and the sale of securities less than the United
States does. Some countries may not have laws to protect investors the
way that the U.S. securities laws do. For example, some foreign
countries may have no laws or rules against insider trading. Insider
trading occurs when a person buys or sells a company's securities
based on non-public information about that company. Accounting
standards in other countries are not necessarily the same as in the
United States. If the accounting standards in another country do not
require as much detail as U.S. accounting standards, it may be harder
for the Fund management to completely and accurately determine a
company's financial condition. Also, brokerage commissions and other
costs of buying or selling securities often are higher in foreign
countries than they are in the United States. This reduces the amount
the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the
United States. The Fund generally holds its foreign securities
and cash in foreign banks and securities depositories. Some foreign
banks and securities depositories may be recently organized or new to
the foreign custody business. In addition, there may be limited or no
regulatory oversight over their operations. Also, the laws of certain
countries may put limits on the Fund's ability to recover its assets
if a foreign bank or depository or issuer of a security or any of their
agents goes bankrupt. In addition, it is often more expensive for the
Fund to buy, sell and hold securities in certain foreign markets than
it is in the U.S. The increased expense of investing in foreign markets
reduces the amount the Fund can earn on its investments and typically
results in higher operating expense ratio for the Fund than investment
companies invested only in the U.S.
Settlement Risk. Settlement and clearance
procedures in certain foreign markets differ significantly from those
in the United States. Foreign settlement procedures and trade
regulations also may involve certain risks (such as delays in payment
for or delivery of securities) not typically generated by the
settlement of U.S. investments. Communications between the United
States and emerging market countries may be unreliable, increasing the
risk of delayed settlements or losses of security certificates.
Settlements in certain foreign countries at times have not kept pace
with the number of securities transactions; these problems may make it
difficult for the Fund to carry out transactions. If the Fund cannot
settle or is delayed in settling a purchase of securities, it may miss
attractive investment opportunities and certain of its assets may be
uninvested with no return earned thereon for some period. If the Fund
cannot settle or is delayed in settling a sale of securities, it may
lose money if the value of the security then declines or, if it has
contracted to sell the security to another party, the Fund could be
liable to that party for any losses incurred.
Derivatives
The Fund may use instruments referred to as Derivatives.
Derivatives are financial instruments the value of which is derived
from another security, a commodity (such as gold or oil), a currency or
an index (a measure of value or rates, such as the Standard & Poor's
500 Index or the prime lending rate). Derivatives allow the Fund to
increase or decrease the level of risk to which the Fund is exposed
more quickly and efficiently than transactions in other types of
instruments.
Hedging. The Fund may use Derivatives for hedging
purposes or for speculative purposes. Hedging is a strategy in which a
Derivative is used to offset the risk that other Fund holdings may
decrease in value. Losses on the other investment may be substantially
reduced by gains on a Derivative that reacts in an opposite manner to
market movements. While hedging can reduce losses, it can also reduce
or eliminate gains if the market moves in a different manner than
anticipated by the Fund or if the cost of the Derivative outweighs the
benefit of the hedge. Hedging also involves the risk that changes in
the value of the Derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the
holdings being hedged may not be reduced.
The use of a derivative is speculative if the Fund is primarily
seeking to achieve gains, rather than offset the risk of other
positions. When the Fund invests in a derivative for speculative
purposes, the Fund will be fully exposed to the risks of loss of that
derivative, which may sometimes be greater than the derivative's cost.
The Fund will not invest in a derivative to gain exposure to an asset
or class of assets that it would be prohibited by its investment
restrictions from purchasing directly.
5 The Fund may use Derivative instruments and trading strategies,
including the following:
Indexed Securities
The Fund may invest in securities the potential return of which is
based on an index. As an illustration, the Fund may invest in a debt
security that pays interest based on the current value of an interest
rate index, such as the prime rate. The Fund may also invest in a debt
security which returns principal at maturity based on the level of a
securities index or a basket of securities or based on the relative
changes of two indices. Indexed securities involve credit risk, and
certain indexed securities may involve currency risk, leverage risk and
liquidity risk. The Fund may invest in indexed securities for both
hedging and speculative purposes. When used for hedging purposes,
indexed securities involve correlation risk.
Options on Securities and Securities Indices
Purchasing Put Options. The Fund may purchase
put options on securities held in its portfolio or on securities or
interest rate indices which are correlated with securities held in its
portfolio. When the Fund purchases a put option, in consideration for
an upfront payment (the "option premium") the Fund acquires a
right to sell to another party specified securities owned by the Fund
at a specified price (the "exercise price") on or before a
specified date (the "expiration date"), in the case of an option
on securities, or to receive from another party a payment based on the
amount a specified securities index declines below a specified level on
or before the expiration date, in the case of an option on a securities
index. The purchase of a put option limits the Fund's risk of loss in
the event of a decline in the market value of the portfolio holdings
underlying the put option prior to the option's expiration date. If
the market value of the portfolio holdings associated with the put
option increases rather than decreases, however, the Fund will lose the
option premium and will consequently realize a lower return on the
portfolio holdings than would have been realized without the purchase
of the put. Purchasing a put option may involve correlation risk, and
may also involve liquidity and credit risk. 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.
Purchasing Call Options. The Fund may also
purchase call options on securities or securities or interest rate
indices. When the Fund purchases a call option, in consideration for
the option premium the Fund acquires the right to purchase from another
party specified securities at the index price on or before the
expiration date. In the case of an option on securities, or to receive
from another party a payment based on the amount a specified securities
index increases beyond a specified level on or before the expiration
date, in the case of an option on a securities index. The purchase of a
call option provides the Fund with the opportunity to profit if the
underlying security or security or interest rate index increases in
value. If the underlying security or security or interest rate index
decreases in value, however, the Fund may lose the entire option
premium. Purchasing a call option may involve correlation, liquidity
and credit risk.
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 may write
(i.e., sell) call options on securities held in its
portfolio or securities indices the performance of which is correlated
with securities held in its portfolio. When the Fund writes a call
option, in return for an option premium the Fund gives another party
the right to buy specified securities owned by the Fund at the exercise
price on or before the expiration date, in the case of an option on
securities, or agrees to pay to another party an amount based on any
gain in a specified securities index beyond a specified level on or
before the expiration date, in the case of an option on a securities
index. The Fund may write call options on securities to earn income,
through the receipt of option premiums; the Fund may write call options
on securities indices for hedging purposes. In the event the party to
which the Fund has written an option fails to exercise its rights under
the option because the value of the underlying securities is less than
the exercise price, the Fund will partially offset any decline in the
value of the underlying securities through the receipt of the option
premium. By writing a call option, however, the Fund limits its ability
to sell the underlying securities, and gives up the opportunity 6 to profit from any increase in the value of the
underlying securities beyond the exercise price, while the option
remains outstanding. Writing a call option may involve correlation
risk.
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
Derivatives" 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 correlate with the performance of
such index) or owns a call option, warrant or convertible instrument
that is immediately exercisable for, or convertible into, such
security.
Types of Options. The Fund may engage in
transactions in the options on securities or securities indices
described above on exchanges and in the over-the-counter ("OTC")
markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin
against their obligations, and the performance of the parties'
obligations in connection with such options is guaranteed by the
exchange or a related clearing corporation. OTC options have more
flexible terms negotiated between the buyer and seller, but generally
do not require the parties to post margin and are subject to greater
credit risk. OTC options also involve greater liquidity risk. See
"Additional Risk Factors of OTC Transactions; Limitations on the Use
of OTC Derivatives" 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. Futures involve substantial leverage risk.
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 futures 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
and currency swaps, purchase and
sell options on currencies and purchase and sell currency futures and
related options thereon (collectively, "Currency Instruments")
for purposes of hedging against the decline in value of currencies in
which its portfolio holdings are denominated against the U.S. dollar.
7 Forward Foreign Exchange Transactions. 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 forward 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 portfolio positions through currency swaps, which are
transactions in which one currency is simultaneously bought for a
second currency on a spot basis, and sold for the second currency on a
forward basis. Forward exchange transactions involve substantial
currency risk, and also involve credit and liquidity risk.
Currency Futures. 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. Currency futures involve substantial currency
risk and also involve leverage risk.
Currency Options. The Fund may also hedge
against the decline in the value of a currency against the U.S. dollar
through the use of currency options. Currency options are similar to
options on securities, but in consideration for an option premium the
writer of a currency option is obligated to sell (in the case of a call
option) or purchase (in the case of a put option) a specified amount of
a specified currency on or before the expiration date for a specified
amount of another currency. The Fund may engage in transactions in
options on currencies either on exchanges or OTC markets. See "Types
of Options" above and "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives" below.
Currency options involve substantial currency risk and may also involve
credit, leverage or liquidity risk.
Limitations on Currency Hedging. 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, however, hedge a
currency by entering into a transaction in a Currency Instrument
denominated in a currency other than the currency being hedged (a
"cross-hedge"). The Fund will only enter into a cross-hedge if
the Manager believes that (i) there is a demonstrable high correlation
between the currency in which the cross-hedge is denominated and the
currency being hedged, and (ii) executing a cross-hedge through the
currency in which the cross-hedge is denominated will be significantly
more cost-effective or provide substantially greater liquidity than
executing a similar hedging transaction by means of the currency being
hedged.
Risk Factors in Hedging Foreign
Currency Risks. Hedging transactions involving Currency
Instruments involve substantial risks, including correlation risk.
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 8 movement relates to a market with respect to which
Currency Instruments are not available (such as certain developing
markets) and it is not possible to engage in effective foreign currency
hedging.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit Risk — the risk that the counterparty on
a Derivative transaction will be unable to honor its financial
obligation to the Fund.
Currency Risk — the risk that changes in the
exchange rate between two currencies will adversely affect the value
(in U.S. dollar terms) of an investment.
Leverage Risk — the risk associated with certain
types of investments or trading strategies (such as borrowing money to
increase the amount of investments) that relatively small market
movements may result in large changes in the value of an investment.
Certain investments or trading strategies that involve leverage can
result in losses that greatly exceed the amount originally invested.
Liquidity Risk — the risk that certain
securities may be difficult or impossible to sell at the time that the
seller would like or at the price that the seller believes the security
is currently worth.
Use of Derivatives for hedging purposes involves correlation risk.
If the value of the Derivatives 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 Derivatives
only if there appears to be a liquid secondary market for such
instruments or, in the case of illiquid instruments traded in OTC
transactions, such instruments satisfy the criteria set forth below
under "Additional Risk Factors of OTC Transactions; Limitations on
the Use of OTC Derivatives." However, there can be no assurance
that, at any specific time, either a liquid secondary market will exist
for a Derivative 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 Derivative without incurring substantial losses,
if at all.
Certain transactions in Derivatives (such as futures transactions
or sales of put options) involve substantial leverage risk and may
expose the Fund to potential losses that exceed the amount originally
invested by the Fund. 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
marked-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 Derivatives
Certain Derivatives traded in OTC markets, including indexed
securities, swaps and OTC options, involve substantial liquidity risk.
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.
Because Derivatives 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 Derivatives 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.
9 Borrowing and Leverage
Debt
Securities. Debt securities are subject to interest rate and
credit risk. Interest rate risk is the risk
that when interest rates go up, the value of debt instruments generally
goes down. In general, the market price of
debt securities with longer maturities will go up or down
more in response to changes in interest rates than
shorter term securities. Credit risk is the risk that the
issuer of a debt security will be unable to pay the
interest or principal when due. The degree of
credit risk depends on both the financial condition of
the issuer and the terms of the obligation.
The use of leverage by the Fund creates an opportunity for greater
total return, but, at the same time, creates special risks. For
example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, the Fund's assets may
change in value during the time the borrowings are outstanding.
Borrowings will create interest expenses of the Fund that can exceed
the income from the assets purchased with the borrowings. To the extent
the income or capital appreciation derived from securities purchased
with borrowed funds exceeds the interest the Fund will have to pay on
the borrowings, the Fund's return will be greater than if leverage had
not been used. Conversely, if the income or capital appreciation from
the securities purchased with such borrowed funds is not sufficient to
cover the cost of borrowing, the return to the Fund will be less than
if leverage had not been used, and therefore the amount available for
distribution to shareholders as dividends and other distributions will
be reduced. In the latter case, the Manager in its best judgment
nevertheless may determine to maintain the Fund's leveraged position
if it expects that the benefits to the Fund's shareholders of
maintaining the leveraged position will outweigh the current reduced
return.
Certain types of borrowings by the Fund may result in the Fund
being subject to covenants in credit agreements relating to asset
coverage, portfolio composition requirements and other matters. It is
not anticipated that observance of such covenants would impede the
Manager from managing the Fund's portfolio in accordance with the
Fund's investment objectives and policies. However, a breach of any
such covenants not cured within the specified cure period may result in
acceleration of outstanding indebtedness and require the Fund to
dispose of portfolio investments at a time when it may be
disadvantageous to do so.
The Fund at times may borrow from affiliates of the Manager,
provided that the terms of such borrowings are no less favorable than
those available from comparable sources of funds in the marketplace.
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
insulates the Fund from fluctuations in the market value of the
underlying security during such period, although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's
return may be affected by currency fluctuations. The Fund may not
invest more than 15% of its total assets in repurchase agreements
maturing in more than seven days (together with other illiquid
securities). 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 10 seller for breach of contract with respect to any
losses arising from market fluctuations following the failure of the
seller to perform.
Securities Lending. The Fund may lend securities
with a value not exceeding 33 1/3 % of its total assets (subject
to investment restriction (5) below) to banks, brokers and other
financial institutions. In return, the Fund receives collateral in cash
or securities issued or guaranteed by the U.S. 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
such a loan, the Fund typically receives the income on both the loaned
securities and the collateral, and thereby increases its yield. In
certain circumstances, the Fund may receive a flat fee for its loans.
Such loans are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days.
The Fund may pay reasonable finder's, administrative and custodial
fees in connection with its loans. In the event that the borrower
defaults on its obligation to return borrowed securities because of
insolvency or for any other reason, the Fund could experience delays
and costs in gaining access to the collateral and could suffer a loss
to the extent the value of the collateral falls below the market value
of the borrowed securities.
Illiquid or Restricted Securities. The Fund may
invest up to 15% of its net assets in securities that lack an
established secondary trading market or otherwise are considered
illiquid. Liquidity of a security relates to the ability to dispose
easily of the security and the price to be obtained upon disposition of
the security, which may be less than would be obtained for a comparable
more liquid security. Illiquid securities may trade at a discount from
comparable, more liquid investments. Investment of the Fund's assets
in illiquid securities may restrict the ability of the Fund to dispose
of its investments in a timely fashion and for a fair price as well as
its ability to take advantage of market opportunities. The risks
associated with illiquidity will be particularly acute where the
Fund's operations require cash, such as when the Fund redeems shares
or pays dividends, and could result in the Fund borrowing to meet short
term cash requirements or incurring capital losses on the sale of
illiquid investments.
The Fund may invest in securities that are not registered under
the Securities Act of 1933, as amended (the "Securities Act") or
that are subject to trading restrictions under the laws of a foreign
jurisdiction ("restricted securities"). Restricted securities may
be sold in private placement transactions between the issuers and their
purchasers and may be neither listed on an exchange nor traded in other
established markets. In many cases, privately placed securities may not
be freely transferable under the laws of the applicable jurisdiction or
due to contractual restrictions on resale. As a result of the absence
of a public trading market, privately placed securities may be less
liquid and more difficult to value than publicly traded securities. To
the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or
less than their fair market value. In addition, issuers whose
securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements that may be applicable if
their securities were publicly traded. If any privately placed
securities held by the Fund are required to be registered under the
securities laws of one or more jurisdictions before being resold, the
Fund may be required to bear the expenses of registration. Certain of
the Fund's investments in private placements may consist of direct
investments and may include investments in smaller, less-seasoned
issuers, which may involve greater risks. These issuers may have
limited product lines, markets or financial resources, or they may be
dependent on a limited management group. In making investments in such
securities, the Fund may obtain access to material non-public
information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.
144A Securities. The Fund may purchase
restricted securities that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act. The
Board of Trustees has determined to treat as liquid Rule 144A
securities that are either freely tradeable in their primary markets
offshore or have been determined to be liquid in accordance with the
policies and procedures adopted by the Fund's Board. The Board of
Trustees has adopted guidelines and delegated to the Manager 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. Since
it is not possible to predict with assurance exactly how this market
for restricted securities sold and offered under Rule 144A will
continue to develop, the Board of Trustees will carefully monitor the
Fund's investments 11 in these securities. 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.
Suitability. The economic benefit of an
investment in the Fund depends upon many factors beyond the control of
the Fund, the Manager and its affiliates. Because of its emphasis on
dividend-paying common stocks that the Fund believes have good
prospects for earnings growth, the Fund should be considered a vehicle
for diversification and not as a balanced investment program. The
suitability for any particular investor of a purchase of shares in the
Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks associated
with investing in dividend-paying common stocks, including the risk of
loss of principal.
Investment Restrictions
The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and
its activities. The fundamental policies set forth below may not be
changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under
the Investment Company Act means the lesser of (i) 67% of the Fund's
shares present at a meeting at which more than 50% of the outstanding
shares of the Fund are represented or (ii) more than 50% of the
Fund's outstanding shares). Under the fundamental investment
restrictions, the Fund may not:
(1) Make any investment inconsistent with the
Fund's classification as a diversified company under the Investment
Company Act.
(2) Invest more than 25% of its total
assets, taken at market value, in the securities of issuers in any
particular industry (excluding the U.S. Government and its agencies and
instrumentalities).
(3) Make investments for the purpose of
exercising control or management.
(4) Purchase or sell real estate, except
that, to the extent permitted by applicable law, the Fund may invest in
securities directly or indirectly secured by real estate or interests
therein or issued by companies that 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 Prospectus and this 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, to the extent permitted by applicable
law, 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 the Prospectus and this
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 Prospectus and this Statement of
12 Additional Information, as they may be amended
from time to time, and without registering as a commodity pool operator
under the Commodity Exchange Act.
Under the Fund's non-fundamental investment restrictions, which
may be changed by the Board without shareholder approval, the Fund may
not:
(a) Purchase securities of other investment
companies, except to the extent 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 total assets
would be invested in such securities. This restriction shall not apply
to securities that mature within seven days or securities that the
Trustees of the Fund have otherwise determined to be liquid pursuant to
applicable law. Securities purchased in accordance with Rule 144A under
the Securities Act and determined to be liquid by the Fund's Board of
Trustees are not subject to the limitations set forth in this
investment restriction.
(d) Notwithstanding fundamental investment
restriction (7) above, borrow amounts in excess of 20% of its total
assets taken at market value (including the amount borrowed), and then
only from banks as a temporary measure for extraordinary or emergency
purposes such as the redemption of Fund shares. In addition, the Fund
will not purchase securities while borrowings are outstanding except to
honor prior commitments and to exercise subscription rights.
In addition, the Fund has adopted an operating policy to structure
the Fund's portfolio, in the aggregate, in a manner designed to
produce potential long-term capital appreciation as well as a net
portfolio yield in excess of the average of mutual funds invested
primarily in U.S. equities. This non-fundamental policy may be changed
by the Board without a vote of the Fund's shareholders.
In addition, to comply with tax requirements for qualification as
a "regulated investment company," the Fund's investments will be
limited in a manner such that at the close of each quarter of each
fiscal year, (a) no more than 25% of the Fund's total assets are
invested in the securities of a single issuer, and (b) with regard
to at least 50% of the Fund's total assets, no more than 5% of its
total assets are invested in the securities of a single issuer. For
purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public
authority which issues securities on behalf of a private entity as a
separate issuer, except that if the security is backed only by the
assets and revenues of a non-government entity then the entity with the
ultimate responsibility for the payment of interest and principal may
be regarded as the sole issuer. These tax-related limitations may be
changed by the Board of Trustees of the Fund to the extent necessary to
comply with changes to the Federal tax requirements.
The staff of the Commission has taken the position that purchased
OTC options and the assets underlying written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including
OTC options on futures contracts) if, as a result of such 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 on futures
contracts exceeds 15% of the net assets of the Fund, taken at market
value, together with all other assets of the Fund which are 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 13 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).
If a percentage restriction on the investment or use of assets set
forth above is adhered to at the time a transaction is effected, later
changes in percentages resulting from changing values will not be
considered a violation.
Because of the affiliation of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") with the Manager, 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 pursuant to an exemptive order under the
Investment Company Act. See "Portfolio Transactions and
Brokerage." Without such an exemptive order the Fund would be
prohibited from engaging in portfolio transactions with Merrill Lynch
or any of its affiliates acting as principal.
Portfolio Turnover
The Fund will effect portfolio transactions without regard to
holding period only if, in its management's judgment, such
transactions are advisable in light of a change in circumstances of a
particular company or within a particular industry or in general
market, economic or financial conditions. As a result of the Fund's
investment policies, under certain market conditions, the Fund's
portfolio turnover may be higher than that of other investment
companies. Accordingly, it is impossible to predict portfolio turnover
rates. The portfolio turnover rate is calculated by dividing the lesser
of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of all securities with maturities at
the time of acquisition of one year or less) by the monthly average
value of the securities in the portfolio during the year. A high
portfolio turnover may result in negative tax consequences, such as an
increase in capital gains dividends. High portfolio turnover may also
involve correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions, which are borne directly by the
Fund. See "Dividends and Taxes."
The Board of Trustees of the Fund consists of nine individuals,
seven of whom are not "interested persons" of the Fund as defined
in the Investment Company Act (the "non-interested Trustees").
The Trustees are responsible for the overall supervision of the
operations of the Fund and perform the various duties imposed on the
directors or trustees of investment companies by the Investment Company
Act.
Information about the Trustees, executive officers and the
portfolio manager of the Fund, including their ages and their principal
occupations for at least the last five years, is set forth below.
Unless otherwise noted, the address of each Trustee, executive officer
and the portfolio manager is P.O. Box 9011, Princeton, New Jersey
08543-9011.
TERRY K. GLENN (60) — President and
Trustee(1)(2) — Executive Vice President of the Manager and FAM
since 1983; Executive Vice President and Director of Princeton
Services, Inc. ("Princeton Services") since 1993; President of
FAM Distributors, Inc. ("FAMD" or the "Distributor") since
1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
RONALD W. FORBES (60) —
Trustee(2)(3) — 1400 Washington Avenue, Albany, New York
12222. Professor Emeritus of Finance, School of Business, State
University of New York at Albany since 2000 and Professor thereof from
1989 to 2000; Consultant, Urban Institute, Washington D.C. from 1995 to
1999.
CYNTHIA A. MONTGOMERY (48) —
Trustee(2)(3) — 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 14 Professor, Graduate School of Business
Administration, The University of Michigan from 1979 to 1985; Director,
UNUMProvident Corporation since 1990 and Director of NewellRubbermaid
Co. since 1995.
CHARLES C. REILLY (69) —
Trustee(2)(3) — 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 from 1986 to 1997.
KEVIN A. RYAN (68) —
Trustee(2)(3) — 127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02467. Founder and Director Emeritus of The Boston
University Center for the Advancement of Ethics and Character;
Professor Emeritus of Education at Boston University since 1999;
formerly taught on the faculties of the University of Chicago, Stanford
University and Ohio State University.
ROSCOE S. SUDDARTH (65) — Trustee(2)(3) —
1761 N. Street, N.W., Washington, D.C. 20036. President, Middle East
Institute since 1995; Foreign Service Officer, U.S. Foreign Service
from 1961 to 1995; Career Minister from 1989 to 1995; U.S. Ambassador
to the Hashemite Kingdom of Jordon from 1987 to 1990; Deputy Inspector
General, U.S. Department of State, from 1991 to 1994.
RICHARD R. WEST (62) —
Trustee(2)(3) — 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), Vorando
Operating Company and Alexander's Inc. (real estate company).
ARTHUR ZEIKEL (68) —
Trustee(1)(2) — 300 Woodland Avenue, Westfield, New Jersey
07090-1826. Chairman of the Manager and Fund Asset Management, L.P.
("FAM") (which terms as used herein, includes their corporate
predecessors) from 1997 to 1999 and President thereof from 1977 to
1997; Chairman of Princeton Services from 1997 to 1999, Director
thereof from 1993 to 1999, and President thereof from 1993 to 1997;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") from 1990 to 1999.
EDWARD D. ZINBARG (66) — Trustee(2)(3) —
5 Hardwell Road, Short Hills, New Jersey 07078-2117. Self-employed
Financial Consultant since 1994; Executive Vice President of The
Prudential Insurance Company of America from 1988 to 1994; former
Director of Prudential Reinsurance Company and former Trustee of The
Prudential Foundation.
ROBERT C. DOLL, JR. (45) — Senior Vice
President(1)(2) — Senior Vice President of the Manager and FAM
since 1999; Senior Vice President of Princeton Services since 1999;
Chief Investment Officer of Oppenheimer Funds, Inc. in 1999 and
Executive Vice President thereof from 1991 to 1999.
WALTER D. ROGERS (57) —
Senior Vice President and Portfolio Manager(1) — First Vice
President of the Manager since 1997; Vice President of the Manager from
1987 to 1997.
DONALD C. BURKE (40) — Vice
President and Treasurer(1)(2) — Senior Vice President and
Treasurer of the Manager and FAM since 1999; Senior Vice President and
Treasurer of Princeton Services since 1999; Vice President of
FAMD since 1999; First
Vice President of Manager and FAM from 1997 to 1999; Vice President of
Manager from 1990 to 1997; Director of Taxation of Manager since 1990.
IRA P. SHAPIRO (37) —
Secretary(1)(2) — First Vice President of the Manager since
1998; Director (Legal Advisory) of the Manager from 1997 to 1998; Vice
President of the Manager from 1996 to 1997; Attorney with the Manager
and FAM from 1993 to 1996.
15
As of November 1, 2000, the Trustees and officers of the Fund
as a group (13 persons) owned an aggregate of less than 1% of the
outstanding shares of the Fund. At such date, Mr. Zeikel, a Trustee of
the Fund, and the officers of the Fund owned an aggregate of less than
1% of the outstanding shares of common stock of ML & Co.
The Fund pays each non-interested Trustee a fee of $2,000 per year
plus $400 per Board meeting attended. The Fund also compensates each
member of the Audit and Nominating Committee (the "Committee"),
which consists of the non-interested Trustees, at a rate of $900 per
year. The Fund pays the Chairman of the Committee an additional fee of
$1,000 per year. Currently, Messrs. Forbes and Reilly serve as
Co-Chairmen, and receive $500 each per year. The Fund reimburses each
non-interested Trustee for his out-of-pocket expenses relating to
attendance at Board and Committee meetings.
The following table shows the compensation earned by the
non-interested Trustees for the fiscal year ended July 31, 2000
and the aggregate compensation paid to them from all registered
investment companies advised by the MLIM and its affiliate, FAM
("MLIM/FAM Advised Funds"), for the calendar year ended
December 31, 1999.
(1) Includes a special meeting fee of $400.
(2) Messrs. Forbes, Reilly, Ryan, Suddarth, Zinbarg and
Ms. Montgomery each serve on the boards of 55 MLIM/FAM-Advised Funds
consisting of 66 portfolios. Mr. West serves on the board of 65
MLIM/FAM-Advised Funds consisting of 69 portfolios.
* Mr. Suddarth was elected Trustee of the Fund on July
10, 2000 and director/trustee of certain other MLIM/FAM-advised funds
on January 20, 2000.
** Mr. Zinbarg was elected Trustee of the Fund on July
10, 2000.
Trustees of the Fund may purchase Class A shares of the Fund at
net asset value. See "Purchase of Shares — Initial Sales Charge
Alternatives — Class A and Class D Shares — Reduced Initial Sales
Charges — Purchase Privilege of Certain Persons."
Management Services. The Manager provides the
Fund with investment advisory and management services. Subject to the
supervision of the Trustees, the Manager is responsible for the actual
management of the Fund's portfolio and constantly reviews the Fund's
holdings in light of its own research analysis and that from other
relevant sources. The responsibility for making decisions to buy, sell
or hold a particular security rests with the Manager. The Manager
performs certain of the other administrative services and provides all
the office space, facilities, equipment and necessary personnel for
management of the Fund.
Management Fee. The Fund has entered into a
management agreement with the Manager (the "Management
Agreement"), pursuant to which 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. The table below sets forth
information about the total investment advisory fees paid by the Fund
to the Manager for the periods indicated.
16 The Manager has also entered into a sub-advisory agreement (the
"Sub-Advisory Agreement") with Merrill Lynch Asset Management
U.K. Limited ("MLAM U.K.") pursuant to which MLAM U.K. provides
investment advisory services to the Manager with respect to the Fund.
For the fiscal years ended July 31, 2000, 1999 and 1998, the
Manager paid no fees to MLAM U.K. pursuant to this agreement.
Payment of Fund Expenses. 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. The Fund pays all other expenses incurred in the operation of
the Fund, including among other things: taxes, expenses for legal and
auditing services, costs of printing proxies, stock certificates,
shareholder reports, prospectuses and statements of additional
information, except to the extent paid by the Distributor; charges of
the custodian and sub-custodian, and the transfer agent; expenses of
redemption of shares; SEC fees; expenses of registering the shares
under Federal, state or foreign laws; fees and expenses of
non-interested Trustees; accounting and pricing costs (including the
daily calculations 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 for the Fund by the Manager and the Fund reimburses the
Manager for its costs in connection with such services. The Distributor
will pay certain promotional expenses of the Fund incurred in
connection with the offering of shares of the Fund. Certain expenses
will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See
"Purchase of Shares — Distribution Plans."
Organization of the Manager. The Manager is a
limited partnership, the partners of which are ML & Co., a financial
services holding company and the parent of Merrill Lynch, 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.
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.
Duration and Termination. Unless earlier
terminated as described herein, the Management Agreement and
Sub-Advisory Agreement will continue in effect from year to year if
approved annually (a) by the Trustees of the Fund or by a majority of
the outstanding shares of the Fund and (b) by a majority of the
Trustees who are not parties to such contract or interested persons (as
defined in the Investment Company Act) of any such party. Such
contracts are not assignable and may be terminated without penalty on
60 days' written notice at the option of either party or by vote of
the shareholders of the Fund.
Transfer Agency Services. Financial Data
Services, Inc. (the "Transfer Agent"), 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 a fee of $11.00 per Class A or Class D account
and $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 this fee will commence the month following the month the
account is closed. At the end 17 of the calendar year, no further fees will be
due. For purposes of the Transfer Agency Agreement, the term
"account" includes a shareholder account maintained directly by
the Transfer Agent and any other account representing the beneficial
interest of a person in the relevant share class on a recordkeeping
system, provided the recordkeeping system is maintained by a subsidiary
of ML & Co.
Distribution Expenses. The Fund has entered
into four separate distribution agreements with the Distributor in
connection with the continuous offering of each class of shares of the
Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been
prepared, set in type and mailed to shareholders, the Distributor pays
for the printing and distribution of copies thereof used in connection
with the offering to dealers and investors. The Distributor also pays
for other supplementary sales literature and advertising costs. The
Distribution Agreements are subject to the same renewal requirements
and termination provisions as the Management Agreement described above.
The Board of Trustees of the Fund has approved a Code of Ethics
under Rule 17j-1 of the Investment Company Act that covers the Fund and
the Fund's Manager and Distributor (the "Code of Ethics"). The
Code of Ethics significantly restricts the personal investing
activities of all employees of the Manager and Distributor and, as
described below, imposes additional, more onerous, restrictions on Fund
investment personnel.
The Code of Ethics requires that all employees of the Manager and
Distributor pre-clear any personal securities investment (with limited
exceptions, such as mutual funds, high quality short-term securities
and direct obligations of the U.S. Government). The pre-clearance
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 and Distributor include a ban on acquiring any securities
in a "hot" initial public offering and investment personnel are
prohibited from profiting on short term trading in securities. In
addition, no employee may purchase or sell any security that at the
time is being purchased or sold (as the case may be), or to the
knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Manager. Furthermore, the Code of Ethics
provides for trading "blackout periods" which prohibit trading by
investment personnel of the Fund within seven calendar days before or
after trading by the Fund in the same or an equivalent security.
Reference is made to "How to Buy, Sell, Transfer and Exchange
Shares" in the Prospectus.
The Fund offers 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
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 (also known as service 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 contingent deferred sales
charges ("CDSCs"), distribution fees and account maintenance fees
that are imposed on Class B and Class C shares, as well as the account
maintenance fees that are imposed on Class D shares, are imposed
directly against those classes and not against all assets of the Fund
and, accordingly, such charges do not affect the net asset value of any
other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and 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."
18 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 Merrill Lynch Select PricingSM System is used by
more than 50 registered investment companies advised by MLIM or FAM.
Funds advised by MLIM or FAM that utilize the Merrill Lynch Select
PricingSM System are referred to herein as "Select
Pricing Funds."
The Fund offers its shares at a public offering price equal to the
next determined net asset value per share plus any sales charge
applicable to the class of shares selected by the investor. The
applicable offering price for purchase orders is based upon the net
asset value of the Fund next determined after receipt of the purchase
order by the Distributor. As to purchase orders received by securities
dealers or other financial intermediaries prior to the close of
business on the New York Stock Exchange (the "NYSE") (generally
4:00 p.m. Eastern Time) which includes orders received after the
determination of net asset value on the previous day, the applicable
offering price will be based on the net asset value on the day the
order is placed with the Distributor, provided that the orders are
received by the Distributor 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. Dealers have the responsibility of submitting purchase orders to
the Fund not later than 30 minutes after the close of business on the
NYSE in order to purchase shares at that day's offering price.
The Fund or the Distributor may suspend the continuous offering of
the Fund's shares of any class at any time in response to conditions
in the securities markets or otherwise and may thereafter resume such
offering from time to time. Any order may be rejected by the Fund or
the Distributor. Neither the Distributor nor the dealers nor other
financial intermediaries 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.
Investors who prefer an initial sales charge alternative may elect
to purchase Class D shares or, if an eligible investor, Class A shares.
Investors choosing the initial sales charge alternative who are
eligible to purchase Class A shares should purchase Class A shares
rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly
reduced initial sales charges may find the initial sales charge
alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges
imposed in connection with purchases of Class B or Class C shares.
Investors not qualifying for reduced initial sales charges who expect
to maintain their investment for an extended period of time also may
elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class
B or Class C shares may exceed the initial sales charges, 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 Select Pricing 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 a reduced initial sales charge 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.
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
19 an individual or to concurrent purchases, which
in the aggregate are at least equal to the prescribed amounts, by an
individual, his or her spouse and their children under the age of 21
years purchasing shares for his, her 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 which
has no purpose other than the purchase of shares of the Fund or shares
of other registered investment companies at a discount; provided,
however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants
therein are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or
clients of an investment adviser.
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 who currently own Class A shares 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 MLIM 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 has $3 million or more initially
invested in Select Pricing 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 certain purchases made in connection with certain fee-based
programs. In addition, Class A shares are offered at net asset value to
ML & Co. and its subsidiaries and their directors and employees and to
members of the Boards of MLIM/FAM Advised Funds. Certain persons who
acquired shares of certain MLIM/FAM-advised closed-end funds 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 shares of the Fund if certain conditions are met.
In addition, Class A shares of the Fund and certain other Select
Pricing Funds are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. and, if certain conditions are
met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such funds in
shares of the Fund and certain other Select Pricing Funds.
Class A and Class D Sales Charge
Information
20 The Distributor may reallow discounts to selected
securities dealers and other financial intermediaries and retain the
balance over such discounts. At times the Distributor may reallow the
entire sales charge to such dealers. Since securities dealers and other
financial intermediaries 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.
Reduced Initial Sales Charges
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 to obtain such investments.
Reinvested Dividends. No initial sales charges
are imposed upon Class A and Class D shares issued as a result of the
automatic reinvestment of dividends.
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 any other Select Pricing 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 or other financial intermediary,
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 the Class A or
Class D shares of the Fund or any Select Pricing Funds made within a
13-month period starting with the first purchase pursuant to a Letter
of Intent. The Letter of Intent is available only to investors whose
accounts are established and maintained at the Fund's Transfer Agent.
The Letter of Intent is not available to employee benefit plans for
which Merrill Lynch provides plan participant recordkeeping 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 a 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 Select Pricing 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 at
least 5.0% 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 5.0% 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
the further reduced percentage sales charge that would be applicable to
a single purchase equal to the total dollar value of the Class A or
Class D shares then being purchased under such Letter, but there will
be no retroactive reduction of the sales charge on any previous
purchase.
The value of any shares redeemed or otherwise disposed of by
the purchaser prior to termination or completion of the Letter of
Intent will be deducted from the total purchases made under such
Letter. An exchange from the Summit Cash Reserves Fund into the Fund
that creates a sales charge will count toward completing a new or
existing Letter of Intent from the Fund.
21 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 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 up to $5,000 at 3.25% plus $3, 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 0.50% of 1% for corporate or group IRA
programs placing orders to purchase their Class A or Class D
shares through Blueprint. Services, including the exchange privilege,
available to Class A and Class D investors through Blueprint,
however, may differ from those available to other investors in Class A
or Class D shares.
Class A and Class D shares are offered at net asset value to
participants in Blueprint through the Merrill Lynch Directed IRA
Rollover Program (the "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 whose
trustee and/or plan sponsor has entered into a Merrill Lynch Directed
IRA Rollover Program Service Agreement.
Orders for purchases and redemptions of Class A or Class D shares
of the Fund may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business
days following the day such orders are placed. The minimum initial
purchase price is $100, with a $50 minimum for subsequent purchases
through Blueprint. There are no minimum initial or subsequent purchase
requirements for participants who are part of an automatic investment
plan. Additional information concerning purchases through Blueprint,
including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New
Jersey 08989-0441.
TMASM Managed Trusts. Class A
shares are offered at net asset value to TMASM Managed
Trusts to which Merrill Lynch Trust Company provides discretionary
trustee services.
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 investment for such accounts is $500, except that
the initial minimum investment for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
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. 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 1-800-237-7777.
Purchase Privilege of Certain Persons. Trustees
of the Fund, members of the Boards of other MLIM/FAM-advised investment
companies, ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to ML & Co.,
includes MLIM, 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. The Fund realizes economies of scale and reduction of
sales-related expenses by virtue of the familiarity of these persons
with the Fund. Employees and directors or trustees wishing to purchase
shares of the Fund must satisfy the Fund's suitability standards.
Class D shares of the Fund are offered at net asset value, without
a sales charge, to an investor that has a business relationship with a
Financial Consultant who joined Merrill Lynch from another investment
22 firm within six months prior to the date of
purchase by such investor, if the following conditions are satisfied:
first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from a redemption of shares of
a mutual fund that was sponsored by the Financial Consultant's
previous firm and was subject to a sales charge either at the time of
purchase or on a deferred basis; and, second, the investor must
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 also offered at net asset value,
without a sales charge, to an investor that has a business relationship
with a Merrill Lynch Financial Consultant and that 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 the
shares of such other fund were subject to a sales charge either at the
time of purchase or on a deferred basis; and, second, such purchase of
Class D shares must be made within 90 days after such notice.
Class D shares of the Fund are offered at net asset value, without
a sales charge, to an investor that has a business relationship with a
Merrill Lynch Financial Consultant and that has invested in a mutual
fund for which Merrill Lynch has not served as a selected dealer if the
following conditions are satisfied: first, the investor must advise
Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from the redemption of shares of such other mutual fund and
that such shares have been outstanding for a period of no less than six
months; and, second, such purchase of Class D shares must be made
within 60 days after the redemption and the proceeds from the
redemption must be maintained in the interim in cash or a money market
fund.
Closed-End Fund Investment Option. Class A
shares of the Fund ("Eligible Class A Shares") are offered at net
asset value to holders of the common stock of certain closed-end funds
advised by the Manager or FAM who purchased such closed-end fund shares
prior to October 21, 1994 (the date the Merrill Lynch Select
PricingSM System commenced operations) and wish to reinvest
the net proceeds from a sale of such shares in Eligible Class A Shares,
if the conditions set forth below are satisfied. Alternatively, holders
of the common stock of closed-end funds who purchased such shares on or
after October 21, 1994 and wish to reinvest the net proceeds from
a sale of those shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund ("Eligible Class D
Shares") at net asset value if the following conditions are met.
First, the sale of closed-end fund shares must be made through Merrill
Lynch, and the net proceeds therefrom must be immediately reinvested in
Eligible Class A or Eligible Class D Shares. Second, the closed-end
fund shares must either have been acquired in that fund's initial
public offering or represent 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.
Subject to the conditions set forth below, shares of the Fund are
offered at net asset value to holders of the common stock of certain
MLIM/FAM-advised continuously offered closed-end funds who wish to
reinvest the net proceeds from a sale of such shares. Upon exercise of
this investment option, shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. will receive Class A shares of the Fund, shareholders
of Merrill Lynch Senior Floating Rate Fund II, Inc. will receive
Class C 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 of Merrill Lynch Municipal Strategies Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. who already own
Class A shares of the Fund may 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 eligible
fund in connection with a tender offer conducted by the eligible fund
and reinvest the proceeds 23 immediately in the designated class of shares of
the Fund. This 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 who wish to exercise this reinvestment
option will be accepted only on the day that the related tender offer
terminates and will be effected at the net asset value of the
designated class of shares of the Fund on such day. The Class C
CDSC may be waived upon redemption of Class C shares purchased by
an investor pursuant to this closed-end fund reinvestment option. Such
waiver is subject to the requirement that the investors have held the
tendered shares for a minimum of one year and to such other conditions
as are set forth in the prospectus for the related closed-end fund.
Acquisition of Certain Investment
Companies. Class D shares may be offered at net asset value 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.
Purchases Through Certain Financial
Intermediaries. Reduced sales charges may be applicable for
purchases of Class A or Class D shares of the Fund through
certain financial advisers and other financial intermediaries that meet
and adhere to standards established by the Manager from time to time.
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 Select Pricing
Funds.
Because no initial sales charges are deducted at the time of the
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 that do not qualify for the 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.
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. See "Pricing of Shares —
Determination of Net Asset Value" below.
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. In determining whether
a CDSC is applicable to a redemption, the calculation will be
determined in the manner that results in the lowest applicable rate
being charged. 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. It will
be assumed that the redemption is first of shares held for over four
years or shares acquired pursuant to reinvestment of dividends and then
of shares held longest during the four-year period. 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.
24 The following table sets forth the Class B CDSC:
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 charge 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 may be waived on redemptions of shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan following the
death or disability (as defined in the Internal Revenue Code of 1986,
as amended) of a 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 or, if later, reasonably promptly following completion of
probate. The Class B CDSC also may be waived on redemptions of shares
by certain eligible 401(a) and eligible 401(k) plans. The CDSC may also
be 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. The Class B CDSC may also be waived for any
Class B shares that are purchased by a Merrill Lynch rollover IRA that
was funded by a rollover from a terminated 410(k) plan managed by MLAM
Private Portfolio Group and held in such account at the time of
redemption. The Class B CDSC may also be waived or its terms be
modified in connection with certain fee-based programs. The Class B
CDSC may also be waived in connection with involuntary termination of
an account in which Fund shares are held or for withdrawals through the
Merrill Lynch Systematic Withdrawal Plan. See "Shareholder Services
— Fee-Based Programs" and "— Systematic Withdrawal Plan."
Employer-Sponsored Retirement or Savings Plans and
Certain Other Arrangements. Certain employer-sponsored retirement
or savings plans and certain other arrangements may purchase Class B
shares with a waiver of the CDSC upon redemption, 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.
Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing
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
1-800-237-7777.
Merrill Lynch BlueprintSM
Program. Class B shares are offered to certain participants in
Blueprint. Blueprint is directed to small investors, group IRAs and
participants in certain affinity groups such as trade associations and
credit unions and benefit plans. Class B shares of the Fund are offered
through Blueprint only to members of certain affinity groups. The CDSC
is waived in connection with purchase orders placed through Blueprint.
Services, including the exchange privilege, available to Class B
investors through Blueprint, however, may differ from those available
to other Class B investors. Orders for purchases and redemptions of
Class B shares of the Fund will be grouped for execution purposes
which, in some circumstances, may involve the execution of such orders
two business days following the day such orders are placed. The minimum
initial purchase price is $100, with a $50 minimum for subsequent 25 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.
Conversion of Class B Shares to Class D
Shares. After approximately eight years (the "Conversion
Period"), Class B shares will be converted automatically into Class
D shares of the Fund. Class D shares are subject to an ongoing account
maintenance fee of 0.25% of 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 into Class D shares will
occur at least once each month (on the "Conversion Date") on the
basis of the relative net asset value 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 the 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.
In general, Class B shares of equity Select Pricing Funds will
convert approximately eight years after initial purchase and Class B
shares of taxable and tax-exempt fixed income Select Pricing 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 on to the holding period
for the shares acquired. The Conversion Period also may be modified for
investors that participate in certain fee-based programs. See
"Shareholder Services — Fee-Based Programs."
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.
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.
Contingent Deferred Sales Charges —
Class C Shares
Class C shares that are redeemed within one year of purchase may
be subject to a 1.0% CDSC charged as a percentage of the dollar amount
subject thereto. 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. 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. It will be assumed that the
redemption is first of shares held for over one year or shares acquired
pursuant to reinvestment of dividends and then of shares held longest
during the one-year period. 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. The Class C CDSC may be waived in connection with
involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plans. See
"Shareholder Services — Systematic Withdrawal Plan."
26 Class B and Class C Sales Charge
Information
* Additional Class B 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.
Merrill Lynch compensates its Financial Consultants
for selling Class B and Class C shares at the time of purchase from its
own funds. 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 and other financial intermediaries
(including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and
Class C shares, such as the payment of compensation to financial
consultants for selling Class B and Class C shares from the dealer's
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.
See "Distribution Plans" below. Imposition of the CDSC and the
distribution fee on Class B and Class C shares is limited by the
National Association of Securities Dealers, Inc. (the "NASD")
asset-based sales charge rule. See "Limitations on the Payment of
Deferred Sales Charges" below.
Reference is made to "Fees and Expenses" in the Prospectus
for certain information with respect to the separate distribution plans
for Class B, Class C and Class D shares pursuant to Rule 12b-1 under
the Investment Company Act (each a "Distribution Plan") with
respect to the account maintenance and/or distribution fees paid by the
Fund to the Distributor with respect to such classes.
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, Merrill Lynch, a
selected securities dealer or other financial intermediary (pursuant to
a sub-agreement) in connection with account maintenance activities with
respect to Class B, Class C and Class D shares. Each of those classes
has exclusive voting rights with respect to the 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).
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, Merrill Lynch, a selected
securities dealer or other financial intermediary (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 or other financial intermediaries 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 selected
securities dealers and other financial intermediaries without the
assessment of an 27 initial sales charge and at the same time permit
the dealer to compensate its financial consultants, a selected
securities dealer or other financial intermediary in connection with
the sale of the Class B and Class C shares.
The Fund's Distribution Plans are subject to the provisions of
Rule 12b-1 under the Investment Company Act. 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 each related class of shareholders.
Each Distribution Plan further provides that, so long as the
Distribution Plan remains in effect, the selection and nomination of
non-interested Trustees shall be committed to the discretion of the
non-interested Trustees then in office. In approving each Distribution
Plan in accordance with Rule 12b-1, the non-interested 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 non-interested Trustees or by the vote of
the holders of a majority of the outstanding related class of voting
securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the
approval of the related class of shareholders and all material
amendments are required to be approved by the vote of Trustees,
including a majority of the non-interested Trustees who have no direct
or indirect financial interest in the Distribution Plan, cast in person
at a meeting called for that purpose. Rule 12b-1 further requires that
the Fund preserve copies of the Distribution Plan and any report made
pursuant to such plan for a period of not less than six years from the
date of the Distribution Plan or such report, the first two years in an
easily accessible place.
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 and/or
distribution fees paid to the Distributor. Payments under the
Distribution Plans are based on a percentage of average daily net
assets attributable to the shares regardless of the amount of expenses
incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related
expenses. Information with respect to the distribution-related revenues
and expenses is presented to the Trustees for their consideration in
connection with their deliberations as to the continuance of the Class
B and Class C Distribution Plans 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 CDSCs and certain other related revenues, and
expenses consist of financial consultant compensation, branch office
and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses,
corporate overhead and interest expense. On the direct expense and
revenue/cash basis, revenues consist of the account maintenance fees,
distribution fees and CDSCs and the expenses consist of financial
consultant compensation.
As of December 31, 1999, the last date for which fully
allocated accrual data is available, the fully allocated accrual
revenues of the Distributor and Merrill Lynch for the period since the
commencement of operations of Class B shares exceeded the fully
allocated accrual expenses by approximately $411,000 (0.63% of Class B
net assets at that date). As of July 31, 2000, direct cash
revenues for the period since the commencement of operations of Class B
shares exceeded direct cash expenses by $19,000,126 (43.80% of Class B
net assets at that date). As of December 31, 1999, the fully
allocated accrual expenses incurred by the Distributor and Merrill
Lynch for the period since the commencement of operations of Class C
shares exceeded the fully allocated accrual expenses by approximately
$16,000 (0.32% of Class C net assets at that date). As of July
31, 2000, direct cash revenues for the period since the commencement of
operations of Class C shares exceeded direct cash expenses by $130,559
(3.04% of Class C net assets at that date).
For the fiscal year ended July 31, 2000, the Fund paid the
Distributor $599,449 pursuant to the Class B Distribution Plan
(based on average daily net assets subject to such Class B Distribution
Plan of approximately $59.7 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, 2000, the Fund paid the
Distributor $47,281 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $4.7 million), all of 28 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,
2000, the Fund paid the Distributor $280,714 pursuant to the Class D
Distribution Plan (based on average daily net assets subject to such
Class D Distribution Plan of approximately $111.9 million), all of
which was paid to Merrill Lynch for providing account maintenance
activities in connection with Class D shares.
The maximum sales charge rule in the Conduct Rules of the NASD
imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares
but not the account maintenance fee. The maximum sales charge rule is
applied separately to each class. As applicable to the Fund, the
maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross
sales of Class B shares and Class C shares, computed separately
(defined to exclude shares issued pursuant to dividend reinvestments
and exchanges), plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the
unpaid balance being the maximum amount payable minus amounts received
from the payment of the distribution fee and the CDSC). In connection
with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of
eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales.
The Distributor retains the right to stop waiving the interest charges
at any time. To the extent payments would exceed the voluntary maximum,
the Fund will not make further payments of the distribution fee with
respect to Class B shares and any CDSCs will be paid to the Fund rather
than to the Distributor; however, the Fund will continue to make
payments of the account maintenance fee. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount
payable under the NASD formula. In such circumstances payment in excess
of the amount payable under the NASD formula will not be made.
The following table sets forth comparative information as of
July 31, 2000 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 the Class
B shares, the Distributor's voluntary maximum.
29 Reference is made to "How to Buy, Sell, Transfer and Exchange
Shares" in the Prospectus.
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 right to redeem shares or to receive payment with respect to
any such redemption may be suspended for more than seven days only for
any period during which trading on the New York Stock Exchange (the
"NYSE") is restricted as determined by the Commission or 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 cost, depending in part on the net asset value
of such shares at such time.
A shareholder wishing to redeem shares held with the Transfer
Agent may do so without charge by tendering the shares directly to the
Transfer Agent at Financial Data Services, Inc., P.O. Box 45289,
Jacksonville, Florida 32232-5289. Redemption requests delivered other
than by mail should be delivered to Financial Data Services, Inc., 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. 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 should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons in whose name(s)
the shares are registered, signed exactly as such name(s) appear(s) on
the Transfer Agent's register. The signature(s) on the redemption
requests may require a guarantee by an "eligible guarantor
institution" as defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934 (the "Exchange Act"), the existence and
validity of which may be verified by the Transfer Agent through the use
of industry publications. In the event a signature guarantee is
required, notarized signatures are not sufficient. In general,
signature guarantees are waived on redemptions of less than $50,000 as
long as the following requirements are met: (i) all requests require
the signature(s) of all person(s) whose name(s) shares are recorded on
the Transfer Agent's register; (ii) all checks must be mailed to the
stencil address of record on the Transfer Agent's register and (iii)
the stencil address must not have changed within 30 days. Certain rules
may apply regarding certain account types such as, but not limited to,
UGMA/UTMA accounts, Joint Tenancies with 30 Rights of Survivorship, contra broker
transactions, and institutional accounts. 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.
A shareholder may also redeem shares held with the Transfer Agent
by telephone request. To request a redemption from your account, call
the Transfer Agent at 1-800-MER-FUND. The request must be made by the
shareholders of record and be for an amount less than $50,000. Before
telephone requests will be honored, signature approval from all
shareholders of record on the account must be obtained. The shares
being redeemed must have been held for at least 15 days. Telephone
redemption requests will not be honored in the following situations:
the accountholder is deceased, the proceeds are to be sent to someone
other than the shareholder of record, funds are to be wired to the
client's bank account, a systematic withdrawal plan is in effect, the
request is by an individual other than the accountholder of record, the
account is held by joint tenants who are divorced, the address on the
account has changed within the last 30 days or share certificates have
been issued on the account.
Since this account feature involves a risk of loss from
unauthorized or fraudulent transactions, the Transfer Agent will take
certain precautions to protect your account from fraud. Telephone
redemption may be refused if the caller is unable to provide: the
account number, the name and address registered on the account and the
social security number registered on the account. The Transfer Agent
may temporarily suspend telephone transactions at any time.
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 (e.g.,
cash, Federal funds or certified check drawn on a U.S. bank). 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
(e.g., cash, Federal funds or certified check drawn on a
U.S. bank) has been collected for the purchase of such Fund shares,
which will usually not exceed 10 days. In the event that a shareholder
account held directly with the Transfer Agent contains a fractional
share balance, such fractional share balance will be automatically
redeemed by the Fund.
The Fund has entered into a joint committed line of credit with
other investment companies advised by the Manager and its affiliates
and a syndicate of banks that is intended to provide the Fund with a
temporary source of cash to be used to meet redemption requests from
Fund shareholders in extraordinary or emergency circumstances.
The Fund also will repurchase Fund shares through a shareholder's
listed selected securities dealer or other financial intermediary. The
Fund normally will accept orders to repurchase Fund shares by wire or
telephone from dealers for their customers at the net asset value next
computed after the order is placed. Shares will be priced at the net
asset value calculated on the day the request is received, provided
that the request for repurchase is submitted to the selected securities
dealer or other financial intermediary prior to the regular close of
business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern
time) and such request is received by the Fund from such selected
securities dealer or other financial intermediary not later than
30 minutes after the close of business on the NYSE on the same
day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 30 minutes after the close of
business on the NYSE, in order to obtain that day's closing price.
The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms that do not have selected dealer
agreements with the Distributor, however, may impose a transaction
charge on the shareholder for transmitting the notice of repurchase to
the Fund. Merrill Lynch, selected securities dealers or other financial
intermediaries may charge customers a processing fee (Merrill Lynch
currently charges $5.35) to confirm a repurchase of shares to such
customers. Repurchases made directly through the Transfer Agent on
accounts held at the Transfer Agent are not subject to the processing
fee. The Fund reserves the right to reject any order for repurchase,
which right of rejection might adversely affect shareholders seeking
redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem Fund
shares as set forth above. 31 Reinstatement Privilege — Class A and
Class D Shares
Shareholders who have redeemed their Class A or Class D shares of
the Fund have a privilege to reinstate their accounts by purchasing
Class A or Class D shares, as the case may be, of the Fund at net asset
value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by sending a notice of
exercise along with a check for the amount to be reinstated to the
Transfer Agent within 30 days after the date the request for redemption
was accepted by the Transfer Agent or the Distributor. 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.
Reference is made to "How Shares are Priced" in the
Prospectus.
The net asset value of the shares of all classes of the Fund is
determined once daily Monday through Friday as of the close of business
on the NYSE on each day the NYSE is open for trading, based on prices
at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern
time. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the
prevailing market rates as quoted by one or more banks or dealers on
the day of valuation. The NYSE is not open for trading 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.
Net asset value is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses,
including the fees payable to the Manager and Distributor, are accrued
daily.
The per share net asset value of Class B, Class C and Class D
shares generally will be lower than the per share net asset value of
Class A shares, 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 the
Class D shares; moreover, the per share net asset value of the
Class B and Class C shares generally will be lower than the per share
net asset value of Class D shares reflecting the daily expense accruals
of the distribution fees and higher transfer agency fees applicable
with respect to Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the
payment of dividends, which will differ by approximately the amount of
the expense accrual differentials between the classes.
Portfolio securities including ADRs, EDRs and GDRs that are traded
on stock exchanges are valued at the last sale price (regular way) on
the exchange on which such securities are traded as of the close of
business on the day the securities are being valued or, lacking any
sales, at the last available bid price for long positions and at the
last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Trustees as the
primary market. 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. 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 32 market, the last bid price. Other investments,
including financial 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. Such
valuations and procedures will be reviewed periodically by the
Trustees.
Generally, trading in foreign securities, as well as U.S.
Government securities and money market instruments, is substantially
completed each day at various times prior to the close of business on
the NYSE. The values of such securities used in computing the net asset
value of the Fund's shares are determined as of such times. Foreign
currency exchange rates are also generally determined prior to the
close of business on the NYSE. Occasionally, events affecting the
values of such securities and such exchange rates may occur between the
times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund's net
asset value.
Computation of Offering Price Per Share
An illustration of the computation of 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 on July
31, 2000 is set forth below.
* Rounded to the nearest one-hundredth
percent; assumes maximum sales charge is applicable.
** Class B and Class C shares are not subject
to an initial sales charge but may be subject to a CDSC on redemption
of shares. See "Purchase of Shares — Deferred Sales Charge
Alternatives — Class B and Class C Shares" herein.
Subject to policies established by the Board of Trustees of the
Fund, the Manager is primarily responsible for the execution of the
Fund's portfolio transactions and the allocation of brokerage. The
Fund has no obligation to deal with any broker or group of brokers in
the execution of transactions in portfolio securities and does not use
any particular broker or dealer. In executing transactions with brokers
and dealers, the Manager seeks to obtain the best net results for the
Fund, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm and the
firm's risk in positioning a block of securities. While the Manager
generally seeks reasonably competitive commission rates, the Fund does
not necessarily pay the lowest spread or commission available. In
addition, consistent with the Conduct Rules of the NASD and policies
established by the Board of Trustees of the Fund, 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.
Subject to obtaining the best net results, brokers who provide
supplemental investment research services 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,
and the expenses of the Manager will not necessarily be reduced as a
result of the receipt of such supplemental information. If in the
judgment of the Manager the Fund will benefit from supplemental
research services, the Manager is 33 authorized to pay brokerage commissions to a
broker furnishing such services that are in excess of commissions that
another broker may have charged for effecting the same transaction.
Certain supplemental research services may primarily benefit one or
more other investment companies or other accounts for which the Manager
exercises investment discretion. Conversely, the Fund may be the
primary beneficiary of the supplemental research services received as a
result of portfolio transactions effected for such other accounts or
investment companies.
The Fund anticipates that its brokerage transactions involving
securities of issuers domiciled in countries other than the United
States generally will be conducted primarily on the principal stock
exchanges of such countries. Brokerage commissions and other
transaction costs on foreign stock exchange transactions generally are
higher than in the United States, although the Fund will endeavor to
achieve the best net results in effecting its portfolio transactions.
There generally is less government supervision and regulation of
foreign stock exchanges and brokers than in the United States. The
Fund's ability and decisions to purchase and sell portfolio securities
may be affected by foreign laws and regulations relating to the
convertibility and repatriation of assets.
Information about the brokerage commissions paid by the Fund,
including commissions paid to Merrill Lynch, is set forth in the
following table:
For the fiscal year ended July 31, 2000, the brokerage
commissions paid to Merrill Lynch represented 3.16% of the aggregate
brokerage commissions paid and involved 2.50% of the Fund's aggregate
dollar amount of transactions involving payment of commissions during
the year.
The Fund may invest in certain securities in the OTC market and
intends to deal directly with the dealers who make a market in
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 unless a permissive order allowing such transactions is
obtained from the Commission. Since transactions in the OTC market
usually involve transactions with dealers acting as principal for their
own accounts, the Fund will not deal with affiliated persons, including
Merrill Lynch and its affiliates, in connection with such transactions.
However, an affiliated person of the Fund may serve as its broker in
OTC transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker
is reasonable and fair compared to the fee or commission received by
non-affiliated brokers in connection with comparable transactions. In
addition, the Fund may not purchase securities during the existence of
any underwriting syndicate for such securities of which Merrill Lynch
is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures adopted by the Board of
Trustees of the Fund that either comply with rules adopted by the
Commission or with interpretations of the Commission staff. See
"Investment Objective and Policies — Investment Restrictions."
Section 11(a) of the Exchange Act generally prohibits members of
the U.S. national securities exchanges from executing exchange
transactions for their affiliates and institutional accounts that they
manage unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least annually
furnishes the account with the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any
rules the Commission has prescribed with respect to the requirements of
clauses (i) and (ii). To the extent Section 11(a) would apply to
Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a
member, appropriate consents have been obtained from the Fund and
annual statements as to aggregate compensation will be provided to the
Fund.
The Board of Trustees of the Fund has considered the possibility
of seeking to recapture for the benefit of the Fund brokerage
commissions and other expenses of possible portfolio transactions by 34 conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by
affiliated brokers could be offset against the advisory fee paid by the
Fund to the Manager. After considering all factors deemed relevant, the
Board of Trustees made a determination not to seek such recapture. The
Board will reconsider this matter from time to time.
Because of different objectives or other factors, a particular
security may be bought for one or more clients of the Manager or an
affiliate when one or more clients of the Manager or an affiliate are
selling the same security. If purchases or sales of securities arise
for consideration at or about the same time that would involve the Fund
or other clients or funds for which the Manager or an affiliate acts as
manager, 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 an affiliate 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 offers a number of shareholder services and investment
plans described below that are designed to facilitate investment in
shares of the Fund. Full details as to each of such services, copies of
the various plans and instructions as to how to participate in the
various services or plans, or how to change options with respect
thereto, can be obtained from the Fund, by calling the telephone number
on the cover page hereof, or from the Distributor, Merrill Lynch a
selected securities dealer or other financial intermediary. Certain of
these services are available only to U.S. investors and certain of
these services are not available to investors who place purchase orders
for the Fund's shares through the Merrill Lynch
BlueprintSM Program.
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 dividends. The statements will also show any other
activity in the account since the preceding statement. Shareholders
will also receive separate confirmations for each purchase or sale
transaction other than automatic investment purchases and the
reinvestment of dividends. A shareholder with an account held at the
Transfer Agent may make additions to his or her Investment Account at
any time by mailing a check directly to the Transfer Agent. A
shareholder may also maintain an account through Merrill Lynch a
selected securities dealer or other financial intermediary. Upon the
transfer of shares out of a Merrill Lynch brokerage account or an
account maintained with a selected securities dealer or other financial
intermediary, an Investment Account in the transferring shareholder's
name may be opened automatically at the Transfer Agent.
Share certificates are issued only for full shares and only upon
the specific request of a shareholder who has an Investment Account.
Issuance of certificates representing all or only part of the full
shares in an Investment Account may be requested by a shareholder
directly from the Transfer Agent.
Shareholders may transfer their Fund shares from Merrill Lynch, a
selected securities dealer or other financial intermediary to another
securities dealer or other financial intermediary that has entered into
a selected dealer agreement with Merrill Lynch. Certain shareholder
services may not be available for the transferred shares. After the
transfer, the shareholder may purchase additional shares of funds owned
before the transfer and all future trading of these assets must be
coordinated by the new firm. If a shareholder wishes to transfer his or
her shares to a securities dealer or other financial intermediary that
has not entered into a selected dealer agreement with Merrill Lynch,
the shareholder must either (i) redeem his or her shares, paying any
applicable CDSC or (ii) continue to maintain an Investment Account at
the Transfer Agent for those shares. The shareholder may also request
the new securities dealer to maintain the shares in an account at the
Transfer Agent registered in the name of the securities dealer for the
benefit of the shareholder whether the securities dealer has entered
into a selected dealer agreement or not.
35 Shareholders considering transferring a tax-deferred retirement
account, such as an individual retirement account, from Merrill Lynch
to another securities dealer or other financial intermediary should be
aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder
must either redeem the shares, paying any applicable CDSC, so that the
cash proceeds can be transferred to the account at the new firm, or
such shareholder must continue to maintain a retirement account at
Merrill Lynch for those shares.
Exchange Privilege
U.S. shareholders of each class of shares of the Fund have an
exchange privilege with other Select Pricing Funds and Summit Cash
Reserves Fund ("Summit"), a series of Financial Institutions
Series Trust, which is a Merrill Lynch-sponsored money market fund
specifically designated for exchange by holders of Class A, Class B,
Class C and Class D shares of Select Pricing Funds. Shares with a net
asset value of at least $100 are required to qualify for the exchange
privilege and any shares utilized in an exchange must have been held by
the shareholder for at least 15 days. Before effecting an exchange,
shareholders should obtain a currently effective prospectus of the fund
into which the exchange is to be 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.
Exchanges of Class A and Class D Shares. Class A
shareholders may exchange Class A shares of the Fund for Class A shares
of a second Select Pricing Fund if the shareholder holds any Class A
shares of the second fund in the 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 Select Pricing 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 Select Pricing
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 D shares are exchangeable with shares
of the same class of other Select Pricing Funds.
Exchanges of Class A or Class D shares outstanding
("outstanding Class A or Class D shares") for Class A or Class D
shares of other Select Pricing Funds or Class A shares of Summit
("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, Class A or Class D shares acquired through
dividend reinvestment 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 generally may be exchanged into the Class A
or Class D shares, respectively, of the other funds with a reduced
sales charge or without a sales charge.
Exchanges of Class B and Class C Shares. Certain
Select Pricing Funds with Class B or Class C shares outstanding
("outstanding Class B or Class C shares") offer to exchange their
Class B or Class C shares for Class B or Class C shares, respectively,
of certain other Select Pricing Funds or for Class B shares of Summit
("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 36 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 CDSC
that may be payable on a disposition of the new Class B or Class C
shares, the holding period for the outstanding Class B or Class C
shares is "tacked" to the holding period of the new Class B or
Class C shares. For example, an investor may exchange Class B shares of
the Fund for those of Merrill Lynch Small Cap Value Fund, Inc.
("Small Cap Value Fund") after having held the Fund's 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 Small Cap
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
Small Cap Value Fund Class B shares, the investor will be deemed to
have held the Small Cap Value Fund Class B shares for more than five
years. Shareholders of Merrill Lynch Senior Floating Rate Fund II, Inc.
have the option to exchange their shares of common stock into Class C
shares of certain Merrill Lynch-sponsored open-end funds ("Eligible
Class C shares") at their net value, without the imposition of any
CDSC upon any subsequent redemption of Eligible Class C shares. This
investment option is available only with respect to eligible shares of
Merrill Lynch Senior Floating Rate Fund II, Inc. as to which no Early
Withdrawal Charge is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be
accepted only on the day that the related tender offer terminates and
will be effected at the net asset value of Class C shares of the fund
on such day.
Exchanges for Shares of a Money Market
Fund. Class A and Class D shares are exchangeable for Class A
shares of Summit and Class B and Class C shares are exchangeable for
Class B shares of Summit. Class A shares of Summit have an exchange
privilege back into Class A or Class D shares of Select Pricing Funds;
Class B shares of Summit have an exchange privilege back into Class B
or Class C shares of Select Pricing Funds and, in the event of such an
exchange, the period of time that Class B shares of Summit are held
will count toward satisfaction of the holding period requirement for
purposes of reducing any CDSC and toward satisfaction of any Conversion
Period with respect to Class B shares. Class B shares of Summit will be
subject to a distribution fee at an annual rate of 0.75% of average
daily net assets of such Class B shares. This exchange privilege 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.
Prior to October 12, 1998, exchanges from the Fund and other
Select Pricing Funds into a money market fund were directed to certain
Merrill Lynch-sponsored money market funds other than Summit.
Shareholders who exchanged Select Pricing Fund shares for shares of
such other money market funds and subsequently wish to exchange those
money market fund shares for shares of the Fund will be subject to the
CDSC schedule applicable to such Fund shares, if any. The holding
period for the money market fund shares will not count toward
satisfaction of the holding period requirement for reduction of the
CDSC imposed on such shares, if any, and, with respect to Class B
shares, toward satisfaction of the Conversion Period. However, the
holding period for Class B or Class C shares received in exchange for
such money market fund shares will be aggregated with the holding
period for the original shares for purposes of reducing the CDSC or
satisfying the Conversion Period. However, the holding period for Class
B or Class C shares of the fund received in exchange for such
money market Fund shares will be aggregated with the holding period for
the Fund shares originally exchanged for such money market fund shares
for purposes of reducing the CDSC or satisfying the Conversion Period.
Exchanges by Participants in the MFA
Program. The exchange privilege is modified with respect to
certain retirement plans that participate in the MFA Program. Such
retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the
same fund on the basis of relative net asset values in connection with
the commencement of participation in the MFA Program, i.e.,
no CDSC will apply. The one year holding period does not apply to
shares acquired through reinvestment of dividends. Upon termination of
participation in the MFA Program, Class A shares will be re-exchanged
for the class of shares originally held. For purposes of computing any
CDSC that may be payable upon redemption of Class B or Class C shares
so reacquired, or the Conversion 37 Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the
holding period for the Class B or Class C shares originally held. The
Fund's exchange privilege is also modified with respect to purchases
of Class A and Class D shares by non-retirement plan investors under
the MFA Program. First, the initial allocation of assets is made under
the MFA Program. Then, any subsequent exchange under the MFA Program of
Class A or Class D shares of a Select Pricing Fund for Class A or Class
D shares of the Fund will be made solely on the basis of the relative
net asset values of the shares being exchanged. Therefore, there will
not be a charge for any difference between the sales charge previously
paid on the shares of the other Select Pricing Fund and the sales
charge payable on the shares of the Fund being acquired in the exchange
under the MFA Program.
Exercise of the Exchange Privilege. To exercise
the exchange privilege, a shareholder should contact his or her Merrill
Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other Select Pricing
Funds with shares for which certificates have not been issued, may
exercise the exchange privilege by wire through their securities
dealers or other financial intermediaries. The Fund reserves the right
to require a properly completed Exchange Application. Telephone
exchange requests are also available in accounts held with the Transfer
Agent for amounts up to $50,000. To request an exchange from your
account, call the Transfer Agent at 1-800-MER-FUND. The request must be
from the shareholder of record. Before telephone requests will be
honored, signature approval from all shareholders of record must be
obtained. The shares being exchanged must have been held for at least
15 days. Telephone requests for an exchange will not be honored in the
following situations: the account holder is deceased, the request is by
an individual other than the account holder of record, the account is
held by joint tenants who are divorced or the address on the account
has changed within the last 30 days. Telephone exchanges may be refused
if the caller is unable to provide: the account number, the name and
address registered on the account and the social security number
registered on the account. The Fund or Transfer Agent may temporarily
suspend telephone transactions at any time.
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. It is contemplated that the exchange privilege may
be applicable to other new mutual funds whose shares may be distributed
by the Distributor.
Certain fee-based programs offered by Merrill Lynch and other
financial intermediaries, including pricing alternatives for securities
transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under
specified circumstances, participants in certain Programs may deposit
other classes of shares which will be exchanged for Class A shares.
Initial or deferred sales charges otherwise due in connection with such
exchanges may be waived or modified, as may the Conversion Period
applicable to the deposited shares. Termination of participation in a
Program may result in the redemption of shares held therein or the
automatic exchange thereof to another class at net asset value, which
may be shares of a money market fund. In addition, upon termination of
participation in a Program, shares that have been held for less than
specified periods within such Program may be subject to a fee based
upon the current value of such shares. These Programs also generally
prohibit such shares from being transferred to another account at
Merrill Lynch, to another financial intermediary, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances
(which may also involve an exchange as described above), such shares
must be redeemed and another class of shares purchased (which may
involve the imposition of initial or deferred sales charges and
distribution and account maintenance fees) in order for the investment
not to be subject to Program fees. Additional information regarding a
specific Program (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in
such Program's client agreement and from the Transfer Agent at
1-800-MER-FUND or 1-800-637-3863. 38 Individual retirement accounts and other retirement and education
savings plans are available from Merrill Lynch. Under these plans,
investments may be made in the Fund and certain of the other mutual
funds sponsored by Merrill Lynch as well as in other securities.
Merrill Lynch may charge an initial establishment fee and an annual
custodial fee for each account. There may be fees associated with
investing through these plans. Information with respect to these plans
is available on request from Merrill Lynch.
Dividends received in each of the plans referred to above are
exempt from Federal taxation until distributed from the plans.
Different tax rules apply to Roth IRA plans and education savings
plans. Investors considering participation in any retirement or
education savings plan should review specific tax laws relating thereto
and should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan.
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) or Class B, Class C or Class D shares at the applicable
public offering price. These purchases may be made either through the
shareholder's securities dealer, or by mail directly to the Transfer
Agent, acting as agent for such securities dealer. Voluntary
accumulation also can be made through a service known as the Fund's
Automatic Investment Plan. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of
such shareholder through charges of $50 or more to the regular bank
account of the shareholder by either pre-authorized checks or automated
clearing house debits. Alternatively, an investor who maintains a
CMA® or CBA® Account may arrange to have periodic investments made
in the Fund in amounts of $100 ($1 or more for retirement accounts) or
more through the CMA® or CBA® Automatic Investment Program.
Unless specific instructions are given as to the method of
payment, dividends will be automatically reinvested, without sales
charge, in additional full and fractional shares of the Fund. Such
reinvestment will be at the net asset value of shares of the Fund
determined as of the close of business on the NYSE on the monthly
payment date for such dividends. No CDSC will be imposed upon
redemption of shares issued as a result of the automatic reinvestment
of dividends.
Shareholders may, at any time, elect to have subsequent dividends,
paid in cash, rather than reinvested in shares of the Fund or vice
versa (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). If the
shareholder's account is maintained with the Transfer Agent, he or she
may contact the Transfer Agent in writing or by telephone
(1-800-MER-FUND). For other accounts, the shareholder should contact
his or her Merrill Lynch Financial Consultant, selected securities
dealer or other financial intermediary. Commencing ten days after the
receipt by the Transfer Agent of such notice, those instructions will
be effected. The Fund is not responsible for any failure of delivery to
the shareholder's address of record and no interest will accrue on
amounts represented by uncashed dividend checks. Cash payments can also
be directly deposited to the shareholder's bank account.
A shareholder may elect to receive systematic withdrawals from his
or her Investment Account by check or through automatic payment by
direct deposit to his or her bank account on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available
for shareholders that 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.
39 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 as determined as of the
close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) 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 as of
the close of business on the NYSE on the following business day. The
check for the withdrawal payment will be mailed, or the direct deposit
will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends on all shares
in the Investment Account are reinvested automatically in Fund shares.
A shareholder's Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund, the
Transfer Agent or the Distributor.
With respect to redemptions of Class B or 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 or Class
C shares are otherwise redeemed. See "Purchase of Shares — Deferred
Sales Charge Alternatives — Class B and Class C Shares." Where the
systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares,
the systematic withdrawal plan will be applied thereafter to Class D
shares if the shareholder so elects. If an investor wishes to change
the amount being withdrawn in a systematic withdrawal plan, the
investor should contact his or her Merrill Lynch Financial Consultant.
Withdrawal payments should not be considered as dividends. 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
that maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Automatic 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®
or CBA® or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA® or CBA® Systematic Redemption Program. The minimum fixed
dollar amount redeemable is $50. The proceeds of systematic redemptions
will be posted to the shareholder's account three business days after
the date the shares are redeemed. All redemptions are made at net asset
value. A shareholder may elect to have his or her shares redeemed on
the first, second, third or fourth Monday of each month, in the case of
monthly redemptions, or of every other month, in the case of 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® or CBA® 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® or CBA® Systematic Redemption Program,
eligible shareholders should contact their Merrill Lynch Financial
Consultant.
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 dividend at or 40 about the end of the calendar year in order to
comply with a Federal tax requirement that certain percentages of its
ordinary income and capital gains be distributed during the calendar
year. If, in any fiscal year, the Fund has net income from certain
foreign currency transactions, such income will be distributed at least
annually. See "Shareholder Services — Automatic Dividend
Reinvestment Plan" for information concerning the manner in which
dividends are reinvested automatically in shares of the Fund. A
shareholder whose account is maintained at the Transfer Agent or whose
account is maintained through Merrill Lynch may also elect in writing
to receive any dividends in cash. Dividends are taxable to
shareholders, as discussed below, whether they are reinvested in shares
of the Fund or received in cash. The per share dividends on Class B and
Class C shares will be lower than the per share dividends 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 on
Class D shares will be lower than the per share dividends 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."
The Fund intends to continue to qualify for the special tax
treatment afforded regulated investment companies ("RICs") under
the Internal Revenue Code of 1986, as amended (the "Code"). 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.
In order to qualify, the Fund must among other things, (i) derive
at least 90% of its gross income (without offset for losses from the
sale or other disposition of securities or foreign currencies) from
dividends, interest, payments with respect to certain securities loans,
gains from the sale of securities, certain gains from foreign
currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies; (ii)
distribute at least 90% of its dividend, interest and certain other
taxable income each year; (iii) at the end of each fiscal quarter
maintain at least 50% of the value of its total assets in cash,
government securities, securities of other RICs, and other securities
of issuers which represent, with respect to each issuer, no more than
5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer; and (iv) at the end of
each fiscal quarter have no more than 25% of its assets invested in
the securities (other than those of the government or other RICs) of
any one issuer or of two or more issuers which the Fund controls and
which are engaged in the same, similar or related trades and
businesses.
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 anticipates that it will make sufficient timely distributions
to avoid imposition of the excise tax, there can be no assurance that
sufficient amounts of the Fund's taxable income and capital gains will
be distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by which
it does not meet the foregoing distribution requirements.
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) ("capital gain dividends")
distributed to shareholders will be taxable as capital gain to the
shareholders, whether or not reinvested and regardless of the length of
time a shareholder has owned his or her shares. The maximum capital
gains rate for individuals is 20%. The maximum capital gain rate for
corporate shareholders currently is the same as the maximum tax rate
for ordinary income.
41 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.
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 rule permitting the issuance and sale of multiple classes of
stock) that is based on the gross income allocable to the Class A,
Class B, Class C and Class D shareholders during the taxable year, or
such other method as the Internal Revenue Service may prescribe. If the
Fund pays a dividend in January that was declared in the previous
October, November or December to shareholders of record on a
specified date in one of such months, then such dividend or
distribution will be treated for tax purposes as being paid by the RIC
and received by its shareholders on December 31 of the year in
which such dividend was declared.
Pursuant to the Fund's investment objectives, the Fund may invest
in foreign securities. Foreign taxes may be paid by the Fund as a
result of tax laws of countries in which the Fund may invest. Income
tax treaties between certain countries and the United States may reduce
or eliminate such taxes. It is impossible to determine in advance the
effective rate of foreign tax to which the Fund will be subject, since
the amount of Fund assets to be invested in various countries is not
known. Because the Fund limits its investment in foreign securities,
shareholders will not be entitled to claim foreign tax credits with
respect to their share of foreign taxes paid by the Fund on income from
investments of foreign securities held by the Fund.
Under certain provisions of the Code, some shareholders may be
subject to a 31% withholding tax on dividends and redemption payments
("backup withholding"). Generally, shareholders subject to backup
withholding will be those for whom a certified taxpayer identification
number is not on file with the Fund or who, to the Fund's knowledge,
have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is
correct and that such shareholder is not otherwise subject to backup
withholding.
Ordinary income dividends paid by the Fund to shareholders who are
non-resident aliens or foreign entities generally will be subject to a
30% United States withholding tax under existing provisions of the
Code applicable to foreign individuals and entities unless a reduced
rate of withholding or a withholding exemption is provided under
applicable treaty law. Non-resident shareholders are urged to consult
their own tax advisers concerning the applicability of the United
States withholding tax.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares 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 of the converted Class B shares.
Upon a sale or exchange of its shares, a shareholder will realize
a taxable gain or loss depending on its basis in the shares. Such gain
or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands. In the case of an
individual, any such capital gain will be treated as short-term capital
gain if the shares were held for not more than 12 months and long-term
capital gain taxable at the maximum of 20% if such shares were held
for more than 12 months. In the case of a corporation, any such capital
gain will be treated as long-term capital gain, taxable at the same
rates as ordinary income, if such shares were held for more than 12
months. Any such capital loss will be treated as long term capital loss
if such shares were held for more than 12 months.
Any loss from sale or exchange of shares held for six months or
less, however, will be treated as long-term capital loss to the extent
of any long-term capital gains dividends 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).
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 42 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.
If a shareholder exercises the exchange privilege within 90 days
of acquiring such shares, then the loss the shareholder can recognize
on the exchange will be reduced (or the gain increased) to the extent
the sales charge paid to the Fund reduces any charge the shareholder
would have owed upon the purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as
an amount paid for the new shares.
The Fund may purchase or sell options and futures and foreign
currency options and futures, and related options on such futures.
Options and futures contracts that are "Section 1256 contracts"
will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each option or futures
contract will be treated as sold for its fair market value on the last
day of the taxable year. Unless such contract is a forward foreign
exchange contract, or is a non-equity option or a regulated futures
contract for a non-U.S. currency for which the Fund elects to have gain
or loss treated as ordinary gain or loss under Code Section 988 (as
described below), gain or loss from transactions in such option and
futures contracts will be 60% long-term and 40% short-term capital
gain or loss.
The Fund may recognize taxable income or gain prior to the receipt
of cash payments under various provisions of the Code including those
dealing with zero coupon securities, deferred interest securities,
market discount securities and certain options, futures and forward
contracts that are required to be marked to market, to the extent the
Fund invests in these instruments. In any such case, the Fund may be
required to liquidate portfolio securities that it might otherwise
elect to hold in order to enable it to have sufficient cash to meet the
distribution requirements, the satisfaction of which are a condition of
continuing qualification of the Fund as a regulated investment company.
Code Section 1092, which applies to certain "straddles", may
affect the taxation of the Fund's transactions in options, futures and
forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in
certain closing transactions in options, futures and forward foreign
exchange. Similarly, Code Section 1091, which deals with "wash
sales," may cause the Fund to postpone recognition of certain losses
for tax purposes; and Code Section 1258, which deals with
"conversion transactions," may apply to recharacterize certain
capital gains as ordinary income for tax purposes, and Code Section
1259, which deals with "constructive sales" of appreciated
financial positions (e.g. stock), may treat the Fund as
having recognized income before the time that such income is
economically recognized by the Fund.
In general, gains from "foreign currencies" and from foreign
currency options, foreign currency futures and forward foreign exchange
contracts relating to investments in stock, securities or foreign
currencies will be qualifying income for purposes of determining
whether the Fund qualifies as a RIC. It is currently unclear, however,
who will be treated as the issuer of a foreign currency instrument or
how foreign currency options, futures or forward foreign exchange
contracts will be valued for purposes of the RIC diversification
requirements applicable to the Fund.
Under Code Section 988, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's
functional currency (i.e., unless certain special rules
apply, currencies other than the U.S. dollar). In general, foreign
currency gains or losses from certain forward contracts, from futures
contracts that are not "regulated futures contracts" and from
unlisted options will be treated as ordinary income or loss under Code
Section 988. In certain circumstances, the Fund may elect capital gain
or loss treatment for such transactions. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the
Fund's investment company taxable income available to be distributed
to shareholders as ordinary income dividends. 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
income dividends and any distributions made before the losses were
realized but in the same 43 taxable year would be recharacterized as a return
of capital to shareholders, thereby reducing each shareholder's basis
in the Fund shares.
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and the Treasury regulations
presently in effect. For the complete provisions, reference should be
made to the pertinent Code sections and the Treasury regulations
promulgated thereunder. The Code and the Treasury regulations are
subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and gains on the sale or exchange of shares in the Fund
may also be subject to state and local taxes.
Shareholders are urged to consult their own tax advisers regarding
specific questions as to Federal, state, local or foreign taxes.
Foreign investors should consider applicable foreign taxes in their
evaluation of an investment in the Fund.
From time to time, the Fund may include its average annual total
return and other total return data in advertisements or information
furnished to present or prospective shareholders. Total return figures
are based on the Fund's historical performance and are not intended to
indicate future performance. Average annual total return is determined
separately for Class A, Class B, Class C and Class D shares in
accordance with formulas specified by the Commission.
Average annual total return quotations for the specified periods
are computed by finding the average annual compounded rates of return
(based on net investment income and any realized and unrealized capital
gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the redeemable value of such
investment at the end of each period. Average annual total return is
computed assuming all dividends and distributions are reinvested and
taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A and
Class D shares and the CDSC that would be applicable to a complete
redemption of the investment at the end of the specified period 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 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 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 investment of
$1,000 or some other amount, 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. 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.
Set forth below is total return information for the Class A, Class
B, Class C and Class D shares of the Fund for the periods indicated.
44 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.
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," 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 CDSCs, a lower amount of
expenses may be deducted.
On occasion, the Fund may compare its performance to various
indices including the Standard & Poors 500 Composite Stock Price Index,
the Dow Jones Industrial Average, other market indexes or performance
data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc. ("Morningstar"), Money Magazine, U.S.
News & World Report, Business Week, CDA Investment Technology,
Inc., Forbes Magazine, Fortune Magazine or other industry
publications. When comparing its performance to a market index, the
Fund may refer to various statistical measures derived from the
historic performance 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 risk-adjusted performance ratings in advertisements or
supplemental sales literature.
The Fund may provide information designed to help investors
understand how the Fund is seeking to achieve its investment
objectives. This may include information about past, current or
possible economic, market, political or other conditions, descriptive
information on general principles of investing such as asset
allocation, diversification and risk tolerance, discussion of the
Fund's portfolio composition, investment philosophy, strategy or
investment techniques, comparisons of the Fund's performance or
portfolio composition to that of other funds or types of investments,
indices relevant to the comparison being made, or to a hypothetical or
model portfolio. The Fund may also quote various measures of volatility
and benchmark correlation in advertising and other materials, and may
compare these measures to those of other funds or types of investments.
As with other performance data, performance comparisons should not be
considered indicative of the Fund's relative performance for any
future period. 45 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 Board of Trustees
has the authority to issue separate classes of shares that represent
interests in the assets of the Fund and have identical voting,
dividend, liquidation and other rights and the same terms and
conditions except that expenses related to the account maintenance and
distribution of the shares of a class may be borne solely by such class
and a class may have exclusive voting rights with respect to matters
relating to the account maintenance and distribution expenses being
borne only by such class. The Board of Trustees of the Fund may
classify and reclassify the shares of the Fund into additional classes
of shares at a future date. Upon liquidation of the Fund, shareholders
of each class are entitled to share pro rata in the net assets of the
Fund available for distribution to shareholders, except for any
expenses which may be attributable only to one class. Shares have no
preemptive rights. The rights of redemption, conversion and exchange
are described elsewhere herein and in the Prospectus. Shares are fully
paid and non-assessable by the Fund.
The Declaration of Trust of the Fund does not require that the
Fund hold an annual meeting of shareholders. However, the Fund will be
required to call special meetings of shareholders in accordance with
the requirements of the Investment Company Act to seek approval of new
management and advisory arrangements, of a material increase in
distribution fees, or of a change in the fundamental policies,
objectives or restrictions of the Fund. The Fund also would be required
to hold a special shareholders' meeting to elect new Trustees at such
time as less than a majority of the Trustees holding office have been
elected by shareholders. The Declaration provides that a shareholders'
meeting may be called for any reason at the request of 10% of the
outstanding shares of the Fund or by majority of the Trustees.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Trustees
(to the extent hereinafter provided) and on other matters submitted to
vote of shareholders, except that shareholders of the class bearing
distribution and account maintenance expenses as provided above shall
have exclusive voting rights with respect to matters relating to such
distribution and account maintenance expenditures (except that Class B
shareholders may vote upon any material changes to expenses charged
under the Class D Distribution Plan). Voting rights are not cumulative,
so that the holders of more than 50% of the shares voting in the
election of Trustees can, if they choose to do so, elect all the
Trustees of the Fund, in which event the holders of the remaining
shares are unable to elect any person as a Trustee.
Deloitte & Touche LLP, Princeton Forrestal Village,
116-300 Village Boulevard, Princeton, New Jersey 08540-6400, has been
selected as the independent auditors of the Fund. The selection of
independent auditors is subject to approval by the non-interested
Trustees of the Fund. The independent auditors are responsible for
auditing the annual financial statements of the Fund.
State Street Bank and Trust Company, (the "Custodian"), One
Heritage Drive P2N, North Quincy, Massachusetts 02171, acts as
custodian of the Fund's assets. Under its contract with the Fund, the
Custodian is authorized, among other things, to establish separate
accounts in foreign currencies and to cause foreign securities owned by
the Fund to be held in its offices outside of the United States and
with certain foreign banks and securities depositories. 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. 46 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 "How to Buy, Sell, Transfer and Exchange
Shares" in the Prospectus.
Swidler Berlin Shereff Friedman, LLP, The Chrysler Building, 405
Lexington Avenue, New York, New York 10174, is counsel for the Fund.
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.
Shareholder inquiries may be addressed to the Fund at the address
or telephone number set forth on the cover page of this Statement of
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 and the Investment Company Act, to which reference is
hereby made.
Under a separate agreement, ML & Co. 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 ML & Co., under certain conditions, the use of any other name
it might assume in the future, with respect to any corporation
organized by ML & Co.
To the knowledge of the Fund, the following persons or entities
owned beneficially 5% or more of a class of the Fund's shares as of
December 1, 2000:
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 the satisfaction of any obligation
or claim of said Fund but the "Trust Property" only shall be
liable.
The Fund's audited financial statements are incorporated in this
Statement of Additional Information by reference to its 2000 annual
report to shareholders. You may request a copy of the annual report at
no charge by calling 1-800-637-3863 between 8:00 a.m. and 8:00 p.m.
Eastern time on any business day. 47
Note: Moody's may apply numerical modifiers 1, 2
and 3 in each generic classification from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking, and the modifier 3 indicates that the issue ranks
in the lower end of its generic category.
The term "commercial paper" as used by Moody's means
promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representations as to whether such A-1 Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an
original maturity in excess of nine months. Moody 's makes no
representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific
note is a valid obligation of a rated issuer or issued in conformity
with any applicable law. Moody 's employs the following three
designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
The effect of industry characteristics and market composition may be
more pronounced. Variability in earnings and profitability may result
in changes in level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternative liquidity
is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or entities,
then the name or names of such supporting entity or entities are listed
within parentheses beneath the name of the issuer, or there is a
footnote referring the reader to another page for the name or names of
the supporting entity or entities. In assigning ratings to such
issuers, Moody's evaluates the financial strength of the indicated
affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no
opinion on the legal validity or enforceability of any support
arrangement. You are cautioned to review with your counsel any
questions regarding particular support arrangements.
Because of the fundamental differences between preferred stocks
and bonds, a variation of the bond rating symbols is being used in the
quality ranking of preferred stocks. The symbols, presented below, are
designed to avoid comparison with bond quality in absolute terms. It
should always be borne in mind that preferred stocks occupy a junior
position to bonds within a particular capital structure and that these
securities are rated within the universe of preferred stocks.
A-2 Preferred stock rating symbols and their definitions are as
follows:
Note: Moody's may apply numerical
modifiers 1, 2 and 3 in each rating classification from "aa"
through "b" in its preferred stock rating system. The modifier 1
indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
A Standard & Poor's corporate or municipal rating is a current
assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default-capacity and willingness of
the obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation; (2) nature of
and provisions of the obligation; and A-3 Debt rated BB, B, CCC and C are regarded as having
predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. BB indicates the least degree of
speculation and C the highest degree of speculation. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or minus ( - ): The ratings
from AA to CCC may be modified by the addition of a plus or minus sign
to show relative standing within the major ratings categories.
Provisional ratings: The letter "p"
indicates that the rating is provisional. A provisional rating assumes
the successful completion of the project being financed by the debt
being rated and indicates that A-4 Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and related
uncertainties.
Bond Investment Quality Standards: Under present
commercial bank regulations issued by the Comptroller of the Currency,
bonds rated in the top four categories ("AAA," "AA,"
"A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In
addition, the laws of various states governing legal investments impose
certain rating or other standards for obligations eligible for
investment by savings banks, trust companies, insurance companies and
fiduciaries generally.
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. Ratings are graded into
four categories, ranging from "A" for the highest quality
obligations to "D" for the lowest. The four categories are as
follows:
A-5 The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based on current information furnished
to Standard & Poor's by the issuer or obtained from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn
as a result of changes in or unavailability of such information.
A Standard & Poor's preferred stock rating is an assessment of
the capacity and willingness of an issuer to pay preferred stock
dividends and any applicable sinking fund obligations. A preferred
stock rating differs from a bond rating inasmuch as it is assigned to
an equity issue, which issue is intrinsically different from, and
subordinated to, a debt issue. Therefore, to reflect this difference,
the preferred stock rating symbol will normally not be higher than the
bond rating symbol assigned to, or that would be assigned to, the
senior debt of the same issuer.
The preferred stock ratings are based on the following
considerations:
NR indicates that no rating has been
requested, that there is insufficient information on which to base a
rating, or that S&P does not rate a particular type of obligation as a
matter of policy.
A-6 Plus (+) or Minus ( - ): To provide more detailed
indications of preferred stock quality, the ratings from "AA" to
"CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
The preferred stock ratings are not a recommendation to purchase
or sell a security, inasmuch as market price is not considered in
arriving at the rating. Preferred stock ratings are wholly unrelated to
Standard & Poor's earnings and dividend rankings for common stocks.
The ratings are based on current information furnished to Standard
& Poor's by the issuer, and obtained by Standard & Poor's from other
sources it considers reliable. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information.
A-7 (This page intentionally left
blank) (This page intentionally left
blank) Code #: 10560-1200
* Filed herewith.
C-1 The Registrant is not controlled by or under common control with
any other person.
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 other
Person under these provisions shall not exclude any other right to
which he may be lawfully entitled; provided that no person may satisfy
any right of indemnity or reimbursement granted herein or in Section
5.1 or to which he may be otherwise entitled except out of the property
of the Trust, and no Shareholder shall be personally liable to any
Person with respect to any claim for indemnity or reimbursement or
otherwise. The Trustees may make advance payments in connection with
indemnification under this Section 5.3, provided that the indemnified
person shall have given a written undertaking to reimburse the Trust in
the event it is subsequently determined that he is not entitled to such
indemnification."
Insofar as the conditional advancing of indemnification monies for
actions based upon the Investment Company Act of 1940 may be concerned,
such payments will be made on the following conditions: (i) the
advances must be limited to amounts used, or to be used, for the
preparation of presentation of a defense to the action, including costs
connected with the preparation of a settlement; (ii) advances may be
made only upon receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the amount
to which it is ultimately determined that he is entitled to receive
from the Registrant by reason of indemnification; and (iii) (a) such
promise must be secured by a surety bond, other suitable insurance or
an equivalent form of security which assures that any repayments may be
obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient
of the advance, or (b) a majority of a quorum of the Registrant's
disinterested, non-party Trustees, or an independent legal counsel in a
written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be
found entitled to indemnification.
C-2 The Registrant has purchased an insurance policy insuring its
officers and Trustees against liabilities, and certain costs of
defending claims against such officers and Trustees, to the extent such
officers and Trustees are not found to have committed conduct
constituting willful misfeasance, bad faith, gross negligence or
reckless disregard in the performance of their duties.
In Section 9 of the Distribution Agreements relating to the
securities being offered hereby, the Registrant agrees to indemnify the
Distributor and each person, if any, who controls the Distributor
within the meaning of the Securities Act of 1933, as amended, against
certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional
Information.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Trustees, officers and
controlling persons of the Registrant and the principal underwriter
pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer, or
controlling person of the Registrant and the principal underwriter in
connection with the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person
or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Set forth below is a list of each executive officer and partner of
the Manager indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity
has been engaged since July 1998 for his, her or its own account
or in the capacity of director, officer, partner or trustee.
C-3 Mr. Glenn is President and Mr. Burke is Vice President and
Treasurer of all or substantially all of the investment companies
described in the following two paragraphs, and Messrs. Doll, Giordano
and Monagle are officers of one or more such companies.
MLIM acts as the investment adviser for the following open-end
registered investment companies: Master Global Financial Series Trust,
Mercury Global Holdings, Inc., Merrill Lynch Global Financial Services
Fund, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Emerging Market Debt Fund, Inc., Merrill Lynch Asset
Growth Fund, Inc., Merrill Lynch Balanced Capital Fund, Inc., Merrill
Lynch Convertible Fund, Inc., Merrill Lynch Developing Capital Markets
Fund, Inc., Merrill Lynch Disciplined Equity Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental
Growth Fund, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill
Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch
Global Growth Fund, Inc., Merrill Lynch C-4 Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc.,
Merrill Lynch Utilities and Telecommunications Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Index Funds, Inc., Merrill Lynch
Intermediate Government Bond Fund, Merrill Lynch International Equity
Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch
Equity Income Fund,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Variable Series Funds, Inc., The Asset Program,
Inc., and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a
division of MLIM); and for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund,
Inc., Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill Lynch
Senior Floating Rate Fund II, Inc. MLIM 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. FAM acts as the investment adviser for the following open-end
registered investment companies: CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust, Master
Focus Twenty Trust, Master Internet Strategies Trust, Master Large Cap
Series Trust, Master Premier Growth Trust, Master Mid Cap Growth Trust,
Mercury Global Holdings, Inc., Mercury Index Funds, Inc., Mercury QA
Equity Series, Inc., Mercury QA Strategy Series, Inc., Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federated
Securities Trust, Merrill Lynch Focus Twenty Fund, Merrill Lynch Focus
Value Fund, Inc., Merrill Lynch Funds for Institutions Series, Merrill
Lynch Large Cap Series Funds, Inc., Merrill Lynch Mid Cap Growth Fund,
Inc., 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 Small Cap Value Fund, Inc., Merrill Lynch U.S. Government
Mortgage Fund, Merrill Lynch U.S. High Yield Fund, Inc., Merrill Lynch
World Income Fund, Inc., The Asset Program, Inc. and The Municipal Fund
Accumulation Program, Inc. and for 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., 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 California Insured
Fund, Inc., MuniHoldings California Insured Fund V, Inc., MuniHoldings
Florida Insured Fund, MuniHoldings Insured Fund II, Inc., MuniHoldings
Insured Fund III, Inc., MuniHoldings Michigan Insured Fund II, Inc.,
MuniHoldings New Jersey Insured Fund, Inc., MuniHoldings New Jersey
Insured Fund IV, Inc., MuniHoldings New York Insured Fund, Inc.,
MuniHoldings New York Insured Fund IV, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., 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 Pennsylvania Insured Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc. and Senior High Income Portfolio, 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 MLIM, FAM,
Princeton Services and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of FAMD 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 10281-1201. The address of the Fund's
transfer agent, Financial Data Services, Inc. ("FDS"), is 4800
Deer Lake Drive East, Jacksonville, Florida C-5
32246-6484.
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.")
acts as 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 2000,
Inc., Master Internet Strategies Trust, Mercury Global Holdings, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Balanced
Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund,
Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill
Lynch Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, 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 Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc.,
Merrill Lynch Utilities and Telecommunications 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 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 Senior Floating Rate Fund II, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Funds, Inc., Merrill Lynch World Income Fund, Inc., The
Asset Program, Inc., and The Municipal Fund Accumulation Program, 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
33 King William Street, London EC4R 9AS, England.
Set forth below is a list of each executive officer and director
of MLAM U.K. indicating each business, profession, vocation or
employment of a substantial nature in which each such person has been
engaged since July 31, 1998, for his or her own account or in the
capacity of director, officer, partner or trustee. In addition, Messrs.
Glenn and Burke are officers of one or more of the registered
investment companies listed in the first two paragraphs of this Item
26:
C-6 (a) FAMD 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 26 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.; FAMD also acts as the principal underwriter for the
following closed-end registered investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy
Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc. and Merrill
Lynch Senior Floating Rate Fund II, Inc.
(b) Set forth below is information concerning each director and
officer of FAMD. The principal business address of each such person is
P.O. Box 9081, Princeton, New Jersey 08543-9081, except that the
address of Messrs. Breen, Crook, Fatseas and Wasel is One Financial
Center, 23rd Floor, Boston, Massachusetts 02111-2665.
(c) Not applicable.
All accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the rules
thereunder are maintained at the offices of the Registrant, 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its transfer
agent, Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Other than as set forth under the caption "Management of the
Fund — Merrill Lynch Investment Managers" 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, the Registrant is not a party to any
management-related service contract.
None.
C-7 Pursuant to the requirements of the Securities Act and
the Investment Company Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the Township of Plainsboro, and the
State of New Jersey, on the
28th day of
December, 2000.
Merrill Lynch Equity Income Fund (Registrant) By: /s/ TERRY K. GLENN
Pursuant to the requirements of the Securities Act,
this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
* This Amendment has been signed by each of
the persons so indicated by the undersigned as Attorney-in-Fact.
By: /s/ TERRY K.
GLENN December 28, 2000 C-8 EXHIBIT INDEX
Page Investment Objective and Policies 2
Other Investment Policies, Practices and Risk Factors 2 Convertible Securities 2 Foreign Investment Risks 3 Derivatives 5 Borrowing and Leverage 10
Investment Restrictions 12 Portfolio
Turnover 14 Management of the Fund 14 Trustees and
Officers 14 Compensation of Trustees 16
Management and Advisory Arrangements 16 Code of
Ethics 18 Purchase of Shares 18 Initial Sales Charge
Alternatives — Class A and Class D Shares 19 Reduced
Initial Sales Charges 21 Deferred Sales Charge Alternatives
— Class B and Class C Shares 24 Distribution Plans 27
Limitations on the Payment of Deferred Sales Charges 29
Redemption of Shares 30 Redemption 30
Repurchase 31 Reinstatement Privilege — Class A
and Class D Shares 32 Pricing of Shares 32
Determination of Net Asset Value 32 Computation of
Offering Price Per Share 33 Portfolio Transactions and
Brokerage 33 Shareholder Services 35 Investment
Account 35 Exchange Privilege 36 Fee-Based
Programs 38 Retirement and Education Savings Plans 39
Automatic Investment Plans 39 Automatic Dividend
Reinvestment Plan 39 Systematic Withdrawal Plan 39
Dividends and Taxes 40 Dividends 40
Taxes 41 Tax Treatment of Options and Futures
Transactions 43 Special Rules for Certain Foreign Currency
Transactions 43 Performance Data 44 General
Information 46 Description of Shares 46
Independent Auditors 46 Custodian 46
Transfer Agent 47 Legal Counsel 47
Reports to Shareholders 47 Shareholder
Inquiries 47 Additional Information 47 Financial
Statements
47 INVESTMENT OBJECTIVE AND POLICIES
MANAGEMENT OF THE FUND
Trustees and Officers
Compensation of Trustees
Name of Trustee Aggregate
Compensation
From Fund(1)Pension or Retirement
Benefits
Accrued as
Part of Fund ExpensesAggregate
Compensation
From Fund and Other
MLIM/FAM Advised
Funds Paid to
Trustees(2)Ronald W. Forbes $4,900 None $213,900
Cynthia A. Montgomery $4,900 None $213,900 Charles C.
Reilly $5,900 None $400,025 Kevin A.
Ryan $4,900 None $213,900 Roscoe S.
Suddarth* $0 None $0 Richard R.
West $4,900 None $388,775 Edward D.
Zinbarg** $0 None $140,875
Management and Advisory Arrangements
Fiscal Year Ended July 31, Investment
Advisory Fee 2000 $1,193,351 1999 $1,287,539
1998 $1,230,228 Code of Ethics
PURCHASE OF SHARES
Initial Sales Charge Alternatives — Class A and Class D Shares
Class A Shares For the Fiscal Year
Ended
July 31, Gross Sales
Charges CollectedSales Charges
Retained by
DistributorSales Charges
Paid to
Merrill LynchCDSCs Received
on
Redemption of
Load-Waived Shares2000
$ 915 $533 $ 382 $0 1999
$1,132 $66 $1,066 $0 1998
$3,914 $260 $3,654 $0
Class D Shares For the Fiscal Year
Ended
July 31, Gross Sales
Charges CollectedSales Charges
Retained by
DistributorSales Charges
Paid to
Merrill LynchCDSCs Received
on
Redemption of
Load-Waived Shares2000
$11,989 $ 925 $11,064 $363 1999
$21,977 $1,502 $20,475 $0 1998
$35,468 $2,330 $33,138 $0 Deferred Sales Charge Alternatives — Class B and Class C Shares
Year Since Purchase Payment Made CDSC as a
Percentage
of Dollar Amount
Subject to Charge0-1 4.0%
1-2 3.0% 2-3 2.0% 3-4 1.0% 4 and
thereafter None
Class B Shares* For
the Fiscal Year
Ended July 31CDSCs Received
by
DistributorCDSCs Paid to
Merrill Lynch2000 $120,786 $120,786
1999 $109,392 $109,392
1998 $44,463 $44,463
Class C Shares For the Fiscal
Year
Ended July 31CDSCs Received
by DistributorCDSCs Paid to
Merrill Lynch2000 $3,312 $3,312
1999 $2,528 $2,528
1998 $1,695 $1,695 Distribution Plans
Limitations on the Payment of Deferred Sales Charges
Data Calculated as of July 31, 2000 (in thousands)
Eligible
Gross
Sales(1)Allowable
Aggregate
Sales Charge(2)Allowable
Interest On
Unpaid
Balance(3)Maximum
Amount
PayableAmounts
Previously Paid
To
Distributor(4)Aggregate
Unpaid
BalanceAnnual
Distribution Fee
At Current
Net Asset
Level(5)Class B Shares for the period November 25,
1987
(commencement
of operations) to
July 31, 2000
Under NASD Rule as Adopted
431,762 26,767 18,432 45,199 21,528 23,671 325 Under
Distributor's Voluntary Waiver
431,762 26,767 2,377 29,144 21,528 7,616 325 Class
C Shares, for the period October 21,
1994 (commencement
of
operations) to
July 31, 2000
Under NASD Rule as Adopted
7,702 481 103 584 145 439 32
REDEMPTION OF SHARES
Redemption
Repurchase
PRICING OF SHARES
Determination of Net Asset Value
Class A Class B Class C Class D Net
Assets $19,114,568
$43,288,765
$4,293,642
$97,517,435
Number of Shares
Outstanding 1,504,635
3,400,534
341,310
7,679,545
Net Asset Value Per Share (net assets divided by number of shares
outstanding) $12.70 $12.73 $12.58 $12.70 Sales Charge
(for Class A and Class D shares: 5.25% of offering price; 5.54% of
net asset value per
share)* .70
**
**
.70
Offering
Price $13.40
$12.73
$12.58
$13.40
PORTFOLIO TRANSACTIONS AND BROKERAGE
Fiscal Year Ended July 31, Brokerage
Commissions PaidCommissions Paid
to Merrill
Lynch2000 $243,317 $7,680 1999 $114,279 $22,980
1998 $205,336 $7,029 SHAREHOLDER SERVICES
Fee-Based Programs
Retirement and Education Savings Plans
Automatic Investment Plans
Automatic Dividend Reinvestment Plan
Systematic Withdrawal Plan
DIVIDENDS AND TAXES
Dividends
Taxes
Tax Treatment of Options and Futures Transactions
Special Rules for Certain Foreign Currency Transactions
PERFORMANCE DATA
Class A Shares Class B Shares Period Expressed as
a
percentage
based on a
hypothetical
$1,000 investmentExpressed as
a percentage
based on a
hypothetical
$1,000 investmentAverage Annual Total
Return
(including maximum applicable sales
charges)
One Year Ended July 31,
2000 (9.45)% (8.95)% Five Years Ended July 31,
2000 13.72% 13.80% Ten Years Ended July 31,
2000 11.26% 10.72%
Class C Shares Class D Shares Period Expressed as
a
percentage
based on a
hypothetical
$1,000 investmentExpressed as
a percentage
based on a
hypothetical
$1,000 investmentAverage Annual Total
Return
(including maximum applicable sales
charges)
One Year Ended July 31,
2000 (6.28)% (9.69)% Five Years Ended July 31,
2000 13.77% 13.45% Inception (October 21, 1994)
to
July 31, 200014.25% 14.10% GENERAL INFORMATION
Description of Shares
Independent Auditors
Custodian
Transfer Agent
Legal Counsel
Reports to Shareholders
Shareholder Inquiries
Additional Information
Name/Address Class A Merrill Lynch Trust Company
PO Box 30532
New Brunswick NJ 0898927.75%
Class D
Merrill Lynch Trust Company
PO Box 30532
New Brunswick NJ 0898921.03% FINANCIAL STATEMENTS
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
Description of Moody's Investors Services, Inc.'s
("Moody's") Corporate Ratings
Aaa Bonds
which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues. Aa Bonds which are rated Aa are judged
to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa
securities. A Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future. Baa Bonds
which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have
speculative characteristics as well. Ba Bonds which are rated Ba
are judged to have speculative elements; their future cannot be
considered as well assured. Often the protection of interest and
principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class. B Bonds which are
rated B generally lack characteristics of desirable investments.
Assurance of interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest. Ca Bonds which are rated Ca
represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Description of Moody's Commercial Paper Ratings
— Leading market positions in
well-established industries
— High rates of return on funds employed
— Conservative capitalization structures
with moderate reliance on debt and ample asset protection
— Broad margins in earnings coverage of
fixed financial charges and higher internal cash generation
— Well established access to a range of
financial markets and assured sources of alternate liquidity.
Description of Moody's Preferred Stock Ratings
aaa An issue rated
"aaa" is considered to be a top-quality preferred stock. This
rating indicates good asset protection and the least risk of dividend
impairment within the universe of preferred stocks. aa An issue
rated "aa" is considered a high-grade preferred stock. This
rating indicates that there is reasonable assurance that earnings and
asset protection will remain relatively well maintained in the
foreseeable future. a An issue rated "a" is considered to
be an upper-medium grade preferred stock. While risks are judged to be
somewhat greater than in the "aaa" and "a" classifications,
earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels. baa An issue rated "baa"
is considered to be medium grade, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time. ba An issue
rated "ba" is considered to have speculative elements and its
future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b An issue rated "b" generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and
maintenance of other terms of the issue over any long period of time
may be small. caa An issue rated "caa" is likely to be in
arrears on dividend payments. This rating designation does not purport
to indicate the future status of payments. ca An issue rated
"ca" is speculative in a high degree and is likely to be in
arrears on dividends with little likelihood of eventual payment. c
This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing. Description of Standard & Poor's Ratings Group's ("Standard &
Poor's") Corporate Debt Ratings
AAA Debt rated AAA has
the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated
AA has a very strong capacity to pay interest and repay principal and
differs from the highest-rated issues only in small degree. A
Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories. BBB Debt rated BBB is regarded as
having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in
this category than for debt in higher-rated categories.
BB Debt rated BB has
less near-term vulnerability to default than other speculative grade
debt. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payment. The
BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB - rating. B Debt
rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity
or willingness to pay interest or repay principal. The B rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB - rating. CCC Debt rated
CCC has a current identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B - rating. CC The
rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating. C The rating
C is typically applied to debt subordinated to senior debt which is
assigned an actual or implied CCC - debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued. CI The rating CI is
reserved for income bonds on which no interest is being paid. D
Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
L The
letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized. * Continuance of the rating is contingent upon
Standard & Poor's receipt of an expected copy of the escrow agreement
or closing documentation confirming investments and cash flows. NR
Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy. Description of Standard & Poor's Commercial Paper Ratings
A Issuers
assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation. A-2 Capacity for
timely payment on issues with this designation is strong. However, the
relative degree of safety is not as high as for issues designated
"A-1." A-3 Issues carrying this designation have a
satisfactory capacity for timely payment. They are, however, somewhat
more vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations. B Issues rated
"B" are regarded as having only adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions
or short-term adversities. C This rating is assigned to
short-term debt obligations with a doubtful capacity for payment.
D This rating indicates that the issue is either in default or
is expected to be in default upon maturity. Description of Standard & Poor's Preferred Stock Ratings
I.
Likelihood of payment-capacity and
willingness of the issuer to meet the timely payment of preferred stock
dividends and any applicable sinking fund requirements in accordance
with the terms of the obligation. II. Nature of, and provisions
of, the issue. III. Relative position of the issue in the event
of bankruptcy, reorganization, or other arrangements affecting
creditors' rights. AAA This is the highest rating that may be
assigned by Standard & Poor 's to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock
obligations. AA A preferred stock issue rated "AA" also
qualifies as a high-quality fixed income security. The capacity to pay
preferred stock obligations is very strong, although not as
overwhelming as for issues rated "AAA." A An issue rated
"A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an
adequate capacity to pay the preferred stock obligations. Whereas it
normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to make payments for a preferred stock in this
category than for issues in the "A" category. BB,
B,
CCC Preferred stock rated "BB," "B," and
"CCC" are regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay preferred stock obligations.
"BB" indicates the lowest degree of speculation and "CCC"
the highest degree of speculation. While such issues will likely have
some quality and protection characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue
in arrears on dividends or sinking fund payments but that is currently
paying. C A preferred stock rated "C" is a non-paying
issue. D A preferred stock rated "D" is a non-paying issue
in default on debt instruments.
PART C. OTHER INFORMATION
Item 23. Exhibits.
Exhibit
NumberDescription 1(a) —Declaration
of Trust of the Registrant.(1) (b)
—Amendment to Declaration of Trust of Registrant dated July
14, 1987.(1) (c) —Instrument establishing
Class A shares and Class B shares of Registrant.(1)
(d) —Certificate of Amendment to
Declaration of Trust and Establishment and Designation of Class C and D
shares, dated October 19, 1994.(1)
(e)
—Amendment to Declaration of Trust of
Registrant dated December 27, 2000* 2(a)
—By-Laws of Registrant.(1) (b)
—Amended By-laws of Registrant.(2) 3
—Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above. 4 —Not
applicable. 5(a) —Class A Distribution Agreement
between Registrant and FAM Distributors, Inc.(1)
(b) —Class B Distribution Agreement between
Registrant and FAM Distributors, Inc.(1) (c)
—Class C Distribution Agreement between Registrant and FAM
Distributors, Inc.(1) (d) —Class D
Distribution Agreement between Registrant and FAM Distributors, Inc.(1)
6 —None. 7
—Custody Agreement between Registrant and State Street Bank and
Trust Company.(1) 8(a) —Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency Agreement between
Registrant and Financial Data Services, Inc.(1) 8(b)
—Credit Agreement between Registrant and a syndicate of banks.(6) 9
—Opinion of Swidler Berlin Shereff Friedman, LLP, counsel for Registrant.(1) 10(a)
—Consent of Deloitte & Touche LLP, independent
auditors for the Registrant.* 10(b) —Consent of Swidler Berlin
Shereff Friedman, LLP, counsel for Registrant.*
11 —None. 12
—Form of Certificate of Merrill Lynch Investment Managers, L.P.(1)
13(a) —Amended and Restated Class B Distribution Plan and
Class B Distribution Plan Sub-Agreement of
Registrant.(3)
(b) —Class C Distribution Plan and Class C
Distribution Plan Sub-Agreement.(1) (c)
—Class D Distribution Plan and Class D Distribution Plan
Sub-Agreement.(1)
14(a)
—Rule 18f-3 Plan.(4) 14(b)
—Other Exhibits
Powers of Attorney for Officers and Trustees(7) Terry
K. Glenn Donald C. Burke Ronald W. Forbes
Cynthia A. Montgomery Charles C. Reilly Kevin
A. Ryan Roscoe S. Suddarth Richard R. West
Arthur Zeikel Edward D.
Zinbarg 15 —Not
applicable. 16 —Code of
Ethics(5)
Exhibit
NumberIncorporated by
Reference
to Reference Number 1(a) 1(a) (b) (b) (c) (c) (d) (d) 2(a) 2
5(a) 6(a) 5(b) 6(b) 5(c) 6(c)
5(d) 6(d)
7 8
8(a) 9
9
10 12 13
13(b) 15(b) 13(c) 15(c)
Item 24. Persons Controlled by or under Common Control with
Registrant.
Item 25. Indemnification
Item 26. Business and Other Connections of Manager.
Name Position(s) with
the ManagerOther Substantial Business
Profession, Vocation or EmploymentML & Co. Limited Partner Financial Services Holding
Company; Limited Partner of Fund Asset Management, L.P. ("FAM")
Princeton Services General Partner General Partner of FAM
Jeffrey M. Peek President President of FAM; President and
Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; Managing Director and Co-Head of
the Investment Banking Division of Merrill Lynch in 1997; Senior Vice
President and Director of the Global Securities in Economics Division
of Merrill Lynch from 1995 to 1997 Terry K. Glenn Executive
Vice President
Executive Vice President of FAM; Executive Vice
President and Director of Princeton Services; President and Managing
Director of FAM Distributors, Inc. ("FAMD"); Director of
Financial Data Services, Inc.; President of
Princeton Administrators
Gregory A. Bundy Chief Operating Officer
and Managing Director Chief Operating Officer and Managing Director
of FAM; Chief Operating Officer and Managing Director of Princeton
Services; Co-CEO of Merrill Lynch Australia from 1997 to 1999
Donald C. Burke Senior Vice President, Treasurer and Director
of Taxation Senior Vice President, Treasurer and Director of
Taxation of FAM; Senior Vice President and Treasurer of Princeton
Services; Vice President of FAMD; First Vice President of FAM from 1997
to 1999; Vice President of FAM from 1990 to 1997 Michael G.
Clark Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services; Treasurer and Director of FAMD;
First Vice President of FAM from 1997 to 1999; Vice President of FAM
from 1996 to 1997 Robert C. Doll, Jr. Senior Vice
President Senior Vice President of FAM; Senior Vice President of
Princeton Services; Chief Investment Officer of Oppenheimer Funds, Inc.
in 1999 and Executive Vice President thereof from 1991 to 1999
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 Michael J.
Hennewinkel Senior Vice President, Secretary and General
Counsel Senior Vice President, Secretary and General Counsel of FAM;
Senior Vice President of Princeton Services Philip L.
Kirstein Senior Vice President Senior Vice President of FAM;
Senior Vice President, Director, General Counsel and Secretary of
Princeton Services Debra W. Landsman-Yaros Senior Vice
President Senior Vice President of FAM; Senior Vice President of
Princeton Services; Vice President of FAMD Stephen M.
Miller Senior Vice President Executive Vice President of
Princeton Administrators; Senior Vice President of Princeton Services
Joseph T. Monagle, Jr. Senior Vice President Senior Vice
President of FAM; Senior Vice President of Princeton Services
Gregory D. Upah Senior Vice President Senior Vice President
of FAM; Senior Vice President of Princeton Services
Name Positions with MLAM U.K. Other
Substantial Business,
Profession, Vocation or EmploymentTerry
K. Glenn Director and Chairman Executive Vice President of MLIM
and FAM; Executive Vice President and Director of Princeton Services;
President and Director of FAMD; President of Princeton Administrators
Nicholas C.D. Hall Director Director of Mercury Asset
Management, Ltd. and the Institutional Liquidity Fund PLC; First Vice
President and General Counsel for Merrill Lynch Mercury Asset
Management Donald C. Burke Treasurer Senior Vice President
and Treasurer of FAM and MLIM; Director of Taxation of MLIM; Senior
Vice President and Treasurer of Princeton Services; Vice President of
FAMD; First Vice President of MLIM from 1997 to 1999 Carol Ann
Langham Company Secretary None Debra Anne Searle Assistant
Company Secretary None James T. Stratford Alternate
Director Director of Mercury Asset Management Group Ltd.; Head of
Compliance, Merrill Lynch Mercury Asset Management Item 27. Principal Underwriters.
Name Position(s) and Office(s)
with FAMDPosition(s) and Office(s)
with RegistrantTerry K.
Glenn President and Director President and Trustee Michael G.
Clark Treasurer and Director None Thomas J.
Verage Director None Robert W. Crook Senior Vice
President None Michael J. Brady Vice President None
William M. Breen Vice President None Donald C.
Burke Vice President Vice President and Treasurer James T.
Fatseas Vice President None Debra W. Landsman-Yaros Vice
President None Michelle T. Lau Vice President None
Salvatore Venezia Vice President None William
Wasel Vice President None Robert
Harris Secretary None Item 28. Location of Accounts and Records.
Item 29. Management Services.
Item 30. Undertakings.
SIGNATURES
(Terry K. Glenn, President and Trustee)
Signature Title Date(s) TERRY K. GLENN*
(Terry
K. Glenn)
President and
Trustee
(Principal Executive
Officer)DONALD C. BURKE*
(Donald C. Burke)Vice
President and Treasurer
(Principal Financial and
Accounting
Officer)
RONALD W. FORBES*
(Ronald W. Forbes)Trustee
CYNTHIA A. MONTGOMERY*
(Cynthia A.
Montgomery)Trustee CHARLES C. REILLY*
(Charles C.
Reilly)Trustee KEVIN A. RYAN*
(Kevin A. Ryan)Trustee ROSCOE S.
SUDDARTH*
(Roscoe S.
Suddarth)Trustee RICHARD R.
WEST*
(Richard R.
West)Trustee ARTHUR
ZEIKEL*
(Arthur
Zeikel)Trustee EDWARD D.
ZINBARG*
(Edward D.
Zinbarg)Trustee
(Terry K. Glenn,
Attorney-in-Fact)
Exhibit
NumberDescription
1(e)
Amendment to the Declaration of Trust of Registrant, dated December 27, 2000.
10(a)
Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
10(b)
Consent of Swidler Berlin Shereff Friedman, LLP, counsel for the Registrant.
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