<PAGE> 1
PROSPECTUS
JULY 29, 1996
MERRILL LYNCH TECHNOLOGY FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Technology Fund, Inc. (the "Company") is a non-diversified,
open-end investment company seeking long-term capital appreciation through
worldwide investment in equity securities of companies that, in the opinion of
management, derive or are expected to derive a substantial portion of their
sales from products and services in technology. While the Company will not
concentrate its investments in any one industry, it is contemplated that
substantial investments will be made in companies involved in such technology
related areas as communications, computers (including software and hardware),
electronics, and factory and office automation. The Company will pursue its
investment objective by investing in a global portfolio of securities of
companies in various stages of development. It is presently contemplated that
the Company's assets will be primarily invested in the United States, Japan and
in Western Europe. However, at times the Company may invest substantially all of
its assets in the United States. For more information on the Fund's investment
objective and policies, please see "Investment Objective and Policies" on page
10.
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Company offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 4.
Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 [(609)
282-2800], or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000, and the
minimum subsequent purchase is $50, except that for retirement plans the minimum
initial purchase is $100, and the minimum subsequent purchase is $1. Merrill
Lynch may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the
Company's transfer agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is a concise statement of information about the Company that
is relevant to making an investment in the Company. This Prospectus should be
retained for future reference. A statement containing additional information
about the Company, dated July 29, 1996 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Company at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 2
FEE TABLE
A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Company follows:
<TABLE>
<CAPTION>
CLASS
A(a) CLASS B(b) CLASS C CLASS D
--------- ----------------------- --------- --------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price).................. 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend Reinvestments... None None None None
Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
whichever is lower)............................ None(d) 4.0% during the first 1.0% for None(d)
year, decreasing 1.0% one year
annually thereafter to
0.0% after the fourth
year
Exchange Fee..................................... None None None None
ANNUAL COMPANY OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Investment Advisory Fees(e)...................... 1.00% 1.00% 1.00% 1.00%
12b-1 Fees(f):
Account Maintenance Fees....................... None 0.25% 0.25% 0.25%
Distribution Fees.............................. None 0.75% 0.75% None
(Class B shares convert
to Class D shares
automatically after
approximately eight
years and cease being
subject to distribution
fees)
Other Expenses:
Custodian Fees................................... .03% .03% .03% .03%
Shareholder Servicing Costs (g).................. .21% .24% .26% .21%
Other............................................ .07% .07% .07% .07%
----- ----- ----- -----
Total Other Expenses......................... .31% .34% .36% .31%
----- ----- ----- -----
Total Company Operating Expenses................... 1.31% 2.34% 2.36% 1.56%
===== ===== ===== =====
</TABLE>
- ---------------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders, certain retirement plans and certain investment
programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" -- page 23.
(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 24.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans in connection with certain
investment programs. Class A or Class D purchases of $1,000,000 or more may
not be subject to an initial sales charge. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares" -- page 23.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase.
(e) See "Management of the Company -- Advisory and Management
Arrangements" -- page 19.
(f) See "Purchase of Shares -- Distribution Plans" page 28.
(g) See "Management of the Company -- Transfer Agency Services" -- page 20.
2
<PAGE> 3
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment including the maximum $52.50
initial sales charge (Class A and Class D shares
only) and assuming (1) the Total Company Operating
Expenses for each class set forth on page 2; (2) a 5%
annual return throughout the periods and (3)
redemption at the end of the period:
Class A........................................... $ 65 $ 92 $ 121 $202
Class B........................................... $ 64 $ 93 $ 125 $249*
Class C........................................... $ 34 $ 74 $ 126 $270
Class D........................................... $ 68 $ 99 $ 133 $228
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at the
end of the period:
Class A........................................... $ 65 $ 92 $ 121 $202
Class B........................................... $ 24 $ 73 $ 125 $249*
Class C........................................... $ 24 $ 74 $ 126 $270
Class D........................................... $ 68 $ 99 $ 133 $228
</TABLE>
- ---------------
* Assumes conversion to Class D shares approximately eight years after purchase.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Company will bear directly or
indirectly. The example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and redemptions. Purchases and redemptions
directly through the Company's transfer agent are not subject to the processing
fee. See "Purchase of Shares" and "Redemption of Shares".
3
<PAGE> 4
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
The Company offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives, and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 mutual funds advised by Merrill Lynch Asset Management, L.P. ("MLAM" or the
"Investment Adviser") or its affiliate, Fund Asset Management, L.P. ("FAM").
Funds advised by MLAM or FAM which utilize the Merrill Lynch Select Pricing(SM)
System are referred to herein as "MLAM-advised mutual funds".
Each Class A, Class B, Class C or Class D share of the Company represents
an identical interest in the investment portfolio of the Company and has the
same rights, except that Class B, Class C and Class D shares bear the expenses
of the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, are imposed directly against those classes
and not against all assets of the Company and, accordingly, such charges will
not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Company
for each class of shares will be calculated in the same manner at the same time
and will differ only to the extent that account maintenance and distribution
fees and any incremental transfer agency costs relating to a particular class
are borne exclusively by that class. Each class has different exchange
privileges. See "Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Company. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
4
<PAGE> 5
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares".
<TABLE>
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
----------------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales
charge(2)(3) No No No
----------------------------------------------------------------------------------------------------------
B CDSC for a period of four years,
at a rate of 4.0% during the
first year, decreasing 1.0% B shares convert to
annually to 0.0% 0.25% 0.75% D shares automatically
after approximately
eight years(4)
----------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
----------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% No No
----------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead will be subject to a 1.0%
CDSC for one year. A 0.75% sales charge for 401(k) purchases over $1 million
will apply. See "Class A" and "Class D" below.
(4) The conversion period for dividend reinvestment shares and certain
retirement plans was modified. Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have a ten year
conversion period. If Class B shares of the Company are exchanged for Class
B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Company are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding Class
A shares. Investors who currently own Class A shares of the Company in
a shareholder account are entitled to purchase additional Class A
shares in that account. Other eligible investors include certain
retirement plans and participants in certain investment programs. In
addition, Class A shares will be offered at net asset value to Merrill
Lynch & Co., Inc. ("ML & Co.") and its subsidiaries (the term
"subsidiaries" when used herein with respect to ML & Co., includes
MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and
employees and to members of the Boards of MLAM-advised mutual funds.
The maximum initial sales charge is 5.25%, which is reduced for
purchases of $25,000 and over, and waived for purchases by certain
retirement plans in connection with certain investment programs.
Purchases of $1,000,000 or more may not be subject to an initial sales
charge but if the
5
<PAGE> 6
initial sales charge is waived, such purchases will be subject to a
1.0% CDSC if the shares are redeemed within one year after purchase.
Sales charges also are reduced under a right of accumulation which
takes into account the investor's holdings of all classes of all
MLAM-advised mutual funds. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares".
Class B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Company's average net assets
attributable to Class B shares, and a CDSC if they are redeemed within
four years of purchase. Approximately eight years after issuance, Class
B shares will convert automatically into Class D shares of the Company,
which are subject to an account maintenance fee but no distribution
fee; Class B shares of certain other MLAM-advised mutual funds into
which exchanges may be made convert into Class D shares automatically
after approximately ten years. If Class B shares of the Company are
exchanged for Class B shares of another MLAM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
Automatic conversion of Class B shares into Class D shares will occur
at least once a month on the basis of the relative net asset values of
the shares of the two classes on the conversion date, without the
imposition of any sales load, fee or other charge. Conversion of Class
B shares to Class D shares will not be deemed a purchase or sale of the
shares for Federal income tax purposes. Shares purchased through
reinvestment of dividends on Class B shares also will convert
automatically to Class D shares. The conversion period for dividend
reinvestment shares, and the conversion and holding periods for certain
retirement plans, is modified as described under "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares".
Class C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.75% of the Company's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC if they are redeemed within one year of purchase. Although Class C
shares are subject to a 1.0% CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject
to distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Company's Board of
Directors and regulatory limitations.
Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Company's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for Class D shares is the same as the schedule
for Class A shares, except that there is no waiver for purchases by
retirement plans in connection with certain investment programs. Class
D shares also will be issued upon conversion of Class B shares as
described above under "Class B". See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares".
6
<PAGE> 7
The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his
particular circumstances.
Initial Sales Charge Alternatives. Investors who prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative who are eligible to purchase Class A shares should purchase Class A
shares rather than Class D shares because there is an account maintenance fee
imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative particularly
attractive because similar sales charge reductions are not available with
respect to the deferred sales charges imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors that previously
purchased Class A shares may no longer be eligible to purchase Class A shares of
other MLAM-advised mutual funds, those previously purchased Class A shares,
together with Class B, Class C and Class D share holdings, will count toward a
right of accumulation which may qualify the investor for reduced initial sales
charges on new initial sales charge purchases. In addition, the ongoing Class B
and Class C account maintenance and distribution fees will cause Class B and
Class C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D account
maintenance fees will cause Class D shares to have a higher expense ratio, pay
lower dividends and have a lower total return than Class A shares.
Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the benefit
of putting all of the investor's dollars to work from the time the investment is
made. The deferred sales charge alternatives may be particularly appealing to
investors who do not qualify for a reduction in initial sales charges. Both
Class B and Class C shares are subject to ongoing account maintenance fees and
distribution fees; however, the ongoing account maintenance and distribution
fees potentially may be offset to the extent any return is realized on the
additional funds initially invested in Class B or Class C shares. In addition,
Class B shares will be converted into Class D shares of the Company after a
conversion period of approximately eight years, and thereafter investors will be
subject to lower ongoing fees.
Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forego the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges".
7
<PAGE> 8
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Company by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year ended
March 31, 1996, and the independent auditors' report thereon are included in the
Statement of Additional Information. Further information about the performance
of the Company is contained in the Company's most recent annual report to
shareholders which may be obtained, without charge, by calling or by writing the
Company at the telephone number or address on the front cover of this
Prospectus.
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
CLASS A* CLASS B*
---------------------------------------------------- ----------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED MARCH 31, APRIL 27, 1992++ FOR THE YEAR ENDED MARCH 31,
---------------------------------- TO MARCH 31, ----------------------------------
1996 1995 1994 1993 1996 1995 1994
---------- ---------- ---------- ---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 4.89 $ 5.17 $ 5.08 $ 3.83 $ 4.78 $ 5.08 $ 5.03
-------- -------- -------- -------- -------- ------- -------
Investment income (loss)
net......................... (.03) .05 (.01) -- (.09) (.01) (.05)
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net......... .28 .11 1.51 1.59 .29 .11 1.48
-------- -------- -------- -------- -------- ------- -------
Total from investment
operations.................... .25 .16 1.50 1.59 .20 .10 1.43
-------- -------- -------- -------- -------- ------- -------
Less dividends and
distributions:
Investment income -- net...... -- (.02) -- -- -- -- +++ --
In excess of investment income
-- net...................... -- (.01) -- -- -- -- +++ --
Realized gain on
investments -- net.......... (.17) (.05) (1.41) (.34) (.17) (.05) (1.38)
In excess of realized gain on
investments -- net.......... (.15) (.36) -- -- (.15) (.35) --
-------- -------- -------- -------- -------- ------- -------
Total dividends and
distributions................. (.32) (.44) (1.41) (.34) (.32) (.40) (1.38)
-------- -------- -------- -------- -------- ------- -------
Net asset value, end of
period........................ $ 4.82 $ 4.89 $ 5.17 $ 5.08 $ 4.66 $ 4.78 $ 5.08
======== ======== ======== ======== ======== ======= =======
TOTAL INVESTMENT RETURN:***
Based on net asset value per
share......................... 5.15% 2.86% 35.68% 42.09%# 4.21% 1.78% 34.22%
======== ======== ======== ======== ======== ======= =======
RATIOS TO AVERAGE NET ASSETS:
Expenses....................... 1.31% 1.33% 1.35% 1.59%** 2.34% 2.38% 2.36%
======== ======== ======== ======== ======== ======= =======
Investment income
(loss) -- net................. (.62)% .87% (.11)% .04%** (1.65)% (.10)% (1.08)%
======== ======== ======== ======== ======== ======= =======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $246,909 $254,188 $174,809 $100,830 $553,819 $614,935 $224,330
======== ======== ======== ======== ======== ======= =======
Portfolio turnover............. 108.36% 175.57% 350.64% 482.79% 108.36% 175.57% 350.64%
======== ======== ======== ======== ======== ======= =======
Average commission rate paid... $ .0366 --+ --+ --+ $ .0366 --+ --+
======== ======== ======== ======== ======== ======= =======
<CAPTION>
CLASS C* CLASS D*
------------------------------- -----------------------------
FOR THE PERIOD FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
APRIL 27, 1992++ YEAR ENDED OCTOBER 21, 1994++ YEAR ENDED OCTOBER 21, 1994 ++
TO MARCH 31, MARCH 31, TO MARCH 31, MARCH 31, TO MARCH 31,
1993 1996 1995 1996 1995
--------------- ---------- ------------------ ---------- -----------------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Net
Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $ 3.83 $ 4.76 $ 5.75 $ 4.89 $ 5.88
------- ---------- -------- -------- ----------
Investment income (loss)
net......................... (.04) (.09) -- (.05) (.02)
Realized and unrealized gain
(loss) on investments and
foreign currency
transactions -- net......... 1.58 .29 (.62) .29 (.60)
------- -------- --------- --------- --------
Total from investment
operations.................... 1.54 .20 (.62) .24 (.62)
------- ---------- --------- -------- --------
<CAPTION>
Less dividends and
Investment income -- net...... -- -- (.02) -- (.02)
In excess of investment income
-- net...................... -- -- (.01) -- (.01)
Realized gain on
investments -- net.......... (.34) (.17) (.04) (.17) (.04)
In excess of realized gain on
investments -- net.......... -- (.15) (.30) (.15) (.30)
------- -------- -------- -------- ---------
Total dividends and
distributions................. (.34) (.32) (.37) (.32) (.37)
------- -------- -------- -------- ---------
Net asset value, end of
period........................ $ 5.03 $ 4.64 $ 4.76 $ 4.81 $ 4.89
======= ========= ======== ======== =========
NVESTMENT RETURN:***
Based on net asset value per
share......................... 40.77%# 4.22% (11.11)%# 4.94% (10.76)%#
======= ======== `======== ======== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses....................... 2.53%** 2.36% 2.59%** 1.56% 1.80%**
======= ======== ======== ======== =========
Investment income
(loss) -- net................. .93%** (1.69)% (.02)% (.89)% (.81)%**
======= ======== ======== ======== =========
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).................... $57,592 $ 31,090 $ 23,259 $ 43,858 $ 32,646
======= ======== ======== ======== =========
Portfolio turnover............. 482.79% 108.36% 175.57% 108.36% 175.57%
======= ======== ======== ======== =========
Average commission rate paid... --+ $ .0366 --+ $ .0366 --+
======= ======== ======== ======== =========
<CAPTION>
distributions:
</TABLE>
- ---------------
* Based on average shares outstanding during the period.
** Annualized.
*** Total investment returns exclude the effects of sales loads.
+ Data not required for the period.
++ Commencement of Operations.
+++ Amount is less than $.01 per share.
# Aggregate total investment return.
8
<PAGE> 9
RISK FACTORS AND SPECIAL CONSIDERATIONS
International Investments. Investments on an international basis involve
certain risks not typically involved in domestic investments, including
fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions applicable to such investments. Securities
prices in different countries are subject to different economic, financial,
political and social factors. Since the Company may invest heavily in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments so far
as U.S. investors are concerned. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of the Company's
assets denominated in those currencies and the Company's yield on such assets.
The rates of exchange between the dollar and other currencies are determined by
forces of supply and demand in the foreign exchange markets. These forces are,
in turn, affected by the international balance of payments, the level of
interest and inflation rates and other economic and financial conditions,
government intervention, speculation and other factors. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resources, self-sufficiency and balance of payments position.
Also, many of the securities held by the Company will not be registered with the
Commission nor will the issuers thereof be subject to the reporting requirements
of such agency.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investments in those countries.
There may be less publicly available information about foreign companies than
about U.S. companies, and foreign companies may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to those
of U.S. companies. In addition, certain foreign investments may be subject to
foreign withholding taxes. See "Additional Information -- Taxes".
Foreign financial markets, while generally growing in trading volume,
typically have substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The foreign markets also have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the
Company are uninvested and no return is earned thereon. The inability of the
Company to make intended security purchases due to settlement problems could
cause the Company to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems either could result
in losses to the Company due to subsequent declines in value of the portfolio
security or, if the Company has entered into a contract to sell the security,
could result in possible liability to the purchaser. Brokerage commissions and
other transaction costs on foreign securities exchanges are generally higher
than in the United States. There is generally less governmental supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
Investments in Technology. Technology oriented investment companies such as
the Company, as with other sector funds, may be subject to rapidly changing
asset inflows and outflows. Moreover, the Company's investments in securities of
technology related companies present certain risks that may not exist to the
same degree as in other types of investments. Technology stocks, in general,
tend to be relatively volatile as compared to other types of investments. Any
such volatility will be reflected in changes in the Company's net asset value.
While volatility may create investment opportunities, it does entail risk. In
addition, since the
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Company is a non-diversified investment company, it may at times concentrate its
investments in a limited number of companies, primarily in the semiconductor,
communications and software industries, which may also increase risk. See
"Investment Objective and Policies" below.
While the Company will invest in the securities of entities in several
different industries considered by management of the Company to be technology
related, many of those entities share common characteristics which may affect an
investment in the Company. For example, industries throughout the technology
field include many smaller and less seasoned companies. These types of companies
may present greater opportunities for capital appreciation, but may also involve
greater risks. Such companies may have limited product lines, markets, or
financial resources, or may depend on a limited management group. In addition,
the securities of smaller companies may be subject to more volatile market
movements than the securities of larger, more established companies. The
companies in which the Company invests are also strongly affected by worldwide
scientific or technological developments, and their products may rapidly fall
into obsolescence. Certain of such companies also offer products or services
that are subject to governmental regulation and may, therefore, be affected
adversely by governmental policies.
Other Considerations. The operating expense ratio of the Company can be
expected to be higher than that of an investment company investing exclusively
in U.S. securities since the expenses of the Company, such as custodial costs
and advisory fees, are higher. Other special considerations are that the Company
may invest up to 15% (10% to the extent required by certain state laws) of its
total assets in illiquid securities (including venture capital investments),
that certain foreign investments may be subject to foreign withholding taxes,
and that the Company may invest more than 5% of its assets in securities issued
or guaranteed by certain foreign governments.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Company is to seek long-term capital
appreciation through worldwide investment in equity securities of companies
that, in the opinion of management, derive or are expected to derive a
substantial portion of their sales from products and services in technology. The
Company will pursue this objective by investing in a global portfolio of
securities of companies in various stages of development. The Company may,
however, for defensive purposes, invest in non-convertible fixed income
securities, including money market securities. Current income from dividends and
interest will not be an important consideration in selecting portfolio
securities. There can be no assurance that the investment objective of the
Company will be realized. The investment objective of the Company described in
the first sentence of this paragraph is a fundamental policy of the Company and
may not be changed without the approval of the holders of a majority of the
Company's outstanding voting securities.
The investment objective of the Company is based upon the belief that
advances in technology are providing companies throughout the world with
opportunities to develop innovative products and services and that investment in
such companies offers significant long-term growth possibilities. While the
Company will seek investments that have a technological orientation, it will
maintain a flexible approach as to the types of industries in which it will
invest, and it will not invest more than 25% of its total assets in any one
industry. Thus, the Company will invest in companies offering products and
services within the various industries in such areas as computers (including
software and hardware), communications, consumer electronics, electronic
components and instruments, factory automation, office automation, and in other
companies substan-
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tially involved in the more general field of technology. The Company also
expects to make investments in energy conservation and development, new
materials, specialty chemicals, aerospace and military technology. The Company
may invest up to 15% (10% to the extent required by certain state laws) of its
total assets (together with all other illiquid investments) in venture capital
investments in new and early stage companies whose securities are illiquid. The
Company will not, however, invest in securities of issuers having a record,
together with predecessors, of less than three years of continuous operation if
more than 5% of the Company's total assets, taken at market value, would be
invested in such securities.
The Company will invest in an international portfolio of securities of
companies located throughout the world. While there are no prescribed limits on
geographic asset distribution, based upon the public market values in the world
equity markets and anticipated technological innovations, it is presently
contemplated that a majority of the Company's assets will be invested at all
times in the securities of issuers domiciled in the United States, Japan and
Western Europe. Western European countries include, among others, the United
Kingdom, Germany, The Netherlands, Switzerland, Sweden, France, Italy, Belgium,
Norway, Denmark, Finland, Portugal, Austria and Spain. The Company may restrict
the securities markets in which its assets will be invested and may increase the
proportion of assets invested in the U.S. securities markets. As a result, when
the Investment Adviser believes it is in the best interests of the shareholders
of the Company, the Company may have few or no investments outside the United
States.
The Company's current investment strategy differs from that of many other
mutual funds. In managing the Company's portfolio, the Investment Adviser
attempts to generate positive returns for shareholders instead of outperforming
a particular stock market index. In seeking to optimize returns the Investment
Adviser may concentrate investments in a limited number of companies or
industries. There is no assurance that the Investment Adviser will be able to
generate positive returns for the Company, especially in light of the inherently
volatile nature of the stock sector in which its assets are invested. While
volatility may create investment opportunities, it does entail risk.
Investment emphasis will be on equities, primarily common stocks and, to a
lesser extent, securities convertible into common stocks and rights to subscribe
for common stock. The Company anticipates that under normal conditions at least
65% of its total assets will be invested in technology companies. The Company
reserves the right, as a temporary defensive measure and to provide for
redemptions, to hold cash or cash equivalents (in U.S. dollars or foreign
currencies) and other types of securities, the issuers of which may not be
involved in technology, including non-convertible preferred stocks and
investment grade debt securities and government and money market securities, in
such proportions as, in the opinion of the Investment Adviser, prevailing market
or economic conditions warrant. Because of the inherently volatile nature of
stocks in the technology sector, the Investment Adviser may be more likely to
sell particular stocks and hold a large cash position than would the manager of
a mutual fund that invests in stocks of companies in a variety of other
industries.
The Company also may invest in securities subject to repurchase agreements
with banks or securities firms if the underlying securities are those which
otherwise qualify for investment by the Company and if, as a result thereof, not
more than 15% (10% to the extent required by certain state laws) of its total
assets would be invested in illiquid securities, including repurchase agreements
maturing in more than seven days. The Company may invest in the securities of
foreign issuers in the form of American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other
securities convertible into securities of foreign issuers. The Company may
invest in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to
disclose material information in the United States, and therefore, there may not
be a correlation between such information and the market value of such ADRs.
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HEDGING TECHNIQUES
The Company may engage in various portfolio strategies to hedge its
portfolio against investment, interest rate and currency risks. These strategies
include the use of options on portfolio securities, stock index options, stock
index futures, financial futures, currency futures, options on such futures and
forward foreign exchange transactions. The Company may enter into such
transactions only in connection with its hedging strategies. While the net asset
value of the Company's shares will fluctuate and no assurance can be given that
the Company's hedging transactions will be effective, the Investment Adviser
believes that the ability of the Company to engage in these hedging transactions
would enhance the Company's ability to reduce the volatility of the net asset
value of its shares. Furthermore, the Company will only engage in hedging
activities from time to time and may not necessarily be engaging in hedging
activities when movements in the equity markets, interest rates or currency
exchange rates occur. Reference is made to the Statement of Additional
Information for further information concerning these strategies.
Although certain risks are involved in options and futures transactions (as
discussed below in "Risk Factors in Options, Futures and Currency
Transactions"), the Investment Adviser believes that, because the Company will
only engage in these transactions for hedging purposes, the options and futures
portfolio strategies of the Company will not subject the Company to the risks
frequently associated with the speculative use of options and futures
transactions. Tax requirements may limit the Company's ability to engage in the
hedging transactions and strategies described below.
Set forth below is a description of the hedging instruments that the
Company may utilize with respect to investment, interest rate and currency
risks.
Writing Covered Call Options. The Company is authorized to purchase and
write (i.e., sell) covered call options on the securities in which it may invest
and to enter into closing purchase transactions with respect to certain of such
options. A covered call option is an option where the Company, in return for a
premium, gives another party a right to buy specified securities owned by the
Company at a specified future date and price set at the time of the contract. By
writing covered call options, the Company gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price.
In addition, the Company's ability to sell the underlying security will be
limited while the option is in effect unless the Company effects a closing
purchase transaction. A closing purchase transaction cancels out the Company's
position as the writer of an option by means of an offsetting purchase of an
identical option prior to the expiration of the option it has written. Covered
call options serve as a partial hedge against the price of the underlying
security declining.
Purchasing Put Options. The Company is authorized to purchase put options
to hedge against a decline in the market value of its securities. By buying a
put option the Company has a right to sell the underlying security at the stated
exercise price, thus limiting the Company's risk of loss through a decline in
the market value of the security until the put expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Company's
position as the purchaser of an option by means of an offsetting sale of an
identical option prior to the expiration of the option it has purchased. The
Company will not purchase put options on securities (including stock index
options discussed below) if as a result of such purchase, the aggregate cost of
all outstanding options on securities held by the Company would exceed 5% of the
market value of the Company's total assets.
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Stock Index Options and Futures and Financial Futures. The Company is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Company may purchase
or write put and call options on stock indices to hedge against the risks of
market-wide stock price movements in the securities in which the Company
invests. Options on indices are similar to options on securities except that on
exercise or assignment, the parties to the contract pay or receive an amount of
cash equal to the difference between the closing value of the index and the
exercise price of the option times a specified multiple. The Company may invest
in stock index options based on a broad market index, e.g., the S&P 500 Index,
or on a narrow index representing an industry or market segment, e.g., the AMEX
Oil & Gas Index.
The Company may also purchase and sell stock index futures contracts and
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Company may effect transactions in stock index futures contracts
in connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Company in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions".
The Company is authorized to sell futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Company's securities portfolio that might otherwise result. When the Company is
not fully invested in the securities markets and anticipates a significant
market advance, it would be able to purchase futures in order to gain rapid
market exposure that may in part or entirely offset increases in the cost of
securities that the Company intends to purchase. As such purchases are made, an
equivalent amount of futures contracts will be terminated by offsetting sales.
The Company does not consider purchases of futures contracts to be a speculative
practice under these circumstances. It is anticipated that, in a substantial
majority of these transactions, the Company will purchase such securities upon
termination of the long futures position, whether the long position is the
purchase of a futures contract or the purchase of a call option or the writing
of a put option on a future, but under unusual circumstances (e.g., the Company
experiences a significant amount of redemptions), a long futures position may be
terminated without the corresponding purchase of securities.
The Company also is authorized to purchase and write call and put options
on futures contracts and stock indices in connection with its hedging
activities. Generally, these strategies would be utilized under the same market
and market sector conditions (i.e., conditions relating to specific types of
investments) in which the Company enters into futures transactions. The Company
may purchase put options or write call options on futures contracts and stock
indices rather than selling the underlying futures contract in anticipation of a
decrease in the market value of its securities. Similarly, the Company can
purchase call options, or write put options on futures contracts and stock
indices, as a substitute for the purchase of such futures to hedge against the
increased cost resulting from an increase in the market value of securities
which the Company intends to purchase.
The Company is also authorized to engage in options and futures
transactions on U.S. and foreign exchanges and in options in the
over-the-counter markets ("OTC options"). In general, exchange traded contracts
are third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange
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or clearing corporation) with standardized strike prices and expiration dates.
OTC options transactions are two-party contracts with prices and terms
negotiated by the buyer and seller. See "Restrictions on OTC Options" below for
information as to restrictions on the use of OTC options.
The Company is authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions could be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Company, sold by
the Company but not yet delivered, or committed or anticipated to be purchased
by the Company. As an illustration, the Company may use such techniques to hedge
the stated value in U.S. dollars of an investment in a yen denominated security.
In such circumstances, for example, the Company can purchase a foreign currency
put option enabling it to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the dollar will tend to be offset by an
increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Company may also sell a call option
which, if exercised, requires it to sell a specified amount of yen for dollars
at a specified price by a future date (a technique called a "spread"). By
selling such a call option in this illustration, the Company gives up the
opportunity to profit without limit from increases in the relative value of the
yen to the dollar. The Investment Adviser believes that "spreads" of the type
which may be utilized by the Company constitute hedging transactions and are
consistent with the policies described above.
Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. A futures contract on
a foreign currency is an agreement between two parties to buy and sell a
specified amount of a currency for a set price on a future date. Futures
contracts and options on futures contracts are traded on boards of trade or
futures exchanges. The Company will not speculate in foreign currency options,
futures or related options. Accordingly, the Company will not hedge a currency
substantially in excess of the market value of securities which it has committed
or anticipates to purchase which are denominated in such currency and, in the
case of securities which have been sold by the Company but not yet delivered,
the proceeds thereof in its denominated currency. The Company will not incur
potential net liabilities of more than 20% of its total assets from foreign
currency options, futures or related options.
Forward Foreign Exchange Transactions. The Company has authority to deal in
forward foreign exchange between currencies of the different countries in which
it will invest and multinational currency units as a hedge against possible
variations in the foreign exchange rates between these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date (up to one year) and price set at the time
of the contract. The Company's dealings in forward foreign exchange will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward foreign
currency with respect to specific receivables or payables of the Company
accruing in connection with the purchase and sale of its portfolio securities,
the sale and redemption of shares of the Company or the payment of dividends and
distributions by the Company. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Company will not attempt to hedge all of its foreign
portfolio positions. If the Company enters into a position hedging transaction,
its custodian bank will place cash or liquid debt securities in a separate
account of the Company in an amount equal to the value of the Company's total
assets committed to the consummation of such forward contract. If the value of
the securities placed in the separate account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Company's commitment with respect to such contracts.
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Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission applicable to the Company provide that the
futures trading activities described herein will not result in the Company being
deemed a "commodity pool" as defined under such regulations if the Company
adheres to certain restrictions. In particular, the Company may purchase and
sell futures contracts and options thereon (i) for bona fide hedging purposes
and (ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed 5%
of the liquidation value of the Company's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts and options.
When the Company purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash and cash equivalents will be
deposited in a segregated account with the Company's custodian so that the
amount so segregated, plus the amount of initial and variation margin held in
the account of its broker, equals the market value of the futures contract,
thereby ensuring that the use of such futures contract is unleveraged.
Restrictions on OTC Options. The Company will engage in OTC options,
including over-the-counter stock index options, over-the-counter foreign
currency options and options on foreign currency futures, only with member banks
of the Federal Reserve System and primary dealers in U.S. Government securities
or with affiliates of such banks or dealers which have capital of at least $50
million or whose obligations are guaranteed by an entity having capital of at
least $50 million.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Company has adopted an investment policy pursuant to
which it will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of such transaction, the sum of the market value of
OTC options currently outstanding which are held by the Company, the market
value of the underlying securities covered by OTC call options currently
outstanding which were sold by the Company and margin deposits on the Company's
existing OTC options on futures contracts exceeds 15% (10% to the extent
required by certain state laws) of the total assets of the Company, taken at
market value, together with all other assets of the Company which are illiquid
or are not otherwise readily marketable. However, if the OTC option is sold by
the Company to a primary U.S. Government securities dealer recognized by the
Federal Reserve Bank of New York and if the Company has the unconditional
contractual right to repurchase such OTC option from the dealer at a
predetermined price, then the Company will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (i.e., current market value of the underlying
security minus the option's strike price). The repurchase price with the primary
dealers is typically a formula price which is generally based on a multiple of
the premium received for the option, plus the amount by which the option is
"in-the-money". This policy as to OTC options is not a fundamental policy of the
Company and may be amended by the Board of Directors of the Company without the
approval of the Company's shareholders. However, the Company will not change or
modify this policy prior to the change or modification by the Commission staff
of its position.
Risk Factors in Options, Futures and Currency Transactions. Utilization of
options and futures transactions to hedge the portfolio involves the risk of
imperfect correlation in movements in the price of options and futures and
movements in the price of the securities or currencies which are the subject of
the hedge. If the price of the options or futures moves more or less than the
price of the hedged securities or currencies, the Company will experience a gain
or loss which will not be completely offset by movements in the price of the
subject of the hedge. The successful use of options and futures also depends on
the Investment Adviser's ability to predict correctly price movements in the
market involved in a particular options or futures
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transaction. To compensate for imperfect correlations, the Company may purchase
or sell stock index options or futures contracts in a greater dollar amount than
the hedged securities if the volatility of the hedged securities is historically
greater than the volatility of the stock index options or futures contracts.
Conversely, the Company may purchase or sell fewer stock index options or
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the stock index options or futures contracts. The
risk of imperfect correlation generally tends to diminish as the maturity date
of the stock index option or futures contract approaches.
The Company intends to enter into options and futures transactions, on an
exchange or in the over-the-counter market, only if there appears to be a liquid
secondary market for such options or futures. However, there can be no assurance
that a liquid secondary market will exist at any specific time. Thus, it may not
be possible to close an options or futures position. The inability to close
options and futures positions also could have an adverse impact on the Company's
ability to hedge effectively its portfolio. There is also the risk of loss by
the Company of margin deposits or collateral in the event of bankruptcy of a
broker with whom the Company has an open position in an option, a futures
contract or related option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written in one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum number
of contracts which any person may trade on a particular trading day. The
Investment Adviser does not believe that these trading and position limits will
have any adverse impact on the portfolio strategies for hedging the Company's
portfolio.
Because the Company will engage in the options and futures transactions
described above solely in connection with its hedging activities, the Investment
Adviser does not believe that such options and futures transactions necessarily
will have any significant effect on the Company's portfolio turnover.
OTHER INVESTMENT PRACTICES
Non-Diversified Status. The Company is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Company is not
limited by such Act in the proportion of its assets that it may invest in the
securities of a single issuer. The Company's investments will be limited,
however, in order to qualify for the special tax treatment afforded a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). See "Additional Information -- Taxes". To qualify, the Company must
comply with certain requirements, including limiting its investments so that at
the close of each quarter of the taxable year (i) not more than 25% of the
market value of the Company's total assets will be invested in the securities of
a single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer, and the Company will not own more
than 10% of the outstanding voting securities of a single issuer. Foreign
government securities (unlike U.S. Government securities) are not exempt from
the diversification requirements of the Code and are considered obligations of a
single issuer. A fund which elects to be classified as "diversified" under the
Investment Company Act must satisfy the foregoing 5% and 10% requirements with
respect to 75% of its total assets. To the extent that the Company assumes large
positions in the securities of a small number of issuers, the Company's net
asset value may fluctuate to a greater extent than that of a diversified company
as a result of changes in the financial condition or in the market's assessment
of the
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issuers, and the Company may be more susceptible to any single economic,
political or regulatory occurrence than a diversified company.
Portfolio Transactions. In executing portfolio transactions, the Investment
Adviser seeks to obtain the best net results for the Company, 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 involved and the firm's risk in positioning a block of
securities. While the Investment Adviser generally seeks reasonably competitive
commission rates, the Company does not necessarily pay the lowest commission or
spread available. The Company has no obligation to deal with any broker or group
of brokers in execution of transactions in portfolio securities. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Company will
endeavor to achieve the best net results in effecting its portfolio
transactions.
Portfolio Turnover. The Company may dispose of securities without regard to
the time they have been held when such actions, for defensive or other reasons,
appear advisable to the Investment Adviser. While it is not possible to predict
portfolio turnover rates with any certainty, at present it is anticipated that
the Company's annual portfolio turnover rate, under normal circumstances, may be
in excess of 300%. This rate of portfolio turnover may be higher than that of
most investment companies. The high rate of portfolio turnover is in large
measure a function of the traditional volatility of technology stocks, which as
a whole is considerably greater than that of stocks generally. The Company's
portfolio turnover rate for the fiscal years ended March 31, 1995 and 1996, was
175.57% and 108.36%, respectively. (The portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal period or year by the monthly average of the value of the
portfolio securities owned by the Company during the particular fiscal year.)
High portfolio turnover involves correspondingly greater transaction costs in
the form of dealer spreads and brokerage commissions, which are borne directly
by the Company.
Lending of Portfolio Securities. The Company may from time to time lend
securities from its portfolio, with a value not exceeding 10% of its total
assets, to banks, brokers and other financial institutions and receive
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 Company receives the income on both the loaned securities and the collateral
and thereby increases its yield.
INVESTMENT RESTRICTIONS
The Company has adopted the following restrictions and policies relating to
the investment of its assets and its activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of the
Company's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (i) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). Among its fundamental policies,
the Company may not invest more than 25% of its total assets, taken at market
value at the time of each investment, in the securities of issuers in any
particular industry (excluding the U.S. Government and its agencies or
instrumentalities). Investment restrictions and policies that are non-
fundamental policies may be changed by the Board of Directors without
shareholder approval. As a non-fundamental policy, the Company may not borrow
amounts in excess of 10% of its total assets, taken at market value, and then
only from banks as a temporary measure for extraordinary or emergency purposes,
including to meet redemptions or to settle securities transactions. In addition,
the Company will not purchase securities while borrowings are outstanding except
to exercise prior commitments and to exercise subscription rights.
17
<PAGE> 18
The purchase of securities while borrowings are outstanding will have the effect
of leveraging the Company. Such leveraging or borrowing increases the Company's
exposure to capital risk, and borrowed funds are subject to interest costs which
will reduce net income.
As a non-fundamental policy, the Company will not invest in securities
which cannot be readily resold because of legal or contractual restrictions or
which cannot otherwise be marketed, redeemed or put to the issuer or a third
party, including repurchase agreements maturing in more than seven days, if,
regarding all such securities, more than 15% of its total assets (or 10% of its
total assets as presently required by certain state laws) taken at market value
would be invested in such securities. Notwithstanding the foregoing, the Company
may purchase without regard to this limitation securities that are not
registered under the Securities Act, but that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the Securities Act,
provided that the Company's Board of Directors continuously determines, based on
the trading markets for the specific Rule 144A security, that it is liquid. The
Board of Directors may adopt guidelines and delegate to the Investment Adviser
the daily function of determining and monitoring liquidity of restricted
securities. The Board has determined that securities which are freely tradeable
in their primary market offshore should be deemed liquid. The Board, however,
will retain sufficient oversight and be ultimately responsible for the
determinations.
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
The Board of Directors of the Company consists of six individuals, five of
whom are not "interested persons" of the Company as defined in the Investment
Company Act. The Board of Directors of the Company is responsible for the
overall supervision of the operations of the Company and performs the various
duties imposed on the directors of investment companies by the Investment
Company Act.
The Directors of the Company are:
ARTHUR ZEIKEL* -- President of the Investment Adviser and its affiliate,
FAM; President and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.; and Director of the Distributor.
DONALD CECIL -- Special Limited Partner of Cumberland Partners (an
investment partnership).
EDWARD H. MEYER -- Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.
CHARLES C. REILLY -- Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
RICHARD R. WEST -- Dean Emeritus, New York University Leonard N. Stern
School of Business Administration.
EDWARD D. ZINBARG -- Former Executive Vice President of The Prudential
Insurance Company of America.
- ---------------
* Interested person, as defined in the Investment Company Act, of the Company.
18
<PAGE> 19
ADVISORY AND MANAGEMENT ARRANGEMENTS
MLAM acts as the investment adviser. The Investment Adviser is owned and
controlled by ML & Co., a financial services holding company and the parent of
Merrill Lynch. The Investment Adviser or its affiliate, FAM, acts as the
investment adviser to more than 130 registered investment companies. As of June
30, 1996, the Investment Adviser and FAM had a total of approximately $206.5
billion in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Investment Adviser.
As compensation for its services to the Company, the Investment Adviser
receives monthly compensation at the annual rate of 1.00% of the average daily
net assets of the Company. For the fiscal year ended March 31, 1996, the fee
paid by the Company to the Investment Adviser was $10,196,193 (based on average
net assets of approximately $1.0 billion). At June 30, 1996, the net assets of
the Company aggregated approximately $808.8 million. At this asset level, the
annual investment advisory fee would aggregate approximately $8.1 million. This
fee is higher than those of most other mutual funds but the Company believes it
is justified by the specialized investment focus of the Company.
Subject to the direction of the Directors, the Investment Adviser is
responsible for the actual management of the Company's portfolio and constantly
reviews the Company'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 Investment Adviser. The
Investment Adviser performs certain of the other administrative services and
provides all the office space, equipment and necessary personnel for management
of the Company.
James K. Renck, Vice President of the Company, is the Company's Portfolio
Manager. Mr. Renck has been a Vice President and Portfolio Manager of the
Investment Adviser and its predecessors since 1986. Mr. Renck has been primarily
responsible for the management of the Company's portfolio since its inception.
The Company pays certain expenses incurred in its operations, 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. Also, accounting services are provided to
the Company by the Investment Adviser, and the Company reimburses the Investment
Adviser for its costs in connection with such services on a semi-annual basis.
For the fiscal year ended March 31, 1996, the Company reimbursed the Investment
Adviser $198,451 for accounting services. For the same period, the ratio of
total expenses to average net assets was 1.31% for Class A shares, 2.34% for
Class B shares, 2.36% for Class C shares and 1.56% for Class D shares.
CODE OF ETHICS
The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Investment Company Act which incorporates the Code of Ethics
of the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a "hot" initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time
19
<PAGE> 20
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
Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Company within
periods of trading by the Company in the same (or equivalent) security (15 or 30
days depending upon the transaction).
TRANSFER AGENCY SERVICES
Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a wholly-owned subsidiary of ML&Co., acts as the Company'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 shareholder account and $14.00 per Class
B or Class C shareholder account, nominal miscellaneous fees (e.g., account
closing fees) and is entitled to reimbursement for out-of-pocket expenses
incurred by it under the Transfer Agency Agreement. For the fiscal year ended
March 31, 1996, the Company paid the Transfer Agent $2,442,871 pursuant to the
Transfer Agency Agreement. At June 30, 1996, the Company had 40,068 Class A
shareholder accounts, 71,568 Class B shareholder accounts, 5,887 Class C
shareholder accounts and 6,425 Class D shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $1.6 million, plus miscellaneous and out-of-pocket expenses.
PURCHASE OF SHARES
The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the distributor of the shares of the Company. Shares of the
Company are offered continuously for sale by the Distributor and other eligible
securities dealers (including Merrill Lynch). Shares of the Company may be
purchased from securities dealers or by mailing a purchase order directly to the
Transfer Agent. The minimum initial purchase is $1,000, and the minimum
subsequent purchase is $50, except that for retirement plans, the minimum
initial purchase is $100, and the minimum subsequent purchase is $1.
The Company is offering its shares in four classes at a public offering
price equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investors under the Merrill Lynch Select
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Company next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE"), (generally, 4:00 p.m., New York time), which
includes orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value determined as of
15 minutes after the close of business on the NYSE on that day provided the
Distributor in turn receives the order from the securities dealer prior to 30
minutes after the close of business on the NYSE on that day. If the purchase
orders are not received by the Distributor prior to 30 minutes after the close
of business on the NYSE, such orders shall be deemed received on the next
business day. The Company or the Distributor may suspend the continuous offering
of the Company's shares of any class at any time in response to conditions in
the securities markets or otherwise and may thereafter resume such offering from
time to time. Any order may be rejected by the Distributor or the Company.
Neither the Distributor nor the dealers are permitted to withhold placing orders
to benefit themselves by a price change. Merrill Lynch may charge its customers
a processing fee (presently $4.85) to confirm a sale of shares to such
customers. Purchases directly through the Transfer Agent are not subject to the
processing fee.
20
<PAGE> 21
The Company issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Company with the
investment thereafter being subject to a CDSC and ongoing distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select Pricing(SM) System is
set forth under "Merrill Lynch Select Pricing(SM) System" on page 4.
Each Class A, Class B, Class C and Class D share of the Company represents
identical interests in the investment portfolio of the Company and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges, distribution and account maintenance fees that are
imposed on Class B and Class C shares, as well as the account maintenance fees
that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Company and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Company
for each class of shares will be calculated in the same manner at the same time
and will differ only to the extent that account maintenance and distribution
fees and any incremental transfer agency costs relating to a particular class
are borne exclusively by that class. Class B, Class C and Class D shares each
have exclusive voting rights with respect to the Rule 12b-1 distribution plan
adopted with respect to such class pursuant to which account maintenance and/or
distribution fees are paid. See "Distribution Plans" below. Each class has
different exchange privileges. See "Shareholder Services -- Exchange Privilege".
Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the deferred sales charges with respect to Class B and Class C shares in that
the sales charges applicable to each class provide for the financing of the
distribution of the shares of the Company. The distribution-related revenues
paid with respect to a class will not be used to finance the distribution
expenditures of another class. Sales personnel may receive different
compensation for selling different classes of shares. Investors are advised that
only Class A and Class D shares may be available for purchase through securities
dealers, other than Merrill Lynch, which are eligible to sell shares.
21
<PAGE> 22
The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION
CLASS SALES CHARGE(1) FEE FEE CONVERSION FEATURE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A Maximum 5.25% initial sales
charge(2)(3) No No No
----------------------------------------------------------------------------------------------------------
B CDSC for a period of four years,
at a rate of 4.0% during the
first year, decreasing 1.0% B shares convert to
annually to 0.0% 0.25% 0.75% D shares automatically
after approximately
eight years(4)
----------------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
----------------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales
charge(3) 0.25% No No
----------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of the redemption or cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives--Class A and Class D Shares--Eligible Class A Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead will be subject to a 1.0%
CDSC for one year. A 0.75% sales charge for 401(k) purchases over $1,000,000
will apply.
(4) The conversion price for dividend reinvestment shares and certain retirement
plans was modified. Also, Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be made have a ten year conversion
period. If Class B shares of the Company are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period
for the shares exchanged will be tacked onto the holding period for the
shares acquired.
22
<PAGE> 23
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below.
<TABLE>
<CAPTION>
SALES LOAD AS DISCOUNT TO
SALES LOAD AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------------------------------------- -------------- -------------- ------------------
<S> <C> <C> <C>
Less than $25,000................................ 5.25% 5.54% 5.00%
$25,000 but less than $50,000.................... 4.75 4.99 4.50
$50,000 but less than $100,000................... 4.00 4.17 3.75
$100,000 but less than $250,000.................. 3.00 3.09 2.75
$250,000 but less than $1,000,000................ 2.00 2.04 1.80
$1,000,000 and over**............................ 0.00 0.00 0.00
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more made on or after October 21, 1994, and on Class A
purchases by certain retirement plan investors in connection with certain
investment programs. If the sales charge is waived, in connection with a
purchase of $1,000,000 or more, such purchases will be subject to a CDSC of
1.0% if the shares are redeemed within one year after purchase. Class A
purchases made prior to October 21, 1994, might have been subject to a CDSC
if the shares were redeemed within one year of purchase at the following
rates: 1.00% on purchases of $1,000,000 to $2,500,000; 0.60% on purchases of
$2,500,001 to $3,500,000; 0.40% on purchases of $3,500,001 to $5,000,000; and
0.25% on purchases of more than $5,000,000, in lieu of paying an initial
sales charge. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed. A sales
charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A
or Class D shares by certain employer-sponsored retirement or savings plans.
The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Company will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act. During
the fiscal year ended March 31, 1996, the Company sold 14,643,437 Class A shares
for aggregate net proceeds of $80,491,145. The gross sales charges for the sale
of Class A shares of the Company for that year were $90,039, of which $6,404 and
$83,635 were received by the Distributor and Merrill Lynch, respectively. During
such period, the Distributor received no CDSCs with respect to redemption within
one year after purchase of Class A shares purchased subject to front-end sales
charge waivers.
During the fiscal year ended March 31, 1996, the Company sold 11,068,175
Class D shares for aggregate net proceeds of $62,166,617. The gross sales
charges for the sale of Class D shares of the Company for that year were
$380,496, of which $22,873 and $357,623 were received by the Distributor and
Merrill Lynch, respectively. During such period, the Distributor received no
CDSCs with respect to redemptions within one year after purchase of Class D
shares purchased subject to front-end sales charge waivers.
Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Company in a shareholder account, including participants in the Merrill Lynch
BlueprintSM Program, are entitled to purchase additional Class A shares of the
Company in that account. Certain employer
23
<PAGE> 24
sponsored retirement or savings plans, including eligible 401(k) plans, may
purchase Class A shares at net asset value provided such plans meet the required
minimum number of eligible employees or required amount of assets advised by
MLAM or any of its affiliates. Class A shares are available at net asset value
to corporate warranty insurance reserve fund programs provided that the program
has $3 million or more initially invested in MLAM-advised mutual funds. Also
eligible to purchase Class A shares at net asset value are participants in
certain investment programs including 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 the Merrill Lynch Mutual Fund Adviser
("MFA") program. In addition, Class A shares are offered at net asset value to
ML & Co. and its subsidiaries and their directors and employees and to members
of the Boards of MLAM-advised investment companies, including the Company.
Certain persons who acquired shares of certain MLAM-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 Company also may
purchase Class A shares of the Company if certain conditions set forth in the
Statement of Additional Information are met. In addition, Class A shares of the
Company and certain other MLAM-advised mutual funds are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if
certain conditions set forth in the Statement of Additional Information 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 Company and certain other MLAM-advised
mutual funds.
Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors".
Class A and Class D shares are offered at net asset value to certain
employer-sponsored retirement or savings plans, and to Employee Access
AccountsSM available through qualified employers which provide such plans. Class
A and Class D shares are offered at net asset value to shareholders of Merrill
Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. who wish to reinvest in shares of the Company the net proceeds from a
sale of certain of their shares of common stock, pursuant to tender offers
conducted by those funds.
Class D shares are offered at net asset value without sales charge to an
investor who has a business relationship with a Merrill Lynch financial
consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies. Class D
shares are offered with reduced sales charges and, in certain circumstances, at
net asset value, to participants in the Merrill Lynch BlueprintSM Program.
Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
24
<PAGE> 25
The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
while Class C shares are subject only to a one-year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares are automatically converted into Class D shares of the Company and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under "Distribution Plans".
Class B and Class C shares are sold without an initial sales charge so that
the Company will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.
Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Company in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares, from its own funds. The combination of the CDSC and
the ongoing distribution fee facilitates the ability of the Company to sell the
Class B and Class C shares without a sales charge being deducted at the time of
purchase. The proceeds from the account maintenance fees are used to compensate
Merrill Lynch for providing continuing account maintenance activities.
Approximately eight years after issuance, Class B shares will convert
automatically into Class D shares of the Company, which are subject to an
account maintenance fee but no distribution fee; Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately ten years. If Class B shares of the
Company are exchanged for Class B shares of another MLAM-advised mutual fund,
the conversion period applicable to the Class B shares acquired in the exchange
will apply, and the holding period for the shares exchanged will be tacked onto
the holding period for the shares acquired.
Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities. Class B shareholders of the Company
exercising the exchange privilege described under "Shareholder
Services--Exchange Privilege" will continue to be subject to the Company's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares acquired as a result of the exchange.
Contingent Deferred Sales Charges--Class B Shares. Class B shares which are
redeemed within four years of purchase may be subject to a CDSC at the rates set
forth below charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.
25
<PAGE> 26
The following table sets forth the rates of the Class B CDSC:
<TABLE>
<CAPTION>
CLASS B CDSC
AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
--------------------- ----------------
<S> <C>
0-1.......................................................... 4.00%
1-2.......................................................... 3.00
2-3.......................................................... 2.00
3-4.......................................................... 1.00
4 and thereafter............................................. 0.00
</TABLE>
For the fiscal year ended March 31, 1996, the Distributor received CDSCs of
$2,839,725 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch.
In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over four years or shares acquired pursuant to reinvestment
of dividends or distributions and then of shares held longest during the
four-year period. The charge will not be applied to dollar amounts representing
an increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
To provide an example, assume an investor purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to the CDSC because of dividend reinvestment. With respect
to the remaining 40 shares, the CDSC is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the third year after purchase for shares purchased after
October 21, 1994).
In the event that Class B shares are exchanged by certain retirement plans
for Class A shares in connection with a transfer to the MFA program, the time
period that such Class A shares are held in the MFA program will be included in
determining the holding period of Class B shares reacquired upon termination of
participation in the MFA program (see "Shareholder Services--Exchange
Privilege").
The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a shareholder. The
Class B CDSC also is waived on redemptions of shares by certain eligible 401(a)
and eligible 401(k) plans. The CDSC also is waived for any Class B shares which
are purchased by eligible 401(k) or eligible 401(a) plans which are rolled over
into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in
such account at the time of redemption. The Class B CDSC also is waived for any
Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information.
26
<PAGE> 27
Contingent Deferred Sales Charges--Class C Shares. Class C shares which are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged as
a percentage of the dollar amount subject thereto. The charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost of
the shares being redeemed. Accordingly, no Class C CDSC will be imposed on
increases in net asset value above the initial purchase price. In addition, no
Class C CDSC will be assessed on shares derived from reinvestment of dividends
or capital gains distributions. During the fiscal year ended March 31, 1996, the
Distributor received CDSCs of $54,329 with respect to redemptions of Class C
shares, all of which were paid to Merrill Lynch.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.
Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Company. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of the net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.
In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Company 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
Company held in the account on the Conversion Date will be converted to Class D
shares of the Company.
Share certificates for Class B shares of the Company to be converted must
be delivered to the Transfer Agent at least one week prior to the Conversion
Date applicable to those shares. In the event such certificates are not received
by the Transfer Agent at least one week prior to the Conversion Date, the
related Class B shares will convert to Class D shares on the next scheduled
Conversion Date after such certificates are delivered.
In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
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The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLAM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLAM-advised mutual funds and the Class B Retirement Plan
was established), all Class B shares of all MLAM-advised mutual funds held in
that Class B Retirement Plan will be converted into Class D shares of the
appropriate funds. Subsequent to such conversion, that Class B Retirement Plan
will be sold Class D shares of the appropriate funds at net asset value.
The Conversion Period also is modified for retirement plan investors which
participate in the MFA program. While participating in the MFA program, such
investors will hold Class A shares. If these Class A shares were acquired
through exchange of Class B shares (see "Shareholder Services--Exchange
Privilege"), then the holding period for such Class A shares will be "tacked" to
the holding period of the Class B shares originally held for purposes of
calculating the Conversion Period on Class B shares acquired upon termination of
participation in the MFA program.
DISTRIBUTION PLANS
The Company has adopted separate distribution plans for Class B, Class C
and Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each
a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Company to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
The Distribution Plans for Class B, Class C and Class D shares each provide
that the Company 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 Company attributable to shares
of the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.
The Distribution Plans for Class B and Class C shares each provide that the
Company 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 Company attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Company
including payments to financial consultants for selling Class B and Class C
shares of the Company. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C shares
through dealers without the assessment of an initial sales charge and at the
same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard, the
purpose and function of the ongoing distribution fees and the CDSC are the same
as those of the initial sales charge with respect to the Class A and Class D
shares of the Company in that the deferred sales charges provide for the
financing of the distribution of the Company's Class B and Class C shares.
For the fiscal year ended March 31, 1996, the Company paid the Distributor
$6,638,132 pursuant to the Class B Distribution Plan (based on average net
assets subject to the Class B Distribution Plan of approximately $667.5
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
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March 31, 1996, the Company paid the Distributor $328,158 pursuant to the
Distribution Plan relating to the Class C shares (based on average net assets
subject to the Class C Distribution Plan of approximately $33.0 million), all of
which was paid to Merrill Lynch for providing account maintenance and
distribution-related activities and services in connection with Class C shares.
For the fiscal year ended March 31, 1996, the Company paid the Distributor
$111,299 pursuant to the Class D Distribution Plan (based on average net assets
subject to the Class D Distribution Plan of approximately $44.8 million) all of
which was paid to Merrill Lynch for providing account maintenance services in
connection with Class D shares. At June 30, 1996, the net assets of the Company
subject to the Class B Distribution Plan aggregated approximately $506.3
million. At this asset level, the annual fees payable pursuant to the Class B
Distribution Plan would aggregate approximately $5.1 million. At June 30, 1996,
the net assets of the Company subject to the Class C Distribution Plan
aggregated approximately $27.7 million. At this asset level, the annual fee
payable pursuant to the Class C Distribution Plan would aggregate approximately
$276,983. At June 30, 1996, the net assets of the Company subject to the Class D
Distribution Plan aggregated approximately $40.2 million. At this asset level,
the annual fee payable pursuant to the Class D Distribution Plan would aggregate
approximately $100,485.
The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, 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, 1995, with respect to Class B shares, fully allocated
accrual expenses incurred by the Distributor and Merrill Lynch for the period
since April 27, 1992 (commencement of operations) exceeded fully allocated
accrual revenues for such period by approximately $11,117,000 (1.75% of Class B
net assets at that date). As of March 31, 1996, with respect to Class B shares,
direct cash revenues for the period since April 27, 1992 (commencement of
operations) exceeded direct cash expenses by $6,509,546 (1.18% of Class B net
assets at that date). Similar fully allocated accrual data for Class C shares is
not presented because such revenues and expenses for the period from October 21,
1994 (commencement of operations) to December 31, 1995 are de minimis. As of
March 31, 1996, with respect to Class C shares, direct cash revenues for the
period since October 21, 1994 (commencement of operations) exceeded direct cash
expenses by $213,288 (0.69% of Class C net assets at that date).
The Company has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Company will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into
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consideration expenses incurred in connection with the account maintenance
and/or distribution of each class of shares separately. The initial sales
charges, the account maintenance fee, the distribution fee and/or the CDSCs
received with respect to one class will not be used to subsidize the sale of
shares of another class. Payments of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares".
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the NASD
imposes a limitation on certain asset-based sales charges such as the
distribution fee and the CDSC borne by the Class B and Class C shares but not
the account maintenance fee. The maximum sales charge rule is applied separately
to each class. As applicable to the Company, the maximum sales charge rule
limits the aggregate of distribution fee payments and CDSCs payable by the
Company 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 fees 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 Company
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Company rather than to the
Distributor; however, the Company will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In such
circumstances payment in excess of the amount payable under the NASD formula
will not be made.
REDEMPTION OF SHARES
The Company is required to redeem for cash all shares of the Company on
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper notice
of redemption. Except for any CDSC which may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Company at such time.
REDEMPTION
A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. 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.
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The redemption request requires the signatures of all persons in whose names the
shares are registered, signed exactly as their names appear on the Transfer
Agent's register or on the certificate, as the case may be. The signatures on
the notice must be guaranteed by an "eligible guarantor institution" (including,
for example, Merrill Lynch branch offices and certain other financial
institutions) as such term is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, the existence and validity of which may be
verified by the Transfer Agent through the use of industry publications.
Notarized signatures are not sufficient. In certain instances, the Transfer
Agent may require additional documents, such as, but not limited to, trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority. For shareholders redeeming directly with
the Transfer Agent, payment will be mailed within seven days of receipt of a
proper notice of redemption.
At various times the Company may be requested to redeem shares for which it
has not yet received good payment. The Company may delay or cause to be delayed
the mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.
REPURCHASE
The Company also will repurchase shares through a shareholder's listed
securities dealer. The Company normally will accept orders to repurchase shares
by wire or telephone from dealers for their customers at the net asset value
next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the close of business
on the NYSE (generally, 4:00 p.m., New York time) on the day received and such
request is received by the Company from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Company 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 Company (other than any
applicable CDSC). Securities firms which do not have selected dealer agreements
with the Distributor, however, may impose a transaction charge on the
shareholder for transmitting the notice of repurchase to the Company. Merrill
Lynch may charge its customers a processing fee (presently $4.85) to confirm a
repurchase of shares to such customers. Repurchases directly through the
Transfer Agent are not subject to the processing fee. The Company 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
Company may redeem shares as set forth above.
Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
Shareholders who have redeemed their Class A or Class D shares have a
one-time privilege to reinstate their accounts by purchasing Class A or Class D
shares, as the case may be, of the Company 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
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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. The
reinstatement privilege is a one-time privilege and may be exercised by the
Class A or Class D shareholder only the first time such shareholder makes a
redemption.
SHAREHOLDER SERVICES
The Company offers a number of shareholder services and investment plans
described below which are designed to facilitate investment in shares of the
Company. Certain of such services are not available to investors who place
purchase orders for the Company's shares through the Merrill Lynch BlueprintSM
Program. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or to change options with respect thereto, can be obtained
from the Company, the Distributor or Merrill Lynch. Certain of these services
are available only to U.S. investors.
Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an Investment Account and will receive statements, at least
quarterly, from the Transfer Agent. These statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. The
statements will also show any other activity in the account since the preceding
statement. Shareholders will receive separate transaction confirmations for each
purchase or sale transaction other than automatic investment purchases and the
reinvestment of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his or her Investment Account
at any time by mailing a check directly to the Transfer Agent. Shareholders also
may maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge, at
the Transfer Agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Company, a shareholder either must
redeem the Class A or Class D shares (paying any applicable CDSC) so that the
cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if the
firm to which the retirement account is to be transferred will not take delivery
of shares of the Company, 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.
Systematic Withdrawal Plans. A Class A or Class D shareholder may elect to
receive systematic withdrawal payments from his or her Investment Account in the
form of payments by check or through automatic payment by direct deposit to his
or her bank account on either a monthly or quarterly basis. A
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Class A or Class D shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption Program,
subject to certain conditions.
Automatic Investment Plans. Regular additions of Class A, Class B, Class C
or Class D shares may be made to an investor's Investment Account by prearranged
charges of $50 or more to his or her regular bank account. Investors who
maintain CMA(R) accounts may arrange to have periodic investments made in the
Company in their CMA(R) account or in certain related accounts in amounts of
$100 or more through the CMA(R) Automated Investment Program.
Automatic Reinvestment of Dividends and Distributions. All dividends and
capital gains distributions are automatically reinvested in full and fractional
shares of the Company, without sales charge, at the net asset value per share
next determined after the close of the NYSE on the payable date of such dividend
or distribution. A shareholder may at any time, by written notification to
Merrill Lynch if the shareholder's account is maintained with Merrill Lynch or
by written notification or telephone call (1-800-MER-FUND) to the Transfer Agent
if the shareholder's account is maintained with the Transfer Agent, elect to
have subsequent dividends, or both dividends and capital gains distributions,
paid in cash rather than reinvested, in which event payment will be mailed on or
about the payment date. Cash payments can also be directly deposited to the
shareholder's bank account. No CDSC will be imposed on redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.
EXCHANGE PRIVILEGE
U.S. shareholders of each class of shares of the Company have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Company for Class A shares of a second
MLAM-advised mutual fund if the shareholder holds any Class A shares of the
second fund in his account in which the exchange is made at the time of the
exchange or is otherwise eligible to purchase Class A shares of the second fund.
If the Class A shareholder wants to exchange Class A shares for shares of a
second MLAM-advised mutual fund, and the shareholder does not hold Class A
shares of the second fund in his account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the shareholder
will receive Class D shares of the second fund as a result of the exchange.
Class D shares also may be exchanged for Class A shares of a second MLAM-advised
mutual fund at any time as long as, at the time of the exchange the shareholder
holds Class A shares of the second fund in the account in which the exchange is
made or is otherwise eligible to purchase Class A shares of the second fund.
Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.
Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.
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Shares of the Company which are subject to a CDSC are exchangeable on the
basis of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Company. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Company is "tacked" to the holding period for the newly acquired
shares of the other fund.
Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares are
held in a money market fund, however, will not count toward satisfaction of the
holding period requirement for reduction of any CDSC imposed on such shares, if
any, and, with respect to Class B shares, toward satisfaction of the Conversion
Period.
Class B shareholders of the Company exercising the exchange privilege will
continue to be subject to the Company's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Company acquired through use of the exchange privilege will be
subject to the Company's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
Exercise of the exchange privilege is treated as a sale for Federal income
tax purposes. For further information, see "Shareholder Services--Exchange
Privilege" in the Statement of Additional Information.
The exchange privilege is modified with respect to certain retirement plans
which 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 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
Company'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
MLAM-advised mutual fund for Class A or Class D shares of the Company will be
made solely on the basis of the relative net asset values of the shares being
exchanged. Therefore, there will not be a charge for any difference between the
sales charge previously paid on the shares of the other MLAM-advised mutual fund
and the sales charge payable on the shares of the Company being acquired in the
exchange under the MFA program.
PERFORMANCE DATA
From time to time the Company may include its average annual total return
for various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with a
formula specified by the Commission.
Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any capital gains or losses on
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portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B and Class C shares and the maximum sales charge in the
case of Class A and Class D shares. Dividends paid by the Company 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 fees and any incremental
transfer agency costs relating to each class of shares will be borne exclusively
by that class. The Company will include performance data for all classes of
shares of the Company in any advertisement or information including performance
data of the Company.
The Company also may quote total return and aggregate total return
performance data for various specified time periods. Such data will be
calculated substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return, and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data calculations
of including or excluding the maximum applicable sales charges, actual annual or
annualized total return data generally will be lower than average annual total
return data since the average annual rates of return reflect compounding;
aggregate total return data generally will be higher than average annual total
return data since the aggregate rates of return reflect compounding over longer
periods of time. In advertisements distributed to investors whose purchases are
subject to reduced sales charges in the case of Class A and Class D shares or
waiver of the CDSC in the case of Class B and Class C shares (such as investors
in certain retirement plans), performance data may take into account the
reduced, and not the maximum, sales charge or may not take into account the CDSC
and therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the CDSC, a lower amount of expenses may be deducted. See
"Purchase of Shares". The Company's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate the effect of such total
return on a hypothetical $1,000 investment in the Company at the beginning of
each specified period.
Total return figures are based on the Company's historical performance and
are not intended to indicate future performance. The Company's total return will
vary depending on market conditions, the securities comprising the Company's
portfolio, the Company'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 Company will fluctuate, and an investor's shares, when
redeemed, may be worth more or less than their original cost.
On occasion, the Company may compare its performance to the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, or
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other industry
publications. In addition, from time to time the Company may include the
Company's risk-adjusted performance ratings assigned by Morningstar
Publications, Inc. in advertising or supplemental sales literature. As with
other performance data, performance comparisons should not be considered
indicative of the Company's relative performance for any future period.
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<PAGE> 36
ADDITIONAL INFORMATION
DIVIDENDS AND DISTRIBUTIONS
It is the Company's intention to distribute all its net investment income,
if any. Dividends from such net investment income will be paid at least
annually. All net realized long- or short-term capital gains, if any, will be
distributed to the Company's shareholders at least annually. The per share
dividends and distributions on each class of shares will be reduced as a result
of any account maintenance, distribution and transfer agency fees applicable to
that class. See "Additional Information -- Determination of Net Asset Value".
Dividends and distributions may be reinvested automatically in shares of the
Company at net asset value without a sales charge. Shareholders may elect in
writing to receive any such dividends or distributions, or both, in cash.
Dividends and distributions are taxable to shareholders as discussed below
whether they are reinvested in shares of the Company or received in cash.
Gains or losses attributable to foreign currency gains or losses from
certain forward contracts may increase or decrease the amount of the Company's
income available for distribution to shareholders. If such losses exceed other
income during a taxable year, (a) the Company would not be able to make any
ordinary dividend distributions, and (b) all or a portion of distributions made
before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's tax basis in Company shares for
Federal income tax purposes. See "Additional Information--Taxes".
TAXES
The Company intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Company (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Company intends to distribute substantially
all of such income.
Dividends paid by the Company from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Company shares. Any loss upon
the sale or exchange of Company shares held for six months or less, however,
will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. Distributions in excess of the Company's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Company. Not later than 60 days after the close of its
taxable year, the Company will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Company's ordinary income dividends may be eligible
for the dividends received deduction allowed to corporations under the Code, if
certain requirements are met. If the Company pays a dividend in January which
was declared in the previous October, November or December to shareholders of
record on a
36
<PAGE> 37
specified date in one of such months, then such dividend will be treated for tax
purposes as being paid by the Company and received by its shareholders on
December 31 of the year in which such dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Dividends and interest received by the Company may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Company. If more than 50% in value of the Company's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Company will be eligible, and intends, to file an election
with the Internal Revenue Service pursuant to which shareholders of the Company
will be required to include their proportionate shares of such withholding taxes
in their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them, and deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Company's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Company will report annually to its shareholders
the amount per share of such withholding taxes.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Company or who, to the Company's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are not
"regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Company's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Company would not be able to make any ordinary
dividend distributions, and all or a portion of distributions made before the
losses were realized but in the same taxable year would be recharacterized as a
return of capital to shareholders, thereby reducing the basis of each
shareholder's Company shares and resulting in a capital gain for any shareholder
who received a distribution greater than such shareholder's basis in Company
shares (assuming the shares were held as a capital asset).
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
37
<PAGE> 38
basis in the Class B shares converted, and the holding period of the acquired
Class D shares will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Company on the exchanged shares reduces any sales charge the
shareholder would have owed upon purchase of the new shares in the absence of
the exchange privilege. Instead, such sales charge will be treated as an amount
paid for the new shares.
A loss realized on a sale or exchange of shares of the Company will be
disallowed if other Company shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Company.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for all classes of the Company is determined once
daily as of 15 minutes after the close of business on the NYSE (generally, 4:00
p.m., New York time), on each day during which the NYSE is open for trading. Any
assets or liabilities initially expressed in terms of non-U.S. dollar currencies
are translated into U.S. dollars at the prevailing market rates as quoted by one
or more banks or dealers on the day of valuation.
The net asset value is computed by dividing the value of the securities
held by the Company plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time. Expenses,
including the fees payable to the Investment Adviser and any account maintenance
and/or distribution fees payable to the Distributor, are accrued daily. The per
share net asset value of Class A shares generally will be higher than the per
share net asset value of shares of the other classes, reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; in addition, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and Class
C shares, reflecting the daily expense accruals of the distribution and higher
transfer agency fees applicable with respect to Class B and Class C shares. It
is expected, however, that the per share net asset value of the classes will
tend to converge (although not necessarily meet) immediately
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<PAGE> 39
after the payment of dividends or distributions which will differ by
approximately the amount of the expense accrual differentials between the
classes.
Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price in the over-the-counter market prior to the time
of valuation. Securities which are traded both in the over-the-counter market
and on a stock exchange are valued according to the broadest and most
representative market. When the Company writes an option, the amount of the
premium received is recorded on the books of the Company 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 over-the-counter market, the last asked price. Options purchased by the
Company are valued at their last sale price in the case of exchange-traded
options or, in the case of options traded in the over-the-counter market, the
last bid price. Other investments, including futures contracts and related
options, are stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Company.
ORGANIZATION OF THE COMPANY
The Company was incorporated in connection with a reorganization (the
"Reorganization") of Sci/Tech Holdings, Inc. ("Sci/Tech"), a Merrill
Lynch-sponsored diversified, open-end investment company. Sci/Tech invested
primarily in the equity securities of companies engaged in science and
technology. Pursuant to the Reorganization, which occurred on April 27, 1992,
Sci/Tech transferred all of its technology oriented securities and certain other
assets (net of liabilities) to the Company in exchange for all of the stock of
the Company (other than seed capital), which Sci/Tech then distributed pro rata
to its stockholders. Thus, the Company's initial portfolio of technology
oriented securities consisted of securities received from Sci/Tech. Sci/Tech
retained its healthcare related investments, changed its name, and now operates
as Merrill Lynch Healthcare Fund, Inc.
The Company was incorporated under Maryland law on August 27, 1991. At the
date of this Prospectus, the Company has an authorized capital of 800,000,000
shares of Common Stock, par value $0.10 per share, divided into four classes,
designated Class A, Class B, Class C and Class D Common Stock. Class A and Class
C each consists of 100,000,000 shares and Class B and Class D each consists of
300,000,000 shares. Shares of Class A, Class B, Class C and Class D Common Stock
represent interests in the same assets of the Company and are identical in all
respects except that Class B, Class C and Class D shares bear certain expenses
related to the account maintenance associated with such shares, and Class B and
Class C shares bear certain expenses related to the distribution of such shares.
Each class has exclusive voting rights with respect to matters relating to
account maintenance and distribution expenditures, as applicable. See "Purchase
of Shares". The Company has received an order from the Commission permitting the
issuance and sale of multiple classes of Common Stock. The Directors of the
Company may classify and reclassify the shares of the Company into additional
classes of Common Stock at a future date.
Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held and will vote on the election of
Directors and any other matters submitted to a shareholder vote. The Company
does not intend to hold meetings of shareholders in any year in which the
Investment Company Act
39
<PAGE> 40
does not require shareholders to act on any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive rights. Shares
have the conversion rights described in this Prospectus. Each share of Common
Stock is entitled to participate equally in dividends and distributions declared
by the Company and in the net assets of the Company upon liquidation or
dissolution after satisfaction of outstanding liabilities, except that, as noted
above, the Class B, Class C and Class D shares bear certain additional expenses.
SHAREHOLDER REPORTS
Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts, the shareholder should notify in writing:
Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this,
please call your Merrill Lynch financial consultant or Merrill Lynch Financial
Data Services, Inc. at 1-800-637-3863.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to the Company at the address or
telephone number set forth on the cover page of this Prospectus.
40
<PAGE> 41
MERRILL LYNCH TECHNOLOGY FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINT(SM) PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINT(SM)
PROGRAM APPLICATION BY CALLING (800) 637-3766.
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)
[ ] Class A shares [ ] Class B shares
[ ] Class C shares [ ] Class D shares
of Merrill Lynch Technology Fund, Inc., and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
Basis for establishing an Investment Account:
A. I enclose a check for $________ payable to Merrill Lynch Financial
Data Services, Inc. as an initial investment (minimum $1,000). I understand
that this purchase will be executed at the applicable offering price next to
be determined after this Application is received by you.
B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the Right of Accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)
1. __________________________________ 4. _________________________________
2. __________________________________ 5. _________________________________
3. __________________________________ 6. _________________________________
Name ________________________________________________________________________
First Name Initial Last Name
Name of Co-Owner (if any) ___________________________________________________
First Name Initial Last Name
Address _____________________________________________________________________
_______________________________________ Date ______________________________
(Zip Code)
Occupation ____________________________ Name and Address of Employer ________
_____________________________________________________________________________
_______________________________________ __________________________________
Signature of Owner Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
Ordinary Income Dividends Long-Term Capital Gains
___________________________________ __________________________________
Select [ ] Reinvest Select [ ] Reinvest
One: [ ] Cash One: [ ] Cash
___________________________________ __________________________________
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
[ ] CHECK OR [ ] DIRECT DEPOSIT TO BANK ACCOUNT
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Technology Fund, Inc. Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE) [ ] CHECKING [ ] SAVINGS
Name on your account __________________________________________________________
Bank Name _____________________________________________________________________
Bank Number ___________________________ Account Number _______________________
Bank Address __________________________________________________________________
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor ________________________________________________________
Signature of Depositor ________________________________ Date __________________
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
- --------------------------------------------------------------------------------
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<PAGE> 42
MERRILL LYNCH TECHNOLOGY FUND, INC.--AUTHORIZATION FORM (PART 1)--(CONTINUED)
3. SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER
___________________________________________________________
___________________________________________________________
Social Security Number or Taxpayer Identification Number
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2) that
I am not subject to backup withholding (as discussed under "Additional
Information -- Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDER-REPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS CERTIFICATION TO
OTHER MERRILL LYNCH-SPONSORED MUTUAL FUNDS.
______________________________________ ____________________________________
SIGNATURE OF OWNER SIGNATURE OF CO-OWNER (IF ANY)
- --------------------------------------------------------------------------------
4. LETTER OF INTENTION -- CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
Dear Sir/Madam:
______________________________, 19___
Date of Initial Purchase
Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Technology Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds Distributor,
Inc. acts as distributor over the next 13 month period which will equal or
exceed:
[ ] $25,000 [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund's prospectus.
I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc. my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Technology Fund, Inc. held as security.
By _________________________________ ________________________________________
Signature of Owner Signature of Co-Owner(if registered
in joint names, both must sign)
In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name _____________________________ (2) Name ______________________________
Account Number _______________________ Account Number _______________________
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp.
________________________________________________
________________________________________________
WE HEREBY AUTHORIZE MERRILL LYNCH FUNDS DISTRIBUTOR, INC. TO ACT AS OUR AGENT
IN CONNECTION WITH TRANSACTION UNDER THIS AUTHORIZATION FORM AND AGREE TO
NOTIFY THE DISTRIBUTOR OF ANY PURCHASES OR SALES MADE UNDER A LETTER OF
INTENTION, AUTOMATIC INVESTMENT PLAN OR SYSTEMATIC WITHDRAWAL PLAN. WE
GUARANTEE THE SHAREHOLDER'S SIGNATURE.
__________________________________ By _____________________________________
Dealer Name and Address Authorized Signature of Dealer
_____________ _________________
________________________________________
_____________ _________________ F/C Last Name
Branch-Code F/C No.
_____________ _________________
_____________ _________________
Dealer's Customer A/C No.
This form when completed should be mailed to:
Merrill Lynch Technology Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289
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<PAGE> 43
MERRILL LYNCH TECHNOLOGY FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR AUTOMATIC
INVESTMENT PLANS ONLY.
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION __________________ __________________________________
Social Security No.
Name of Owner ____________________________ or Taxpayer Identification Number
Name of Co-Owner (if any) ________________ Account Number ____________________
(if existing account)
Address __________________________________
__________________________________________
- --------------------------------------------------------------------------------
2. SYSTEMATIC WITHDRAWAL PLAN -- CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)
MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of / / Class A or / / Class D shares in Merrill Lynch Technology
Fund, Inc., at cost or current offering price. Withdrawals to be made either
(check one) / / Monthly on the 24th day of each month, or / / Quarterly on the
24th day of March, June, September and December. If the 24th falls on a weekend
or holiday, the next succeeding business day will be utilized. Begin systematic
withdrawal on ________ (month) or as soon as possible thereafter.
SPECIFY HOW YOU WOULD LIKE YOUR WITHDRAWAL PAID TO YOU (CHECK ONE): / /
$ or / / % of the current value of / / Class A or / / Class D shares
in the account.
SPECIFY WITHDRAWAL METHOD: / / check or / / direct deposit to bank account
(check one and complete part (a) or (b) below):
DRAW CHECKS PAYABLE (CHECK ONE)
(a) I hereby authorize payment by check
/ / as indicated in Item 1.
/ / to the order of ________________________________________________________
Mail to (check one)
/ / the address indicated in Item 1.
/ / Name (Please Print) ____________________________________________________
Address ________________________________________________________________________
Signature of Owner __________________________ Date _____________________
Signature of Co-Owner (if any) __________________________________________
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND (IF
NECESSARY) DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
Specify type of account (check one): / / checking / / savings
Name on your Account ___________________________________________________________
Bank Name ______________________________________________________________________
Bank Number ____________________________ Account Number _______________________
Bank Address ___________________________________________________________________
________________________________________________________________________________
Signature of Depositor _____________________________ Date _____________________
Signature of Depositor _________________________________________________________
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
43
<PAGE> 44
- --------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C shares / / Class D
shares
of Merrill Lynch Technology Fund, Inc., subject to the terms set forth below. In
the event that I am not eligible to purchase Class A shares, I understand that
Class D shares will be purchased.
MERRILL LYNCH FINANCIAL DATA
SERVICES, INC.
You are hereby authorized to draw
checks or an ACH debit each month on
my bank account for investment in
Merrill Lynch Technology Fund, Inc. as
indicated below:
Amount of each ACH debit $________
Account Number ___________________
Please date and invest ACH debits on
the 20th of each month beginning
_____________________ (month)
or as soon thereafter as possible.
I agree that you are drawing these ACH
debits voluntarily at my request and
that you shall not be liable for any
loss arising from any delay in
preparing or failure to prepare any
such debit. If I change banks or
desire to terminate or suspend this
program, I agree to notify you
promptly in writing. I hereby
authorize you to take any action to
correct erroneous ACH debits of my
bank account or purchases of fund
shares including liquidating shares of
the Fund and crediting my bank
account. I further agree that if a
debit is not honored upon
presentation, Merrill Lynch Financial
Data Services, Inc. is authorized to
discontinue immediately the Automatic
Investment Plan and to liquidate
sufficient shares held in my account
to offset the purchase made with the
returned dishonored debit.
- -------------- --------------------------
Date Signature of Depositor
--------------------------
Signature of Depositor
(If joint account, both
must sign)
AUTHORIZATION TO HONOR ACH DEBITS
DRAWN BY MERRILL LYNCH FINANCIAL
DATA SERVICES, INC.
To _________________________________ Bank
(Investor's Bank)
Bank Address ____________________________
City __________ State ____ Zip Code _____
As a convenience to me, I hereby
request and authorize you to pay and
charge to my account ACH debits drawn
on my account by and payable to
Merrill Lynch Financial Data Services,
Inc. I agree that your rights in
respect to each such debit shall be
the same as if it were a check drawn
on you and signed personally by me.
This authority is to remain in effect
until revoked by me in writing. Until
you receive such notice, you shall be
fully protected in honoring any such
debit. I further agree that if any
such debit be dishonored, whether with
or without cause and whether
intentionally or inadvertently, you
shall be under no liability.
- -------------- --------------------------
Date Signature of Depositor
- ------------------- --------------------------
Bank Account Number Signature of Depositor
(If joint account, both
must sign)
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED
"VOID" SHOULD ACCOMPANY THIS APPLICATION.
44
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45
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46
<PAGE> 47
INVESTMENT ADVISER
Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289
CUSTODIAN
The Chase Manhattan Bank, N.A.
Global Securities Services
4 Chase MetroTech Center, 18th Floor
Brooklyn, New York 11245
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE> 48
- ------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE INVESTMENT ADVISER OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Fee Table.......................... 2
Merrill Lynch Select PricingSM
System........................... 4
Financial Highlights............... 8
Risk Factors and Special
Considerations................... 9
Investment Objective and
Policies......................... 10
Hedging Techniques............... 12
Other Investment Practices....... 16
Investment Restrictions.......... 17
Management of the Company.......... 18
Board of Directors............... 18
Advisory and Management
Arrangements.................. 19
Code of Ethics................... 19
Transfer Agency Services......... 20
Purchase of Shares................. 20
Initial Sales Charge Alternatives
--
Class A and Class D Shares.... 23
Deferred Sales Charge
Alternatives --
Class B and Class C Shares.... 24
Distribution Plans............... 28
Limitations on the Payment of
Deferred Sales Charges........ 30
Redemption of Shares............... 30
Shareholder Services............... 32
Performance Data................... 34
Additional Information............. 36
Dividends and Distributions...... 36
Taxes............................ 36
Determination of Net Asset
Value......................... 38
Organization of the Company...... 39
Shareholder Reports.............. 40
Shareholder Inquiries............ 40
Authorization Form................. 41
Code #16089-0796
</TABLE>
YZa
()MERRILL LYNCH
TECHNOLOGY FUND, INC.
PROSPECTUS
July 29, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 49
STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH TECHNOLOGY FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
------------------------
Merrill Lynch Technology Fund, Inc. (the "Company") is a non-diversified,
open-end investment company seeking long-term capital appreciation through
worldwide investment in equity securities of companies that, in the opinion of
management, derive or are expected to derive a substantial portion of their
sales from products and services in technology. While the Company will not
concentrate its investments in any one industry, it is contemplated that
substantial investments will be made in companies involved in such
technology-related areas as communications, computers (including software and
hardware), electronics, and factory and office automation. The Company will
pursue its investment objective by investing in a global portfolio of securities
of companies in various stages of development. It is presently contemplated that
the Company's assets will be invested primarily in the United States, Japan and
Western Europe. However, at times the Company may invest substantially all of
its assets in the United States.
Pursuant to the Merrill Lynch Select PricingSM System, the Company 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.
------------------------
The Statement of Additional Information of the Company is not a prospectus
and should be read in conjunction with the Prospectus of the Company, dated July
29, 1996 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Company at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus.
------------------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.-- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is July 29, 1996.
<PAGE> 50
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Company is to seek long-term capital
appreciation through worldwide investment in equity securities of companies
that, in the opinion of management, derive or are expected to derive a
substantial portion of their sales from products and services in technology.
Reference is made to "Investment Objective and Policies" in the Prospectus for a
discussion of the investment objective and policies of the Company.
TECHNOLOGY
The Company will invest in companies offering products and services in such
areas as computers (including software and hardware), communications, consumer
electronics, electronic components and instruments, factory automation, office
automation and other companies substantially involved in the field of
technology. The Company also expects to make investments in energy conservation
and development, new materials, specialty chemicals, aerospace and military
technology. While rapid changes in technology present attractive opportunities
for investment in companies in such fields, such companies may face special
risks that their products or services may not prove to be commercially
successful or may be rendered obsolete by further scientific and technological
developments. The value of the Company's investment in a company whose products
are not commercially successful or are rendered obsolete may decrease
substantially. See "Risk Factors and Special Considerations" in the Prospectus.
Investors in the Company will receive the benefit of the specialized research
and analysis of Merrill Lynch Asset Management, L.P. (the "Investment Adviser").
INTERNATIONAL DIVERSIFICATION
The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce risk
for the Company's portfolio as a whole. This negative correlation also may
offset unrealized gains the Company has derived from movements in a particular
market. To the extent the various markets move independently, total portfolio
volatility is reduced when the various markets are combined into a single
portfolio. Of course, movements in the various securities markets may be offset
by changes in foreign currency exchange rates. Exchange rates frequently move
independently of securities markets in a particular country. As a result, gains
in a particular securities market may be affected by changes in exchange rates.
TYPES OF PORTFOLIO COMPANIES
The Company will attempt to maximize opportunity and reduce risk by
investing in a portfolio of companies in different stages of development.
Portfolio companies will range from large, well-established companies to
medium-sized companies and smaller, less seasoned companies in an earlier stage
of development.
Investments in larger companies present certain advantages attributable to
their greater financial resources: more extensive research and development,
manufacturing, marketing and service capabilities; more stability; and greater
depth of management and technical personnel. Investments in smaller, less
seasoned companies may present greater opportunities for growth but also involve
greater risks than customarily are associated with more established companies.
The securities of smaller companies may be subject to more abrupt or erratic
market movements than larger, more established companies. These companies may
have limited product lines, markets or financial resources, or they may be
dependent upon a limited management
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<PAGE> 51
group. Their securities may be traded only in the over-the-counter market
("OTC") or on a regional securities exchange and may not be traded every day or
in the volume typical of trading on a national securities exchange. As a result,
the disposition by the Company of portfolio securities to meet redemptions or
otherwise may require the Company to sell these securities at a discount from
market prices or during periods when such disposition is not desirable or to
make many small sales over a lengthy period of time.
The Company may invest up to 15% (10% to the extent required by certain
state laws) of its total assets (together with all other illiquid investments)
in illiquid venture capital investments in new and early-stage companies whose
securities are not publicly traded. Venture capital investments may present
significant opportunities for capital appreciation but involve a high degree of
business and financial risk that can result in substantial losses and should be
considered as speculative investments. The Company's venture capital investments
may include limited partnership interests. The disposition of U.S. venture
capital investments normally will be restricted under Federal securities laws.
Generally, restricted securities may be sold only in privately negotiated
transactions or in public offerings registered under the Securities Act of 1933,
as amended (the "Securities Act"). The Company also may be subject to
restrictions contained in the securities laws of other countries in disposing of
portfolio securities. As a result, the Company may be unable to dispose of such
investments at times when such disposition ordinarily would be deemed
appropriate due to investment or liquidity considerations. Alternatively, the
Company may be forced to dispose of such investments at less than their fair
market value. Where registration is required, the Company may be obligated to
pay part or all of the expenses of such registration. Market quotations may not
be readily available for such securities, and for purposes of determining the
offering and redemption prices of Company shares, these investments will be
valued at fair value. See "Determination of Net Asset Value".
OTHER FACTORS
The Company may invest in securities subject to repurchase agreements with
banks or securities firms, which are instruments under which the purchaser
(i.e., the Company) acquires a debt security, and the seller agrees, at the time
of sale, to repurchase the obligation at a mutually agreed upon time and price,
thereby determining the yield during the purchaser's holding period. The
underlying securities are limited to those which otherwise qualify for
investment by the Company. In the event of default by the seller under a
repurchase agreement, the Company may suffer time delays and incur costs or
losses in connection with the disposition of the underlying securities. The
Company will not enter into a repurchase agreement if, as a result thereof, more
than 15% (10% to the extent required by certain state laws) of its total assets
would be subject to repurchase agreements maturing in more than seven days.
The Company may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are receipts
typically issued by an American bank or trust company which evidence ownership
of underlying securities issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership arrangement. GDRs are
receipts issued globally, typically by banking institutions, and evidence a
similar ownership arrangement. Generally, ADRs, in registered form, are designed
for use in the U.S. securities markets, and EDRs, in bearer form, are designed
for use in European securities markets. GDRs are tradeable both in the U.S. and
Europe and are designed for use throughout the world. The Company may invest in
unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose
material information in the U.S., and therefore, there may not be a correlation
between such information and the market value of such ADRs.
3
<PAGE> 52
The Investment Adviser will effect portfolio transactions without regard to
holding period if in its 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
investment policies described in the Prospectus, the Company's portfolio
turnover may be higher than that of other investment companies; however, it is
extremely difficult to predict portfolio turnover rates with any degree of
accuracy. The portfolio turnover rate is calculated by dividing the lesser of
the Company's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of U.S. Government securities and of all other securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of the securities in the portfolio during the year. For
the fiscal years ended March 31, 1995 and 1996, the Company's portfolio turnover
rate was 175.57% and 108.36%, respectively. The Company is subject to the
Federal income tax requirement that less than 30% of the Company's gross income
be derived from gains from the sale or other disposition of securities held for
less than three months. See "Investment Objective and Policies--Other Investment
Practices--Portfolio Turnover" in the Prospectus.
HEDGING TECHNIQUES
Reference is made to the discussion under the caption "Investment Objective
and Policies-Hedging Techniques" in the Prospectus for information with respect
to various portfolio strategies involving options and futures. The Company may
seek to hedge its portfolio against movements in the equity markets, interest
rates and exchange rates between currencies through the use of options and
futures transactions and forward foreign exchange transactions. The Company has
authority to write (i.e., sell) covered call options on its portfolio
securities, purchase put options on securities and engage in transactions in
stock index options, stock index futures and financial futures, and related
options on such futures. The Company may also deal in forward foreign exchange
transactions and forward currency options and futures and related options on
such futures. The Company is authorized to enter into such options and futures
transactions either on exchanges or in the OTC markets. Each of such portfolio
strategies is described in the Prospectus. Although certain risks are involved
in options and futures transactions (as discussed in the Prospectus and below),
the Investment Adviser believes that, because the Company will only engage in
these transactions for hedging purposes, the options and futures portfolio
strategies of the Company will not subject the Company to the risks frequently
associated with the speculative use of options and futures transactions. While
the Company's use of hedging strategies is intended to reduce the volatility of
the net asset value of its shares, the net asset value of the Company's shares
will fluctuate. There can be no assurance that the Company's hedging
transactions will be effective. The following is further information relating to
portfolio strategies involving options and futures the Company may utilize.
Hedging Investment and Interest Rate Risks. The Company may write (i.e.,
sell) covered call options on the equity securities in which it may invest and
may enter into closing purchase transactions with respect to certain of such
options. Covered call options serve as a partial hedge against the decline in
price of the underlying security. A covered call option is an option where the
Company, in return for a premium, gives another party a right to buy specified
securities owned by the Company at a specified future date and price set at the
time of the contract. By writing covered call options, the Company gives up the
opportunity, while the option is in effect, to profit from any price increase in
the underlying security above the option exercise price. In addition, the
Company's ability to sell the underlying security will be limited while the
option is in effect unless the Company effects a closing purchase transaction. A
closing purchase transaction cancels out the Company's position as the writer of
an option by means of an offsetting purchase of an identical option prior to the
expiration of the option it has written. The writer of a covered call option has
no control over when he may be required to sell his securities since he may be
assigned an exercise notice at any time prior to the
4
<PAGE> 53
termination of his obligation as a writer. If an option expires unexercised, the
writer realizes a gain in the amount of the premium. Such a gain, of course, may
be offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer realizes a gain or loss
from the sale of the underlying security.
The Company may also purchase put options to hedge against a decline in the
market value of its equity holdings. By buying a put, the Company has a right to
sell the underlying security at the exercise price, thus limiting the Company's
risk of loss through a decline in the market value of the security until the put
option expires. The amount of any appreciation in the value of the underlying
security will be offset partially by the amount of the premium paid for the put
option and any related transaction costs. Prior to its expiration, a put option
may be sold in a closing sale transaction, and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the put option plus the related transaction cost. A closing sale transaction
cancels out the Company's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option it
has purchased.
The Company also may engage in transactions in stock index options and
futures, financial futures in U.S. and foreign agency and government securities
and corporate debt securities, and related options on such futures. A futures
contract is an agreement between two parties to buy and sell a security or, in
the case of an index-based futures contract, to make and accept a cash
settlement for a set price on a future date. A majority of transactions in
futures contracts, however, do not result in the actual delivery of the
underlying instrument or cash settlement but are settled through liquidation,
i.e., by entering into an offsetting transaction. Futures contracts have been
designed by boards of trade which have been designated "contracts markets" by
the Commodity Futures Trading Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is typically between 2% and 15% of the value of the
futures contract, must be deposited with the broker. This amount is known as
"initial" margin and represents a "good faith" deposit assuring the performance
of both the purchaser and seller under the futures contract. Subsequent payments
to and from the broker, called "variation margin", are required to be made on a
daily basis as the price of the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable, a process known
as "mark to the market". At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.
The Company has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its strategy
of investing in futures contracts. Section 17(f) relates to the custody of
securities and other assets of an investment company and may be deemed to
prohibit certain arrangements between the Company and commodities brokers with
respect to initial and variation margin. Section 18(f) of the Investment Company
Act prohibits an open-end investment company such as the Company from issuing a
"senior security" other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a futures contract may be a "senior
security" under the Investment Company Act.
5
<PAGE> 54
Risk Factors in Options and Futures Transactions. Utilization of options
and futures transactions involves the risk of imperfect correlation in movements
in the prices of options and futures contracts and movements in the prices of
the securities or currencies which are the subject of the hedge. If the price of
the options and futures contract moves more or less than the prices of the
hedged securities or currencies, the Company will experience a gain or loss
which will not be completely offset by movements in the prices of the subject of
the hedge. The successful use of options and futures also depends on the
Investment Adviser's ability to predict correctly price movements in the market
involved in a particular options or futures transaction.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Company will enter into an option or futures transaction on an
exchange only if there appears to be a liquid secondary market for such options
or futures. However, there can be no assurance that a liquid secondary market
will exist for any particular call or put option or futures contract at any
specific time. Thus, it may not be possible to close an option or futures
position. In the case of a futures position or an option on a futures position
written by the Company, in the event of adverse price movements, the Company
would continue to be required to make daily cash payments of variation margin.
In such situations, if the Company has insufficient cash, it may have to sell
portfolio securities to meet daily variation margin requirements at a time when
it may be disadvantageous to do so. In addition, the Company may be required to
take or make delivery of the security or currency underlying futures contracts
it holds. The inability to close options and futures positions also could have
an adverse impact on the Company's ability to effectively hedge its portfolio.
There is also the risk of loss by the Company of margin deposits in the event of
bankruptcy of a broker with whom the Company has an open position in a futures
contract or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.
The exchanges on which the Company intends to conduct options transactions
have generally established limitations governing the maximum number of call or
put options on the same underlying currency (whether or not covered) which may
be written by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). "Trading limits" are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose other sanctions or restrictions. The Investment Adviser does not believe
that these trading and position limits will have any adverse impact on the
portfolio strategies for hedging the Company's portfolio.
Hedging Foreign Currency Risks. Generally, the foreign exchange
transactions of the Company will be conducted on a spot, i.e., cash, basis at
the spot rate then prevailing for purchasing or selling currency in the foreign
exchange market. This rate under normal market conditions differs from the
prevailing exchange rate in an amount generally less than 1/10 of 1% due to the
costs of converting from one currency to another. However, the Company has
authority to deal in forward foreign exchange between currencies of Far Eastern,
European and Western Pacific countries and the dollar as a hedge against
possible variations in the foreign exchange rates between these currencies. This
is accomplished through contractual agreements to purchase or to sell a
specified currency at a specified future date and price set at the time of the
contract. The Company's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Company accruing in
connection with the purchase and sale of its portfolio securities, the sale and
redemption of shares of the Company or the payment of dividends and
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<PAGE> 55
distributions by the Company. Position hedging is the sale of forward foreign
currency with respect to portfolio security positions denominated or quoted in
such foreign currency. The Company will not speculate in forward foreign
exchange. All dealings in forward exchange will be limited to contracts
involving currencies of Far Eastern, European and Western Pacific countries and
the dollar. The Company may not position hedge with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. If the Company enters into a
position hedging transaction, its custodian will place cash or liquid debt
securities in a separate account of the Company in an amount equal to the value
of the Company's total assets committed to the consummation of such forward
contract. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Company's commitment with
respect to such contracts. The Company will not attempt to hedge all of its
portfolio positions and will enter into such transaction only to the extent, if
any, deemed appropriate by the Investment Adviser of the Company. The Company
will not enter into a position hedging commitment if, as a result thereof, the
Company would have more than 15% of the value of its assets committed to such
contracts. The Company will not enter into a forward contract with a term of
more than one year.
As discussed in the Prospectus, the Company may also purchase or sell
listed or OTC foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the price of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Company to hedge against a devaluation that is so
generally anticipated that the Company is not able to contract to sell the
currency at a price above the devaluation level it anticipates. It is possible
that, under certain circumstances, the Company may have to limit its currency
transactions to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"); in this regard, the Company
presently intends to limit its gross income from currency hedging transactions
to less than 10% of its gross income in any taxable year until such time as the
Company determines that income from the transaction is not subject to this
restriction. The cost to the Company of engaging in foreign currency
transactions varies with such factors as the currencies involved, the length of
the contract period and the market conditions then prevailing. Since
transactions in foreign currency exchange usually are conducted on a principal
basis, no fees or commissions are involved.
The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such as
the Company. If such restrictions should be reinstituted it might become
necessary for the Company to invest all or substantially all of its assets in
U.S. securities. In such event, the Company would review its investment
objective and investment policies to determine whether changes are appropriate.
The Company's ability and decisions to purchase or sell portfolio
securities may be affected by laws or regulations relating to the convertibility
and repatriation of assets. Because the shares of the Company are redeemable on
a daily basis in U.S. dollars, the Company intends to manage its portfolio so as
to give a reasonable assurance that it will be able to obtain U.S. dollars to
the extent necessary to meet anticipated redemptions. Under present conditions,
it is not believed that these considerations will have any significant effect on
its portfolio strategy.
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<PAGE> 56
OTHER INVESTMENT POLICIES AND PRACTICES
Non-Diversified Status. The Company is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Company is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Company's investments will be limited,
however, in order to qualify for the special tax treatment afforded regulated
investment companies under the Code. See "Dividends, Distributions and Taxes".
To qualify, the Company will comply with certain requirements, including
limiting its investments so that at the close of each quarter of the taxable
year (i) not more than 25% of the market value of the Company's total assets
will be invested in the securities of a single issuer, and (ii) with respect to
50% of the market value of its total assets, not more than 5% of the market
value of its total assets will be invested in the securities of a single issuer,
and the Company will not own more than 10% of the outstanding voting securities
of a single issuer. A fund which elects to be classified as "diversified" under
the Investment Company Act must satisfy the foregoing 5% and 10% requirements
with respect to 75% of its total assets. To the extent that the Company assumes
large positions in the securities of a small number of issuers, the Company's
net asset value may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers, and the Company may be more susceptible to any single
economic, political or regulatory occurrence than a diversified company.
INVESTMENT RESTRICTIONS
In addition to the investment restrictions set forth in the Prospectus the
Company 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 Company's outstanding voting securities (which
for this purpose and under the Investment Company Act means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares).
Under the fundamental investment restrictions, the Company may not:
1. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Company may invest in securities directly or
indirectly secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
4. 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 Company 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 Company's Prospectus and
Statement of Additional Information, as they may be amended from time to
time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that (i) the Company 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),
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<PAGE> 57
(ii) the Company may, to the extent permitted by applicable law, borrow up
to an additional 5% of its total assets for temporary purposes (currently
Ohio regulations prohibit any borrowing in excess of 33 1/3% of the
Company's total assets), (iii) the Company may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) the Company may purchase securities on margin
to the extent permitted by applicable law. The Company may not pledge its
assets other than to secure such borrowings or, to the extent permitted by
the Company's investment policies as set forth in its Prospectus and
Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers except insofar as the
Company technically may be deemed an underwriter under the Securities Act
in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to
the extent that the Company may do so in accordance with applicable law and
the Company's Prospectus and Statement of Additional Information, as they
may be amended from time to time, and without registering as a commodity
pool operator under the Commodity Exchange Act.
In addition, the Company has adopted non-fundamental restrictions which may
be changed by the Board of Directors. Under the non-fundamental investment
restrictions, the Company may not:
a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law.
b. Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law. The Company currently does not
intend to engage in short sales, except short sales "against the box".
c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Company
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent the laws of any
state in which the Company's shares are registered or qualified for sale
require a lower limitation, the Company will observe such limitation. As of
the date hereof, therefore, the Company will not invest more than 10% of
its total assets in securities which are subject to this investment
restriction (c). Securities purchased in accordance with Rule 144A under
the Securities Act (a "Rule 144A security") and determined to be liquid by
the Company's Board of Directors are not subject to the limitations set
forth in this investment restriction (c).
d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Company's net assets. Included within such limitation, but not to
exceed 2% of the Company's net assets, are warrants which are not listed on
the New York Stock Exchange (the "NYSE") or American Stock Exchange or a
major foreign exchange. For purposes of this restriction, warrants acquired
by the Company in units or attached to securities may be deemed to be
without value.
e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Company's total assets would be invested in such
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securities. This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Company, the officers and general
partner of the Investment Adviser, the directors of such general partner or
the officers and directors of any subsidiary thereof each owning
beneficially more than one-half of one percent of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer.
g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases, or exploration or development programs,
except that the Company may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.
h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Company's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.
i. Notwithstanding fundamental investment restriction (6) above,
borrow amounts in excess of 10% of its total assets, taken at market value,
and then only from banks as a temporary measure for extraordinary or
emergency purposes such as the redemption of Company shares. In addition,
the Company will not purchase securities while borrowings are outstanding
except to exercise prior commitments and to exercise subscription rights.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Company has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of such
transactions, the sum of the market value of OTC options currently outstanding
which are held by the Company, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Company
and margin deposits on the Company's existing OTC options on futures contracts
exceed 10% of the net assets of the Company, taken at market value, together
with all other assets of the Company which are illiquid or are not otherwise
readily marketable. However, if an OTC option is sold by the Company to a
primary U.S. Government securities dealer recognized by the Federal Reserve Bank
of New York and if the Company has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Company will treat as illiquid such amount of the underlying securities as is
equal to the repurchase price less the amount by which the option is
"in-the-money" (i.e., current market value of the underlying securities minus
the option's strike price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a multiple of the premium
received for the option, plus the amount by which the option is "in-the-money".
This policy as to OTC options is not a fundamental policy of the Company and may
be amended by the Board of Directors of the Company without the approval of the
Company's shareholders. However, the Company will not change or modify this
policy prior to the change or modification by the Commission staff of its
position.
Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Company, the Company is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions and
Brokerage". Without such an exemptive order, the Company would be prohibited
from engaging in portfolio transactions with Merrill Lynch or any of its
affiliates acting as principal
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and from purchasing securities in public offerings which are not registered
under the Securities Act in which such firm or any of its affiliates participate
as an underwriter or dealer.
The investment restrictions set forth in the Prospectus contain an
exception that permits the Company to purchase securities pursuant to the
exercise of subscription rights, subject to the condition that such purchase
will not result in the Company ceasing to be a diversified investment company
under the Code. Japanese and European corporations frequently issue additional
capital stock by means of subscription rights offerings to existing shareholders
at a price substantially below the market price of the shares. The failure to
exercise such rights would result in the Company's interest in the issuing
company being diluted. The market for such rights is not well developed, and
accordingly, the Company may not always realize full value on the sale of
rights. Therefore, the exception applies in cases where the limits set forth in
the investment restrictions in the Prospectus would otherwise be exceeded by
exercising rights or have already been exceeded as a result of fluctuations in
the market value of the Company's portfolio securities with the result that the
Company would otherwise be forced either to sell securities at a time when it
might not otherwise have done so or to forego exercising the rights.
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Company,
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 executive
officer and Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.
ARTHUR ZEIKEL (64) -- President and Director(1)(2) -- President of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1977; President of Fund Asset Management, L.P. ("FAM")
(which term as used herein includes its corporate predecessors) since 1977;
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since
1990; Director of Merrill Lynch Funds Distributor, Inc. (the "Distributor")
since 1977.
DONALD CECIL (69) -- Director(2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.
EDWARD H. MEYER (69) -- Director(2) -- 777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors Inc. and Harman International Industries, Inc.
CHARLES C. REILLY (65) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; former
Senior Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990;
Adjunct Professor, Columbia University Graduate School of Business, 1990;
Adjunct Professor, Wharton School, University of Pennsylvania, 1990; Partner,
Small Cities Cablevision, Inc.
RICHARD R. WEST (58) -- Director(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, Dean from 1984 to 1993, and currently Dean
Emeritus of New York University Leonard N. Stern
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School of Business Administration; Director of Bowne & Co., Inc. (financial
printers), Vornado, Inc. (real estate holding company), Smith-Corona Corporation
(manufacturer of typewriters and word processors) and Alexander's Inc. (real
estate company).
EDWARD D. ZINBARG (61) -- Director(2) -- 5 Hardwell Road, Short Hills, New
Jersey 07078-2117. 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.
TERRY K. GLENN (55) -- Executive Vice President(1)(2) -- Executive Vice
President of the Investment Adviser and FAM since 1983; Executive Vice President
and Director of Princeton Services since 1993; President of the Distributor
since 1986 and Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
NORMAN R. HARVEY (62) -- Senior Vice President(1)(2) -- Senior Vice
President of the Investment Adviser and FAM since 1982.
JAMES K. RENCK (39) -- Vice President(1) -- Vice President of the
Investment Adviser and Portfolio Manager since 1986; Assistant Vice President of
the Investment Adviser and Associate Portfolio Manager from 1985 to 1986; Fund
Analyst for the Investment Adviser from 1983 to 1985.
DONALD C. BURKE (36) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Investment Adviser since 1990.
GERALD M. RICHARD (47) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Investment Adviser and FAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer since 1984.
ROBERT HARRIS (44) -- Secretary(1)(2) -- Vice President of the Investment
Adviser since 1984 and attorney associated with the Investment Adviser since
1980; Secretary of the Distributor since 1982.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Company.
(2) Such Director or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or its
affiliate, FAM, acts as investment adviser.
At June 30, 1996, the Directors and officers of the Company as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Company. At such date, Mr. Zeikel, a Director and officer of the Company, and
the other officers of the Company owned less than 1% of the outstanding shares
of common stock of ML & Co.
COMPENSATION OF DIRECTORS
The Company pays each Director not affiliated with the Investment Adviser
(each, a "non-affiliated Director") a fee of $3,500 per year plus $500 per
meeting attended, together with such Director's actual out-of-pocket expenses
relating to attendance at meetings. The Company also compensates members of its
Audit and Nominating Committee (the "Committee"), which consists of all the
non-affiliated Directors, at a rate of $500 per Committee meeting attended. The
Chairman of the Committee receives an additional fee of $250 per Committee
meeting attended. For the fiscal year ended March 31, 1996, fees and expenses
paid to non-affiliated Directors aggregated $20,542.
The following table sets forth for the fiscal year ended March 31, 1996,
compensation paid by the Company to the non-affiliated Directors and for the
calendar year ended December 31, 1995 the aggregate
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compensation paid by all registered investment companies advised by the
Investment Adviser and its affiliate, FAM ("MLAM/FAM Advised Funds") to the
non-affiliated Directors.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
PENSION OR FROM COMPANY
RETIREMENT AND OTHER
BENEFITS ACCRUED MLAM/FAM
AS PART OF ADVISED FUNDS
COMPENSATION COMPANY'S PAID TO
NAME OF DIRECTOR FROM COMPANY EXPENSES DIRECTORS(1)
---------------- ------------ ----------------- --------------
<S> <C> <C> <C>
Donald Cecil.................... $4,250 None $271,850
Edward H. Meyer................. $3,750 None $239,225
Charles C. Reilly............... $3,750 None $269,600
Richard R. West................. $3,750 None $294,600
Edward D. Zinbarg............... $3,750 None $155,063
</TABLE>
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(1) The Directors serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (36 registered investment companies consisting of 36 portfolios); Mr.
Meyer (36 registered investment companies consisting of 36 portfolios); Mr.
Reilly (41 registered investment companies consisting of 54 portfolios); Mr.
West (41 registered investment companies consisting of 54 portfolios) and
Mr. Zinbarg (18 registered investment companies consisting of 18
portfolios).
MANAGEMENT AND ADVISORY ARRANGEMENTS
Reference is made to "Management of the Company--Advisory and Management
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Company.
Securities held by the Company also may be held by, or be appropriate
investments for, other funds or other investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Securities may be held
by, or be appropriate investments for, the Company as well as other clients of
the Investment Adviser or its affiliates. Because of different objectives or
other factors, a particular security may be bought for one or more clients when
one or more clients are selling the same security. If purchases or sales of
securities by the Investment Adviser for the Company or other funds for which it
acts as investment adviser or for its other advisory clients arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Investment Adviser or its affiliates during the same period
may increase the demand for securities being purchased or supply of securities
being sold, there may be an adverse effect on price.
The Company has entered into an Investment Advisory Agreement with the
Investment Adviser. As discussed in the Prospectus the Company will pay the
Investment Adviser a fee for its services at the annual rate of 1.0% of the
Company's average daily net assets. For the fiscal years ended March 31, 1994,
1995 and 1996, the fees paid by the Company to the Investment Adviser aggregated
$2,476,639, $7,146,254 and $10,196,193, respectively.
The State of California imposes limitations on the expenses of the Company.
These expense limitations require that the Investment Adviser reimburse the
Company in an amount necessary to prevent the ordinary operating expenses of the
Company (excluding interest, taxes, distribution fees, brokerage fees and
commissions and extraordinary charges such as litigation costs) from exceeding
2.5% of the Company's first $30 million of average daily net assets, 2.0% of the
next $70 million of average daily net assets and 1.5% of the remaining average
daily net assets. The Investment Adviser's obligation to reimburse the Company
is limited to the amount of the investment advisory fee. No fee payment will be
made to the Investment Adviser during any fiscal year which will cause such
expenses to exceed the most restrictive expense limitation applicable at
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the time of such payment. For the fiscal years ended March 31, 1994, 1995 and
1996, no reimbursement of expenses was required pursuant to the applicable
expense limitations.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and furnish
office space for officers and employees of the Company connected with investment
and economic research, trading and investment management of the Company, as well
as the fees of all Directors of the Company who are affiliated persons of the
Investment Adviser or any of its affiliates. The Company pays all other expenses
incurred in its operation including, among other things, taxes; expenses for
legal and auditing services; costs of printing proxies, stock certificates,
shareholders' reports and prospectuses and statements of additional information
(except to the extent paid by the Distributor); charges of the custodian, any
sub-custodian and transfer agent; expenses of redemption of shares; Commission
fees; expenses of registering the shares under Federal, state or foreign laws;
fees and expenses of unaffiliated Directors; accounting and pricing costs
(including the daily calculation of net asset value); insurance; interest;
brokerage costs; litigation and other extraordinary or non-recurring expenses;
and other expenses properly payable by the Company. Accounting services are
provided to the Company by the Investment Adviser, and the Company reimburses
the Investment Adviser for its costs in connection with such services on a
semiannual basis. For the fiscal years ended March 31, 1995 and 1996, the amount
of such reimbursement was $78,659 and $198,451, respectively. As required by the
Company's distribution agreements, its underwriters will pay the promotional
expenses of the Company incurred in connection with the offering of its shares.
Certain expenses in connection with the distribution of Class B, Class C and
Class D shares will be financed by the Company pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares -- Distribution Plans".
The Investment Adviser is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Adviser 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.
Duration and Termination. Unless earlier terminated as described herein,
the Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Company or by a majority
of the outstanding shares of the Company and (b) by a majority of the Directors
who are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of the Company.
PURCHASE OF SHARES
Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Company shares.
The Company issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Company represents identical interests
in the investment portfolio of the Company and has the same rights, except that
Class B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the
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<PAGE> 63
Rule 12b-1 distribution plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid. Each class has
different exchange privileges. See "Shareholder Services -- Exchange Privilege".
The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by the Investment Adviser or its affiliate, FAM. Funds advised by
the Investment Adviser or FAM which utilize the Merrill Lynch Select PricingSM
System are referred to herein as "MLAM-advised mutual funds".
The Company has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Company (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 Company. 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 Investment Advisory Agreement
described above.
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
The Company sells its Class A and Class D shares through the Distributor
and Merrill Lynch, as dealers. During the fiscal year ended March 31, 1994, the
Company sold 12,878,911 Class A shares for aggregate net proceeds to the Company
of $66,764,420. The gross sales charges for the sale of Class A shares of the
Company for that year were $735,190, of which $690,731 was received by Merrill
Lynch and $44,459 was received by the Distributor. During the fiscal year ended
March 31, 1995, the Company sold 31,862,508 Class A shares for aggregate net
proceeds to the Company of $174,435,046. The gross sales charges for the sale of
Class A shares of the Company for that year were $1,567,969, of which $1,474,578
was received by Merrill Lynch and $93,391 was received by the Distributor.
During the fiscal year ended March 31, 1996, the Company sold 14,643,437 Class A
shares for aggregate net proceeds to the Company of $80,491,145. The gross sales
charges for the sale of Class A shares of the Company for that year were
$90,039, of which $83,635 was received by Merrill Lynch and $6,404 was received
by the Distributor. During the fiscal period October 21, 1994 (commencement of
operations) to March 31, 1995, the Company sold 8,332,225 Class D shares for
aggregate net proceeds to the Company of $43,660,136. The gross sales charges
for the sale of Class D shares of the Company for that period were $647,654, of
which $605,730 was received by Merrill Lynch and $41,924 was received by the
Distributor. During the fiscal year ended March 31, 1996, the Company sold
11,068,175 Class D shares for aggregate net proceeds to the Company of
$62,166,617. The gross sales charges for the sale of Class D shares of the
Company for that year were $380,496, of which $357,623 was received by Merrill
Lynch and $22,873 was received by the Distributor.
The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Code) although more than one beneficiary is involved. The term "purchase"
also includes purchases by any "company", as that term is defined in the
Investment Company Act, but does not include purchases by any such company which
has not been in existence for at least six months or which has no purpose other
than the purchase of shares of the Company or
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<PAGE> 64
shares of other registered investment companies at a discount. The term
"purchaser" shall not include purchases by any group of individuals whose sole
organizational nexus is that the participants therein are credit cardholders of
a company, policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser. The term "purchase" also
includes purchases by employee benefit plans not qualified under Section 401 of
the Code, including purchases by employees or by employers on behalf of
employees, by means of a payroll deduction plan or otherwise, of shares of the
Company. Purchases by such a company or non-qualified employee benefit plan will
qualify for the quantity discounts discussed above only if the Company and the
Distributor are able to realize economies of scale in sales effort and sales
related expense by means of the company, employer or plan making the Company's
Prospectus available to individual investors or employees and forwarding
investments by such persons to the Company and by any such employer or plan
bearing the expense of any payroll deduction plan.
Closed-End Fund Investment Option. Class A shares of the Company and other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or its
affiliate, 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 their closed-end fund
shares of common stock in Eligible Class A Shares, if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994, and wish to reinvest the net proceeds
from a sale of their closed-end fund shares are offered Class A shares (if
eligible to buy Class A shares) or Class D shares of the Company and other
MLAM-advised mutual funds ("Eligible Class D Shares"), if the following
conditions are met. First, the sale of the closed-end fund shares must be made
through Merrill Lynch, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A or Class D Shares. Second, the closed-end fund
shares must either have been acquired in the initial public offering or be
shares representing dividends from shares of common stock acquired in such
offering. Third, the closed-end fund shares must have been continuously
maintained in a Merrill Lynch securities account. Fourth, there must be a
minimum purchase of $250 to be eligible for the investment option.
Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Company. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Company 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 Company, except that shareholders
already owning Class A shares of the Company will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order to
exercise this investment option, a shareholder of one of the above-referenced
continuously offered closed-end funds (an "eligible fund") must sell his or her
shares of common stock of the eligible fund (the "eligible shares") back to the
eligible fund in connection with a tender offer conducted by the eligible fund
and reinvest the proceeds immediately in the designated class of shares of the
Company. This investment option is available only with respect to eligible
shares as to which no Early Withdrawal Charge or CDSC (each as defined in the
eligible fund's prospectus) is applicable. Purchase orders from eligible fund
shareholders wishing to exercise this investment option will be accepted only on
the day that the related tender offer terminates and will be effected at the net
asset value of the designated class of the Company on such day.
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<PAGE> 65
REDUCED INITIAL SALES CHARGES -- CLASS A AND CLASS D SHARES
Right of Accumulation. The reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Company 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 Company and of other MLAM-advised mutual funds. For any such
right of accumulation to be made available, the Distributor must be provided at
the time of purchase, by the purchaser or the purchaser's securities dealer,
with sufficient information to permit confirmation of qualification, and
acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit-sharing, or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.
Letter of Intention. Reduced sales charges are applicable to a purchase
aggregating $25,000 or more of Class A or Class D shares of the Company or any
other MLAM-advised mutual funds made within a thirteen-month period starting
with the first purchase pursuant to a Letter of Intention in the form provided
in the Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Company's transfer agent. The Letter of Intention
is not available to employee benefit plans for which Merrill Lynch provides plan
participant record-keeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares, but its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter 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
Company and of other MLAM-advised mutual funds presently held, at cost or
maximum offering price (whichever is higher), on the date of the first purchase
under the Letter of Intention, may be included as a credit toward 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
purchased does not equal the amount stated in the Letter of Intention (minimum
of $25,000), the investor will be notified and must pay, within 20 days of the
expiration of such Letter, the difference between the sales charge on the Class
A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to five percent of the intended amount will be held in escrow
during the 13-month period (while remaining registered in the name of the
purchaser) for this purpose. The first purchase under the Letter of Intention
must be at least five percent of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the reduced percentage sales charge
which would be applicable to a single purchase equal to the total dollar value
of the shares then being purchased under such Letter, but there will be no
retroactive reduction of the sales charges on any previous purchase.
The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter. An exchange from a MLAM-advised
money market fund into the Company that creates a sales charge will count toward
completing a new or existing Letter of Intention from the Company.
Merrill Lynch BlueprintSM Program. Class D shares of the Company are
offered to participants in the Merrill Lynch BlueprintSM Program ("Blueprint").
In addition, participants in Blueprint who own Class A shares of the Company may
purchase additional Class A shares of the Company through Blueprint. Blueprint
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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 Company 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 Company are offered at net asset
value plus a sales charge of 1/2 of 1% for corporate or group IRA programs
placing orders to purchase their Class A or Class D shares through Blueprint.
Services, including the exchange privilege, available to Class A and Class D
investors through Blueprint, however, may differ from those available to other
Class A or Class D share investors.
Class A and Class D shares are offered at net asset value to participants
in Blueprint through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from 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
Company may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum initial
or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint SM Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
TMA (SM) Managed Trusts. Class A shares are offered to TMA (SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.
Employee Access Accounts (SM). Class A or Class D shares are offered at net
asset value to Employee Access Accounts available through qualified employers
that provide employer-sponsored retirement or savings plans that are eligible to
purchase such shares at net asset value. The initial minimum for such accounts
is $500 except that the initial minimum for shares purchased for such accounts
pursuant to the Automatic Investment Program is $50.
Purchase Privilege of Certain Persons. Directors of the Company, members of
the Boards of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries", when used herein with respect to ML &
Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly-owned and controlled by ML & Co.) and their directors and employees, and
any trust, pension, profit-sharing or other benefit plan for such persons may
purchase Class A shares of the Company at net asset value.
Class D shares of the Company are offered at net asset value, without sales
charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that it
will purchase Class D shares of the Company with proceeds from a redemption of a
mutual fund that was sponsored by the financial consultant's previous firm and
was subject to a sales charge either at the time of purchase or on a deferred
basis; and second, the investor also must establish that such redemption had
been made within 60 days prior to the investment in the Company, and the
proceeds from the redemption had been maintained in the interim in cash or a
money market fund.
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<PAGE> 67
Class D shares of the Company are also offered at net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Company with
proceeds from a redemption of shares of such other mutual fund and such fund was
subject to a sales charge either at the time of purchase or on a deferred basis;
and, second such purchase of Class D shares must be made within 90 days after
such notice.
Class D shares of the Company will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: first, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Company with proceeds from the redemption of such
shares of the 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.
Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may in appropriate cases be adjusted to
reduce possible adverse tax consequences to the Company which might result from
an acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Company. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Company; (ii) are acquired for
investment and not for resale (subject to the understanding that the disposition
of the Company's portfolio securities shall at all times remain within its
control); and (iii) are liquid securities, the value of which is readily
ascertainable, which are not restricted as to transfer either by law or
liquidity of market (except that the Company may acquire through such
transactions restricted or illiquid securities to the extent the Company does
not exceed the applicable limits on acquisition of such securities set forth
under "Investment Objective and Policies" herein).
Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available
toll-free from Merrill Lynch Business Financial Services at (800) 237-7777.
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<PAGE> 68
DISTRIBUTION PLANS
Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Company to the Distributor with
respect to such classes.
Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. Among
other things, each Distribution Plan provides that the Distributor shall provide
and the Directors shall review quarterly reports of the disbursement of the
account maintenance fees and/or distribution fees paid to the Distributor. In
their consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Company and to its related class of shareholders. Each
Distribution Plan further provides that, so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Company, as defined in the Investment Company Act
(the "Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is
reasonable likelihood that such Distribution Plan will benefit the Company and
its related class of shareholders. Each Distribution Plan can be terminated at
any time, without penalty, by the vote of a majority of the Independent
Directors or by the vote of the holders of a majority of the outstanding related
class of voting securities of the Company. A Distribution Plan cannot be amended
to increase materially the amount to be spent by the Company without the
approval of the related class of shareholders, and all material amendments are
required to be approved by the vote of the Directors, including a majority of
the Independent Directors who have no direct or indirect financial interest in
such Distribution Plan, cast in person at a meeting called for that purpose.
Rule 12b-1 further requires that the Company preserve copies of each
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of such Distribution Plan or such report, the
first two years in an easily accessible place.
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
The maximum sales charge rule in the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges such as the distribution fee and the contingent
deferred sales charge ("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 Company, the maximum sales charge rule
limits the aggregate of distribution fee payments and CDSCs payable by the
Company 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 Company
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Company rather than to the
Distributor; however, the Company will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum
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<PAGE> 69
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 March 31, 1996
with respect to the Class B and Class C shares of the Company indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares, the Distributor's voluntary maximum.
<TABLE>
<CAPTION>
DATA CALCULATED AS OF MARCH 31, 1996
--------------------------------------------------------------------------------------
ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- --------- --------- ------- -------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Class B Shares, for the period April
27, 1992 (commencement of
operations) to March 31, 1996:
Under NASD Rule As Adopted........ $681,091 $42,568 $ 5,456 $48,024 $ 13,937 $34,087 $4,154
------- ------- ------ ------- ------- ------- ------
Under Distributor's Voluntary
Waiver.......................... $681,091 $42,568 $ 3,406 $45,974 $ 13,937 $32,037 $4,154
------- ------- ------ ------- ------- ------- ------
Class C Shares, for the period
October 21, 1994 (commencement of
operations) to March 31, 1996:
Under NASD Rule As Adopted........ $46,066 $ 2,879 $ 20 $2,899 $ 351 $ 2,548 $ 233
------- ------- ------ ------- ------- ------- ------
</TABLE>
- ---------------
(1) Purchase price of all eligible Class B or Class C shares sold during periods
indicated other than shares acquired through dividend reinvestment and the
exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to July
7, 1993, under the distribution plan in effect at that time, at the 1.00%
rate, 0.75% of average daily net assets has been treated as a distribution
fee and 0.25% of average daily net assets has been deemed to have been a
service fee and not subject to the NASD maximum sales charge rule. See
"Purchase of Shares--Distribution Plans" in the Prospectus.
(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the NASD maximum or, with respect to Class B shares, the
voluntary maximum.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Company shares.
The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the 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 Company is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of shareholders
of the Company.
The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Company at such time.
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<PAGE> 70
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares", while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in connection with certain
post-retirement withdrawals from an Individual Retirement Account ("IRA") or
other retirement plan or following the death or disability of a Class B
shareholder. Redemptions for which the waiver applies are: (a) any partial or
complete redemption in connection with a tax-free distribution following
retirement under a tax-deferred retirement plan or attaining age 59 1/2 in the
case of an IRA or other retirement plan, or part of a series of equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) or any redemption resulting from the tax-free return of an excess
contribution to an IRA; or (b) any partial or complete redemption following the
death or disability (as defined in the Code) of a Class B shareholder (including
one who owns the Class B shares as joint tenant with his or her spouse),
provided the redemption is requested within one year of the death or initial
determination of disability. For the fiscal years ended March 31, 1994, 1995 and
1996 the Distributor received CDSCs of $315,184, $1,118,846 and $2,839,725,
respectively, with respect to the redemption of Class B shares, all of which
were paid to Merrill Lynch. Similarly, for the fiscal period October 21, 1994
(commencement of operations) to March 31, 1995 and for the fiscal year ended
March 31, 1996, the Distributor received CDSCs of $4,037 and $54,329,
respectively, with respect to the redemption of Class C shares, all of which
were paid to Merrill Lynch.
Merrill Lynch BlueprintSM Program. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations and
credit unions. Class B shares of the Company 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 investors in Class B shares. Orders for purchases
and redemptions of Class B shares of the Company 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 purchases through
Blueprint. There is no minimum initial or subsequent purchase requirement for
investors who are part of the 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.
Retirement Plans. Any Retirement Plan which does not meet the
qualifications to purchase Class A or Class D shares at net asset value has the
option of purchasing Class A or Class D shares at the sales charge schedule
disclosed in the Prospectus, or if the Retirement Plan meets the following
requirements, then it may purchase Class B shares with a waiver of the CDSC upon
redemption. The CDSC is waived for any Eligible 401(k) Plan redeeming Class B
shares. "Eligible 401(k) Plan" is defined as a retirement plan qualified under
Section 401(k) of the Code with a salary reduction feature offering a menu of
investments to plan participants. The CDSC is also waived for redemptions from a
401(a) plan qualified under the Code, provided, however, that each such plan has
the same or an affiliated sponsoring employer as an Eligible 401(k) Plan
purchasing Class B shares of MLAM-advised mutual funds ("Eligible 401(a) Plan").
Other tax qualified retirement plans within the meaning of Section 401(a) or
403(b) of the Code which are provided specialized services (e.g., plans whose
participants may direct on a daily basis their plan allocations among a menu of
investments) by independent administration firms contracted through Merrill
Lynch also may purchase Class B shares with a waiver of the CDSC. The CDSC is
also waived for any Class B shares which
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<PAGE> 71
are purchased by an Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled
over into a Merrill Lynch or Merrill Lynch Trust Company custodied Individual
Retirement Account and held in such account at the time of redemption. The Class
B CDSC also is waived for any Class B shares which are purchased by a Merrill
Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the time
of redemption. The minimum initial and subsequent purchase requirements are
waived in connection with all the above referenced Retirement Plans.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Reference is made to "Investment Objective and Policies--Other Investment
Practices" in the Prospectus.
Subject to policies established by the Board of Directors of the Company,
the Investment Adviser is primarily responsible for the execution of the
Company's portfolio transactions. In executing such transactions, the Investment
Adviser seeks to obtain the best net results for the Company, 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 involved and the firm's risk in positioning a block of
securities. While the Investment Adviser generally seeks reasonably competitive
commission rates, the Company does not necessarily pay the lowest commission or
spread available. The Company has no obligation to deal with any broker or group
of brokers in the execution of transactions in portfolio securities. Subject to
obtaining the best price and execution, brokers who provide supplemental
investment research to the Investment Adviser may receive orders for
transactions by the Company. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement, and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information. It is possible that certain of the supplementary
investment research so received will primarily benefit one or more other
investment companies or other accounts for which investment discretion is
exercised. Conversely, the Company may be the primary beneficiary of the
research or services received as a result of portfolio transactions effected for
such other accounts or investment companies. In addition, consistent with the
Rules of Fair Practice of the NASD and policies established by the Directors of
the Company, the Investment Adviser may consider sales of shares of the Company
as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Company.
The Company anticipates that its brokerage transactions involving
securities of companies domiciled in countries other than the U.S. will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the
Company will endeavor to achieve the best net results in effecting its portfolio
transactions. There is generally less government supervision and regulation of
foreign stock exchanges and brokers than in the United States.
Foreign equity securities may be held by the Company in the form of ADRs,
EDRs, GDRs or securities convertible into foreign equity securities. ADRs, EDRs
and GDRs may be listed on stock exchanges or traded in over-the-counter markets
in the United States or Europe, as the case may be. ADRs, like other securities
traded in the U.S., as well as GDRs traded in the United States, will be subject
to negotiated commission rates.
The Company may invest in securities traded in the over-the-counter markets
and intends to deal directly with the dealers who make markets in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the
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<PAGE> 72
Company and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Company 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 over-the-counter market usually
involve transactions with dealers acting as principal for their own account, the
Company will not deal with affiliated persons, including Merrill Lynch and its
affiliates, in connection with such transactions. However, affiliated persons of
the Company may serve as its broker in listed or over-the-counter 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. See "Investment Objective and Policies--Investment
Restrictions".
The Board of Directors has considered the possibility of seeking to
recapture for the benefit of the Company brokerage commissions and other
expenses of possible portfolio transactions by conducting portfolio transactions
through affiliated entities. For example, brokerage commissions received by
affiliated brokers could be offset against the advisory fee paid by the Company.
After considering all factors deemed relevant, the Board of Directors made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.
Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which 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 a statement disclosing 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 Company 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 Company, and annual statements as to aggregate compensation
will be provided to the Company.
For the fiscal year ended March 31, 1994, the Company paid total brokerage
commissions of $976,986, none of which was paid to Merrill Lynch. For the fiscal
year ended March 31, 1995, the Company paid total brokerage commissions of
$1,224,398, of which $9,753 or 0.8% was paid to Merrill Lynch for effecting 0.7%
of the aggregate dollar amount of transactions on which the Company paid
brokerage commissions. For the fiscal year ended March 31, 1996, the Company
paid total brokerage commissions of $1,031,569, of which $10,605 or 1.03% was
paid to Merrill Lynch for effecting 0.40% of the aggregate dollar amount of
transactions on which the Company paid brokerage commissions.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Company is determined once daily
Monday through Friday as of 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York time), on each day during which the NYSE is open
for trading. The NYSE is not open on New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
Net asset value is computed by dividing the value of the securities held by
the Company plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued expenses)
by the total number of shares outstanding at such time. Expenses, including the
fee payable
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<PAGE> 73
to the Investment Adviser and any account maintenance and/or distribution fees
are accrued daily. The per share net asset value of the Class B, Class C and
Class D shares generally will be lower than the per share net asset value of the
Class A shares reflecting the daily expense accruals of the account maintenance,
distribution and higher transfer agency fees applicable with respect to the
Class B and Class C shares and the daily expense accruals of the account
maintenance fees applicable with respect to the Class D shares; moreover, the
per share net asset value of the Class B and Class C shares generally will be
lower than the per share net asset value of the Class D shares reflecting the
daily expense accruals of the distribution fees and higher transfer agency fees
applicable with respect to the Class B and Class C shares of the Company. It is
expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.
Portfolio securities, including ADRs, EDRs or GDRs, which are traded on
stock exchanges are valued at the last sale price (regular way) on the exchange
on which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market. Securities traded in the over-the-
counter market are valued at the last available bid price in the
over-the-counter market prior to the time of valuation. Portfolio securities
which are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. When the
Company writes an option, the amount of the premium received is recorded on the
books of the Company 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 Company are valued at their last sale price in
the case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Company. Such valuation and procedures will be reviewed periodically by the
Board of Directors.
Securities and assets for which market quotations are not readily available
(including venture capital investments, which are subject to limitations as to
their sale) are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company. Such valuations and
procedures will be reviewed periodically by the Board of Directors. The fair
market value for venture capital investments for which no market exists cannot
be precisely determined. There is a range of values which is reasonable for such
investments at any particular time. In the early stages of development, venture
capital investments will typically be valued based upon their original cost to
the Company (the "cost method"). The cost method will be utilized until
significant developments affecting the portfolio company provide a basis for use
of an appraisal valuation (the "appraisal method"). The appraisal method will be
based upon such factors affecting the portfolio company as earnings and net
worth, the market prices for similar securities of comparable companies and an
assessment of the company's future prospects. In the case of unsuccessful
operations, the appraisal may be based upon liquidation value. Valuations based
on the appraisal method are necessarily subjective. The Company will also use
third party transactions (actual or proposed) in the portfolio company's
securities as the basis of valuation (the "private market method"). The private
market method will only be used with respect to actual transactions or actual
firm offers by sophisticated, independent investors.
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<PAGE> 74
Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of the NYSE. The values of such
securities used in computing the net asset value of the Company'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 which will not be reflected in the computation of the Company's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Directors.
SHAREHOLDER SERVICES
The Company offers a number of shareholder services described below which
are designed to facilitate investment in its shares. Certain of such services
are not available to investors who place orders for the Company's shares through
the Merrill Lynch Blueprint SM Program. Full details as to each of such
services, copies of the various plans described below and instructions as to how
to participate in the various services or plans, or how to change options with
respect thereto, can be obtained from the Company, the Distributor or Merrill
Lynch.
INVESTMENT ACCOUNT
Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases, the reinvestment of ordinary income
dividends and long-term capital gain distributions. A shareholder may make
additions to his or her investment account at any time by mailing a check
directly to the Company's transfer agent.
Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Company's transfer agent.
Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Company, a shareholder either must
redeem the Class A or Class D shares (paying any applicable CDSC) so that the
cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the transfer
agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the transfer
agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the transfer agent. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence. Shareholders
considering transferring a tax-deferred retirement account such as an individual
retirement account from Merrill Lynch to another brokerage firm or financial
institution
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<PAGE> 75
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Company, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account at Merrill Lynch for those shares.
AUTOMATIC INVESTMENT PLANS
A U.S. shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if he or she is an eligible Class A investor as
described in the Prospectus) or Class B, Class C or Class D shares at the
applicable public offering price, either through the shareholder's securities
dealer or by mail directly to the transfer agent, acting as agent for such
securities dealer. Voluntary accumulation also can be made through a service
known as the Automatic Investment Plan whereby the Company is authorized through
preauthorized checks or automated clearing house debits of $50 or more to charge
the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. An investor
whose shares of the Company are held within a CMA(R) or CBA(R) account may
arrange to have periodic investments made in the Company in amounts of $100 or
more ($1 for retirement accounts) through the CMA(R) or CBA(R)Automated
Investment Program.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be automatically reinvested in additional shares of the
Company. Such reinvestment will be at the net asset value of the shares of the
Company as of the close of business on the ex-dividend date of the dividend or
distribution. Shareholders may elect to receive their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed or direct deposited on or about the payment date.
Shareholders may, at any time, notify the transfer agent in writing or by
telephone (1-800-MER-FUND) that they no longer wish to have their dividends
and/or distributions reinvested in shares of the Company or vice versa, and
commencing ten days after receipt by the transfer agent of such notice, those
instructions will be effected.
SYSTEMATIC WITHDRAWAL PLANS--CLASS A AND CLASS D SHARES
A Class A or Class D shareholder may elect to make systematic withdrawals
from an Investment Account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders who have acquired
Class A or Class D shares of the Company having a value, based upon cost or the
current offering price, of $5,000 or more, and monthly withdrawals are available
for shareholders with Class A or Class D shares with such a value of $10,000 or
more.
At the time of each withdrawal payment, sufficient Class A or Class D
shares are redeemed from those on deposit in the shareholder's account to
provide the withdrawal payment specified by the shareholder. The shareholder may
specify either a dollar amount or a percentage of the value of his Class A or
Class D shares. Redemptions will be made at net asset value as determined as of
15 minutes after the close of business on the NYSE (generally 4:00 p.m., New
York 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 Class A or Class D shares will be redeemed at the close of
business on the following business day. The check for the withdrawal payment
will be mailed, or the direct deposit of the withdrawal payment will be made, on
the next
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<PAGE> 76
business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all Class A or Class D shares in the
Investment Account are reinvested automatically in Class A or Class D shares of
the Company, respectively. A shareholder's Systematic Withdrawal Plan may be
terminated at any time, without charge or penalty, by the shareholder, the
Company, the Company's transfer agent or the Distributor.
Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be
correspondingly reduced. Purchase of additional Class A or Class D shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Company will not knowingly
accept purchase orders for Class A or Class D shares of the Company from
investors who maintain a Systematic Withdrawal Plan unless such purchase is
equal to at least one year's scheduled withdrawals or $1,200, whichever is
greater. Periodic investments may not be made into an Investment Account in
which the shareholder has elected to make systematic withdrawals.
A Class A or Class D shareholder whose shares are held within a CMA(R),
CBA(R) or Retirement Account may elect to have shares redeemed on a monthly,
bimonthly, quarterly, semiannual or annual basis through the CMA(R) or CBA(R)
Systematic Redemption Program. The minimum fixed dollar amount redeemable is
$25. The proceeds of systematic redemptions will be posted to the shareholder's
account three business days after the date the shares are redeemed. Monthly
systematic redemptions will be made at net asset value on the first Monday of
each month, bimonthly systematic redemptions will be made at net asset value on
the first Monday of every other month, and quarterly, semiannual or annual
redemptions are made at net asset value on the first Monday of months selected
at the shareholder's option. If the first Monday of the month is a holiday, the
redemption will be processed at net asset value on the next business day. The
Systematic Redemption Program is not available if Company shares are being
purchased with the account pursuant to the Automatic Investment Program. For
more information on the CMA(R) or CBA(R) Systematic Redemption Program, eligible
shareholders should contact their Merrill Lynch Financial Consultant.
EXCHANGE PRIVILEGE
Shareholders of each class of shares of the Company have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill Lynch
Select PricingSM System, Class A shareholders may exchange Class A shares of the
Company for Class A shares of a second MLAM-advised mutual fund if the
shareholder holds any Class A shares of the second fund in his account in which
the exchange is made at the time of the exchange or is otherwise eligible to
purchase Class A shares of the second fund. If the Class A shareholder wants to
exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his account at the time of
the exchange and is not otherwise eligible to acquire Class A shares of the
second fund, the shareholder will receive Class D shares of the second fund as a
result of the exchange. Class D shares also may be exchanged for Class A shares
of a second MLAM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class B, Class C and Class D shares are exchangeable
with the shares of the same class of other MLAM-advised mutual funds. For
purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Company is "tacked" to the holding period for the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares are also exchangeable for shares of certain MLAM-advised
money market funds as follows: Class A shares may be exchanged for shares of
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<PAGE> 77
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Reserves Money Fund
(available only for exchanges within certain retirement plans), Merrill Lynch
U.S.A. Government Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B,
Class C and Class D shares may be exchanged for shares of Merrill Lynch
Government Fund, Merrill Lynch Institutional Fund, Merrill Lynch Institutional
Tax-Exempt Fund and Merrill Lynch Treasury Fund. Shares with a net asset value
of at least $100 are required to qualify for the exchange privilege, and any
shares utilized in an exchange must have been held by the shareholder for 15
days. It is contemplated that the exchange privilege may be applicable to other
new mutual funds whose shares may be distributed by the Distributor.
Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount equal
to the difference, if any, between the sales charge previously paid on the
outstanding Class A or Class D shares and the sales charge payable at the time
of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have taken
place, the "sales charge previously paid" shall include the aggregate of the
sales charges paid with respect to such Class A or Class D shares in the initial
purchase and any subsequent exchange. Class A or Class D shares issued pursuant
to dividend reinvestment are sold on a no-load basis in each of the funds
offering Class A or Class D shares. For purposes of the exchange privilege,
Class A and 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 of the Company generally may
be exchanged into the Class A or Class D shares of the other funds or into
shares of the Class A and Class D money market funds with a reduced or without a
sales charge.
In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another
MLAM-advised mutual fund ("new Class B or Class C shares") on the basis of
relative net asset value per Class B or Class C share, without the payment of
any CDSC that might otherwise be due on redemption of the outstanding shares.
Class B shareholders of the Company exercising the exchange privilege will
continue to be subject to the Company'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 Company acquired
through use of the exchange privilege will be subject to the Company's CDSC
schedule if such schedule is higher than the CDSC schedule relating to the Class
B shares of the fund from which the exchange has been made. For purposes of
computing the sales charge that may be payable on a disposition of the new Class
B or Class C shares, the holding period for the outstanding Class B 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 Company for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Company Class B shares for two and a half years. The 2% CDSC that generally
would apply to a redemption would not apply to the exchange. Three years later
the investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of Company Class B shares to the three
year holding period for the Special Value Fund Class B shares, the investor will
be deemed to have held the new Class B shares for more than five years.
The exchange privilege is modified with respect to certain retirement plans
which participate in the Merrill Lynch Mutual Fund Adviser ("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
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<PAGE> 78
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
reexchanged 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 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.
Shareholders also may exchange shares of the Company into shares of a money
market fund advised by the Investment Adviser or its affiliates, but the period
of time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or with respect to Class B shares, towards satisfaction of the
conversion period. However, shares of a money market fund which were acquired as
a result of an exchange for Class B or Class C shares of the Company may, in
turn, be exchanged back into Class B or Class C shares, respectively, of that
fund offering such shares, in which event the holding period for Class B or
Class C shares of the Company will be aggregated with previous holding periods
for purposes of reducing the CDSC. Thus, for example, an investor may exchange
Class B shares of the Company for shares of Merrill Lynch Institutional Fund
("Institutional Fund") after having held the Company Class B shares for two and
a half years and three years later decide to redeem the shares of Institutional
Fund for cash. At the time of this redemption, the 2% CDSC that would have been
due had the Class B shares of the Company been redeemed for cash rather than
exchanged for shares of Institutional Fund will be payable. If instead of such
redemption the shareholder exchanged such shares for Class B shares of a fund
which the shareholder continued to hold for an additional two and a half years,
any subsequent redemption would not incur a CDSC.
Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
To exercise the exchange privilege, shareholders should contact their
Merrill Lynch financial consultant, who will advise the Company of the exchange.
Shareholders of the Company, and shareholders of the other funds described above
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Company
reserves the right to require a properly completed Exchange Application. This
exchange privilege may be modified or terminated in accordance with the rules of
the Commission. The Company 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 at any time and thereafter may resume such
offering from time to time. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Company intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. If it so
qualifies, the Company (but not its shareholders) will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital gains
which it distributes to Class A, Class B, Class C and Class D shareholders
(together, the "shareholders"). The Company intends to distribute substantially
all of such income.
Dividends paid by the Company from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains
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<PAGE> 79
over net short-term capital losses (including gains or losses from certain
transactions in futures and options) ("capital gain dividends") are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder has owned Company shares. Any loss upon the sale or exchange of
Company shares held for six months or less, however, will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Company's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).
Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Company will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. A portion of the Company'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 Company will allocate
dividends eligible for the dividends received deduction among 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 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 Company pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Company
and received by its shareholders on December 31 of the year in which such
dividend was declared.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Company or who, to the Company's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
Dividends and interest received by the Company may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes, subject to
certain conditions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held in the Company. If more than 50% in value of the Company's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Company will be eligible, and intends, to file an election
with the Internal Revenue Service pursuant to which shareholders of the Company
will be required to include their proportionate shares of such withholding taxes
in their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them, and deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Company's
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election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Company will report annually to its shareholders
the amount per share of such withholding taxes. For this purpose, the Company
will allocate foreign taxes and foreign source income among the Class A, Class
B, Class C and Class D shareholders according to a method similar to that
described above for the allocation of dividends eligible for the dividends
received deduction.
No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period for the converted Class B shares.
If a shareholder exercises an exchange privilege within 90 days of
acquiring the shares, then the loss the shareholder can recognize on the
exchange will be reduced (or the gain increased) to the extent any sales charge
paid to the Company on the exchanged shares reduces any sales charge the
shareholder would have owed upon the purchase of the new shares in the absence
of the exchange privilege. Instead, such sales charge will be treated as an
amount paid for the new shares.
A loss realized on a sale or exchange of shares of the Company will be
disallowed if other Company shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Company intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Company's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Company will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirements.
TAX TREATMENT OF OPTIONS TRANSACTIONS
The Company may write, purchase or sell options, futures and forward
foreign exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the end
of each taxable year, i.e., each such option or futures contract will be treated
as sold for its fair market value on the last day of the taxable year. 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 Company
elects to have gain or loss treated as ordinary gain or loss under Code Section
988 (as described below), gain or loss from Section 1256 contracts will be 60%
long-term and 40% short-term capital gain or loss. Application of these rules to
Section 1256 contracts held by the Company may alter the timing and character of
distributions to shareholders. The mark-to-market rules outlined above, however,
will not apply to certain transactions entered into by the Company solely to
reduce the risk of changes in price or interest or currency exchange rates with
respect to its investments.
A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Company may, nonetheless, elect to treat the gain or loss from certain forward
foreign
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exchange contracts as capital. In this case, gain or loss realized in connection
with a forward foreign exchange contract that is a Section 1256 contract will be
characterized as 60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles", may affect the
taxation of the Company's sales of securities and transactions in options,
futures and forward foreign exchange contracts. Under Section 1092, the Company
may be required to postpone recognition for tax purposes of losses incurred in
certain sales of securities and closing transactions in options, futures and
forward foreign exchange contracts.
One of the requirements for qualification as a RIC is that less than 30% of
the Company's gross income be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Company may be restricted in effecting closing transactions within three months
after entering into an option or futures contract.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Company qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Company.
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 debt instruments, 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 Company may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Code Section 988 is elected by the Company. In general, however,
Code Section 988 gains or losses will increase or decrease the amount of the
Company's investment company taxable income available to be distributed to
shareholders as ordinary income. Additionally, if Code Section 988 losses exceed
other investment company taxable income during a taxable year, the Company would
not be able to make any ordinary dividend distributions, and all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Company shares, and resulting in a
capital gain for any shareholder who received a distribution greater than such
shareholder's basis in Company shares (assuming the shares were held as a
capital asset). These rules and the mark-to-market rules described above,
however, will not apply to certain transactions entered into by the Company
solely to reduce the risk of currency fluctuations with respect to its
investments.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
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Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on U.S. Government obligations. State law varies
as to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Company.
PERFORMANCE DATA
From time to time the Company 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
Company'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 a formula specified by
the Commission.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses, including the maximum sales charge in the case of Class A and Class D
shares and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class C
shares.
The Company also may quote annual, average annual and annualized total
return and aggregate total return performance data, both as a percentage and as
a dollar amount based on a hypothetical $1,000 investment for various periods
other than those noted below. Such data will be computed as described above,
except that (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted,
and (2) the maximum applicable sales charge will not be included with respect to
annual or annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data generally will be
lower than average annual total return data since the average 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 longer periods of time.
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Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.
<TABLE>
<CAPTION>
CLASS A SHARES
------------------------------------
REDEEMABLE VALUE CLASS B SHARES
OF A -----------------------------------------
HYPOTHETICAL REDEEMABLE VALUE
EXPRESSED AS A $1,000 EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ------------------------------- ----------------- ---------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended March 31,
1996......................... (0.37)% $ 996.30 (.31)% $ 996.90
Inception (April 27, 1992)
to March 31, 1996............ 18.92% $ 1,975.60 19.20% $1,993.90
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended March 31,
1996......................... 5.15% $ 1,051.50 4.21% $1,042.10
One Year Ended March 31,
1995......................... 2.86% $ 1,028.60 1.78% $1,017.80
One Year Ended March 31,
1994......................... 35.68% $ 1,356.80 34.22% $1,342.20
Inception (April 27, 1992)
to March 31, 1993............ 42.09% $ 1,420.90 40.77% $1,407.70
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (April 27, 1992)
to March 31, 1996............ 97.56% $ 1,975.60 99.39% $1,993.90
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------ ------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
OF A OF A
HYPOTHETICAL HYPOTHETICAL
EXPRESSED AS A $1,000 EXPRESSED AS A $1,000
PERCENTAGE BASED INVESTMENT PERCENTAGE BASED INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ----------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended March 31, 1996...... 3.25% $ 1,032.50 (.57)% $ 994.30
Inception (October 21, 1994)
to March 31, 1996................ (5.16)% $ 926.40 (7.94)% $ 887.40
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
One Year Ended March 31, 1996...... 4.22% $ 1,042.20 4.94% $ 1,049.40
Inception (October 21, 1994)
to March 31, 1995................ (11.11)% $ 888.90 (10.76)% $ 892.40
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (October 21, 1994) to
March 31, 1996................... (7.36)% $ 926.40 (11.26)% $ 887.40
</TABLE>
In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the CDSC, in the case of Class B or Class C
shares, applicable to certain investors, as described under "Purchase of Shares"
and "Redemption of Shares", respectively, the total return data quoted by the
Company in
35
<PAGE> 84
advertisements directed to such investors may take into account a reduced, and
not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses may be
deducted.
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Company was incorporated in connection with a reorganization (the
"Reorganization") of Sci/Tech Holdings, Inc. ("Sci/Tech"), a Merrill
Lynch-sponsored diversified, open-end investment company. Sci/Tech previously
invested primarily in the equity securities of companies engaged in science and
technology. In connection with such Reorganization, which occurred on April 27,
1992, Sci/Tech transferred to the Company all of its technology oriented
securities and certain other assets (net of liabilities) in exchange for all of
the stock of the Company (other than seed capital), which Sci/Tech then
distributed pro rata to its stockholders.
The Company was incorporated under Maryland law on August 27, 1991. At the
date of this Statement of Additional Information, it has an authorized capital
of 800,000,000 shares of Common Stock, par value of $0.10 per share, divided
into four classes, designated Class A, Class B, Class C and Class D Common
Stock. Class A and Class C each consists of 100,000,000 shares and Class B and
Class D each consists of 300,000,000 shares. Shares of Class A, Class B, Class C
and Class D Common Stock represent an interest in the same assets of the Company
and are identical in all respects except that the Class B, Class C and Class D
shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such account maintenance and/or distribution expenditures.
The Board of Directors of the Company may classify and reclassify the shares of
the Company into additional classes of Common Stock at a future date.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Company does not intend to
hold meetings of shareholders in any year in which the Investment Company Act
does not require shareholders to act upon any of the following matters: (i)
election of Directors; (ii) approval of an investment advisory agreement; (iii)
approval of a distribution agreement; and (iv) ratification of selection of
independent auditors. Generally, under Maryland law, a meeting of shareholders
may be called for any purpose on the written request of the holders of at least
10% of the outstanding shares of the Company. Voting rights for Directors are
not cumulative. Shares issued are fully paid and nonassessable and have no
preemptive rights. Redemption and conversion rights are discussed elsewhere
herein and in the Prospectus. Each share is entitled to participate equally in
dividends and distributions declared by the Company and in the net assets of the
Company upon liquidation or dissolution after satisfaction of outstanding
liabilities. Stock certificates are issued by the transfer agent only on
specific request. Certificates for fractional shares are not issued in any case.
Shareholders may, in accordance with Maryland law, cause a meeting of
shareholders to be held for the purpose of voting on the removal of Directors at
the request of 25% of the outstanding shares of the Company. A Director may be
removed at a special meeting of shareholders by a vote of a majority of the
votes entitled to be cast for the election of Directors.
The Investment Adviser provided the initial capital for the Company by
purchasing 10,000 shares for $100,000. Such shares were acquired for investment
and can only be disposed of by redemption. The organizational expenses of the
Company were paid by the Company and are being amortized over a period not
36
<PAGE> 85
exceeding five years. The proceeds realized by the Investment Adviser upon the
redemption of any of the shares initially purchased by it will be reduced by the
proportionate amount of the unamortized organizational expenses which the number
of shares redeemed bears to the number of shares initially purchased.
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 Company based on the current sales charge
and the value of the Company's net assets on March 31, 1996, and its shares
outstanding on that date is set forth below:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets................................ $246,909,290 $553,818,469 $31,089,950 $43,858,244
============ ============ =========== ===========
Number of Shares Outstanding.............. 51,190,305 118,827,509 6,706,834 9,118,197
============ ============ =========== ===========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)............................ $ 4.82 $ 4.66 $ 4.64 $ 4.81
Sales Charge (for Class A and Class D
shares: 5.25% of offering price (5.54%
of net asset value))*................... .27 ** ** .27
------------ ------------ ----------- -----------
Offering Price............................ $ 5.09 $ 4.66 $ 4.64 $ 5.08
============ ============ =========== ===========
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C Shares"
in the Prospectus and "Redemption of Shares -- Deferred Sales
Charges -- Class B and Class C Shares" herein.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, has
been selected as the independent auditors of the Company. The selection of
independent auditors is subject to approval by the independent Directors of the
Company. The independent auditors are responsible for auditing the annual
financial statements of the Company.
CUSTODIAN
The Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, 18th Floor,
Global Securities Services, Brooklyn, New York 11245 (the "Custodian"), acts as
the custodian of the Company's assets. Under its contract with the Company, the
Custodian is authorized to establish separate accounts in foreign currencies and
to cause foreign securities owned by the Company to be held in its offices
outside the U.S. and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Company's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Company's investments.
TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, acts as the Company's transfer agent (the
"Transfer Agent"). The Transfer Agent is responsible for the
37
<PAGE> 86
issuance, transfer and redemption of shares and the opening, maintenance and
servicing of shareholder accounts. See "Management of the Company--Transfer
Agency Services" in the Prospectus.
LEGAL COUNSEL
Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Company.
REPORTS TO SHAREHOLDERS
The fiscal year of the Company ends on March 31 of each year. The Company
sends to its shareholders at least semi-annually reports showing the Company's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Company 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.
Categories in the Schedule of Investments contained in the financial
statements herein have been adopted by the Investment Adviser and are deemed
appropriate with respect to a specialized sector fund such as the Company.
Under a separate agreement Merrill Lynch has granted the Company 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 Company at any time or to grant the use
of such name to any other company, and the Company has granted Merrill Lynch,
under certain conditions, the use of any other name it might assume in the
future, with respect to any corporation organized by Merrill Lynch.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the knowledge of the Company, no person or entity owned beneficially 5%
or more of the Company's common stock on June 30, 1996.
38
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MERRILL LYNCH TECHNOLOGY FUND, INC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Technology Fund, Inc. as of March
31, 1996, the related statements of operations for the year then ended and
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the three-year period then
ended and the period April 27, 1992 (commencement of operations) to March 31,
1993. These financial statements and the financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at March
31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch
Technology Fund, Inc. as of March 31, 1996, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
May 1, 1996
39
<PAGE> 88
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Singapore Microcomputer 727,150 ++Creative Technology Ltd. $ 9,807,063 $ 4,728,800 0.5%
Peripherals
Total Investments in
Singaporean Stocks 9,807,063 4,728,800 0.5
United Analog 20,000 ++Analog Devices, Inc. 588,150 560,000 0.1
States Semiconductors 20,000 Linear Technology Corporation 965,000 835,000 0.1
------------ ------------ ------
1,553,150 1,395,000 0.2
Application 20,000 ++Baan Company, N.V. 1,230,000 1,152,500 0.1
Development 4,203,000 ++Informix Corp. 83,875,337 110,854,125 12.7
Software 280,000 ++Oracle Corporation 13,976,075 13,125,000 1.5
311,200 ++Peoplesoft Inc. 6,052,916 17,894,000 2.0
------------ ------------ ------
105,134,328 143,025,625 16.3
Application 786,400 ++C-Cube Microsystems, Inc. 46,725,852 40,499,600 4.6
Specific 2,264,400 ++LSI Logic Corp. 79,898,858 60,572,700 6.9
Integrated 30,000 ++Oak Technology, Inc. 748,125 622,500 0.1
Circuits ------------ ------------ ------
127,372,835 101,694,800 11.6
Broadcasting/Cable 50,000 ++US West Media Group 1,034,250 1,031,250 0.1
Communications 1,050,000 ++Ascend Communications, Inc. 37,488,272 56,568,750 6.5
Equipment 60,000 ++Cascade Communications Corp. 4,076,249 5,385,000 0.6
20,000 ++Gandalf Technologies, Inc. 282,500 292,500 0.0
25,000 ++Pairgain Technologies, Inc. 1,630,357 1,609,375 0.2
1,419,000 ++Stratacom, Inc. 36,489,685 51,793,500 5.9
262,900 ++Tellabs, Inc. 12,283,178 12,684,925 1.5
------------ ------------ ------
92,250,241 128,334,050 14.7
Educational/ 6,480,000 ++Acclaim Entertainment, Inc. ++++ 103,211,387 68,040,000 7.8
Entertainment 1,679,400 ++Electronic Arts, Inc. 49,908,085 44,504,100 5.1
Software ------------ ------------ ------
153,119,472 112,544,100 12.9
Internetworking 1,360,000 ++3Com Corporation 44,615,006 54,060,000 6.2
1,780,000 ++cisco Systems, Inc. 58,681,825 82,547,500 9.4
750,200 ++FORE Systems, Inc. 41,776,489 53,545,525 6.1
------------ ------------ ------
145,073,320 190,153,025 21.7
Microcomputer 20,000 ++Adaptec, Inc. 1,098,334 965,000 0.1
Peripherals 8,106,700 ++Creative Technology Ltd. ++++ 113,149,604 48,640,200 5.6
------------ ------------ ------
114,247,938 49,605,200 5.7
Microcomputer 130,000 ++Microsoft Corporation 13,472,500 13,390,000 1.5
Software
Photography 602,300 Polaroid Corporation 26,543,556 27,103,500 3.1
</TABLE>
40
<PAGE> 89
<TABLE>
<CAPTION>
Merrill Lynch Technology Fund, Inc., March 31, 1996
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
Shares Value Percent of
COUNTRY Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
United Semiconductors-- 316,900 ++Altera Corporation $ 21,187,427 $ 17,667,175 2.0%
States Memory 725,000 Micron Technology, Inc. 24,034,662 22,746,875 2.6
(concluded) 570,000 ++Xilinx, Inc. 23,798,633 18,097,500 2.1
------------ ------------ ------
69,020,722 58,511,550 6.7
Semiconductors-- 340,000 Intel Corporation 19,838,957 19,295,000 2.2
Microprocessors
Systems Software 255,000 Computer Associates International,
Inc. 18,623,972 18,264,375 2.1
Total Investments in
United States Stocks 887,285,241 864,347,475 98.8
Total Investments in Stocks 897,092,304 869,076,275 99.3
<CAPTION>
SHORT-TERM Face
SECURITIES Amount Issue
<S> <C> <C> <C> <C> <C>
Commercial $ 4,619,000 Associates Corp. of North America,
Paper* 5.48% due 4/01/1996 4,617,594 4,617,594 0.5
Total Investments in Short-Term
Securities 4,617,594 4,617,594 0.5
Total Investments $901,709,898 873,693,869 99.8
============
Other Assets Less Liabilities 1,982,084 0.2
------------ ------
Net Assets $875,675,953 100.0%
============ ======
</TABLE>
*Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the
Company.
++Non-income producing security.
++++Investment in companies 5% or more of whose outstanding
securities are held by the Company (such companies are defined as
'Affiliated Companies' in Section 2 (a)(3) of the Investment Company
Act of 1940) is as follows:
<TABLE>
<CAPTION>
Net Share Net Dividend
Industry Affiliate Activity Cost Income
<S> <C> <C> <C> <C>
Educational/ Acclaim
Entertainment Entertainment,
Software Inc. 605,000 $ 9,376,747 --
Microcomputer Creative
Peripherals Technology Ltd 275,500 3,011,641 --
Total $12,388,388
===========
</TABLE>
See Notes to Financial Statements.
41
<PAGE> 90
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
As of March 31, 1996
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$901,709,898)(Note 1a) $873,693,869
Cash 496
Foreign cash (Note 1c) 32
Receivables:
Securities sold $ 22,316,211
Capital shares sold 4,512,616 26,828,827
------------
Deferred organization expenses (Note 1f) 27,437
Prepaid registration fees and other assets (Note 1f) 32,225
------------
Total assets 900,582,886
------------
Liabilities: Payables:
Securities purchased 20,748,022
Capital shares redeemed 1,997,181
Investment adviser (Note 2) 731,587
Distributor (Note 2) 500,553 23,977,343
------------
Accrued expenses and other liabilities 929,590
------------
Total liabilities 24,906,933
------------
Net Assets: Net assets $875,675,953
============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 5,119,031
Class B Shares of Common Stock, $0.10 par value, 300,000,000
shares authorized 11,882,751
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 670,683
Class D Shares of Common Stock, $0.10 par value, 300,000,000
shares authorized 911,820
Paid-in capital in excess of par 926,058,084
Accumulated realized capital losses on investments and foreign
currency transactions--net (14,068,351)
Accumulated distributions in excess of realized capital gains on
investments and foreign currency transactions--net (26,882,035)
Unrealized depreciation on investments and foreign currency
transactions--net (28,016,030)
------------
Net assets $875,675,953
============
Net Asset Class A--Based on net assets of $246,909,290 and 51,190,305
Value: shares outstanding $ 4.82
============
Class B--Based on net assets of $553,818,469 and 118,827,509
shares outstanding $ 4.66
============
Class C--Based on net assets of $31,089,950 and 6,706,834
shares outstanding $ 4.64
============
Class D--Based on net assets of $43,858,244 and 9,118,197
shares outstanding $ 4.81
============
See Notes to Financial Statements.
</TABLE>
42
<PAGE> 91
STATEMENT OF OPERATIONS MERRILL LYNCH TECHNOLOGY FUND, INC., MARCH 31, 1996
<TABLE>
<CAPTION>
For the Year Ended March 31, 1996
<S> <C> <C> <C>
Investment Interest and discount earned $ 6,305,688
Income Dividends (net of $13,009 foreign withholding tax) 790,302
(Notes 1d & 1e): ------------
Total income 7,095,990
------------
Expenses: Investment advisory fees (Note 2) 10,196,193
Account maintenance and distribution fees--Class B (Note 2) 6,638,132
Transfer agent fees--Class B (Note 2) 1,665,727
Transfer agent fees--Class A (Note 2) 595,584
Account maintenance and distribution fees--Class C (Note 2) 328,158
Printing and shareholder reports 326,265
Custodian fees 264,644
Accounting services (Note 2) 198,451
Registration fees (Note 1f) 146,176
Account maintenance fees--Class D (Note 2) 111,299
Transfer agent fees--Class D (Note 2) 94,795
Transfer agent fees--Class C (Note 2) 86,765
Professional fees 72,304
Amortization of organization expenses (Note 1f) 25,326
Directors' fees and expenses 20,542
Pricing fees 198
Other 25,002
------------
Total expenses 20,795,561
------------
Investment loss--net (13,699,571)
------------
Realized & Realized gain from:
Unrealized Gain Investments--net $ 75,358,732
(Loss) on Foreign currency transactions--net 9,233,227 84,591,959
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net (30,055,810)
(Notes 1b, 1c, Foreign currency transactions--net 7,633,796 (22,422,014)
1e & 3): ------------ ------------
Net Increase in Net Assets Resulting from Operations $ 48,470,374
============
See Notes to Financial Statements.
</TABLE>
43
<PAGE> 92
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended March 31
Increase (Decrease) in Net Assets: 1996 1995
<S> <C> <C> <C>
Operations: Investment income (loss)--net $(13,699,571) $ 1,661,432
Realized gain on investments and foreign currency
transactions--net 84,591,959 870,828
Change in unrealized depreciation on investments and foreign
currency transactions--net (22,422,014) (29,622,966)
------------ ------------
Net increase (decrease) in net assets resulting from operations 48,470,374 (27,090,706)
------------ ------------
Dividends & Investment income--net:
Distributions to Class A -- (1,262,702)
Shareholders Class B -- (287,745)
(Note 1g): Class C -- (41,855)
Class D -- (69,130)
In excess of investment income--net:
Class A -- (280,276)
Class B -- (63,869)
Class C -- (9,290)
Class D -- (15,345)
Realized gain on investments--net:
Class A (8,279,075) (2,232,025)
Class B (20,434,367) (4,866,620)
Class C (1,128,078) (81,670)
Class D (1,437,377) (110,609)
In excess of realized gain on investments--net:
Class A (7,115,288) (16,321,125)
Class B (17,561,916) (35,585,943)
Class C (969,506) (597,190)
Class D (1,235,326) (808,804)
------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (58,160,933) (62,634,198)
------------ ------------
Capital Share Net increase (decrease) in net assets derived from capital
Transactions shares transactions (39,662,007) 615,613,902
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets (49,352,566) 525,888,998
Beginning of year 925,028,519 399,139,521
------------ ------------
End of year $875,675,953 $925,028,519
============ ============
See Notes to Financial Statements.
</TABLE>
44
<PAGE> 93
FINANCIAL HIGHLIGHTS MERRILL LYNCH TECHNOLOGY FUND, INC., MARCH 31, 1996
<TABLE>
<CAPTION>
Class A**
For the
The following per share data and ratios have been derived Period
from information provided in the financial statements. For the Year April 27, 1992++
Ended March 31, to March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 4.89 $ 5.17 $ 5.08 $ 3.83
Operating -------- -------- -------- --------
Performance: Investment income (loss)--net (.03) .05 (.01) --
Realized and unrealized gain on investments and
foreign currency transactions--net .28 .11 1.51 1.59
-------- -------- -------- --------
Total from investment operations .25 .16 1.50 1.59
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.02) -- --
In excess of investment income--net -- (.01) -- --
Realized gain on investments--net (.17) (.05) (1.41) (.34)
In excess of realized gain on investments--net (.15) (.36) -- --
-------- -------- -------- --------
Total dividends and distributions (.32) (.44) (1.41) (.34)
-------- -------- -------- --------
Net asset value, end of period $ 4.82 $ 4.89 $ 5.17 $ 5.08
======== ======== ======== ========
Total Investment Based on net asset value per share 5.15% 2.86% 35.68% 42.09%+++
Return:*** ======== ======== ======== ========
Ratios to Average Expenses 1.31% 1.33% 1.35% 1.59%*
Net Assets: ======== ======== ======== ========
Investment income (loss)--net (.62%) .87% (.11%) .04%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $246,909 $254,188 $174,809 $100,830
Data: ======== ======== ======== ========
Portfolio turnover 108.36% 175.57% 350.64% 482.79%
======== ======== ======== ========
Average commission rate paid $ .0366 -- -- --
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Class B**
For the
The following per share data and ratios have been derived Period
from information provided in the financial statements. For the Year April 27, 1992++
Ended March 31, to March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 4.78 $ 5.08 $ 5.03 $ 3.83
Operating -------- -------- -------- --------
Performance: Investment loss--net (.09) (.01) (.05) (.04)
Realized and unrealized gain on investments and
foreign currency transactions--net .29 .11 1.48 1.58
-------- -------- -------- --------
Total from investment operations .20 .10 1.43 1.54
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- --++++ -- --
In excess of investment income--net -- --++++ -- --
Realized gain on investments--net (.17) (.05) (1.38) (.34)
In excess of realized gain on investments--net (.15) (.35) -- --
-------- -------- -------- --------
</TABLE>
45
<PAGE> 94
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total dividends and distributions (.32) (.40) (1.38) (.34)
-------- -------- -------- --------
Net asset value, end of period $ 4.66 $ 4.78 $ 5.08 $ 5.03
======== ======== ======== ========
Total Investment Based on net asset value per share 4.21% 1.78% 34.22% 40.77%+++
Return:*** ======== ======== ======== ========
Ratios to Average Expenses 2.34% 2.38% 2.36% 2.53%*
Net Assets: ======== ======== ======== ========
Investment income (loss)--net (1.65%) (.10%) (1.08%) .93%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $553,819 $614,935 $224,330 $ 57,592
Data: ======== ======== ======== ========
Portfolio turnover 108.36% 175.57% 350.64% 482.79%
======== ======== ======== ========
Average commission rate paid $ .0366 -- -- --
======== ======== ======== ========
Class C** Class D**
------- -------
For the For the
Period Period
The following per share data and ratios have been derived For the Oct. 21, For the Oct. 21,
from information provided in the financial statements Year Ended 1994++ to Year Ended 1994++ to
March 31, March 31, March 31, March 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1996 1995
Per Share Net asset value, beginning of period $ 4.76 $ 5.75 $ 4.89 $ 5.88
Operating -------- -------- -------- --------
Performance: Investment loss--net (.09) -- (.05) (.02)
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .29 (.62) .29 (.60)
-------- -------- -------- --------
Total from investment operations .20 (.62) .24 (.62)
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net -- (.02) -- (.02)
In excess of investment income--net -- (.01) -- (.01)
Realized gain on investments--net (.17) (.04) (.17) (.04)
In excess of realized gain on investments--net (.15) (.30) (.15) (.30)
-------- -------- -------- --------
Total dividends and distributions (.32) (.37) (.32) (.37)
-------- -------- -------- --------
Net asset value, end of period $ 4.64 $ 4.76 $ 4.81 $ 4.89
======== ======== ======== ========
Total Investment Based on net asset value per share 4.22% (11.11%)+++ 4.94% (10.76%)+++
Return:*** ======== ======== ======== ========
Ratios to Average Expenses 2.36% 2.59%* 1.56% 1.80%*
Net Assets: ======== ======== ======== ========
Investment loss--net (1.69%) (.02%)* (.89%) (.81%)*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 31,090 $ 23,259 $ 43,858 $ 32,646
Data: ======== ======== ======== ========
Portfolio turnover 108.36% 175.57% 108.36% 175.57%
======== ======== ======== ========
Average commission rate paid $ .0366 -- $ .0366 --
======== ======== ======== ========
</TABLE>
*Annualized.
**Based on average shares outstanding during the period.
***Total investment returns exclude the effects of sales loads.
++Commencement of Operations.
++++Amount is less than $.01 per share.
+++Aggregate total investment return.
See Notes to Financial Statements.
46
<PAGE> 95
NOTES TO FINANCIAL STATEMENTS MERRILL LYNCH TECHNOLOGY FUND, INC.
MARCH 31, 1996
1. Significant Accounting Policies:
Merrill Lynch Technology Fund, Inc. (the "Company") is registered
under the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Company offers four classes
of shares under the Merrill Lynch Select Pricing SM System. Shares
of Class A and Class D are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent
deferred sales charge. All classes of shares have identical voting,
dividend, liquidation, and other rights and the same terms and
conditions, except that Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to
the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to its account maintenance
and distribution expenditures. The following is a summary of
significant accounting policies followed by the Company.
(a) Valuation of securities--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-counter
market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-term
securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market quotations are not readily available are valued at
their fair value as determined in good faith by or under the
direction of the Company's Board of Directors.
(b) Derivative financial instruments--The Company may engage in
various portfolio strategies to seek to increase its return by
hedging its portfolio against adverse movements in the equity, debt
and currency markets. Losses may arise due to changes in the value
of the contract or if the counterparty does not perform under the
contract.
* Financial futures contracts--The Company may purchase or sell
futures contracts and options on such futures contracts for the
purpose of hedging the market risk on existing securities or the
intended purchase of securities. Futures contracts are contracts for
delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Company
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Company agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in value of
the contract. Such receipts or payments are known as variation
margin and are recorded by the Company as unrealized gains or
losses. When the contract is closed, the Company records a realized
gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed.
* Options--The Company is authorized to write and purchase call and
put options. When the Company writes an option, an amount equal to
the premium received by the Company is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Company enters into a closing transaction), the
Company realizes a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Company is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Company's records. However, the effect on
operations is recorded from the date the Company enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
47
<PAGE> 96
* Foreign currency options and futures--The Company may also
purchase or sell listed or over-the-counter foreign currency
options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be
effected with respect to hedges on non-US dollar denominated
securities owned by the Company, sold by the Company but not yet
delivered, or committed or anticipated to be purchased by the
Company.
(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(d) Income taxes--It is the Company's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the
exdividend date, except if the ex-dividend date has passed, certain
dividends from foreign securities are recorded as soon as the
Company is informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-line
basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(g) Dividends and distributions to shareholders--Dividends and
distributions paid by the Company are recorded on the ex-dividend
dates. Distributions in excess of net investment income and realized
capital gains are due primarily to differing tax treatments for
futures transactions and post-October losses.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $368,780 have been reclassified from undistributed net investment
income to paid-in capital in excess of par. These reclassifications
have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Company has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Company has also entered into a
Distribution Agreement and Distribution Plans with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Company's portfolio
and provides the administrative services necessary for the operation
of the Company. As compensation for its services to the Company,
MLAM receives monthly compensation at the annual rate of 1.0% of the
average daily net assets of the Company. Certain states in which
shares of the Company are qualified for sale impose limitations on
the expenses of the Company. The most restrictive annual expense
limitation requires that MLAM reimburse the Company to the extent
that expenses (excluding interest, taxes, distribution fees,
brokerage fees and commissions, and extraordinary items) exceed 2.5%
of the Company's first $30 million of average daily net assets, 2.0%
of the Company's next $70 million of average daily net assets, and
1.5% of the average daily net assets in excess thereof. MLAM's
obligation to reimburse the Company is limited to the amount of the
investment advisory fee. No fee payment will be made to MLAM during
any fiscal year which will cause such expenses to exceed the most
restrictive expense limitation applicable at the time of such
payment.
Pursuant to the distribution plans (the "Distribution Plans")
adopted by the Company, pursuant to Rule 12b-1 under the Investment
Company Act of 1940, the Company pays the Distributor an ongoing
account maintenance fee and distribution fee. The fees are accrued
daily and paid monthly at annual rates based upon the average daily
net assets of the shares as follows:
<TABLE>
<CAPTION>
Account Distribution
Maintenance Fee Fee
<S> <C> <C>
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
</TABLE>
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
48
<PAGE> 97
NOTES TO FINANCIAL STATEMENTS (concluded) MERRILL LYNCH TECHNOLOGY FUND, INC.
MARCH 31, 1996
also provides account maintenance and distribution services to the
Company. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the year ended March 31, 1996, MLFD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Company's Class A and Class D
Shares as follows:
<TABLE>
<CAPTION>
MLFD MLPF&S
<S> <C> <C>
Class A $ 6,404 $ 83,635
Class D $22,873 $357,623
</TABLE>
For the year ended March 31, 1996, MLPF&S received contingent
deferred sales charges of $2,839,725 and $56,334 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $10,605 in commissions on the execution
of portfolio security transactions for the year ended March 31,
1996.
For the year ended March 31, 1996, the Company paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $137 for security
price quotations to compute the net asset value of the Company.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Company's transfer agent.
Accounting services are provided to the Company by MLAM at cost.
Certain officers and/or directors of the Company are officers and/or
directors of MLAM, PSI, MLPF&S, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended March 31, 1996 were $1,099,230,553 and
$992,526,999, respectively.
Net realized and unrealized gains (losses) as of March 31, 1996 were
as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Gains Losses
<S> <C> <C>
Long-term investments $ 75,358,038 $(28,016,029)
Short-term investments 694 --
Foreign currency transactions (20,637) (1)
Forward foreign exchange contracts 9,253,864 --
------------ ------------
Total $ 84,591,959 $(28,016,030)
============ ============
</TABLE>
As of March 31, 1996, net unrealized depreciation for Federal income
tax purposes aggregated $28,432,931, of which $120,564,312 related
to appreciated securities and $148,997,243 related to depreciated
securities. The aggregate cost of investments at March 31, 1996 for
Federal income tax purposes was $902,126,800.
4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $(39,662,007) and $615,613,902 for the years ended
March 31, 1996 and March 31, 1995, respectively.
Transactions in capital shares for each class were as follows:
<TABLE>
<CAPTION>
Class A Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 14,643,437 $ 80,491,145
Shares issued to shareholders
in reinvestment of distributions 2,916,570 13,999,534
------------ ------------
Total issued 17,560,007 94,490,679
Shares redeemed (18,367,105) (101,763,387)
------------ ------------
Net decrease (807,098) $ (7,272,708)
============ ============
<CAPTION>
Class A Shares for the Year Dollar
Ended March 31, 1995 Shares Amount
<S> <C> <C>
Shares sold 31,862,508 $ 174,435,046
Shares issued to shareholders
in reinvestment of dividends and
distributions 3,494,000 17,829,324
------------ -------------
Total issued 35,356,508 192,264,370
Shares redeemed (17,158,170) (92,814,537)
------------ ------------
Net increase 18,198,338 $ 99,449,833
============ =============
<CAPTION>
Class B Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 44,533,673 $ 247,425,471
Shares issued to shareholders
in reinvestment of distributions 7,345,183 34,155,100
------------ -------------
Total issued 51,878,856 281,580,571
Shares redeemed (60,499,212) (331,236,048)
Automatic conversion of shares (1,154,117) (6,053,728)
------------ -------------
Net decrease (9,774,473) $ (55,709,205)
============ =============
</TABLE>
49
<PAGE> 98
<TABLE>
<CAPTION>
Class B Shares for the Year Dollar
Ended March 31, 1995 Shares Amount
<S> <C> <C>
Shares sold 110,181,775 $ 589,755,859
Shares issued to shareholders
in reinvestment of dividends
and distributions 7,328,692 36,567,423
------------ -------------
Total issued 117,510,467 626,323,282
Shares redeemed (31,692,920) (163,195,508)
Automatic conversion
of shares (1,346,902) (7,153,389)
------------ -------------
Net increase 84,470,645 $ 455,974,385
============ =============
<CAPTION>
Class C Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 4,886,598 $ 26,661,560
Shares issued to shareholders
in reinvestment of distributions 393,754 1,823,084
------------ -------------
Total issued 5,280,352 28,484,644
Shares redeemed (3,459,920) (18,347,380)
------------ -------------
Net increase 1,820,432 $ 10,137,264
============ =============
<CAPTION>
Class C Shares for the Period Dollar
October 21, 1994++ to March 31, 1995 Shares Amount
<S> <C> <C>
Shares sold 5,309,942 $ 27,166,187
Shares issued to shareholders
in reinvestment of dividends and
distributions 128,715 635,854
------------ -------------
Total issued 5,438,657 27,802,041
Shares redeemed (552,255) (2,727,441)
------------ -------------
Net increase 4,886,402 $ 25,074,600
============ =============
++Commencement of Operations.
<CAPTION>
Class D Shares for the Year Dollar
Ended March 31, 1996 Shares Amount
<S> <C> <C>
Shares sold 11,068,175 $ 62,166,617
Automatic conversion of shares 1,119,350 6,053,728
Shares issued to shareholders
in reinvestment of distributions 499,971 2,394,860
------------ ------------
Total issued 12,687,496 70,615,205
Shares redeemed (10,248,895) (57,432,563)
------------ ------------
Net increase 2,438,601 $ 13,182,642
============ ============
<CAPTION>
Class D Shares for the Period Dollar
October 21, 1994++ to March 31, 1995 Shares Amount
<S> <C> <C>
Shares sold 8,332,225 $ 43,660,136
Automatic conversion of shares 1,316,991 7,153,389
Shares issued to shareholders
in reinvestment of dividends and
distributions 174,684 883,900
------------ ------------
Total issued 9,823,900 51,697,425
Shares redeemed (3,144,304) (16,582,341)
------------ ------------
Net increase 6,679,596 $ 35,115,084
============ ============
</TABLE>
++Commencement of Operations.
50
<PAGE> 99
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Investment Objective and
Policies......................... 2
Technology....................... 2
International Diversification.... 2
Types of Portfolio Companies..... 2
Other Factors.................... 3
Hedging Techniques............... 4
Other Investment Policies and
Practices..................... 8
Investment Restrictions.......... 8
Management of the Company.......... 11
Directors and Officers........... 11
Compensation of Directors........ 12
Management and Advisory
Arrangements.................. 13
Purchase of Shares................. 14
Redemption of Shares............... 21
Portfolio Transactions and
Brokerage........................ 23
Determination of Net Asset Value... 24
Shareholder Services............... 26
Dividends, Distributions and
Taxes............................ 30
Performance Data................... 34
General Information................ 36
Description of Shares............ 36
Computation of Offering Price Per
Share......................... 37
Independent Auditors............. 37
Custodian........................ 37
Transfer Agent................... 37
Legal Counsel.................... 38
Reports to Shareholders.......... 38
Additional Information........... 38
Security Ownership of Certain
Beneficial Owners............. 38
Independent Auditors' Report....... 39
Financial Statements............... 40
Code #16090-0796
</TABLE>
MERRILL LYNCH
TECHNOLOGY FUND, INC.
STATEMENT OF
ADDITIONAL
INFORMATION
July 29, 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 100
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission File due to ASCII-incompatibility and
cross-references this material to the location of each occurrence in the text.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>
